Partnership Law and the Single Entity Defense

By Booth, Richard A. | Stanford Journal of Law, Business & Finance, Fall 2012 | Go to article overview

Partnership Law and the Single Entity Defense


Booth, Richard A., Stanford Journal of Law, Business & Finance


The Supreme Court has held that a single business entity cannot conspire with itself to restrain trade in violation of the antitrust laws. But this single entity defense raises two closely related questions. First, can conspirators escape liability by the simple expedient of forming a corporation or other entity? Second, can competitors or potential competitors be held liable if they enter into a legitimate joint venture but fail to incorporate or form some other entity to conduct the venture? The latter question - the focus here - is particularly acute if the venture is challenged as a per se violation of the antitrust laws since the defendants cannot argue that such an arrangement is reasonable or even pro-competitive.

The Supreme Court has recently addressed these issues in American Needle, Inc. v. National Football League, which involved an antitrust challenge to a corporation formed by the 32 NFL teams for purposes of marketing logowear. In holding that the arrangement could be challenged as a conspiracy (albeit under the rule of reason), the Court focused on whether the corporation is in fact an entity separate from the 32 teams that own it. In focusing exclusively on the ultimate issue of whether the entity is separate and independent from its owners, the Court effectively adopts a know-it-when-you-see-it approach that offers no real guidance for future cases, particularly those involving partnerships without formal written agreements. Although the Court denies that the issue is whether an arrangement "seem[s] like one firm or multiple firms in any metaphysical sense," I argue here that whether the arrangement is a firm is precisely the question. Moreover, and more important, the answer depends on whether the parties to the arrangement have assumed a fiduciary duty to the firm. In short, it is not necessary or even helpful to ask whether the arrangement is truly separate and independent from its owners. Rather, one can distinguish a true firm from a conspiracy with relative ease by asking whether the participants in the arrangement would have assumed a fiduciary duty thereto if it had been organized as a partnership.

Introduction

Like the sound of one hand clapping, there is no such thing as a conspiracy of one. It takes two (or more) to violate section 1 of the Sherman Act, which provides that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce ... is hereby declared to be illegal."1 So an individual firm cannot conspire with itself to restrain trade in violation of the antitrust laws.2 But when is a business really a firm and not simply a collection of individuals who clearly can conspire with each other? Few businesses of any consequence are sole proprietorships. Most businesses involve multiple individuals- whether as owners or managers or both- who could be seen as conspiring with each other.3 Thus, most businesses could be viewed as conspiracies in restraint of trade. Indeed, every contract is a restraint of trade.4

Mercifully, the agencies that enforce the antitrust laws have not often pursued individual corporations on this theory (with a few notable exceptions).5 But what if the business is unincorporated? A partnership is sometimes seen as a collection of individuals rather than as an entity.6 Is a business at risk simply because it fails to incorporate or to form some other entity? The law is that when two or more individuals go into business with each other as co-owners for profit, they have formed a partnership. There is no need for a written agreement. Partnership happens.7 Is such a partnership a firm separate from its partners for purposes of antitrust law? Or is such a partnership always subject to challenge as a conspiracy even though a corporation would not be so at risk? What exactly is the difference between a firm and a conspiracy?8

Partnerships and joint ventures have proved difficult to distinguish from conspiracies as a matter of antitrust law.

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