Partial Ownership of Subsidiaries, Unity of Purpose, and Antitrust Liability

Partial Ownership of Subsidiaries, Unity of Purpose, and Antitrust Liability Ryan P Meyerst The main statutory scheme for antitrust enforcement was laid out over a century ago, with the passage of the Sherman Act.' Today, it remains in virtually the same form as it did in 1890. But in the face of a changing corporate culture, courts have been faced with interpretive questions that most likely were beyond the purview of the statute's creators. One of the questions raised in recent years concerns the application of the Sherman Act to alleged conspiratorial activity between a parent corporation and its subsidiary Although it might be conceptually difficult to think of a parent and subsidiary "conspiring"-much as it would be to think of your left and right hands "conspiring"-it may be surprising to find that in some situations a parent and a subsidiary can be held liable for antitrust damages when their coordinated activity harms consumers or another competitor. Under existing case law, the activity between a parent and any of its wholly owned subsidiaries is clearly immune from conspiratorial antitrust liability. This clarity ends when courts consider partially B.S. 1999, Harding University; J.D. Candidate 2002, The University of Chicago. Sherman Act, 26 Stat 209 (1890), codified as amended at 15 USC §§ 1-7 (1994). Here I only discuss Sherman Act Section 1 liability. This section governs concerted activ2 ity. See 15 USC § 1 (1994) (prohibiting "contract[s] ...or conspirac[ies] in restraint of trade"). See also text accompanying notes 31-35. Regardless of whether there is Section 1 liability, there might be Section 2 liability if the behavior is egregious enough to "threaten[] actual monopoly." Copperweld Corp v Independence Tube Co, 467 US 752,767 (1984). Section 2 liability requires a heightened showing of anticompetitive behavior and is determined without regard to whether the behavior was concerted or unilateral. See id at 767-68 nn 13-14. See also text accompanying notes 16-30. 3 A parent is a "corporation that has a controlling interest in another corporation," usually "through ownership of more than one-half the voting stock." Black's Law Dictionary 344 (West 7th ed 1999). Likewise, a subsidiary is a "corporation in which a parent corporation has a controlling share." Id at 345. Although by the strict definitional views voting stock is the key factor, it is not clear that courts reserve the terms "parent" and "subsidiary" solely for these situations. Often, courts will simply talk of a parent "owning" a certain percentage of stock in the subsidiary, without reference to the parent's voting control. See, for example, Rohlfing v Manor Care,Inc, 172 FRD 330, 344 (N D 11 1997) (noting the percentages of its subsidiaries the parent corporation "own[ed]"); Bell Atlantic Business Systems Services v Hitachi Data Systems Corp, 849 F Supp 702, 705-06 (N D Cal 1994) (discussing the parent-subsidiary relationship in terms of "ownership"). Thus, it seems that courts use the terms "parent" and "subsidiary" rather loosely to refer to any corporation owning a significant portion of an affiliated corporation. Because of this loose interpretation, the Comment will also use the terms "parent" and "subsidiary" in a broad and general sense not limited to majority interests in voting stock. t 1 1401 1402 The University of Chicago Law Review [68:1401 owned subsidiaries. Some jurisdictions grant immunity to all majority owned subsidiaries, just as they do to wholly owned subsidiaries. Other jurisdictions only grant immunity for coordinated activities with subsidiaries that are at least 90 percent owned. This uncertainty undoubtedly makes corporate officers uneasy. Under a pessimistic view, the risk of liability might even cause a company and its partially owned subsidiary to forego efficient and procompetitive business activities for fear of antitrust liability. This inefficiency will be passed on to the consumer. Prior to 1984, a corporation ran the risk of incurring antitrust liability under Section 1 of the Sherman Act6 for concerted action with a subsidiary corporation that it wholly owned.7 In that year, the Supreme Court ruled that immunity from Section 1 liability should be granted to a parent and its wholly owned subsidiary,8 but the Court did not address whether, and to what extent, the same immunity should be granted when the subsidiary is only partially owned.9 Lower courts have generally held that immunity might be applicable in some of these situations, but they have set inconsistent standards. Some courts use a "de minimis" approach. In practice this means that two corporations have Section 1 immunity when one corporation has an ownership interest in the other corporation that is very close to 100 percent." Other courts grant immunity to partially owned subsidiaries more liberally, through use of a "control approach." Under this standard, all 4 See, for example, Novatel Communications, Inc v Cellular Telephone, 1986 US Dist LEXIS 16017, *24-26 (N D Ga) (granting summary judgment on Sherman Act Section 1 claim because parent was "incapable" of conspiring with its 51 percent owned subsidiary). 5 See, for example, Aspen Title & Escrow, Inc v Jeld-Wen, Inc, 677 F Supp 1477, 1486 (D Or 1977) (extending immunity only to corporations which are a de minimis amount less than 100 percent owned by parent). See also note 10. 6 15 USC § 1. 7 See, for example, Kiefer-Stewart Co v Joseph E. Seagram & Sons, Inc, 340 US 211, 215 (1951) (holding that two wholly owned subsidiaries of a liquor distiller were guilty under Section 1 of the Sherman Act for jointly refusing to supply a wholesaler who declined to abide by a maximum resale pricing scheme). 8 See Copperweld, 467 US at 777 ("Copperweld and its wholly owned subsidiary ... are incapable of conspiring with each other for purposes of § 1 of the Sherman Act."). Copperweldis discussed in further detail in Part I.B. 9 Copperweld, 467 US at 767 ("We do not consider under what circumstances, if any, a parent may be liable for conspiring with an affiliated corporation it does not completely own."). 10 See Aspen Title, 677 F Supp at 1482-83, 1486 (extending Section 1 immunity to a parent corporation that held a 97.5 percent interest in a subsidiary, and denying immunity to other subsidiaries in which it owned 60 percent and 75 percent). It is important to note that there is no clear line at which an ownership of less than 100 percent ceases to qualify as de minimis. At least one court has held that an ownership percentage as low as 91.9 percent qualifies for immunity under the de minimis standard. See Leaco Enterprises,Inc v General Electric Co, 737 F Supp 605, 609 (D Or 1990) (holding that General Electric's 91.9 percent share in its subsidiary was a de minimis amount less than 100 percent). While Aspen Title suggests that percentages less than or equal to 75 percent are insufficient to qualify for immunity under the de minimis approach, (...truncated)