Antitrust Federalism and State Restraints of Interstate Commerce: An Essay for Professor Hovenkamp

This essay examines and critiques the federal antitrust treatment of state legislation that unreasonably restrains interstate commerce, building upon important work on the subject by Herbert Hovenkamp. Such restraints take three forms: (1) legislation authorizing parties to enter unreasonable restraints; (2) legislation compelling conduct that restrains trade; and (3) legislation banning private, wealth-creating conduct that would be lawful under the Sherman Act. The Sherman Act condemns restraints in the first category, unless states “actively supervise” resulting prices and output. However, beginning with Parker v. Brown, 317 U.S. 341 (1943), which scrutinized state-imposed output restrictions, the Supreme Court has repeatedly and unanimously held that the Sherman Act does not preempt state-imposed restraints in the second and third categories. Invoking principles of federalism and state sovereignty, the Court has held that Congress never intended the Sherman Act to preempt such state regulations of economic activity, including those that destroy wealth and injure consumers in other states.As Professor Hovenkamp has previously explained, Parker and its progeny rest upon a “fictional reading of the legislative history of the antitrust laws,” given the dual federalism in place in 1890. This essay elaborates on this assertion, showing that the constitutional landscape extant when Congress passed the Sherman Act excluded the sort of overlapping regulatory authority that gives rise to the possibility of preemption. More precisely, the Supreme Court placed strict limits on the affirmative scope of Congress’s commerce power and employed the negative or dormant implication of the Commerce Clause to invalidate state restraints of the relatively small category of interstate commerce. Such restraints also contravened the due process clause of the 14th Amendment, which the Court and state courts read to ban unreasonable state restrictions on economic liberty. Because state and federal regulatory authority over public and private trade restraints was mutually exclusive, Congress could not have contemplating state-imposed restraints.Of course, the constitutional framework in place in 1890 collapsed in 1937, when the Supreme Court abandoned liberty of contract and ceased placing meaningful limits on the commerce power. At the same time, the Court “unshackled” the states, weakening the Dormant Commerce Clause and empowering states to impose restraints on interstate commerce that pre-1937 case law would have condemned. The Court also expanded the scope of the Sherman Act to reach purely local restraints with tangential connections to interstate commerce. The result was vast overlapping regulatory authority, opening the door to Sherman Act preemption of state restraints of the now-expansive category of interstate commerce. This overlap raised an interpretive question the Court did not face before 1937, namely, whether the Sherman Act preempts unreasonable state restraints of interstate commerce despite the lack of any conscious decision by Congress regarding the treatment of such restraints. This essay briefly reviews the case for and against such preemption and concludes that the case for such preemption is stronger than many have supposed. Nonetheless, the paper offers a two-part alternative to such preemption. First, the Court should restrict the scope of the Sherman Act to reach only those restraints imposing distinct harm on consumers in more than one state. Reducing the reach of the Sherman Act would minimize the sort of federal-state friction that drives the federalism concerns militating against preemption. Second, the Court should revisit its decisions relaxing dormant commerce clause scrutiny of state-imposed restraints. In particular, the Court should repudiate Parker’s less famous holding that a pro-rate scheme imposing nearly all of its costs on consumers in other states is nonetheless consistent with the Dormant Commerce Clause. Such revitalization of the Dormant Commerce Clause would discourage wealth-destroying regulation and enhance price flexibility, thereby facilitating recovery from macroeconomic downturns. The approach just sketched would largely replicate the institutional framework that Congress believed it was supporting when it passed the Sherman Act in 1890.