Jump to content

Hub-and-spoke conspiracy

Add links
From Wikipedia, the free encyclopedia

This is an old revision of this page, as edited by PraeceptorIP (talk | contribs) at 03:23, 10 June 2016 (→top: expand intro.). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

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]

The antitrust cases often emphasize the importance of interdependence among the spokes and their recognition of one another. The general criminal cases, such as narcotics conspiracy prosecutions, tend to require only a more general knowledge among the spokes that there is a larger overall unlawful scheme involving other actors who are cooperating with the hub in carrying out the scheme. It is controversial, particularly in the antitrust cases, how much knowledge spoke actors must have of the conduct of other spoke actors—which is to say how much of a "rim" must be put around the "wheel" of the hub-and-spoke conspiracy for it to be a single conspiracy rather than many separate "vertical" conspiracies. There is a controversy and some uncertainty over the legal status of the "rimless" conspiracy—one with very limited interaction among the spokes.

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."

Blumenthal

In Blumenthal v. United States, the Supreme Court looked at the other side of the coin ofKotteakos. The Court distinguished the Kotteakos case involving several conspiracies from the case before it involving one conspiracy:

[In Kotteakos] no two of those agreements were tied together as stages in the formation of a larger all-inclusive combination, all directed to achieving a single unlawful end or result. On the contrary each separate agreement had its own distinct, illegal end. Each loan was an end in itself, separate from all others, although all were alike in having similar illegal objects. Except for Brown, the common figure, no conspirator was interested in whether any loan except his own went through. And none aided in any way, by agreement or otherwise, in procuring another's loan. The conspiracies therefore were distinct and disconnected, not parts of a larger general scheme, both in the phase of agreement with Brown and also in the absence of any aid given to others as well as in specific object and result. There was no drawing of all together in a single, over-all, comprehensive plan. Here the contrary is true. All knew of and joined in the overriding scheme.[14]

Theater Enterprises

In Theatre Enterprises, Inc. v. Paramount Film Distributing Corp.,[15] 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.[16]

Klor's

In Klor’s, Inc. v. Broadway-Hale Stores, Inc.,[17] 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."[18]

Parke, Davis

In United States v. Parke, Davis & Co.[19] 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.,[20] 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.[21]

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."[22]

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. . . .[23] In addition, it was price fxing.[24]

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

The Toys "R" Us chain of retail toy stores, the largest such U.S. chain (selling approximately 20% of all the toys sold in the United States), found itself encountering severe competition from price-cutting warehouse clubs. It became concerned that warehouse clubs—with substantially lower prices—presented a threat to its low-price image and its profits. The FTC determined that to eliminate this threat, Toys "R" Us used its dominant position as a toy distributor to extract parallel agreements from among ten principal toy manufacturers (such as Mattel, Hasbro, Fisher Price, Tyco, and Sega) to stop selling to warehouse clubs the exact same toys that they sold to other toy distributors such as the clubs. The FTC explained that Toys "R" Us wanted "to prevent consumers from comparing the price and quality of products in the clubs to the price and quality of the same toys displayed and sold at Toys "R" Us, and thereby to reduce the effectiveness of the clubs as competitors."

The FTC found that Toys "R" Us also used the acquiescence of one manufacturer to obtain that of others, orchestrating a horizontal agreement among at least seven manufacturers to adhere to Toys "R" Us’s restrictions. The company also used the manufacturers to police one another. When one manufacturer complained that a competitor was selling to warehouse clubs, Toys "R" Us threatened to stop buying that competitor’s products and got its renewed acquiescence to the sales restrictions. The FTC found that the effect of the agreements was to eliminate competition that would have driven Toys "R" Us to lower its prices had Toys "R" Us not taken action to stifle the competitive threat posed by the clubs. The FTC concluded that "Toys "R" Us and its reluctant collaborators set out to eliminate from the marketplace a form of price competition and a style of service that increasing numbers of consumers preferred," and that Toys "R" Us’ had orchestrated a boycott that harmed the clubs, competition, and consumers without any "business justification for a boycott that had [such] a pronounced anticompetitive effect."[25]

In so ruling, the FTC emphasized that "key toy manufacturers were unwilling to refuse to sell to or discriminate against the clubs unless they were assured that their competitors would do the same,” and that Toy "R" Us "acted as the central player in the middle of what might be called a hub-and-spoke conspiracy, shuttling commitments back and forth between toy manufacturers and helping to hammer out points of shared understanding.”[26]

The Seventh Circuit affirmed, comparing the case to Interstate Circuit. The court emphasized FTC findings supporting a hub-and-spoke theory. For example, a Toys "R" Us official testified, "We made a point to tell each of the vendors that we spoke to that we would be talking to our other key suppliers." Mattel and Hasbro executives testified that they went along with "the special warehouse club policy (or, in the Commission's more pejorative language, boycott)" only "because our competitors had agreed" to it.[27]

The Seventh Circuit acknowledged that "there must be some evidence that tends to exclude the possibility' that the alleged conspirators acted independently," but rejected the idea that "the Commission had to exclude all possibility that the manufacturers acted independently." But the FTC relied on evidence even more compelling than that in Interstate Circuit because it included direct communications and interdependence—the manufacturers testified that "the only condition on which each toy manufacturer would agree to [the boycott] demands was if it could be sure its competitors were doing the same thing." And "as is classically true in such cartels," the court said, "they were willing to do so only if TRU could protect them against cheaters."[28]

Dickson v. Microsoft

In Dickson v. Microsoft Corp., the plaintiffs unsuccessfully argued that Microsoft had engaged in a hub-and-spoke conspiracy with three original equipment manufacturers (OEMs)—Compaq, Dell, and PB Electronics—to restrain trade, in violation of § 1 of the Sherman Act, in the sale of operating systems, word processing, and spreadsheet software, and also a conspiracy to maintain Microsoft's alleged monopolies in the same markets, in violation of § 2 of the Sherman Act. The alleged conspiracy was a set of similar licensing agreements in which the licensees agreed: (1) not to remove icons, folders, or Start menu entries from the Windows desktop; (2) not to modify the initial Windows boot sequence; (3) to integrate Microsoft's Internet browser software Internet Explorer (IE) and other application software with Microsoft's operating system software; and (4) to long-term distribution contracts, exclusive dealing distribution arrangements, and per-processor license fees. In exchange, the OEM defendants received various benefits, including discounts on software and "greater cooperation from Microsoft in product development." The OEMs also gained various competitive advantages in selling computer hardware. The district court held that the complaint failed to state a claim upon which relief could be granted, and dismissed the case. An appeal to the Fourth Circuit followed.[29]

The Fourth Circuit said that the allegations described a "rimless wheel" conspiracy or a hub-and-spoke conspiracy. Citing Kotteakos, the court stated, "A rimless wheel conspiracy is one in which various defendants enter into separate agreements with a common defendant, but where the defendants have no connection with one another, other than the common defendant's involvement in each transaction." That is a hub-and-spoke conspiracy "without the rim of the wheel to enclose the spokes." The court added, "In Kotteakos, the Supreme Court made clear that a rimless wheel conspiracy is not a single, general conspiracy but instead amounts to multiple conspiracies between the common defendant and each of the other defendants." Thus, the hub-and-spoke conspiracy claim failed. The claim of separate vertical conspiracies, however, potentially survived a motion to dismiss.[30] The Fourth Circuit dismissed the complaint, however, on other grounds, including insufficient likelihood of substantial anticompetitive effects.

A dissenting judge distinguished Kotteakos from this case and would have found a sufficient allegation of a conspiracy. The missing element in Kotteakos was interdependence; each of the other defendants used Brown's services independently of every other defendant's use. The rimless conspiracy pleaded here had as its elements: (1) an overall unlawful plan; (2) knowledge that others must be involved is inferable to each member, because of his knowledge of the unlawful nature of the subject of the conspiracy, but knowledge on the part of each member of the exact scope of the operation or the number of people involved is not required; and (3) each alleged co-conspirator participated in some way. The dissent argued that the allegations were that "that each OEM joined a conspiracy which it knew was, by its nature, broader than just itself and Microsoft." The dissent said this satisfied the Supreme Court's language on hub-and-spoke conspiracy in Interstate Circuit ("[I]t is elementary that an unlawful conspiracy may be and often is formed without simultaneous action or agreement on the part of the conspirators") and Masonite ("Here, as in Interstate Circuit, . . . [i]t was enough that, knowing that concerted action was contemplated and invited, the distributors gave their adherence to the scheme and participated in it.").[31]

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. ^ Blumenthal v. United States, 332 U.S. 539, 558 (1948).
  15. ^ 346 U.S. 537 (1954).
  16. ^ 346 U.S. at 541.
  17. ^ 359 U.S. 207 (1959).
  18. ^ 359 U.S. at 213.
  19. ^ 362 U.S. 29 (1960).
  20. ^ 384 U.S. 127 (1966).
  21. ^ 384 at U.S. 143.
  22. ^ 384 U.S. at 144-45.
  23. ^ 384 U.S. at 146.
  24. ^ 384 U.S. at 147-48.
  25. ^ Toys “R” Us, Inc., 126 F.T.C. 415, 574–75 (1998).
  26. ^ 126 F.T.C. at 574.
  27. ^ Toys “R” Us, Inc. v. FTC, 221 F.3d 928, 932–33 (7th Cir. 2000).
  28. ^ 221 F.3d at 934-36.
  29. ^ 309 F.3d 193, 198–200 (4th Cir. 2002).
  30. ^ 309 F.3d at 203-05.
  31. ^ 309 F.3d at 216-18.
Retrieved from "https://en.wikipedia.org/w/index.php?title=Hub-and-spoke_conspiracy&oldid=724570791"