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A Knowledge Theory of Tacit
Agreement
Wentong Zheng
Univ. of Florida Levin College of Law
ABA/NYU Next Generation of Antitrust Scholars Conference
January 26, 2018
Agreement Under the Sherman Act
• Section 1: “Every contract, combination . .
. or conspiracy . . . in restraint of trade . . .
is declared to be illegal.”
• Section 2: “Every person who shall . . .
combine or conspire with any
other person or persons, to monopolize
any part of the trade . . . shall be deemed
guilty of a felony . . . .”
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Agreement Under the Sherman Act
• Explicit Agreement
– Exchange of explicit assurances of common
actions
• Inferred Explicit Agreement
– Agreement inferred from indirect,
circumstantial evidence of concerted action
– But still an explicit agreement
• Tacit Agreement?
– Agreement formed by conduct?
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Agreement Under the Sherman Act
Supreme Court:
“The crucial question is whether the
challenged anticompetitive conduct stems
from independent decision or from an
agreement, express or tacit.”
Bell Atlantic Corp. v. Twombly， 550 U.S.
544, 553 (2007)
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Tacit Agreement
• In at least three scenarios, courts have
held that certain conduct could constitute
a Sherman Act agreement:
– Parallel conduct preceded by suggestive
communications
– Hub-and-spoke conspiracy
– Parallel conduct with facilitating practices
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Tacit Agreement
• Parallel conduct preceded by suggestive
communications
– US v. Foley, 598 F.2d 1323 (4th Cir. 1979)
• At a dinner each defendant stated his or her
intention to raise real estate commission to 3%,
regardless of what others would do.
• The discussions also referred to an earlier
unsuccessful effort by one defendant to raise
commission.
• Defendants raised commissions afterwards.
Court: sufficient for a jury to find a conspiracy.
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Tacit Agreement
• Hub-and-spoke conspiracy
– Interstate Circuit, Inc. v. US, 306 U.S. 208 (1939).
• In a letter addressed to all defendant motion
picture distributors, defendant movie theatre
group demanded restrictions upon subsequent-
run movie theatres.
• All defendant distributors independently complied
with the demand.
Court: sufficient to establish an unlawful conspiracy
among the distributors.
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Tacit Agreement
• Parallel conduct with facilitating practices
– The Petroleum Products case, 906 F.2d 432 (9th
Cir. 1990)
• Defendant oil companies publicly posted dealer
prices and discounts.
• Court: Defendants’ price dissemination practices
were probative of a conspiracy to fix gasoline
prices.
• “The public dissemination of such information
served little purpose other than to facilitate
interdependent or collusive price coordination.”
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Existing Approaches to Tacit
Agreement
• Minimalist (e.g., Bork)
– Rejects the concept of tacit agreement
– Limits illegal agreement under the Sherman Act to
“explicit and detectable agreements”
• Expansive (e.g., Posner)
– Equates interdependent conduct with tacit
agreement
• Middle-Ground (e.g., Bill Page)
– Ascertains tacit agreement based on whether the
communication serves efficiency purposes.
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Existing Approaches to Tacit
Agreement
• Problem with existing approaches:
– Ignores conspiratory intent of the alleged co-
conspirators
– So rivals could be held criminally liable for
something that’s completely outside of their
control (e.g., whether third parties happen to
benefit from their communications)
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A Knowledge Theory of Tacit
Agreement
• Proposed theory of tacit agreement:
– Define tacit agreement as an agreement
formed by non-explicit communications
(including actions and non-explicit verbalized
communications) that enable co-conspirators
to acquire knowledge of one another’s
conspiratory intent.
– Conspiratory intent as the yardstick for
distinguishing tacit agreements from
uncoordinated actions.
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A Knowledge Theory of Tacit
Agreement
• Proposed theory of tacit agreement:
– The circumstances of the non-explicit
communication must be such that the only
reasonable explanation is that it is made to
convey the conspiratory intent of the co-
conspirators.
• Tacit offer
• Tacit acceptance
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A Knowledge Theory of Tacit
Agreement
• Proposed theory of tacit agreement:
– Example: A German auction of spectrums.
By rule, each new bid had to be at least 10%
higher than the previous bid. Firm A bid DM
20 million/MHz on Blocks 1-5 and DM 18.18
million/MHz on Blocks 6-10. Firm B bid DM
20 million/MHz on Blocks 6-10 and did not
bid on Blocks 1-5.
– Is this a tacit agreement?
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A Knowledge Theory of Tacit
Agreement
• Proposed theory of tacit agreement:
– Tacit offer?
• Are there alternative explanations for why Firm A
bid DM 20 million/MHz on Blocks 1-5 and DM
18.18 million/MHz on Blocks 6-10, other than
inviting a conspiracy?
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A Knowledge Theory of Tacit
Agreement
• Proposed theory of tacit agreement:
– Tacit offer?
• Are there alternative explanations for why Firm A
bid DM 20 million/MHz on Blocks 1-5 and DM
18.18 million/MHz on Blocks 6-10, other than
inviting a conspiracy?
– Tacit Acceptance?
• Are there alternative explanations for why Firm B
bid DM 20 million/MHz on Blocks 6-10 and did
not bid on Blocks 1-5, other than accepting the
conspiratory offer?
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A Knowledge Theory of Tacit
Agreement
• Proposed theory of tacit agreement:
– The evidentiary standard for determining a
tacit agreement will depend on whether it is a
criminal prosecution or civil litigation.
• Criminal: Beyond a reasonable doubt
• Civil: preponderance of evidence
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A Knowledge Theory of Tacit
Agreement
• Proposed theory of tacit agreement:
– Model jury instruction for criminal
prosecution:
“Would the party’s action/communication make a
reasonable person believe, beyond a reasonable
doubt, that its true intent was to offer/accept a
conspiracy?”
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A Knowledge Theory of Tacit
Agreement
• Proposed theory of tacit agreement:
– After an agreement is ascertained based on intent,
the next inquiry will be whether the agreement is
illegal.
– Efficiency could still be taken into account in that
inquiry.
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Applications of the Knowledge Theory
• Conscious parallelism
– The action/communication is in the ordinary
course of the rival’s business (e.g., gas
stations posting their prices).
– That would not allow the recipients of the
communication to acquire knowledge of the
sender’s conspiratory intent.
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Applications of the Knowledge Theory
• Parallel conduct preceded by suggestive
communications (e.g., Foley)
– One has to determine if the circumstances of
the suggestive communications are such that
the only reasonable explanation is that they
are sent to convey conspiratory intent.
– One also has to determine if there are
reasonable explanations for the subsequent
parallel conduct, other than accepting the
conspiratory offer..
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Applications of the Knowledge Theory
• Facilitating practices
– One has to determine whether the facilitating
practices lack efficiency justifications.
– If so, it demonstrates that the only reason why
the practices are adopted by rivals is to allow
rivals to acquire knowledge of one another’s
conspiratory intent.
– So efficiency (or the lack thereof) is still
relevant, but it goes towards establishing
parties’ conspiratory intent.
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