Reversing Prior Order, Utah District Court Holds Per Se Rule Applies To Customer Allocation Agreement
On February 21, 2019, Judge David Sam of the U.S. District Court for the District of Utah reversed course and found that a per se standard applies to a market allocation agreement among competitors in the heir location services market. Judge Sam initially found that the more lenient rule of reason standard should apply. However, following a recent Tenth Circuit ruling, Judge Sam held it is the form of the agreement—not the type of industry—that compels the appropriate standard of review. United States of America, v. Kemp & Associates, Inc. and Daniel J. Mannix, No. 2:16CR403 DS, 2019 WL 763796 (D. Utah Feb. 21, 2019).
Defendants, an heir location service and its chief operating officer, identify heirs to estates of intestate decedents and represent those heirs in probate court on a contingency fee basis. The U.S. Department of Justice brought this case under Section 1 of the Sherman Act alleging that defendants entered into an anticompetitive agreement with a direct competitor. Under the terms of this arrangement, defendant and its competitor would not undercut each other’s prices in exchange for a portion of the contingency fees paid by that client. The government argued that this constituted an illegal market allocation that was per se unlawful.
Judge Sam issued a ruling in August of 2017 recognizing that customer allocations are traditionally subject to per se liability, but held that this case should be subject to the rule of reason. First, Judge Sam found that the agreement “was structured in an unusual way in that it only applied to new customers.” Second, it “affected only a small number of customers, those who were contacted by more than one heir location service.” Finally, the agreement “occurred in an obscure industry with an unusual manner of operation.” Soon after this ruling, Judge Sam dismissed the case as barred by the statute of limitations. DOJ appealed both decisions to the Tenth Circuit Court of Appeals. In October of 2018, the Tenth Circuit reversed Judge Sam’s order regarding the statute of limitations issue. The Tenth Circuit also encouraged the district court to review its earlier decision regarding the rule of reason. United States v. Kemp & Assocs., Inc., 907 F.3d 1264, 1278 (10th Cir. 2018).
In response to this encouragement, Judge Sam reversed his prior holding. In so doing, he acknowledged the Tenth Circuit’s analysis that per se liability stems from the judiciary’s experience with particular business relationships, rather than particular industries. Thus, the court determined that “[t]he Per Se approach need not be ‘justified’ for every industry that has not been subject to significant antitrust litigation.”
Judge Sam then analyzed whether defendants’ agreements are subject to per se liability, and if so, whether any “special circumstances” would extract them from such liability. The court noted that, under the Tenth Circuit’s analysis, per se liability is not impacted by whether an agreement applies to new or existing customers, or whether it affects only a small number of customers. Rather, what matters is if direct competitors entered into an agreement in an attempt to reduce competition. Here, the court found just that.
Finally, the court considered whether any special circumstances would negate the appropriateness of the per se rule. Under the antitrust laws, certain types of agreements are exempt from per se treatment--i.e., valid joint ventures or similar business collaborations between competitors, and agreements that make possible the very existence of a product. Finding that neither of these exceptions applied to the agreements at hand, the court concluded that application of the per se rule was appropriate.