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Wednesday, October 29, 2003

Column: When the law gets naked

On July 24, 2003, the Federal Trade Commission affirmed the holding of an administrative law judge that music giants PolyGram and Warner had entered into a “naked agreement to fix prices and restrict output” of recordings by the “Three Tenors” (emphasis added).

To the casual observer, the FTC’s use of the word “naked” to describe an agreement might seem like an odd rhetorical flourish. How can one tell if a contract is naked or clothed?

Granted, the word “naked” has been used metaphorically in legal writing for over a century: the word gets its own entry, for example, in Bouvier’s 1856 Legal Dictionary. The normal meaning of the word, however, is “undisguised” or “unembellished” – much like the pejorative use of bare (as in, “a bare allegation”). But that makes little sense in the context of the FTC’s findings – surely the Commission was not suggesting that an agreement to fix prices would be better if it were disguised.

No, the use of the word “naked” in antitrust law is slightly more complicated, as we will see. But first, a little background. In the Three Tenors case, PolyGram and Warner entered into a joint venture to distribute a 1998 recording by those vocal giants Jose Carreras, Placido Domingo, and Luciano Pavarotti. The joint venture itself was uncontroversial, but the FTC objected to an alleged side agreement whereby PolyGram and Warner agreed to refrain from promoting other recordings by the Three Tenors.

By referring to the side agreement as “naked,” the FTC was using a shorthand reference to a long line of authority that distinguishes between “naked” restraints of trade, which are bad, and “ancillary” restraints, which are good, or at least tolerable. If business rivals agree to set prices, allocate customers, or divide sales territories between themselves, then that’s a naked restraint. But if the rivals agree on restrictions that are “ancillary” to a legitimate transaction, then it’s probably okay. An example of an ancillary restraint might be a non-competition agreement that is part of a sale of a business.

Where does this use of the word “naked” come from? The distinction between naked and ancillary restraints is invariably attributed to the landmark 1898 opinion of Judge (later Chief Justice) William Howard Taft in United States v. Addyston Pipe & Steel Co. The only problem with this attribution is that Taft himself, while using the term “ancillary,” never actually uses the word “naked.” Nor does “naked” appear in the Supreme Court opinion affirming Taft’s decision.

A search of Supreme Court antitrust cases turns up no “naked” references until the 1963 decision in White Motor Co. v. United States in which Justice Douglas states: “Horizontal territorial limitations . . . are naked restraints of trade with no purpose except stifling competition.” And there the trail goes cold because Douglas gives no citation for his use of “naked.”

Historically, the most likely origin of “naked agreement” is the Latin nudum pactum, literally, a “nude contract.” A nude contract is one that is not supported by (or “clothed with”) consideration. This derivation makes sense, because an ancillary agreement would be “clothed” with whatever consideration supports the main transaction, whereas a naked agreement would stand on its own with no consideration, save the desire of the parties to stifle competition.

The concept of a nude contract in English law goes back at least as far as the eighteenth century, when Blackstone wrote – and I quote – “[a] confideration of fome fort or other is fo abfolutely neceffary to the forming of contract that a nudum pactum . . . if totally void in law.” To which we might add, it certainly if.

So much for naked. Its companion term, “ancillary,” by the way, also comes to us by way of a long-standing metaphor. In Latin, ancilla refers to a young female house servant; hence, the word was anglicized to mean something that is subordinate or accessory.

* * *

So: if the Three Tenors have gotten themselves into antitrust trouble, the obvious follow-up question is: what kind of legal problems do sopranos face?
Plenty, it turns out. The New York Post reports that Sopranos cast member Richard Maldone was recently charged with selling the drug kentamine out of his Long Island home.

Maldone, who plays the mobster Albert Barese on the HBO show, was facing prosecution by Queens District Attorney Richard Brown for alleged drug trafficking. The charges, however, have now been dropped since the Queens Supreme Court has determined that Brown lacks jurisdiction over the case, which arises from facts that allegedly occurred in Nassau County.

Jurisdiction is one of those key legal words that people take for granted. Roughly, it is synonymous with “power,” i.e., the power of a court to hear a particular kind of case, or the power of a government official to make or enforce laws on a given subject matter, or within a certain territory. The word comes directly from the Latin iuris dictio, meaning literally “speaking of the law.” In the ancient world, the law was a matter of pronouncements and proclamations – an official had authority if he had the power to “speak the law” within a particular area.

Jurisdiction is sometimes of the subject-matter variety, as in the Federal system, where a case must fit within certain categories to be heard by a Federal judge. But there is also the territorial sense of jurisdiction, which is what foiled the efforts of the Queens D.A. to prosecute the Maldone for something he allegedly did in Nassau County.

The prosecutorial power of New York State is generally divided along territorial lines, county by county, which is meant to prevent situations where two District Attorneys end up fighting over the right to prosecute a particular case. And come to think of it, isn’t that a naked restraint on competition?

* * *

To keep with the musical theme, hip-hop impresario Russell Simmons was recently slapped with a subpoena by New York Attorney General Elliot Spitzer. Spitzer wants to know about Simmons’ efforts to persuade state lawmakers to reform certain drug laws.

Simmons – the founder of Def Jam records and mentor to such artists as Funk Master Flux and LL Cool J – says that he was simply exercising his constitutional right to petition the government. Spitzer, evidently, takes a different view. He is concerned that Simmons, along with former NAACP leader Benjamin Chavez, failed to register as lobbyists, a requirement for certain people who seek to influence state lawmakers.

Which brings us to the question: why are political pressure groups called “lobbyists?”

An oft-cited etymology for the word is that it comes from the lobby of the Willard Hotel in Washington, D.C. According to lore, President Ulysses S. Grant would stroll from the White House, across Lafayette Park to the Willard, where he would sit in the lobby, entertaining various favor-seekers.

In fact, the word is much older than the Grant administration (1869-77). Americans began referring to “lobbyists” around 1808, referring to the habit of petitioners to wait in the “lobby” outside of Congress in the hopes of collaring legislators and persuading them as to the merits of various causes.

The use of the word “lobby” to refer to a legislative antechamber is older still. During the 17th Century, when the British Parliament used to meet in St. Stephens chapel, people started referring to the antechamber of the chapel – where legislators could mingle with the public – as the “lobby” (the word comes from the Latin lobia, meaning a “covered walk.”) To this day, the reception and meeting area behind the U.S. House chamber is referred to as the “Speaker’s Lobby.”

Experts say it is a highly technical question as to when a person crosses the line from citizen to “lobbyist.” But really: lobbyists are cigar-chomping hacks in cheap suits. Does anybody think that Funk Master Flex would be caught dead with somebody like that?

(This column originally appeared in the October 2003 issue of New York Law Journal Magazine).