Polygram Holding, Inc. v. F.T.C., 03-1293.

• Decision Date: 22 July 2005
• Docket Number: No. 03-1293.,03-1293.
• Parties: POLYGRAM HOLDING, INC., et al., Petitioners v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

416 F.3d 29

POLYGRAM HOLDING, INC., et al., Petitioners v. FEDERAL TRADE COMMISSION, Respondent.

No. 03-1293.

United States Court of Appeals, District of Columbia Circuit.

Argued September 16, 2004.

Decided July 22, 2005.

COPYRIGHT MATERIAL OMITTED

On Petition for Review of an Order of the Federal Trade Commission.

Bradley S. Phillips argued the cause for petitioners. With him on the briefs were Glenn D. Pomerantz and Stephen E. Morrissey.

John F. Daly, Deputy General Counsel for Litigation, Federal Trade Commission, argued the cause for respondent. With him on the brief were Michele Arington, Attorney, Susan A. Creighton, Director, and Richard B. Dagen, Assistant Director.

Before: GINSBURG, Chief Judge, and EDWARDS and ROGERS, Circuit Judges.

Opinion for the Court filed by Chief Judge GINSBURG.

GINSBURG, Chief Judge.

PolyGram Holding, Inc. and several of its affiliates petition for review of an order of the Federal Trade Commission holding PolyGram violated § 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. As detailed below, PolyGram entered into an agreement with Warner Communications, Inc. to distribute the recording of a concert to be given by "The Three Tenors" in 1998. The two companies later entered into a separate agreement to suspend, for ten weeks, advertising and discounting of two earlier Three Tenors concert albums, one distributed by PolyGram and the other by Warner. The Commission held the latter agreement unlawful and prohibited PolyGram from entering into any similar agreement in the future. We agree with the Commission that, although not a per se violation of antitrust law, the agreement was presumptively unlawful and PolyGram failed to rebut that presumption. We therefore deny PolyGram's petition for review.

I. Background

Here are the facts as found by the Commission in its order and opinion of July 28, 2003. See In re PolyGram Holding, Inc., Docket No. 9298(FTC), 2003 WL 21770765, available at http://www.ftc.gov/os/2003/07/polygramopinion.pdf (hereinafter, FTC Op.). The Three Tenors — José Carreras, Placido Domingo, and Luciano Pavarotti — put on spectacular concerts coinciding with the World Cup soccer finals in 1990, 1994, and 1998. PolyGram distributed the recording of the 1990 concert, which became one of the best-selling classical albums of all time. FTC Op. at 5-6. Warner distributed the 1994 concert album, which also met with great success. Both albums remained on the top-ten classical list throughout 1994, 1995, and 1996. Id. at 6.

In late 1997 PolyGram and Warner agreed jointly to distribute the recording of The Three Tenors' July 1998 concert. Warner, which had the worldwide rights, retained the United States rights but licensed to PolyGram the exclusive right to distribute the 1998 album outside the United States, and the companies agreed to share equally the worldwide profit or loss on the project. FTC Op. at 8. The agreement also obligated PolyGram and Warner to consult with one another on all "marketing and promotional activities" for the 1998 concert album, but each company was free ultimately to pursue its own marketing strategy and to continue exploiting its earlier Three Tenors concert album without limitation. The agreement also provided that PolyGram and Warner would collaborate on the distribution of any future Three Tenors album released through August 2002. Id.

Representatives of PolyGram and Warner first met in January 1998 to discuss "marketing and operational issues." One of PolyGram's representatives voiced concern about the effect of marketing the earlier Three Tenors albums upon the prospects for the 1998 concert album and suggested the two companies impose an "advertising moratorium" surrounding the 1998 release, which was scheduled for August 1. According to notes of their next meeting (in March) PolyGram and Warner representatives agreed that "a big push" on the earlier albums "shouldn't take place before November 15." After that meeting, each company instructed its affiliates to cease all promotion of the 1990 and 1994 Three Tenors albums for approximately six weeks, beginning in late July or early August. FTC Op. at 8.

Apparently Warner's overseas division did not get the message because in May it announced an aggressive marketing campaign, scheduled to run through December, to discount and to promote the 1994 album throughout Europe. When PolyGram learned of this, it threatened to "retaliate" by cutting the price of its 1990 album. Accusations then flew between the two companies about which had started the imminent price war. Meanwhile, in June the promoter of The Three Tenors concert informed PolyGram and Warner that the repertoire for the 1998 concert would substantially overlap those of the 1990 and 1994 concerts, which in the view of both PolyGram and Warner executives jeopardized the commercial viability of the forthcoming concert album. FTC Op. at 8-9.

By the time The Three Tenors performed in Paris on July 10, PolyGram and Warner had exchanged letters reaffirming their commitment to suspend advertising and discounting the 1990 and 1994 concert albums and agreeing the moratorium would run from August 1 through October 15. About a week later, however, PolyGram's Senior Marketing Director, who had passed on the details of the agreement to PolyGram's General Counsel, sent a memorandum around the company stating, "Contrary to any previous suggestion, there has been no agreement with [Warner] in relation to the pricing and marketing of the previous Three Tenors albums." Warner followed suit on August 10, sending a letter to PolyGram repudiating any pricing or advertising restrictions relative to its 1994 album. At the same time, however, PolyGram and Warner executives privately assured one another their respective companies intended to honor the agreement, and in fact the companies did substantially comply with the agreement through October 15, 1998. FTC Op. at 9.

In 2001 the Commission issued complaints against PolyGram and Warner charging that, by entering into the moratorium agreement, the companies had engaged in an unfair method of competition in violation of § 5 of the FTC Act. Warner soon consented to an order barring it from making any similar agreement in the future. FTC Op. at 3 n.3. PolyGram contested the charge and, after a trial, an Administrative Law Judge ruled that PolyGram had violated § 5 and ordered PolyGram, like Warner, to refrain from making any similar agreement in the future.

The Commission affirmed the order of the ALJ. After first observing (correctly) that the analysis under § 5 of the FTC Act is the same in this case as it would be under § 1 of the Sherman Act, 15 U.S.C. § 1, FTC Op. at 13 n.11, the Commission revived the analytic framework it had first announced In re Massachusetts Board of Optometry, 110 F.T.C. 549 (1988), which begins with the proposition that conduct "inherently suspect" as a restraint of competition — that is, conduct that "appears likely, absent an efficiency justification, to restrict competition and decrease output" — is to be presumed unreasonable. FTC Op. at 22-24. Only if the competitive harm wrought by the restraint is not readily apparent from the nature of the restraint itself, or the charged party offers a plausible competitive justification for the restraint, must the Commission, under this approach, engage in a more searching analysis of the market circumstances surrounding the restraint. Id. at 29.

Here the Commission determined the agreement between PolyGram and Warner to prohibit discounts and advertising for a time was indeed "inherently suspect" because such restraints by their nature tend to raise prices and to reduce output. FTC Op. at 35-40. The Commission then looked to PolyGram to identify some competitive justification for the restraint. Id. at 40. PolyGram objected that the Commission must first offer some evidence the agreement actually harmed competition. In any event, PolyGram argued, the agreement was justified because it prevented PolyGram and Warner, as distributors of the 1990 and 1994 albums, respectively, from free-riding upon — and thereby diminishing — each other's efforts to promote the 1998 album; hence the restraints created an incentive for each company vigorously to promote the 1998 album and thereby increased output. The Commission rejected that purported efficiency justification as legally insufficient. In the Commission's view, the moratorium agreement could not have had any such procompetitive effect but instead simply shielded the 1998 concert album from the competition of the two earlier albums. Id. at 41-48.

Observing that under the analytic framework of Mass. Board it could have stopped there, the Commission nonetheless went on to rule that, even if PolyGram's efficiency justification were cognizable, the facts simply did not support it, FTC Op. at 50; indeed, the Commission found the moratorium had no effect upon the degree to which the companies promoted the 1998 album and did not make the joint venturers any more likely to release a future Three Tenors album. Id. at 56-57. Thus, upon closer inspection, the Commission confirmed its initial conclusion that the moratorium agreement was an unreasonable restraint of trade in violation of § 1 of the Sherman Act and, hence, an unfair method of competition in violation of § 5 of the FTC Act. Id. at 58.

II. Analysis

PolyGram raises four objections to the decision of the Commission: First, the Commission should not have rejected the free-rider justification as legally insufficient because the moratorium agreement had a legitimate, procompetitive purpose reasonably related to the joint venture. Second, the Commission was required to show the restraints actually harmed competition before it could require PolyGram to proffer a competitive justification. Third, the Commission's findings concerning the competitive impact of the restraint were not supported by substantial evidence. Finally,...