Antitrust

Tying arrangements raise two primary antitrust concerns:

(1) A party who al- ready enjoys market power over the tying product is able to extend that power into the tied product market and (2) competitors in the tied product market are foreclosed from equal access to that market.

Why should a manufacturer or distributor seek to influence the price at which the product is resold? (Not vertical price fixing, but what is formally called resale price maintenance)

(1) establishing a minimum price to enhance the product's reputation, (2) helping retailers make a profit sufficient to provide customer service, (3) preventing discount stores from pricing beneath full-price retail outlets, and (4) preventing free riders.

Drug Mart Pharmacy Corp. v. American Home Products (summary)

(Plaintiffs are a number of individually-owned retail pharmacies. Plaintiffs allege that defendants, five manufactur- ers of brand name prescription drugs ("BNPDs"), offered dis- counts and rebates to plaintiffs' competitors but not to plaintiffs, and that this constitutes price discrimination in vio- lation of the Robinson-Patman Act.)

Leegin Decisions

- PSKS sued Leegin in the United States District Court for the Eastern District of Texas. It alleged, among other claims, that Leegin had violated the antitrust laws by "enter[ing] into agreements with retailers to charge only those prices fixed by Leegin." - The jury agreed with PSKS and awarded it $1.2 million. - The Court of Appeals for the Fifth Circuit affirmed. We granted certiorari to determine whether vertical minimum re- sale price maintenance agreements should continue to be treated as per se unlawful.

Rick-Mik Enterprises, Inc. v. Equilon Enterprises, LLC (franchise tying)

- Rik-Mik alleges that Equilon violated antitrust laws by illegally tying two distinct products (the franchises and the credit-card processing services). - Rick-Mik contends franchisees could pay lower transaction fees from others for credit-card processing. . . . The district court dismissed the antitrust and related state- law counts. . . . - If Equilon lacks market power in the gasoline-franchise market, there can be no cognizable tying claim. Such an arrangement would not raise antitrust concerns. - Thus, the complaint fails to allege market power in the rele- vant market.

Framework for monopoly analysis

1. Define the relevant product market. 2. Define the relevant geographic market. 3. Compute the defendant's market power. 4. Assess the defendant's intent (predatory or coercive conduct). 5. Raise any available defenses.

The basic tying violation test (Proof of all four of those ingredients establishes per se illegality.)

1. The existence of separate products. (That is, two products are present rather than one product consisting of two or more components, or two entirely separate products that happen to be elements in a single transaction.) 2. A requirement that the purchase of one of the products (the tying product) is condi- tioned on the purchase of another product (the tied product). 3. Market power in the tying product. 4. Substantial impact on commerce in the tied product market. (Some courts require a substantial anticompetitive effect in the tied product market.)

How may a seller resist a Robinson-Patman charge? (Defenses)

1. The price differential is attributable to cost savings. 2. The price differential is attributable to a good faith effort to meet the equally low price of a competitor. 3. Certain transactions are exempt from the act. Of special note is a price change made in response to a changing market. (prices might lawfully be altered for seasonal goods or perishables.)

Three-part test for attempted monopolization

1. that the defendant has engaged in predatory or anticompetitive conduct with 2. a specific intent to monopolize and 3. a dangerous probability of achieving monopoly power (by which the court was insisting on evidence of some "realistic" likelihood that monopoly would actually follow).

Two types of enforcement options for the Sherman Act are available to the federal government:

1.Violation of the Sherman Act opens participants to criminal penalties. The maxi- mum corporate fine is $100 million per violation, whereas individuals may be fined as much as $1 million and/or imprisoned for up to 10 years. 2.Injunctive relief is provided under civil law. The government or a private party may secure a court order preventing continuing violations of the act and affording appropriate relief (such as dissolution or divestiture). Those harmed by a violation of the act also may bring a civil action seeking three times the actual damages (treble damages) sustained.

Exclusive dealing contract

Agreement in which a buyer commits itself to deal only with a specific seller, thereby cutting competing sellers out of that share of the market.

What must persons considering a merger do under the Clayton Act?

All persons considering a merger or acquisition above a certain size must notify both the Antitrust Division and the Federal Trade Commission.

Customer allocating:

Arrangement between competitors to split up customers, such as by geographic area, to reduce or eliminate competition.

When can antitrust issues emerge in exclusive dealing?

Because market foreclosure results from exclusive dealing, depending on how much of the market a firm controls, antitrust issues may arise.

Why do critics argue that per se analysis for tying arrangements should be overturned?

Because tying arrangements often enhance consumer welfare.

What is the primary enforcement device for the FTC Act?

Cease and desist order, but fines may be imposed.

What legislation dictates price discrimination?

Clayton Act, Section 2, as amended by the Robinson-Patman Act.

What legislation dictates exclusive dealing contract?

Clayton Act, Section 3; Sherman Act, Section 1.

In what laws are tying arrangements (sometimes called "bundling") prohibited?

Clayton Act, Section 3; Sherman Act, Sections 1 and 2; Federal Trade Commission Act, Section 5.

Horizontal group boycott

Competitors agree not to deal with a supplier, customer, or another competitor.

How are corporate violators of Sherman Act punished?

Corporations can be fined up to $100 million for each offense.

Section 5 of the FTC Act

Declares unlawful "unfair methods of competition" and "unfair or deceptive acts or practices in or affecting commerce."

Principal legislation—Sherman Act, Section 1.

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce, among the several states, or with foreign nations, is declared to be illegal . . .

Section 2 of the Sherman Antitrust Act

Forbids monopolization, attempts to monopolize, and conspiracies to monopolize.

The Clayton Act

Forbids price discrimination, exclusive dealing, tying arrangements, requirements contracts, mergers restraining commerce or tending to create a monopoly, and interlocking directorates. Prohibits mergers or acquisitions that are likely to lessen competition.

Section 1 of the Sherman Antitrust Act

Forbids restraints of trade

When do state antitrust laws apply?

Generally apply to violations that occur wholly in one State.

Section 1 of the Sherman Act

Governs horizontal restraints by forbidding contracts, combinations, or conspiracies in restraint of trade.

Difference between horizontal and vertical restraints

Horizontal restraints, in general, are per se unlawful while vertical restraints, in general, are to be resolved under the rule of reason.

Vertical restraints

Imposed by suppliers on their buyers. Sometimes are harmful but sometimes are beneficial to competition and thus ordinarily should be evaluated on a case-by-case basis.

How are individual violators of Sherman Act punished?

Individual violators can be fined up to $1 million and sentenced to up to 10 years in Federal prison for each offense.

European Commission fined Intel $1.45 billion for predatory pricing and other alleged misconduct.

Intel was accused of reducing prices for its chips by unlawfully paying rebates/discounts to computer manufacturers and retailers to persuade them not to use rival chips.

What legislation addresses mergers?

Mergers are addressed by the Sherman Act, Section 1; but the Clayton Act, Section 7, offers the primary legislative oversight.

Do states have antitrust laws?

Most States also have antitrust laws closely paralleling the Federal antitrust laws.

How must vertical price fixing cases be analyzed?

Must be considered on a case-by-case basis weighing their pro- and anticompetitive effects (Leegin case.)

Do you need to prove that the violation caused, or is likely to cause, competitive harm for price fixing? (Per se)

No, plaintiffs must just prove that the violation in question occurred because the act itself is so injurious.

Are criminal law remedies are not available under the Clayton Act?

No.

Were the Visa and MasterCard refusal to deal rules lawful?

No. Horizontal restraint that would likely harm future competition. The antitrust division of the federal Department of Justice sued the two giants for their alleged exclusionary practices and won in the federal courts.

Price fixing:

Occurs when two or more competing sellers agree on what prices to charge.

Big rigging:

Occurs when two or more firms agree to bid in such a way that a designated firm submits the winning bid, typically for local, State, or Federal Government contracts.

Romero and Ferree v. Philip Morris, et al. (Price Fixing, appealed)

On appeal, the Court of Appeals acknowledged that "Marlboro Friday and the industry-wide price reductions that occurred afterward represented the triumph of competition over oligopolistic price coordination." Although the Court affirmed summary judgment in favor of Lorillard and Liggett because the evidence showed that they had merely acted "consistent with conscious parallelism," the Court reversed summary judgment in favor of Philip Morris, RJR, and B&W because "we think that a reasonable factfinder could view conscious parallelism as a relatively implausible explanation for the anticompetitive scenario that played out following Marlboro Friday."

The Sherman Antitrust Act

Outlaws all contracts, combinations, and conspiracies that unreasonably restrain interstate and foreign trade. Also makes it a crime to monopolize any part of interstate commerce.

Establishing the presence of an unlawful price-fixing (Principal legislation—Sherman Act, Section 1)

PROOF 1. Agreement with direct evidence. In the easiest case, the government/plaintiff can produce direct evidence such as writings or testimony from participants proving the existence of collusion. 2. Agreement without direct evidence. Here the defendants directly but covertly agree, and circumstantial evidence such as company behavior must be employed to draw an inference of collusion. 3. Agreement based on a tacit understanding. In this situation no direct exchange of assurances occurs, but the parties employ tactics that act as surrogates for direct assurances and thus "tell" each other that they are, in fact, in agreement. 4. Agreement based on mutual observation. These defendants have simply observed each others' pricing behavior over time, and they are able therefore to anticipate each others' future conduct and act accordingly without any direct collusion but with results akin to those that would have resulted from a direct agreement.3

Horizontal cartel among competing manufacturers or competing retailers that decreases output or reduces competi- tion in order to increase price

Per se unlawful

Romero and Ferree v. Philip Morris, et al. (Price Fixing)

Plaintiffs filed this class action lawsuit on April 10, 2000, alleging violations of New Mexico antitrust and consumer pro- tection laws. Defendants filed motions for summary judgment. In granting the motion for summary judgment, the district court held that Plaintiffs had met their initial burden of showing a pattern of parallel behavior, but failed to meet their second burden of showing the existence of plus factors that would tend to exclude the possibility that the alleged conspirators acted independently.

Contracts, combinations, and conspiracies that unreasonably restrain interstate and foreign trade:

Price fixing, bid rigging, and allocating customers.

The Federal Trade Commission Act

Prohibits unfair methods of competition in interstate commerce, but carries no criminal penalties. It also created the Federal Trade Commission to police violations of the Act.

What Do the Antitrust Laws Do for the Consumer?

Protect competition.

How are Sherman Act violations involving agreements between competitors usually punished?

Punished as criminal felonies.

What type of analysis is applied to vertical territorial and customer restraints.

Rule of reason

What did the Standard Oil decision of 1911 articulate>

Rule of reason. The Court said that the Sherman Act forbids only unreasonable restraints of trade

Requirements contract

Seller agrees to supply all of a buyer's needs, or a buyer agrees to purchase all of a seller's output, or both.

What did the Spectrum Sports decision do?

Set out a three-part test for attempted monopolization

Principal Monopoly Legislation:

Sherman Act, Section 2

What legislation regulates predatory pricing?

Sherman Act, Section 2.

Who bring civil suits under the Clayton Act?

State attorneys general do on behalf of injured consumers in their States, and groups of consumers often bring suits on their own.

Leegin case

Supreme Court overturned a nearly 100-year-old precedent in the Dr. Miles case to rule that agreements specifying minimum resale prices must also be analyzed under the rule of reason; that is, those agreements are no longer per se violations of the law.

What type of law is the Clayton Act?

The Clayton Act is a civil statute (carrying no criminal penalties.)

Which act forbids attempts to monopolize as well as monopoly itself

The Sherman Act

What happens when not all four of the requirements of basic tying violation test are met?

The analysis may proceed on a rule of reason basis, weighing pro- and anticompetitive considerations.

Rule of reason

The plaintiff must prove the existence of an anticompetitive agreement or conduct and also prove that, on balance, the agreement or conduct harms competition.

What is a restraint of trade?

The reasonableness of a restraint of trade is largely determined by a detailed balancing of the pro- and anticompetitive effects of the situation.

Parallel Conduct

Their business judgment has led each to independently follow parallel paths. So-called conscious parallelism is fully lawful because the com- petitors have not agreed either explicitly or by implication to follow the same course of action.

How are state antitrust laws enforced?

These laws typically are enforced through the offices of State attorneys general.

Why do free-market advocates condemn price discrimination law?

They see it as an attack on common, consumer-friendly pricing practices that often result in reduced prices.

Purpose of the Robinson-Patman Act

To prohibit "price discrimination only to the extent that it threatens to injure com- petition."

Vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel

Unlawful under the rule of reason

When is a monopoly legal?

When a firm's vigorous competition and lower prices take sales from its less efficient competitors—that is competition working properly.

Horizontal restraints of trade

When competitors collude, conspire, or agree among themselves.

When does an unlawful monopoly exist?

When only one firm controls the market for a product or service by suppressing competition with anticompetitive conduct.

Are exclusive dealing and requirements contracts lawful?

Yes, but antitrust issues may arise.

Can unilateral (individual) refusal to deal by a buyer or a seller raise antitrust concerns?

Yes, if the firm refusing to deal is a monopolist and harm to competition can be proven

Tying arrangements

are another form of nonprice verti- cal restraint.

Drug Mart Pharmacy Corp. v. American Home Products

de minimus. Because they are essentially unable to match up a signifi- cant number of the customers they lost with those the favored purchasers gained, plaintiffs have failed to demonstrate anti- trust injury. . For all these reasons, defendants' motion for summary judg- ment is granted.

Price discrimination

involves selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition.

U.S. two-part test for establishing predatory pricing:

• Pricing below cost. • A "dangerous probability" of recouping the losses suffered from the below-cost pricing.

There are three major Federal antitrust laws:

• The Sherman Antitrust Act • The Clayton Act • The Federal Trade Commission Act