Florida Law Review Volume 60|Issue 3 Article 4 11-18-2012 Much Ado About Nothing? The Antitrust Implications of Private Equity Club Deals Jessica Jackson Follow this and additional works at:http://scholarship.law.ufl.edu/flr Part of theAntitrust and Trade Regulation Commons, and theEnergy Law Commons Recommended Citation Jessica Jackson,Much Ado About Nothing? The Antitrust Implications of Private Equity Club Deals, 60 Fla. L. Rev. 697 (2008). Available at: http://scholarship.law.ufl.edu/flr/vol60/iss3/4 This Note is brought to you for free and open access by UF Law Scholarship Repository. It has been accepted for inclusion in Florida Law Review by an authorized administrator of UF Law Scholarship Repository. For more information, please [email protected]. Jackson: Much Ado About Nothing? The Antitrust Implications of Private Equ NOTES MUCH ADO ABOUT NOTHING? THE ANTITRUST IMPLICATIONS OF PRIVATE EQUITY CLUB DEALS Jessica Jackson* I. INTRODUCTION. .................................... 697 II. ANTITRUST LAW BACKGROUND. ....................... 701 A. Development of Antitrust Standards. ................. 702 B. A Blending of the Legal Standards. .................. 705 III. THE RISE OF PRIVATE EQUITY.......................... 706 A. Defining Private Equity............................ 706 B. Why Join a Private Equity Club?..................... 708 C. Private Equity Club Agreements. .................... 710 IV. JOINT VENTURE TREATMENT UNDER ANTITRUST LAW. ..... 712 A. Classification of Private Equity Clubs................. 712 B. General Treatment of Joint Ventures.................. 714 C. Treatment of Purchasing Joint Ventures............... 716 V. ANTITRUST ANALYSIS OF PRIVATE EQUITY CLUBS.......... 718 A. Full-Blown Rule of Reason Analysis.................. 720 1. Market Power Factor. .......................... 720 2. Competitive Harm Factor........................ 723 3. Economic-Efficiency-Enhancement Factor. ......... 725 4. Rule of Reason Balancing of the Factors............ 727 B. Alternate Analysis: Ancillary Restraints Doctrine. ...... 728 VI. CONCLUSION. ...................................... 730 I. INTRODUCTION In May 1976, with merely $120,000 and a few metal chairs left behind from a prior tenant, Kolberg Kravis Roberts & Co. (KKR) opened its doors.1 Though few people outside Wall Street circles knew of this start-up * J.D. 2008, University of Florida Levin College of Law. This Note is dedicated to my loving husband, Patrick Jackson, for all of his encouragement and support. I would also like to thank my parents, Robert and Margie Aronson, as well as my sister, Brittany Aronson, for always believing in me. 1. GEORGE ANDERS, MERCHANTS OF DEBT, at xv (1992). 697 Published by UF Law Scholarship Repository, 2008 1 Florida Law Review, Vol. 60, Iss. 3 [2008], Art. 4 698 FLORIDA LAW REVIEW [Vol. 60 company, by the 1980s its reputation as a takeover machine brought it notoriety.2 One can only imagine what went on behind closed doors, but whatever happened, it worked. By 1989, KKR had become the largest client of accounting giant Deloitte & Touche, with General Motors following as a close second.3 The “Age of Leverage” peaked in 1990 when KKR took over RJR Nabisco.4 Until 2006, this takeover was the largest in history and is still considered one of the largest ever.5 The deal almost ruined KKR,6 yet KKR managed to acquire many other companies in the ensuing years. In late February 2007, KKR and other private equity firms announced another record-breaking deal.7 An investor group led by KKR and Texas Pacific Group (TPG) purchased TXU Corporation, a Texas-based energy company, for an unprecedented $45 billion.8 GS Capital Partners, Lehman Brothers, Citigroup, and Morgan Stanley became equity partners at closing.9 An official statement explained that the new owners planned to have stronger environmental and climate stewardship policies, to invest in alternative energy, and to focus on the electric consumer market by delivering both price cuts and protection.10 Although a deal of this volume may seem extraordinary, it is only one of the many mega-deals in the realm of private equity,11 which has become a vital engine for investment in our economy.12 2. Id. at xiv–xv. 3. Id. at xiv. 4. Id. at xx. 5. As of February 2007 the RJR Nabisco deal was still the third largest private equity deal. See Private Equity Power List: Top Ten Deals, CNNMONEY.COM, Feb. 23, 2007, http://money.cnn.com/ 2007/02/16/magazines/fortune/top10.fortune/index.htm (listing the most expensive private equity deals of all time). 6. ANDERS, supra note 1, at xx. 7. This is the largest private equity deal as of April 2008. KKR, TPG-Led Consortium to Acquire TXU, ALTASSETS, Feb. 26, 2007, http://www.altassets.com/news/arc/2007/nz10351.php. 8. Id. 9. Id. 10. News Release, TXU Corp., TXU to Set New Direction as Private Company (Feb. 26, 2007), available at http://www.txucorp.com/media/newsrel/detail.aspx?prid=1020. 11. See supra note 5; see also infra Part III.A for a thorough description of private equity. Briefly explained, “[p]rivate-equity firms solicit money from wealthy individuals and institutions such as pension funds and then buy companies—private firms or public ones that want to go private. They often use debt to help finance the purchases. They seek to fix operations and cut costs and then make a return by selling the companies or taking them public, usually a few years later.” Rick Rothacker, Private-Equity Firms Grow, CHARLOTTE OBSERVER, Nov. 3, 2006, at 1D. As an aside, insider trading allegations arose with the TXU deal and at least one banker was convicted in a New York court. See Michael J. DeLa Merced, Former Credit Suisse Banker Convicted of Insider Trading by U.S. Court, INT’L HERALD TRIB., Feb. 5, 2008, http://www.iht.com/articles/2008/02/05/business/05insider.php. 12. Private equity has become a very important part of the economy because it has raised a http://scholarship.law.ufl.edu/flr/vol60/iss3/4 2 Jackson: Much Ado About Nothing? The Antitrust Implications of Private Equ 2008] THE ANTITRUST IMPLICATIONS OF PRIVATE EQUITY CLUB DEALS 699 Generally, private equity is any equity investment that is not freely tradable on public stock markets.13 A trend contributing to the success of private equity is a strategy known as “clubbing.” Clubbing occurs when at least two buyout firms join forces to purchase a company.14 Buyout firms cite many reasons for clubbing, such as spreading the risk of a single deal or amassing sufficient capital to acquire a huge corporate target.15 But clubbing can carry negative consequences as well, especially if companies use the practice to inhibit competition. This concern apparently worried the Department of Justice (DOJ), which in October 2006 launched an inquiry into the potentially anticompetitive behavior of private equity firms—an inquiry that could unearth antitrust violations.16 The DOJ is examining the possibility of collusion among private equity firms and is trying to discover attempts by clubs to reduce purchase prices.17 The inquiry started with a two-page letter sent to several of the tremendous amount of money, which allows private equity to do things that it could not do before. Ken MacFadyen, 2007: A Look Back Provides a 2007 Roadmap for the Private Equity and Private Placement Markets, INVESTMENT DEALERS’ DIG., Dec. 18, 2006, at 12, 14 (citing Mark Opel, Principal, American Capital Partners). MacFadyen stated that “2006 will be remembered as the year private equity came out of its shell.” Id. at 12; see also Kit R. Roane, The New Face of Capitalism, U.S. NEWS & WORLD REP., Dec. 4, 2006, at 48, 48, 51 (explaining that club deals accounted for $414 billion in buyouts from December 2005 to December 2006 and listing some of the biggest brands that have now gone private including, “Clear Channel Communications, Cablevision, Reader’s Digest, Dunkin’ Donuts, SunGard Data Systems, Freescale Semiconductor, Toys “R” Us, Neiman Marcus, Metro-Goldwyn-Mayer, and hospital giant HCA, to note just a few”). 13. Investor Words, Private Equity Definition, http://www.investorwords.com/3853/private_ equity.html (last visited May 13, 2008). 14. Arleen Jacobius, Club Deal Probe Could Be Good News for Investors, PENSIONS & INVESTMENTS, Oct. 16, 2006, at 3. 15. Id. 16. Tom Bawden, Buyout Firms in U.S. Cartel Inquiry, TIMES (London), Oct. 11, 2006, at 44. The DOJ Antitrust Division and the Federal Trade Commission (FTC) both have public authority to enforce antitrust laws. The DOJ has jurisdiction pursuant to the Sherman Act and the FTC can exercise additional authority pursuant to the Federal Trade Commission Act. Although they have concurrent jurisdiction over some aspects of antitrust law, the DOJ has exclusive jurisdiction over criminal matters. Private civil enforcement can also be sought by those suffering antitrust injury, which may be difficult to prove. E. THOMAS SULLIVAN & JEFFREY L. HARRISON, UNDERSTANDING ANTITRUST AND ITS ECONOMIC IMPLICATIONS § 3.01, at 45 (4th ed. 2003). For information on private civil actions against private equity firms, see generally David B. Caruso, Investors Sue Private Equity Firms, ASSOCIATED PRESS, Nov. 15, 2006, available at http://www.whafh.com/modules/press_release/?action=view&id=60. Caruso’s article discusses a lawsuit filed against thirteen companies that engaged in private equity club deals. Id.; see also Murphy v. Kohlberg Kravis Roberts & Co., No. 1:06-cv-13210 (S.D.N.Y. filed Nov. 15, 2006). 17. Bawden, supra note 16. The DOJ could be focusing on agreements between particular bidders. Joint bids may be difficult to attack for efficiency reasons. Red flags would be agreements to pull out of a bid, rewards for pulling out of bids, or rotating bids between deals. The DOJ would want to look at how deals go together by sequence. Questions that should be asked are those such as the circumstances of the particular deal, who is participating, and how the participants are Published by UF Law Scholarship Repository, 2008 3 Florida Law Review, Vol. 60, Iss. 3 [2008], Art. 4 700 FLORIDA LAW REVIEW [Vol. 60 largest private equity firms seeking voluntary, general information about club deals since January 2003.18 Although seemingly straightforward, the inquiry presents many complex issues that cannot be easily resolved.19 Irrespective of the outcome, the private equity industry is paying attention.20 Private equity will likely need to change if it wishes to continue assembling mega-deals like the TXU deal. This Note addresses the antitrust issues that clubbing raises and argues that the antitrust laws should not restrict clubbing—absent some egregious conduct—and that courts should apply rule of reason analysis rather than per se rules to these sorts of antitrust claims. Part II provides a general background of antitrust law and the various standards that courts apply to private equity clubs. Part III explains private equity and fleshes out what a club deal is and how it works. Part IV discusses antitrust law within the context of joint ventures and sets out the varying standards that could apply to private equity clubs. Part V applies the antitrust analysis to private equity clubbing. Finally, Part VI concludes by suggesting ways to deal with antitrust problems and by examining some of the underlying issues.21 chosen. Dan Slater, Club Deals: Collusion or Illusion?, THEDEAL.COM, Nov. 10, 2006, http://www.thedeal.com (available by subscription). 18. Letters seeking information such as bidder names and price changes were sent to KKR, Silver Lake Partners, The Carlyle Group, and Clayton, Dubilier & Rice. Dennis K. Berman & Henny Sender, Private-Equity Firms Face Anticompetitive Probe; U.S.’s Informal Inquiries Have Gone to Major Players Such as KKR, Silver Lake, WALL ST. J., Oct. 10, 2006, at A3; see also KKR & Co. L.P., Registration Statement (Form S-1A), at 38 (Nov. 13, 2007). This Note discusses the TXU deal merely as an example of the clubbing practice—the acquisition was separately approved and not under any investigation. See Elizabeth Souder, Buyout Gets Final OK from Nuclear Regulators; Buyers Now Must Finish Getting the Financing in Place for the Deal, DALLAS MORNING NEWS, Sept. 12, 2007, at 4D (explaining that TXU obtained the final approval that was required for the deal to close). 19. Tom Allchorne, U.S. Department of Justice Launches PE Probe, EUR. VENTURE CAP. J., Nov. 2006, at 48, 49 (estimating that it could take up to three years before the inquiry concludes); see also M. Cohn, DOJ Probes Private Equity Firms, RED HERRING, Oct. 10, 2006, http://www.redherring.com/Home/19112 (noting that because these parties are sophisticated and will not engage in facially illegal activities, it will be difficult to prove anything is wrong). 20. Richard L. Reinish & Ronan P. O’Brien, Private Equity and Antitrust Law: Primer in the Face of the DOJ’s Investigation of Possible Anticompetitive Behavior, MGMT. ALERT (Seyfarth & Shaw LLP), Oct. 2006, http://www.seyfarth.com/dir_docs/news_item/8e851cfc-548f-4e8d-9258- a20fa0b6ed0c_documentupload.pdf. Many feel that unless the DOJ finds the “smoking gun—evidence of a meeting or meetings of the head honchos of the top firms to slice up the pie”—then there is not much to worry about. Allchorne, supra note 19, at 49. Certain authorities feel that clubs have been engaging in suspect behavior for a long time. Id. As of March 2008 it is uncertain whether the investigation is still ongoing. Arlene Jacobius, Club Deals See Silver Lining in Federal Court Ruling, PENSIONS & INVESTMENTS, Mar. 17, 2008, at 24. 21. Antitrust laws are theoretically designed to protect consumers, so literature often focuses on the effects on the ultimate consumer. See, e.g., Jacqueline Dowd, Note, Application of the Antitrust Laws to Newspaper Distribution Systems: The Sherman Act Turned on Its Head, 38 U. http://scholarship.law.ufl.edu/flr/vol60/iss3/4 4 Jackson: Much Ado About Nothing? The Antitrust Implications of Private Equ 2008] THE ANTITRUST IMPLICATIONS OF PRIVATE EQUITY CLUB DEALS 701 II. ANTITRUST LAW BACKGROUND Antitrust law regulates competition and involves conflicting underlying policies and difficult facts. Despite policy differences,22 commentators agree that the antitrust laws were written primarily to encourage competition.23 Over the years, courts have used their discretionary power under § 1 of the Sherman Act to address antitrust issues, resulting in a rich and changing jurisprudence.24 Section 1 of the Sherman Act states: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony . . . .25 Section 1 of the Act outlaws horizontal restraints that may affect trade or commerce.26 Horizontal restraints occur “[w]hen competitors enter into an agreement which interferes with interstate commerce . . . [such as] price fixing, market divisions or concerted refusals to deal.”27 The Act seeks to prevent restraints that restrict output, increase prices, or in some other way exclude competition, but the Act has been applied differently depending largely on policies employed by the courts.28 The next section follows the development of the two standards that courts have used when applying the Sherman Act: the rule of reason and the per se standard. The rule of reason strikes a balance between procompetitive and anticompetitive behavior, while the per se standard simply prohibits certain activities. The last section explains how the Supreme Court has recently blended the FLA. L. REV. 479 (1986) (addressing a prior version of law and arguing that the application of per se rules to newspaper price ceilings fails to protect consumers). A shift from a consumer-oriented focus to a shareholder-oriented focus may be required when looking at private equity clubs. 22. On one end of the spectrum, the principal goals of antitrust law are “[d]ispersing economic power and stimulating access to free markets.” SULLIVAN & HARRISON, supra note 16, § 1.02, at 3. The other end of the spectrum rejects “this politically-centered, distributive-goal analysis . . . [and] conclude[s] that the main, if not the sole, purpose behind [antitrust law is] the promotion of economic efficiency.” Id. at 4; see also Simon A. Rodell, Comment, Antitrust Law: The Fall of the Morton Salt Rule in Secondary-Line Price Discrimination Cases, 58 FLA. L. REV. 967, 968 (2006) (noting that the primary goals of the “antitrust laws were to limit inefficiencies . . . and protect consumers”). 23. SULLIVAN & HARRISON, supra note 16, § 1.02, at 4. 24. Congress delegated to the courts broad authority to fill in the gaps. Id. at 6. 25. 15 U.S.C. § 1 (Supp. IV 2004). 26. SULLIVAN & HARRISON, supra note 16, § 4.01, at 115. 27. Id. 28. Id. Published by UF Law Scholarship Repository, 2008 5 Florida Law Review, Vol. 60, Iss. 3 [2008], Art. 4 702 FLORIDA LAW REVIEW [Vol. 60 standards to evaluate activities on a continuum rather than as falling strictly within the rule of reason or per se standard. A. Development of Antitrust Standards The first case that the Court decided under the Sherman Act, United States v. E.C. Knight Co.,29 narrowed the Act because the Court concluded that the defendant’s actions, mere manufacturing, did not fall within the definition of interstate commerce.30 This narrow interpretation of the Sherman Act would not last. During the early stages of antitrust jurisprudence, the Court struggled with indirect restraints and developed what would become known as the ancillary restraints doctrine, which is still applied today.31 In United States v. Joint-Traffic Ass’n,32 the Court suggested that it would permit indirect restraints,33 and formally announced this doctrine in Addyston Pipe & Steel Co. v. United States.34 The doctrine essentially says that “all direct restraints are ipso facto unlawful, even when the outcome is unreasonable; ancillary restraints which are unreasonable are unlawful; and ancillary restraints that are reasonable are lawful.”35 Standard Oil Co. v. United States36 demonstrates the Court’s struggle with interpreting § 1 of the Sherman Act and the breadth of the statutory language, as well as a change in the ancillary restraints doctrine.37 In Standard Oil, the Court clarified that the rule of reason applied to both direct and ancillary restraints.38 The Court not only advanced the rule of reason, but also recognized a per se standard.39 In applying the rule of reason, the Court assessed the reasonableness of the agreement, whether ancillary or direct. However, certain types of agreements, such as price- fixing agreements, were presumptively illegal naked restraints.40 Early cases under the Sherman Act focused on small business.41 In United States v. Trans-Missouri Freight Ass’n,42 the Court worried that 29. 156 U.S. 1 (1895). 30. Id. at 16–17. 31. SULLIVAN & HARRISON, supra note 16, § 4.04, at 124–25; see infra Part V.B. 32. 171 U.S. 505 (1898). 33. Id. at 568. 34. 175 U.S. 211, 228–29 (1899). 35. SULLIVAN & HARRISON, supra note 16, § 4.04, at 124. 36. 221 U.S. 1 (1911). 37. SULLIVAN & HARRISON, supra note 16, § 4.05, at 127. 38. Standard Oil, 221 U.S. at 66. 39. See id. at 66–67. 40. See id.; SULLIVAN & HARRISON, supra note 16, § 4.05, at 127 & n.75. 41. See Animesh Ballabh, Antitrust Law: An Overview, 88 J. PAT. & TRADEMARK OFF. SOC’Y 877, 885–88 (2006) (discussing the progression of antitrust law and the early concern over large business trusts). 42. 166 U.S. 290 (1897). http://scholarship.law.ufl.edu/flr/vol60/iss3/4 6 Jackson: Much Ado About Nothing? The Antitrust Implications of Private Equ 2008] THE ANTITRUST IMPLICATIONS OF PRIVATE EQUITY CLUB DEALS 703 commodity price reductions might ruin small businesses; thus, the Court condemned fixing railroad rates by a cartel of several railroads.43 The Court focused again on small business in Chicago Board of Trade v. United States,44 where the Court demonstrated a desire to promote competitive equality and initially announced the rule of reason approach. At issue was the legality of an agreement, by members of the Board of Trade, that regulated after-hour grain prices.45 The Court set forth a test to determine the legality of an agreement: whether the restraint was merely regulatory, thus promoting competition, or whether it was imposed to suppress and possibly destroy competition.46 In applying this now-classic rule of reason test, the Chicago Board Court upheld the agreement because the agreement improved, rather than destroyed, market conditions.47 Both Trans-Missouri and Chicago Board reflect the Court’s concern for small competitors unable to compete against larger, more efficient firms.48 The Court continued expanding its interpretation of the Sherman Act in Appalachian Coals, Inc. v. United States49 by “advanc[ing] a rule of broad discretion in favor of courts weighing competitive market factors before reaching antitrust conclusions.”50 Yet the Court did not abandon the per se standard for egregious behavior like price fixing. In United States v. Trenton Potteries Co.,51 the Court developed the per se standard in more detail.52 The Court indicated that an agreement would be per se unlawful only if it was effective but left open whether market power was necessary.53 In United States v. Socony-Vacuum Oil Co.,54 the Court answered this question, finding that market power was not a requirement for a per se violation of the Sherman Act.55 In developing antitrust law, the Warren Court used a structuralist approach to develop the per se standard and disregarded the rule of reason.56 The Court explained in Northern Pacific Railway Co. v. United 43. Id. at 323–25. 44. 246 U.S. 231 (1918). 45. Id. at 237. 46. Id. at 238. 47. Id. at 240. 48. SULLIVAN & HARRISON, supra note 16, § 4.02, at 116. 49. 288 U.S. 344 (1933). 50. SULLIVAN & HARRISON, supra note 16, § 4.05, at 128; see Appalachian Coals, 288 U.S. at 360–61. 51. 273 U.S. 392 (1927). 52. See id. at 396–97; SULLIVAN & HARRISON, supra note 16, § 4.06, at 129. 53. SULLIVAN & HARRISON, supra note 16, § 4.06, at 130. 54. 310 U.S. 150 (1940); see infra note 173. 55. Socony-Vacuum, 310 U.S. at 224 n.59. 56. SULLIVAN & HARRISON, supra note 16, § 4.02, at 116. The Warren Court’s structuralist approach “focused on the structure of markets, reasoning that normal market structures will yield competitive environments, at least in the absence of explicit horizontal price fixing,” which led to Published by UF Law Scholarship Repository, 2008 7 Florida Law Review, Vol. 60, Iss. 3 [2008], Art. 4 704 FLORIDA LAW REVIEW [Vol. 60 States57 that the per se approach avoided conducting the complicated industry-specific analysis that the rule of reason required, “an inquiry so often wholly fruitless when undertaken.”58 During this time, the Warren Court would likely have found that groups acting in concert, like the firms in the TXU deal, and the surrounding restraints that these groups created were per se illegal.59 The Burger Court moved in, cast aside structural analysis, and focused on economic efficiency.60 In United States v. United States Gypsum Co.,61 the rule of reason analysis re-emerged.62 The case clarified that the Court preferred to view antitrust cases with an affinity for economic efficiency.63 The Court now preferred to weigh competitive harm against economic benefit, even when the conduct in question could directly affect prices, and consequently often chose a market solution over an antitrust intervention.64 For example, in Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. (BMI),65 the Court rejected a per se analysis and instead examined the redeeming qualities of the challenged practice.66 Up to this point in the jurisprudence, two differing schools of thought created two vastly different categories. The rule of reason balancing test was distinct from the bright-line per se standard. Yet having two completely separate categories would soon be a thing of the past. per se analysis application. Id.; see United States v. Container Corp. of Am., 393 U.S. 333, 335–37 (1969) (focusing on market structure and finding that “[t]he limitation or reduction of price competition brings the case within the ban [of § 1], for . . . interference with the setting of price by free market forces is unlawful per se” (citation omitted)). 57. 356 U.S. 1 (1958). 58. Id. at 5. 59. See David A. Balto, The Rule of Reason: Tension in the Law of Joint Ventures, in 45TH ANNUAL ADVANCED ANTITRUST SEMINAR: DISTRIBUTION AND MARKETING 181, 183, 188–89 (PLI Corp. Law & Practice, Course Handbook Series No. 8497, 2006). For examples of joint ventures perceived as cartel-type arrangements and struck down as per se illegal, see United States v. Topco Assocs., Inc., 405 U.S. 596, 608 (1972); United States v. Sealy, Inc., 388 U.S. 350, 357–58 (1967); Timken Roller Bearing Co. v. United States, 341 U.S. 593, 598 (1951), overruled in part by Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). 60. SULLIVAN & HARRISON, supra note 16, § 4.06, at 117. 61. 438 U.S. 422 (1978). 62. See id. at 441–43. 63. SULLIVAN & HARRISON, supra note 16, § 4.06, at 118. 64. Id. 65. 441 U.S. 1 (1979); see infra Part IV.B. 66. BMI, 441 U.S. at 13. http://scholarship.law.ufl.edu/flr/vol60/iss3/4 8 Jackson: Much Ado About Nothing? The Antitrust Implications of Private Equ 2008] THE ANTITRUST IMPLICATIONS OF PRIVATE EQUITY CLUB DEALS 705 B. A Blending of the Legal Standards Historically, the Supreme Court tackled antitrust problems by applying either the rule of reason or the per se standard, but in recent years the Court has blurred the standards. The Court indicated in National Collegiate Athletic Ass’n v. Board of Regents of the University of Oklahoma67 that in some circumstances a full rule of reason analysis may not be necessary.68 In 1988, the Federal Trade Commission (FTC) articulated a new rule of reason. In In re Massachusetts Board of Registration in Optometry,69 the FTC extended recent Supreme Court jurisprudence on horizontal restraints and set forth a three-step analysis to determine whether a restraint is unlawful.70 Under the new analysis, the FTC explained that courts should look first at whether a restraint is inherently suspect.71 A court must determine whether a procompetitive justification or a theory of competitive harm, which would prove a defendant’s market power, needs to be presented to win the case.72 If the restraint is not inherently suspect, the traditional rule of reason applies. Courts must determine whether there is a plausible efficiency justification for the practice. If no credible justification exists, the practice is condemned.73 If the justification is plausible, courts should examine whether the justification is valid.74 If it is valid, the next step is a full-blown rule of reason analysis.75 If not, the restraint is declared unlawful under the “quick-look” rule of reason,76 and no further circumstantial inquiry is required.77 Several subsequent FTC decisions have employed this three-step approach.78 Further, in California Dental Ass’n v. FTC,79 the Supreme Court affirmed the quick-look analysis and indicated that a spectrum of analyses exists.80 In stressing the flexibility of the rule of reason, the Court 67. 468 U.S. 85 (1984). 68. Id. at 110 n.42. 69. 110 F.T.C. 549 (1988), available at 1988 WL 1025476. 70. Id. at 8–13 (Commission opinion). The FTC has jurisdiction and authority to enforce the Sherman Act. See 15 U.S.C. § 21 (2000); 54A Am. Jur. 2d Monopolies and Restraints of Trade § 1234 (2008). 71. Mass. Bd. of Registration, 1988 WL 1025476, at 12. 72. Id. 73. Id. 74. Id. at 12–13. 75. Id. at 13. 76. Balto, supra note 59, at 190. 77. Mass. Bd. of Registration, 1988 WL 1025476, at 13 (Commission opinion). 78. See New England Motor Rate Bureau, Inc., 112 F.T.C. 200 (1989), available at 1989 WL 1126783, at 26–27 (Commission opinion); Detroit Auto Dealers Ass’n, 111 F.T.C. 417 (1989), available at 1989 WL 1126784, at 20–21 (Commission opinion). 79. 526 U.S. 756 (1999). 80. Id. at 780. Although the California Dental Court found this analysis inappropriate Published by UF Law Scholarship Repository, 2008 9