Perils of the perilous-leading theory and output decisions

In a recent decision involving allegations of coordinated output restrictions, the Seventh Circuit applied in dicta a rarely used theory called “perilous leading” to categorize the legality of supply decisions under Section 1 of the Sherman Act based upon their permanence – as either “less reversible” or “easily reversed.” The court’s application of the perilous-leading theory assumes that a firm acting unilaterally in a competitive environment would not take a long-term supply cut (such as closing a facility) where competitors could capture the lost sales, even if that firm’s own supply exceeds the demand for its products. But the perilous-leading theory can also create perverse incentives by discouraging firms from rationally matching output with demand conditions to operate efficiently. Courts evaluating output restrictions should thus consider additional factors to accurately account for economic realities.
This piece was co-authored with King & Spalding LLP partners Jeffery S. Spigel and John D. Carroll and senior associate Christopher C. Yook