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In Re: Sulfuric Acid Antitrust Litigation.

December 27, 2012

IN RE: SULFURIC ACID ANTITRUST LITIGATION. APPEAL OF: OHIO CHEMICAL SERVICES, ET AL., PLAINTIFFS, CROSS-APPEAL OF: FALCONBRIDGE, LTD., ET AL., DEFENDANTS.


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 03 C 4576--James F. Holderman, Chief Judge.

The opinion of the court was delivered by: Posner, Circuit Judge.

ARGUED SEPTEMBER 21, 2012

Before POSNER, KANNE, and SYKES, Circuit Judges.

This is a class action suit under section 1 of the Sherman Act, 15 U.S.C. § 1, that after certification of the class was dismissed on the merits when shortly before the trial was scheduled to begin the district judge ruled that the case could not go to trial on a theory of per se liability. The plaintiffs could have gone to trial on a theory of liability under the rule of reason, but preferred to appeal the dismissal, hoping we would order the reinstatement of their per se case. The dismissal is final because the plaintiffs have made clear that the case is over if they are not allowed to try it as a per se case.

The class consists of chemical companies that purchase sulfuric acid as one of the inputs into their production of chemicals. The defendants own smelters that process nonferrous minerals such as nickel and copper. They also produce sulfuric acid and sell or sold it to the mem- bers of the class.

The defendants cross-appeal, asking that if (but only if) we reverse the dismissal of the suit, we decertify the class. The purpose of the "only if" qualification is to make the judgment bind the entire class if we affirm the dismissal, which it would not do if the class were decerti- fied. See Smith v. Bayer Corp., 131 S. Ct. 2368, 2380 (2011). If we reverse, and allow the class members to press their theory of per se liability, the defendants would prefer to fight the class members one by one, which would be the result of decertification of the class, rather than have to face all of them in a single trial that could produce a monstrous judgment. It is such threats of ruin that force most defendants in class action suits to settle if a class is certified. In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1299-1300 (7th Cir. 1995).

The abiding puzzle of the plaintiffs' appeal is why the lawyers for the class, having spent almost nine years litigating the case in the district court, refused to go to trial. Though the trial would have been governed by the rule of reason, probably all that this would have meant in a case such as this is that the defendants would have had greater latitude for offering justifica- tions for what the plaintiffs claim is a price-fixing con- spiracy than if the standard governing the trial had been the per se rule, which treats price fixing by competi- tors as illegal regardless of consequences or possible justifications. Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006). The plaintiffs do not concede that the conduct they challenge was reasonable and therefore lawful; but their refusal to go to trial under the rule of reason suggests that they expected a jury to find that it was.

From remarks by their lawyer at the oral argument we infer that they think that in a trial governed by the rule of reason they would have had to prepare a radically different case in chief, proving not only that the defendants fixed prices (all they'd have to prove, besides damages, in a per se case), but also that the defendants had market power (that is, the power to raise price above the competitive level without losing so much business to other sellers that the price would quickly fall back to the competitive level) and that their collusive activity was indeed anticompetitive. Doubtless in most cases the prima facie case under the rule of reason requires proof "that the defendant has sufficient market power to restrain competition substantially," as we said in General Leaseways, Inc. v. National Truck Leasing Associa- tion, 744 F.2d 588, 596 (7th Cir. 1984). But a plaintiff who proves that the defendants got together and agreed to raise the price (whether directly or by restricting output, which would have the same effect) that he paid them to buy their products--which is what the plaintiffs in this case would have had to prove under the per se rule to establish liability and obtain damages--has made a prima facie case that the defendants' behavior was unreasonable. He need not prove market power; even though by definition without it a firm or group of firms can't harm competition, it is not a part of the prima facie case of illegal per se price fixing. E.g., National Collegiate Athletic Association v. Board of Regents, 468 U.S. 85, 109-10 (1984). But even if a challenged practice doesn't quite rise to the level of per se illegality, it may be close enough to shift to the defendant the burden of showing that appearances are deceptive and really the behavior that the plaintiffs have challenged is not anticompetitive. Of course there would be more work for the plaintiffs if the defendants in this case were able to create a triable issue of justification, but, as we have just explained, probably less than they think.

But this is a detail; the question is whether the judge was right to think this a rule of reason case. Before turning to that question, we address briefly the plain- tiffs' argument that the district court's ruling on the question was not only substantively unsound but proce- durally irregular. The district judge who had handled the lengthy pretrial proceedings in this case had retired and the case had been reassigned. The original judge, in denying summary judgment (except on one issue) for the defendants, had, rather oddly, refused to decide whether the case should proceed as a per se case or a rule of reason case. After the case was reassigned and a trial date set, the defendants became concerned that they didn't know what kind of trial to prepare for, so they asked the judge to decide, and he said rule of reason. His ruling was abrupt and not explained, but whether it was correct is a question of law that we can decide without benefit of an analysis by the district judge. See Deutscher Tennis Bund v. ATP Tour, Inc., 610 F.3d 820, 829 n. 7 (3d Cir. 2010).

So let's decide it; concretely, let's decide whether the challenged practices are the sort that fall within the scope of the per se rule against price fixing, or fall outside it in which event the judge was right to rule that a trial would be governed by the rule of reason.

The principal defendants are Noranda, Inc. and Falconbridge Ltd., Canadian mining companies that in 2005, after the period of the alleged antitrust violations (1988-2002), merged to form a single company named Xstrata Canada. During the relevant period Noranda owned between 46 and 60 percent of Falconbridge's common stock, and as a result controlled Falconbridge. They thus were affiliated rather than independent pro- ducers, and in fact pooled and jointly sold their sulfuric acid.

The smelting of nonferrous minerals generates sulfur dioxide as a byproduct, and sulfur dioxide reacts with the water vapor in the atmosphere to create sulfuric acid, which is the acid in acid rain. For environmental reasons the Canadian government requires the mining companies to process the sulfur dioxide into sulfuric acid, which unlike sulfur dioxide does not enter the atmosphere and so does not contribute to the formation of acid rain. Although there is a market for sulfuric acid--it is used in manufacturing fertilizer, paper, and other prod- ucts--Noranda and Falconbridge didn't want to produce the acid because the Canadian market for it is limited and what is not sold is costly to store or--because of further re- strictions imposed by the Canadian government to protect the environment--to dispose of other than by sale. When in the mid-1980s the government increased the amount of sulfur dioxide that smelters were re- quired to capture, Noranda had to build a large new sulfuric acid plant at one of its smelter sites in order to be in compliance with the new requirement.

Thus at the same time that Noranda was involuntarily contributing to the solution of the acid rain problem, it was compounding its own problem (its "personal" prob- lem as it were) of excess production of sulfuric acid--excess because as we said it is a product costly to store or dispose of and difficult to find a market for in Canada. And so in the 1980s Noranda and Falconbridge began looking at the large U.S. market for sulfuric acid. Having virtually no capability for distributing their acid in the United States--no distributors, no customer relationships--they had to create a U.S. distribution network if they wanted to sell sulfuric acid in this coun- try. The logical candidates for such a network were the U.S. producers of sulfuric acid. Although sulfuric acid was an unwanted byproduct of the smelting operations of Canadian mining companies, chemical companies in the United States manufactured it from sulfur and sold it to firms that used it in their own manufacturing. The domestic U.S. production of sulfuric acid (called

"virgin acid") was not very profitable, however, so the Canadian companies saw an opportunity to persuade the producers to distribute the Canadian companies' sulfuric acid ("smelter acid") in lieu of producing their own. The U.S. companies are also the distributors of the sulfuric acid they produced and so had the customer ...


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