The Enigma of the Single Entity

THE ENIGMA OF THE SINGLE ENTITY Mark Anderson* INTRODUCTION ..........................................................................................497 I. THE EXISTENCE OF AN AGREEMENT CONTROLS WHETHER THE COMPETITIVE EFFECT OF MOST BEHAVIOR WILL BE ANALYZED ......................................................................................499 II. THE SUPREME COURT AND THE FICTION OF THE SINGLE ENTITY ........504 A. Wholly Owned Subsidiaries Are Part of the Parent Corporation ..............................................................................504 B. Teams in a Professional Sports League Are Separate Actors ......................................................................................510 III. THEORIES OF THE FIRM AND THE SINGLE ENTITY CONCEPT ...............514 A. Coase Views the Firm as Distinct From the Market ..................515 B. The Nexus of Contracts Concept Denies the Separation of the Firm From the Market .......................................................519 C. The Single Entity Concept from Coasean and Nexus of Contracts Perspectives .............................................................524 IV. SHARING NET PROFITS AND EXERTING SIGNIFICANT CONTROL JUSTIFY SINGLE ENTITY TREATMENT ............................................526 A. Sharing Net Profits Induces Cost Savings Sufficient to Justify Single Entity Treatment ...............................................527 B. When One Person Substantially Controls the Activities of Another They Will Be Considered a Single Entity .................534 C. The Relationship of the Sharing of Profits Test and the Control Test .............................................................................537 D. Partially Owned Subsidiaries: Testing the Tests .....................538 V. COPPERWELD AND AMERICAN NEEDLE UNDER THE SHARING OF PROFITS AND CONTROL TESTS .......................................................543 CONCLUSION ..............................................................................................547 INTRODUCTION The Sherman Act of 1890 allows for the assessment of the competitive * Professor of Law, University of Idaho. B.A. Macalester College (1973), J.D. University of Chicago (1977). 497 498 U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 16:2 effects of defendants’ activities. Section One of the Sherman Act applies only to agreements between two or more actors. A perplexing aspect of the agreement requirement of Section One is that sometimes two or more actors who are parties to an agreement are classified as one person, a “single entity.” Since an agreement requires two or more distinct actors, the single entity fiction precludes finding the required agreement. Therefore, the agreements among actors within an economic unit deemed to be a single entity are invisible for purposes of Section One. Because these agreements within a single entity are deemed not to exist for purposes of Section One, their competitive effects are not assessed. Therefore, the single entity concept controls when the competitive effects of agreements will and will not be subject to Section One scrutiny. This article (1) analyzes the theoretical foundation of the single entity concept and (2) proposes a sequential two-step test for determining when the preclusive effect of the single entity concept is justified. The first section of this article will examine the structure of the Sherman Act, focusing on the assessment of competitive effects of agreements under Section One. Section II will analyze the efforts of the U.S. Supreme Court to address the limits of the single entity concept. The Court has determined that corporations and their wholly owned subsidiaries are incapable of conspiring for purposes of Section One and that teams forming the National Football League are separate entities unprotected by the single entity concept. Section III will analyze the impact of two contrasting theories of the firm on the single entity concept. Ronald Coase’s groundbreaking 1937 essay, The Nature of the Firm, fits neatly with the single entity concept. Coase viewed the firm as consisting of an entrepreneur and his or her employees, and he distinguished activities within the firm from transactions between the firm and other actors. However, the predominant view of the firm for the last several decades has been the “nexus of contracts” concept. The nexus of contracts concept views the firm as a web of explicit and implicit contracts, which includes suppliers of capital, services, and goods together with the purchasers of output. The nexus of contracts approach downplays the distinction between suppliers of services who are employees and suppliers who are not. It also questions whether suppliers of equity capital are “owners” of the firm in any meaningful sense. The nexus of contracts concept rejects the categorical distinction between activity “inside” the Coasean firm and activity “outside” the firm. Section IV will develop a two-stage test for determining the boundaries of a single entity for the purposes of Section One. The test relies on an analysis of the likelihood of incentives for efficiency. Sharing of net profits creates incentives for efficiency, so parties who share net profits should be part of the single entity. Persons significantly controlled 2014] THE ENIGMA OF THE SINGLE ENTITY 499 by parties who share net profits should also be included in the single entity. This is because the people who have the incentive to seek efficiency control the people who lack that incentive. Finally, Section V will apply the tests developed in the preceding section to the facts of Supreme Court cases addressing the single entity concept. I. THE EXISTENCE OF AN AGREEMENT CONTROLS WHETHER THE COMPETITIVE EFFECT OF MOST BEHAVIOR WILL BE ANALYZED The structure of the Sherman Act prohibits a single inquiry into whether conduct is anticompetitive. The Act is divided into two sections, each of which gives rise to claims with two elements. Section One prohibits all contracts, conspiracies, and combinations which unreasonably restrain trade.1 The first element of a claim under Section One is the existence of an agreement between two or more actors. Evidence of an express agreement may directly prove an agreement. Express agreements are sometimes contained in written contracts.2 Express agreements are also contained in rules or bylaws adopted by organizations in order to govern the conduct of their members.3 Section One cases involving such direct proof of agreements turn on the analysis of whether the uncontroverted agreement is a reasonable one. However, parties often vigorously contest the existence of an agreement. Courts have struggled with the standard for when conduct of the parties indicates the existence of an agreement.4 Such conduct can occur both in the context of alleged agreements among competitors5 and in the context of alleged agreements between buyers and sellers.6 In resolving 1. 15 U (...truncated)