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===Kotteakos===
===Kotteakos===


Simon Brown, owner of a construction company, conspired with Kotteakos and 31 other persons to defraud the Government by filing false statements in applications for loans for modernization and renovation under the National Housing Act. No connections was shown between the individual loan applicants. In each case, however, Brown induced the applicants to file the loan application and assisted them in applying, in return for a 5% commission. The Court characterized the facts as showing: "As the Government puts it, the pattern was 'that of separate spokes meeting at a common center,' though we may add without the rim of the wheel to enclose the spokes." The Court therefore held that while the indictment alleged one conspiracy the Government proved several (at least eight) conspiracies.<ref>328 U.S. at 755.</ref>
Simon Brown, owner of a construction company, conspired with Kotteakos and 31 other persons to defraud the Government by filing false statements in applications for loans for modernization and renovation under the National Housing Act. No connections was shown between the individual loan applicants. In each case, however, Brown induced the applicants to file the loan application and assisted them in applying, in return for a 5% commission. The Court characterized the facts as showing: "As the Government puts it, the pattern was 'that of separate spokes meeting at a common center,' though we may add without the rim of the wheel to enclose the spokes." The Court therefore held that while the indictment alleged one conspiracy the Government proved several (at least eight) conspiracies.<ref>328 U.S. at 755.</ref> That is, the Government failed to demonstrate the rim of the wheel, that connected the spokes to one another. "Without the rim, an alleged hub-and-spoke cartel is merely a set of vertical relationships (or restraints) that result in parallel conduct and does not establish" a hub-and-spoke conspiracy.<ref>Barak Orbach, [http://www.americanbar.org/content/dam/aba/publishing/antitrust_source/apr16_orbach_4_11f.authcheckdam.pdf '' Hub-and-Spoke Conspiracies''], {{smallcaps|the antitrust source}} (April 2016).</ref>


==Subsequent Supreme Court hub-and-spoke conspiracy cases==
==Subsequent Supreme Court hub-and-spoke conspiracy cases==

Revision as of 18:44, 9 June 2016

A hub-and-spoke conspiracy (or hub-and-spokes conspiracy) is a legal construct or doctrine of United States antitrust and criminal law.[1] In such a conspiracy, several parties ("spokes") enter into an unlawful agreement with a leading party ("hub"). The United States Court of Appeals for the First Circuit explained the concept in these terms:

In a "hub-and-spoke conspiracy," a central mastermind, or "hub," controls numerous "spokes," or secondary co-conspirators. These co-conspirators participate in independent transactions with the individual or group of individuals at the "hub" that collectively further a single, illegal enterprise.[2]

The United States Court of Appeals for the Third Circuit explained the concept in these terms:

Such a conspiracy involves a hub, generally the dominant purchaser or supplier in the relevant market, and the spokes, made up of the distributors involved in the conspiracy. The rim of the wheel is the connecting agreements among the horizontal competitors (distributors) that form the spokes.[3]

History

The leading two Supreme Court cases were Interstate Circuit and Kotteakos.[4]

Interstate Circuit

The Government sued two groups of defendants for engaging in a price-fixing conspiracy. One group of eight defendants were distributors (such as Paramount Pictures) of motion picture films, that distributed about 75 percent of all first-class feature films exhibited in the United States.. A second group of defendants were two dominant theater owners in Texas and New Mexico—Interstate Circuit and a related company—which had a monopoly of first-run theaters in various cities.[5] The manager of the defendant theater owners sent a same or similar letter to each of the distributor defendants, naming on its face as addressees all of the defendant distributors. The letter demanded as a condition of continued dealing that the distributor (1) require that second-run theaters never exhibit the films at a smaller admission price than 25¢, and (2) never exhibit them in conjunction with another feature picture (so-called double features). Conferences discussing the matter were held between representatives of Interstate and individual distributors. The distributors each agreed and complied with the demands.[6]

The Supreme Court held it permissible to draw "the inference of agreement from the nature of the proposals made . . .[and] from the substantial unanimity of action taken upon them by the distributors." The Court emphasized that each distributor knew that the distributors all knew that the others were getting the same letter and knew that "without substantially unanimous action with respect to the restrictions for any given territory, there was risk of a substantial loss of the business and goodwill of the subsequent-run and independent exhibitors, but that, with it, there was the prospect of increased profits." The Court said that provided "strong motive for concerted action."[7] The Court added:

It was enough that, knowing that concerted action was contemplated and invited, the distributors gave their adherence to the scheme and participated in it. Each distributor was advised that the others were asked to participate; each knew that cooperation was essential to successful operation of the plan. . . . Acceptance by competitors, without previous agreement, of an invitation to participate in a plan the necessary consequence of which, if carried out, is restraint of interstate commerce is sufficient to establish an unlawful conspiracy under the Sherman Act.[8]

Kotteakos

Simon Brown, owner of a construction company, conspired with Kotteakos and 31 other persons to defraud the Government by filing false statements in applications for loans for modernization and renovation under the National Housing Act. No connections was shown between the individual loan applicants. In each case, however, Brown induced the applicants to file the loan application and assisted them in applying, in return for a 5% commission. The Court characterized the facts as showing: "As the Government puts it, the pattern was 'that of separate spokes meeting at a common center,' though we may add without the rim of the wheel to enclose the spokes." The Court therefore held that while the indictment alleged one conspiracy the Government proved several (at least eight) conspiracies.[9] That is, the Government failed to demonstrate the rim of the wheel, that connected the spokes to one another. "Without the rim, an alleged hub-and-spoke cartel is merely a set of vertical relationships (or restraints) that result in parallel conduct and does not establish" a hub-and-spoke conspiracy.[10]

Subsequent Supreme Court hub-and-spoke conspiracy cases

Since Interstate Circuit, the Supreme Court decided four hub-and-spoke conspiracy cases and one case rejecting a parallel-action conspiracy claim.

Masonite

United States v. Masonite Corp.,[11] was a patent–antitrust price-fixing case, in which the patent holder negotiated licenses with price-fixing clauses while resolving infringement disputes with some of them. The Supreme Court said that each licensee “acted independently of the others, negotiated only with [the patent holder], desired the agreement regardless of the action that might be taken by any of the others, did not require as a condition of its acceptance . . . an agreement with any of the others, and had no discussions with any of the others."[12] Nevertheless, the Court applied Interstate Circuit because:

It is not clear at what precise point of time each [defendant licensee] became aware of the fact that its contract was not an isolated transaction but part of a larger arrangement. But it [was] clear that as the arrangement continued each became familiar with its purpose and scope.”[13]

Accordingly, even if the evidentiary requirements of Interstate Circuit were not met at the outset of the cartel arrangement, they were met after it remained in place. "It was enough that, knowing that concerted action was contemplated and invited, the distributors gave their adherence to the scheme and participated in it."

Theater Enterprises

In Theatre Enterprises, Inc. v. Paramount Film Distributing Corp.,[14] the Supreme Court rejected a claim by a suburban theater owner (TEI) that a group of motion picture producers and distributors had violated the antitrust laws by conspiring to restrict first-run films to downtown Baltimore theaters, thus confining petitioner's suburban theater to subsequent runs and unreasonable "clearances." Each of the defendant motion picture producers and distributors refused to make first-run films available to TEI and adhered to an established policy of restricting first-runs in Baltimore to the eight downtown theaters. There was no direct evidence of illegal agreement among the defendants. The "crucial question" was whether the defendants' conduct against TEI "stemmed from independent decision or from an agreement, tacit or express." The lower court, in effect, refused to direct the jury to find a conspiracy based on the facts as to parallel refusals to deal with TEI. The Supreme Court said that was correct, because:

[T]his Court has never held that proof of parallel business behavior conclusively establishes agreement or, phrased differently, that such behavior itself constitutes a Sherman Act offense. Circumstantial evidence of consciously parallel behavior may have made heavy inroads into the traditional judicial attitude toward conspiracy, but "conscious parallelism" has not yet read conspiracy out of the Sherman Act entirely.[15]

Klor's

In Klor’s, Inc. v. Broadway-Hale Stores, Inc.,[16] a major California department store, Broadway-Hale, induced Admiral, Emerson Radio, General Electric, Philco, RCA, Whirlpool, Zenith, and other major appliance manufacturers to stop selling to Klor's, a price cutter in San Francisco. Klor's brought an antitrust treble damages suit, alleging a conspiracy among Broadway-Hale and the manufacturers. By pre-trial order the case one was limited to a single conspiracy charging a Sherman Act violation. The defendants moved for summary judgment, and the lower courts agreed, on the grounds that Klor's was only one of many stores selling such goods, so that its elimination as a competitive factor did not substantially lessen competition in the general market—there was no public injury. Whether a conspiracy existed was by-passed, even though the allegations appear to have described a rimless wheel conspiracy, without the spokes (appliance manufacturers) being connected to one another, knowing what one another were doing, or being interdependent. The Supreme Court reversed, on the grounds that Klor's sufficiently pleaded a boycott conspiracy. The Court said, "Alleged in this complaint is a wide combination consisting of manufacturers, distributors, and a retailer."[17]

Parke, Davis

In United States v. Parke, Davis & Co.[18] the Supreme Court held it proper to infer a combination among a drug manufacturer, wholesalers, and retailers when the manufacturer engaged in a substantial course of concerted activities in order to stop discounters from selling its products below recommended resale prices. The manufacturer informed its wholesalers that it would terminate any wholesaler that sold its products to discounters, and enforced this policy. It discussed the policy with its wholesalers and retailers to secure adherence to it, and it put together an agreement among retailers not to advertise products at prices below those recommended. Parke Davis offered the retailers its products "packaged in a competition-free wrapping . . . by virtue of concerted action induced by the manufacturer." Parke Davis was "thus the organizer of a price maintenance combination or conspiracy in violation of the Sherman Act."

General Motors

In United States v. General Motors Corp.,[19] a group of Chevrolet car dealers in the Los Angeles area persuaded GM to eliminate price cutters. In response to dealers' complaints organized by their trade associations, GM Los Angeles area officials treated the "principal offenders" to "unprecedented individual confrontations" and obtained promises to abandon the practices deemed objectionable. Most agreed promptly but one put off decision for a week "to make sure that the other dealers, or most of them, had stopped their business dealings with discount houses." A "joint effort between General Motors, the three [local dealer] associations, and a number of individual dealers" was organized to police compliance. GM local officials confronted reoffenders and required thewm to repurchase cars sold in violation of policy. "[T]he campaign to eliminate the discounters from commerce in new Chevrolet cars was a success."

The district court refused to find a Sherman Act violation. But the Supreme Court reversed. It explained:

The dealers collaborated, through the associations and otherwise, among themselves and with General Motors, both to enlist the aid of General Motors and to enforce dealers' promises to forsake the discounters. The associations explicitly entered into a joint venture to assist General Motors in policing the dealers' promises, and their joint proffer of aid was accepted and utilized by General Motors.[20]

Not only did the dealers conspire among themselves but they enlisted GM to act as the "hub" of the conspiracy:

As Parke Davis had done, General Motors sought to elicit from all the dealers agreements, substantially interrelated and interdependent, that none of them would do business with the discounters. These agreements were hammered out in meetings between nonconforming dealers and officials of General Motors' Chevrolet Division, and in telephone conversations with other dealers. It was acknowledged from the beginning that substantial unanimity would be essential if the agreements were to be forthcoming. And once the agreements were secured, General Motors both solicited and employed the assistance of its alleged co-conspirators in helping to police them. What resulted was a fabric interwoven by many strands of joint action to eliminate the discounters from participation in the market, to inhibit the free choice of franchised dealers to select their own methods of trade, and to provide multilateral surveillance and enforcement. This process for achieving and enforcing the desired objective can by no stretch of the imagination be described as "unilateral" or merely "parallel."[21]

This conduct was illegal per se. "Exclusion of traders from the market by means of combination or conspiracy is so inconsistent with the free market principles embodied in the Sherman Act that it is not to be saved by reference to the need for preserving the collaborators' profit margins or their system for distributing automobiles, any more than by reference to the allegedly tortious conduct against which a combination or conspiracy may be directed. . . .[22] In addition, it was price fxing.[23]

Recent lower court cases

The various courts of appeals have interpreted and modified the Supreme Court's rulings on hub-and-spoke conspiracies.

Toys “R” Us

Dickson v. Microsoft

PepsiCo v. Coca-Cola

Apple (eBook Case)

Guitar Center

See also

  • Barak Orbach, Hub-and-Spoke Conspiracies, the antitrust source (April 2016)

References

The citations in this article are written in Bluebook style. Please see the talk page for more information.

  1. ^ The U.S. use of the doctrine can be traced to an origin in the 1930s or 1940s. See Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939); Kotteakos v. United States, 328 U.S. 750 (1946). But since 2000 European cartel authorities have begun to use the concept. See, e.g., JJB Sports PLC v Office of Fair Trading, [2006] EWCA Civ 1318(UK Ct App 2003). See also News Ltd v Australian Rugby League Ltd (No 2) (1996) 64 FCR 410 (Australia).
  2. ^ United States v. Newton, 326 F.3d 253, 255 n.2 (1st Cir. 2003).
  3. ^ Howard Hess Dental Labs. Inc. v. Dentsply Int’l, Inc., 602 F.3d 237, 255 (3d Cir. 2010).
  4. ^ Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939); Kotteakos v. United States, 328 U.S. 750 (1946).
  5. ^ 306 U.S. at 214-15.
  6. ^ 306 U.S. at 216-17.
  7. ^ 306 U.S. at 221–22.
  8. ^ 306 U.S. at 226–27.
  9. ^ 328 U.S. at 755.
  10. ^ Barak Orbach, Hub-and-Spoke Conspiracies, the antitrust source (April 2016).
  11. ^ 316 U.S. 265 (1942),
  12. ^ 316 U.S. at 275.
  13. ^ 316 U.S. at 275.
  14. ^ 346 U.S. 537 (1954).
  15. ^ 346 U.S. at 541.
  16. ^ 359 U.S. 207 (1959).
  17. ^ 359 U.S. at 213.
  18. ^ 362 U.S. 29 (1960).
  19. ^ 384 U.S. 127 (1966).
  20. ^ 384 at U.S. 143.
  21. ^ 384 U.S. at 144-45.
  22. ^ 384 U.S. at 146.
  23. ^ 384 U.S. at 147-48.
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