Antitrust
Majority approach -
the Stevens Approach • Price fixing is illegal per se and it is unreasonable per se to foreclose competitors from any substantial market. o cannot effect an insubstantial amount of commerce in the tied product • Lessors may impose on lessees reasonable restrictions designed in good faith to minimize maintenance burdens and to assure satisfactory operations, but can't require them to use their products if can't prove that their products are the only ones that fit the essential characteristics.
Now 3 reasons not to apply per se:
1) different product, 2) major efficiencies, or 3) restraints necessary for product to exist.
Monopoly defined:
1. SC defines monopoly as "the power to control prices or exclude competition" (DuPont)
Elements of a Clayton Act violation that make it per se illegal:
1. Two products a. tied together b. market power in tying product i. forcing coercion (the power is what causes purchase) c. not insubstantial amount of commerce d. (some courts) where tying seller has financial interest in tied product.
Antitrust usually
takes consumer demand as a given, goes on from there—does not try to shape demand. (note Adams Brock article).
Significance of the Market Share 1. Market share
= relevant portion of the market
2. CASE: Aspen Skiing Co. v Aspen Highlands, Inc., SCt. 1985 Monopolization, market definition, conduct
A. Aspen Ski Co had control of 3 mountains of the 4 available at Aspen. 1. Stopped selling all-Aspen ticket, cut Highlands out of market and causing significant losses to Highlands—Highlands brought claim of monopolization in violation of § 2. 2. earlier case had been brought of collusion for creating the all-mountain pass 3. Points to consider are: a. (monopolist's perspective) lack of a valid business reason for the decision to discontinue the combined ticket. harm to competitors is significant only if it can be shown to harm consumers: that conduct is deemed anticompetitive (consumers' perspective) b. Conduct is also deemed exclusionary (competitors' perspective) c. Conduct is also deemed predatory, if it hurts the monopolist for possible later gain 4. Conduct: 1—discontinues 4-mountain pass, 2—refuses to sell Highlands daily, 3. Refuses to accept vouchers. Patterson: behaving irrationally in the day-skiing market for advantage in the destination-skiing market. Ski Co was willing to accept vouchers from tour operators but not from Highlands. "a firm with monopoly power violates Sherman Act Sec 2 if it excludes rivals from the monopolized market by restricting a complementary or collaborative relationship without an adequate business justification." D. dealer is free to refuse to deal only "in the absence of any purpose to create or maintain a monopoly." E. looks like essential facilities case
5. CASE: U.S. v Grinnell Corp., SCt. 1966, 384 US 563 Monopolization, market definition and conduct
A. Civil suit by government against Grinnell for Sherman Act §1 and § 2 violations. • ∆ manufactured plumbing supplies & fire sprinklers, owned controlling (minimum of 76%) shares of three companies that provided accredited central station services for fire and burglar alarms. Grinnell controlled through those companies 87% of business in central station service, customers of which receive significant insurance reduction. • Companies had acquired competitors and required non-compete contracts from former owners. The three Grinnell companies, ADT (both), AFA (fire alarms in 3 cities), and Holmes (burglar alarms in 3 cities), also had long-standing non-compete relationships among themselves. Finally, Grinnell had exclusive supplier agreements with the companies that provided central station fire service. • Evidence showed pricing in comp. markets was lower, markets with monopoly prices were "substantially increased." Company also threatened retaliation against potential competitors. • Many restrictive agreements limited competition.
CASE: Chicago Board of Trade v US, SCt. 1918 • Horizontal agreement on rules of trading, classic rule of reason analysis, looking at all factors and effects.
CBOT market center for grain trans, trade by members only, but can be others behalf, or trade off-exchange and off-hours; off-premises trades with non-members OK. Trades: spot-market, futures, "to arrive"Ks • CBOT adopted rule prohibiting changing price of to-arrive bids when Board was not in session (trading only at closing price of the day) • US sued that rule was restraint of trade in violation of Sherman §1. Dist ct enjoined members from acting upon rule or adopting any similar rule. • SCOTUS reversed, held that test was not just if rule restrained trade. "True test of legality is whether the restraint imposed ...merely regulates and perhaps thereby promotes competition, or whether it is such as may suppress or even destroy competition."
RULE for market definition:
Commodities reasonably interchangeable by consumers for the same purposes make up that "part of the trade or commerce" to consider in evaluating monopolization. 1. Uses to which commodity is put are controlling 2. Prices and quality of competing products may vary and have market effects. 3. Court produced Findings comparing characteristics of various packaging materials—transparency, strength, cheapness, etc.
Comparing the systems:
Costs of US approach Costs of EU approach FALSE NEGATIVE - no liability when should be (i.e. Brooke Group) - HIGH FALSE NEGATIVE - LOW FALSE POSITIVE - LOW FALSE POSITIVE - MED AVC determination (expensive) OR Recoup determination (expensive) AVC determination (expensive) OR ATC and intent determination (cheap) i. Europe wins 1. Cheap litigation over accuracy 2. BUT, US doesn't necessarily choose accuracy, but is per se legality
Issue was definition of the relevant market.
Court defined and analyzed monopoly power
Effect on cost and demand curves of a merger
Demand Costs premerge postmerge • Cost down because of efficiencies, but demand curve slope changes because consumer has fewer options • most economists believe real cost curves are U shaped, because of difficulty of managing a big enterprise
NCAA held restrictions imposed by a membership organization governing intercollegiate athletics should be judged under the rule of reason rather than summarily condemned by the per se rule.
Followed by appellate court decisions enunciating the principle that restraints ancillary to a legitimate joint venture should be analyzed under the rule of reason rather than summarily condemned under the per se rule.
In state action case, ask: where is the private conduct? If state is not approving or deciding on private actions, there is a problem.
Hypo that state picks one wholesaler and uses its COSTS to set a price schedule. Is that state action? Conduct of private party isn't there, unless party is manipulating cost accounting figures. This arrangement would not be illegal, according to a case in NY.
When an information exchange is condemned under Sherman Act § 1, is it because it is an illegal information exchange or because it is illegal price-fixing? When is identical parallel action significant, and when is it not?
Many problems with trade associations, which have legitimate functions, but also offer opportunities for antitrust violations through collective action. Important to look at type of information that is made available— • Past transactions are more acceptable than possible future transactions, so e.g. inventory figures are problematic, but sales less so • General and average figures are better than specific and individual. • Open and public information better than secretive and private exchanges. • Pressure and advice from associations on pricing are always problematic.
Real boycotts are usually analyzed under
RofR since Northwest, and also under ancillary restraint doctrine
CASE: Town of Hallie v City of Eau Claire, SCt 1985
Sewage treatment plant built by city refused service to town unless it allowed itself to be annexed. Town alleged city was tying its monopoly of sewage treatment to gain a monopoly in sewage collection and transportation services. Court held that this was OK as state action. Held that clear policy was stated of replacing competition in provision of sewage services with regulation, that State supervised conduct of city through Dept of Natural Resources that had authority to review decisions. City conduct examined in light of state action doctrine. City must demonstrate it is acting pursuant to a clear state policy, BUT municipality is NOT subject to requirement of active supervision. Court saw little danger that municipality would be acting in furtherance of private interests.
Question: why don't we mind monopolization of the cigarette packaging market? Cellophane fallacy
There would be arbitrage if prices charged to cigarette manufacturers were higher than to other customers, unless cigarette manufacturers were a large enough share of the customer base that you could design your pricing for them to exclusion of other customers. What about dissent discussion of profits? Profits are either due to market power OR to more efficiency. High profits due to increased efficiency is market power, but it is not an antitrust violation.
Structural inquiry substitutes for direct evidence of power:
a. size, b. market share, c. entry barriers.
Network effect—
benefit to consumer of existence of other consumers using same product.
Note that in antitrust, COST really means
cost + a reasonable rate of return—NOT the accounting definition of cost.
Clayton Act (15 USC 14) § 3 provides
it is unlawful to lease or sell any goods on condition or understanding that purchaser or lessee shall not use goods of a competitor, where effect is to substantially lessen competition. o this is really a prohibition against exclusive dealing, not tying; it includes a tendency toward monopoly.
Concurrence (O'Connor): abandon per se analysis for tying arrangements unless there is probable forcing;
rule of reason analysis, focusing on pro- & anti-competitive effects of arrangement, was necessary articulation of a TEST
O'Connor test: Three threshold criteria required before consideration of violation can proceed:
market power in tying product threat to acquire power in tied market coherent economic basis for treating products as distinct o Tied product must be one that some consumers might wish to purchase separately without the tying product, and need to consider justification for sale of items as a unit. o In Jeff Parish, criterion not met no basis for treating products distinct, because there is nothing to be gained by hospital from tying: It already has absolute power over provision of anesthesia by deciding who can be on staff
CASE: US v Socony-Vacuum Oil Co., SCt. 1940 Horizontal price fixing agreement, per se analysis
"Under the Sherman Act, a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se." • Overcapacity in industry: "Hot oil" in violation of government restrictions on production caused intense price pressure. ∆ owned, operated, and leased service stations, supplied independent retailers. • By setting and fixing tank car prices, S-V attempted to affect retail gas prices in Midwest. Spot market price determined retail prices: Tank Car Committee was organized by Petroleum Administrative Board to buy up distress gasoline in an organized and coordinated program with ultimate end to raise prices at retail. o Note that one company could do this, but it would lessen his profits compared with everyone else. • SCOTUS reinstated conviction, distinguished Appalachian Coal as not designed to affect consumer market and also noted that court had reserved jurisdiction if actual effect of proposed plan was to raise or fix prices and unduly restrain commerce. o Distinguished CBOT because purpose or effect not to raise or depress prices—just to limit hours. • Held: price-fixing agreements unlawful per se and no evidence of trying to mitigate competitive abuses or market evils could be a defense. • Rule stated: 3 elements sufficient for Sherman 1 violation: 1. conspiracy exists 2. purpose is to raise prices 3. conspiracy caused or contributed to a price rise. • Not necessary that all competition is removed—as long as there is restriction. • Court will not address fairness of pricing. • Rule is uniform and applicable to all industries—no special circumstances. Prices need not be "fixed" to a single level—establishing a floor or a range is sufficient. Note issue of jurisdiction is briefly addressed; that's why Wisconsin effect is discussed. Footnote 59, pointing out> 1. no reasonableness inquiry permitted in price-fixing, and 2. market power issue is not germane for Sherman 1—only for Sherman 2. Note less restrictive alternative would have been just to increase storage for the glut of gasoline. Test: Per se rule Defenses allowed: none, really Defensive arguments impermissible: lack of power, among MANY others Note the issue of deciding whether per se or rule of reason is what is difficult
Quick Look ROR 6. Quick look ROR is used when there is
"a naked restraint on price and output" - this requires some competitive justification even in the absence of detailed market analysis. k. So P barely needs to show a "naked restraint" i. What's "naked restraint"? Unclear; basically just show that its really bad; l. Then burden shifts to D to show procompetitive justifications; 7. Court-friendly approach, truncates ROR factors from (Chicago BOT) m. NCAA: establish quick look ROR. Illegal b/c fit was bad, but justification good: "industry in which horizontal restraints on competition are essential if product is to be available at all." n. CALIFORNIA DENTAL: if no naked restraint, use regular ROR.
"Rule of Reason" (first articulated in Standard Oil):
"it was intended that the standard of reason which had been applied at the common law and in this country in dealing with subjects of the character embraced by the statute was intended to be the measure used for the purpose of determining whether, in a given case, a particular act had or had not brought about the wrong against which the statute provided..."
Market Definition 1. Burden rests on P to establish the relevant market 2. Defining the product market - legal rule:
"reasonable interchangeability" of products (from demand perspective) f. Cross elasticity of demand: Change in sales off product B in response to change in price of product A i. Extent to which customers will substitute away from Ds product in response to price increase ii. Degree to which substitution limits Ds ability to charge monopoly price g. DUPONT: [cellophane] product market must be defined, and look at cross-elasticity of demand ("reasonable interchangeability").
CASE: US v United Shoe Manufacturing, Dist Ct. of Mass., 1953 monopolization, exclusionary conduct, difficulty of remedy, bundling Court noted that company had grown by merger approved by courts in 1918. A. Market: total demand for shoe machine services (except 1 type), ∆ had 75-85% share. Court then considered defendant's conduct re:
(1) lease terms: a. never selling, only leasing, although costs to customers were kept low b. lease durations of 10 yrs, with significant early return charge, and other restrictions deterred substituting of other manufacturers' equipment. c. Replacement with another US Shoe machine large reduction in return fee at end of lease term d. costs of lease based on usage—not on length of lease and note that price of lease is affected by this expectation; required plants to run at full capacity e. bundling of free repair service into lease. (2) pricing policies for other equipment that was offered for sale a. widely different rates of return on investment dependent on whether or not there was competition for that particular machine B. business practices were not "predatory, abusive, or coercive" but were "in economic effect exclusionary" (1) Standard Oil v US theory: no monopolization unless ∆ engaged in predatory practices, but Hand in US v Alcoa: a company could be held to have monopolized if it had achieved market power through voluntary choices of business policies not dictated by objective factors.
Major issue is definitions of market and market share
(a) Alcoa production for sales to other fabricators (b) Alcoa captive production (for in-house fabrication)—included in market—P thinks this analysis is inconclusive. (c) foreign producers—only significant at an increased price because of their higher cost. (d) secondary recovered aluminum—eliminated from market analysis—P. does not like this analysis, thinks it is flawed to deliberately reach desired conclusion. • Cites Addystone Pipe & Steel holding that producers' territorial divisions were always illegal. o Cites US v Trenton Potteries and US v Socony-Vacuum Co. holding that price fixing was always illegal (per se illegal). Notes that Standard Oil v US and American Tobacco v US held that NOT all contracts restricting competition were illegal. o Hand disapproves of Alcoa's practice of expanding their capacity in advance of demand to keep competitors from entering.—This would no longer be considered inappropriate conduct. • Note that INTENT is not significant, because monopolist always intends to exclude competitors, but so do legitimate businesses. Opinion that, although an inadvertent monopoly was not illegal, showing of intent was irrelevant once monopoly was achieved that had originally been achieved through improper actions • Note Hand's comment that failing to charge an exorbitant price is not significant, since they COULD be exploiting consumers, even if they aren't doing so. • Because monopoly exists, evidence of action to use its power in fixing prices is not required. Price fixing agreements are really just partial monopolies. • Note result of Hand's decision was oligopoly, not monopoly but not real competition.
Attempted monopolization Supreme Court ruled that attempted monopolization required evidence of
(a) exclusionary/predatory conduct AND of (b) dangerous probability of success in monopolizing market (c) specific intent to monopolize can be inferred from (a) • Under Spectrum, (b) cannot be inferred from conduct: o Must prove a market and defendant's power in it. o increase in market share to 50% as indicative of dangerous threat of monopoly power.
See Ticor Case (below) for comparison
. Is the state the but-for cause—yes, but that is not the standard after Ticor. What are the tests for a commerce clause violation—discrimination against residents of other states, but this doesn't do that, treats all buyers alike, and doesn't harm producers in other states, since they are free to set their prices. Compare to Socony-Vacuum case—pool to stabilize gasoline prices. There the courts ruled that the private actors could not combine to regulate the market and hold up prices, but this IS within the power of the state. Note that the Commission at least was set up to approve programs established by the growers. Note Olsen v Smith on licensing harbor pilots—within the power of the state to determine who has authority to perform duties.
Conduct taken with OEMS
1) Licenses issued to OEMs included provisions reducing usage of Netscape browser a) network effect requires critical mass of users to promote dev of apps compatible with browser b) Microsoft restricted OEMs from removing icons, altering desktop appearance, or editing Start menu c) Increased support costs from dual browser support by OEMs d) Licenses also prohibited modifying initial boot sequence e) Court infers anticompetitive effect from that exclusionary behavior 2) OEMs indicated desire to promote & use other browsers, developers dissuaded from creating applications compatible with other browsers, and consumers were denied opportunity to access them, or it was made more difficult for them to do so. 3) Microsoft's justification was its possession of copyright, which, it claimed, meant it could not be violating antitrust laws. Court found this ludicrous. ("baseball bat") a) Microsoft did offer reasons for overriding choice of default browser in a few circumstances' b) Microsoft also bundled some IE browser functions into same file as some Windows functions, so that removing file to remove IE would disable Windows. D. Conduct with IAPs, both ISPs and Online Services such as AOL • Compare to essential facilities doctrine, only comparable burden for π is feasibility of providing facility. • Microsoft is accused of overriding customer choice of browser pro-competitive argument, court complains π did not even try to rebut. o Patterson says reason is that nobody really does this because it is too hard. E. Eventual settlement was to require access to APIs and let OEMs know that there will be no retaliation for installing other vendors' software. Outcome: NOT that tying is no longer per se illegal, but analysis of tying requires thorough exploration of product definition.
Sequence of events req'd in evaluating anticompetitive conduct.—5 steps: Π must establish prima facie caseL:
1) identify acts which have anticompetitive effect: harming competitive process & thus consumers 2) demonstrate conduct indeed has anticompetitive effect 3) If π has established prima facie case, ∆ may offer pro-competitive justification (valid business reason), e.g, greater efficiency or enhanced consumer appeal 4) If no rebuttal of pro-competitive evidence, then π must show anticompetitive harm outweighs pro-competitive benefit a) [or (from Patterson) show that pro-competitive effect could be achieved with a less restrictive alternative.] 5) Focus is on effect—INTENT is irrelevant.
IP and Antitrust—a conflict Old List of Nine No-Nos (for patentees)—used to be considered improper actions
1) that patentee should not require a licensee to grant back patented improvements to the licensee's original technology; 2) the setting of royalty payments in amounts unrelated to the sales volume of the patented product; 3) tying of unpatented supplies to obtain a license; 4) post-sale restrictions on resale by purchasers of patented products; 5) tie-outs; 6) licensee veto power over the licensor's grant of future licenses; 7) mandatory package licensing; 8) restrictions on sales of unpatented products made by a patented process; and 9) specifying the prices a licensee could charge upon resale of licensed products Note that both are intended to enable or encourage sellers to produce what consumers want at low prices. In short term, though, IP eliminates competition, while antitrust promotes it. CompareTopco case to an IP case—why worry about territorial restrictions being anticompetitive for intrabrand competition, when it was procompetititve for interbrand competition? More important—Topco as an association was a new entity—did not exist before the territorial restraints. IP takes position that we don't restrict the patentee's powers because his product is a new product. But the question is whether the restraints were necessary for the creation of the new product. There is NO empirical evidence of how much incentive is necessary to encourage innovation. Quid pro quo is grant of exclusivity for 20 years in return for invention and its disclosure. Standards for patentability are useful, novel, and non-obvious. Claims define scope of invention. Patent prevents making, using, importing, or selling anything that infringes on your invention. Note that market power in itself is not bad—issue in antitrust is what you do with it. IP gives rights to do things that antitrust would otherwise prohibit. Patent used to be a rebuttable presumption of market power—but no more since International Ink SCt case this term.
Antitrust issue is how much of the market is foreclosed. Three possible tests:
1. $ amount foreclosed—International Salt 2. per cent foreclosed—Standard Stations 3. per cent and other factors—Tampa Electric (current law)
Requirements:
1. Attempt to monopolize has 3 components: d. anticompetition (exclusionary conduct), e. "specific intent" to monopolize, and f. dangerous probability of achieving monopoly. 2. SPECTRUM SPORTS: In addition to predatory tactics as proof of intent to monopolize, you need to prove dangerous probability REQUIRES inquiry into relevant product and geographic market and D's economic power in that market. Keeps inference of intent from predatory/anticomp conduct, that's still ok.
Factors to consider under Guidelines
1. Changing market conditions may mean a share is under- or overstated 2. Gap between market and substitutes -how large a price increase would be possible? 3. Increase in possibility of coord. interaction—ability to detect and punish deviations and any history of tacit agreements or information exchanges 4. Ability of rivals to replace lost competition—if merged firm market share >35%, customers may find alternatives lacking 5. Barriers to entry 6. Merger-specific efficiencies. 7. Failing firm in absence of merger
. Court's definition of market—entire accredited central station service business:
1. Considers services differentiated from products—noted most css firms offered all services, and those that did not largely only lacked ONE of the services. 2. noted criteria of utility, efficiency, reliability, responsiveness, continuity—and insurance discount 3. also considered geographic market definition—found a single national market, despite the fact that competition was sometimes strictly local from view of consumers 4. Patterson: if you want a CS burglary service in your town and it is not available, you would more likely go to a different CS provider and persuade him to expand to burglary than go to e.g. a watchman provider and ask him to initiate CS services. Therefore buyers' perspective makes sense. D. Decision: Court remanded to lower court for further consideration of nature of relief to be afforded.
Antitrust Enforcement
1. DOJ Antitrust Division— a. Enforce Sherman and Clayton Acts. Note Sherman price-fixing often criminally prosecuted, but significant prosecutorial discretion exercised. b. Stated standard for crim prosecution is "outrageous conduct of undoubted illegality." c. civil penalties frequently divestiture or divorcement in merger or acquisition 2. FTC— a. Enforce Clayton Act and FTC Act. Courts have indicated conduct restrained should be limited to what violates established Sherman proscriptions or is "collusive, coercive, predatory, restrictive or deceitful.." b. truth in lending, fair credit reporting c. packaging and labeling standards 3. private parties 4. state attorneys general as parens patriae
The Intra-enterprise Conspiracy Doctrine Should antitrust law and corporate law view the question of a subsidiary's independence from its parent in the same way? Single Entities
1. If two companies can be considered a single entity, they cannot be conspiring entities under §1. u. E.g. Wholly-owned subsidiaries of the same parent company. v. However, if agents of a single firm have independent financial interests, may be considered separate actors: i. AMERICAN NEEDLE (NFL CASE): to determine if single entity, consider if separate economic actors pursuing separate economic interests and whether there were independent centers of decision-making.
Foreclosure Theory
1. Look at percentage of the market foreclosed lll. "even though a contract is found to be an exclusive dealing arrangement, it does not violate the section unless the court believes it probable that the performance of the contract will foreclose competition in a substantial share of the line of commerce affected" (Tampa) mmm. Market Share nnn. Time period of exclusivity
Types of Monopolistic Conduct Excessive Pricing
1. Must be a legitimate business justification for such actions. 2. Should not force company to act in an inefficient way (forced market for facility) a. TRINKO (VERIZON): refused to extend essential facilities doctrine past Aspen. Telex was indispensable, BUT, not necessary to share. Not as essential in nature. b. Note Telecomm Act of 1996 did not overrule S/A. c. MCI COMM: not economically feasible to create duplicate of phone facilities, therefore AT&T had complete control over essential facility, and needed to share. 3. European Case Study a. How Europe differs: (1) Exclusionary abuses: US, EU (2) Exploitative abuses: EU, elsewhere, NOT US b. UNITED BRANDS (CHIQUITA BANANA): both US and EU do not permit exclusionary abuses, but only EU forbids exploitative abuses.
Test for Monopolization
1. OTTER TAIL:[power systems] introduces two element test for monopolization . 2. Two element test: a. Monopoly power b. Un-nice conduct: used monopoly power to foreclose competition (no good reason to do this, therefore must be bad reason) i. "No good reason" becomes "no legitimate business purpose" in Aspen 3. ASPEN SKIING: honestly industrial standard/legitimate business justification, (not as important: serves consumers?). i. Monopoly: multi-area ticket as an "essential facility" that Ski Co has duty to market jointly with Highlands.
The Legality of Non-Price Vertical Agreements Applying the ROR
1. Once the agreement has been identified, still must examine § 1 issue: was there unreasonable restriction of trade.
Court defined 2 elements of Sherman § 2 violation:
1. Possession of monopoly power in relevant market AND 2. Willful acquisition or maintenance of power as distinguished from "growth resulting from superior product, business acumen, or historic accident."
Recent Merger Cases Recent Cases
1. STAPLES: [office depot merger] define the market to find out if anticompetitive. Relevant market of 3 superstores, and w/in that market, merger anticompetitive. a. Look to entry and efficiencies.
Essential facilities doctrine: (NOT accepted or rejected by Supreme Court, but often cited in lower courts, eg 7th Cir.) FOUR ELEMENTS:
1. control of an essential facility by monopolist 2. (anticompetitive) impossible or impractical to duplicate essential facility—threshold for this is very high 3. (exclusion) access is denied 4. (predatory) it is feasible to provide access to competitor. a. no business or technical reason for refusal except to foreclose competition
Fortas dissent, found definition of market to be "procrustean" and ad hoc., believed:
1. court should have included watchmen, watchdogs, unaccredited systems, etc part of market, & 2. market should be viewed as necessarily local, w/ monopolies in some local markets, but not others. F. Note that in attempting to identify market geographically, courts have considered many factors, including sales patterns, whether there are parallel price movements in two different areas, governmental barriers such as tariffs and licenses, transportation costs, etc. 1. This case noted national planning and financing of business. 2. federal merger guidelines addressing geographic market analysis—§ 1.2
Consideration of whether to use per se or rule of reason:
1. different product, that could not be offered individually 2. key is that the old product is still available 3. efficiencies of transaction costs, and restraint is necessary for them.
NCAA argued that it did not have market power, but court said:
1. market power is immaterial.—naked restraint on price and output requires competitive justification. 2. yes, you do, anyways — market is college football, not all TV programming; audience had unique demographics making them attractive to advertisers • Question is whether NCAA has affirm defense of competitive justification outweighing anticompetitive effects. NCAA justified it as joint venture necessary to make new product possible. o Court: NCAA not offering a new product, only restricting the colleges that actually offered the product from doing so in a competitive market • NCAA's real motivation was to protect ticket sales for live games—which could not compete with TV, and to maintain competitive balance among college teams. Court agreed with motivation but disputed means of achieving end. Plan is not tailored to achieve those goals. • "naked restraint on price and output requires some competitive justification even in the absence of detailed market analysis." • Dissent: total viewership should be measure instead of number of games, viewership might not be decreased by plan, even though number of televised games was.—NCAA did create a new product—exclusive TV rights. Patterson points out that nobody is interested in maximizing overall profits—just their own profits. Also, transaction costs are only cost NCAA has. More games televised would be more profit for entire NCAA. Cannot consider this a different product. Some efficiencies, but not a lot. IMPORTANT POINT: NON-PROFIT ORGANIZATIONS ARE NOT EXEMPT FROM PER SE ANALYSIS. Difference from Macaroni because not possible for one team to contract by itself for TV—takes two teams to play.
Monopolization -never prosecuted as a criminal offense, only with civil proceedings, consists of 2 elements:
1. monopoly power 2. bad conduct Do products outside of a defined market affect competition in the market? If the elasticity of demand faced by a seller is low, what is it likely to do?
Π Alleges violation of Robinson-Patman Act prohib price discrim. (standards basically same as Sherman § 2). Elements required are
1. predatory pricing (defined as below average variable cost) and 2. reasonable prospect of recoupment. (for Sherman Act see below, also monopoly power or threat of it and dangerous probability of recoupment instd of reasonable prospect.) • Kennedy's arguments come down to denying that the strategy could work, however ∆ evidently thought that the strategy was rational. Held: o ultimate effect of price cut cannot be considered. Laws are to protect competition, not competitors. o Tacit collusion is not illegal. Kennedy does not believe collusive predatory pricing is plausible to maintain, especially without express coordination, though he concedes that the R-P Act would prohibit such conduct. Rejects reasonable probability of recoup, though prices kept below AVC for 18. American Airlines Case (p 183 in notes), which probably should not have been brought as a § 2 case, but was "conduct that could not be ignored." American president Crandall telephoned Braniff president and suggested they raise fares by 20% in market in which they jointly controlled 76%. Justice Department brought proceedings after Braniff president supplied tape recording of conversation. Conspiracy to monopolize?
CASE: Professional Real Estate Investors v Columbia Pictures, SCt. 1993 Opinion by Thomas: Further defines sham exception to Noerr Pennington. **Two part TEST:
1. suit was objectively baseless AND 2. reason for suit was to interfere directly with business relationships of competitor through governmental function itself NOT through the outcome of the process. Prof RE wanted to extend exception to cover situations in which party was indifferent to outcome or require defendant to prove that he would have acted to influence government regardless of predatory motive. Note that letters from attorneys to customers of alleged infringers were OK under Noerr-Pennington. Note that courts have said that a pattern of repeated or multiple suits has also been held to be a sham, where objective seemed to be interference (California Motor Transport) Note that for attempted monopolization, must have specific intent
Per Se Rule
13. Per se rule means that if the activity is present, it is illegal. a. gives courts the option of dismissing cases very efficiently 14. SOCONY-VACUUM: [oil spot market] price fixing is per se, and dropped the market power requirement. All that has to be shown is that there is an agreement to fix prices. a. Here: no agreement to decide prices, but the ultimate effect of the organized effort to agree on a course of conduct was to raise oil prices.
Horizontal Mergers Merger
15. Merger which produces a firm with undue percentage share of the relevant market, and creates significant increase in concentration of firms in that market, is inherently likely to lessen competition substantially. 16. PHILADELPHIA NAT'L BANK: statutory test: whether the effect of the merger may be to substantially lessen competition in any line of commerce in any section of the country. a. Court looks to: i. Line of Commerce ii. Relevant Market b. 30% MS is too much. 17. Factors: a. Entry: i. Timely ii. Likely iii. Efficient b. Efficiencies: i. Verifiable (this is more often the issue) ii. Merger-specific (would you have achieved those efficiencies indep of that merger) iii. Cognizable
Joint Ventures
2. DAGHER: joint ventures are allowed to set products - it amounts to price setting by single entity. w. Substance - on the merits, it is a single entity x. Not anti-competitive y. §1 must have agreement z. Economic interests?
Pricing with market power:
2. If you have a pure monopoly, you will produce at highest profit 3. If there are 10 sellers, now price will be at cost a. Otherwise, your competitor would be able to undersell you b. This is why competition is better than a monopoly 4. Cartel: 10 sellers, will go back to fixing price to highest profit - divide by 10
The Role of Economics in Antitrust 1. The Effects of Market Power—
2. market power is the ability to affect price. Explanation of basic price-quantity graph with demand curve and marginal cost—note approximation that marginal cost is close to horizontal (constant) which is true except in predatory pricing scenarios. a. Seller profit = sale price - cost of production b. Buyer surplus = amount buyer willing to pay - sales price c. Deadweight loss—is what antitrust works to minimize—results from people being priced out of the market by sellers charging more than they need for a "reasonable rate of return." It does this not by attacking price directly, but by maintaining competitive markets 3. Perfect price discrimination means selling to each buyer at exactly his value.
Specific Intent
3. If monopoly is not completed, evidence of specific intent to monopolize is necessary to show anticipated consequences of the act. 4. With completed monopolization, intent may be inferred from evidence that the firm had monopoly power and engaged in one or more prohibited exclusionary practices.
Predatory Pricing
6. Robinson-Patman Act a. Price discrimination only to extent that it threatens to injure competition b. "Reasonable possibility" 7. "Areeda-Turner" TEST: if D's prices are below marginal cost, they are predatory a. Use AVC as a surrogate for marginal cost (b/c MC hard to determine). b. Should the predatory characterization attach only based on prices/cost ratio, or should other elements be considered? i. Size? Comparative product cost (v. smaller companies)? Motive/intent? c. BROOKE GROUP: two elements of PP (1) below cost pricing and (2) no likelihood of recoupment. Not brought under S/A because no monopoly power. (R/P Act).
Sliding Scale Analysis
8. Polygram Holding Inc. v. FTC: claim of §1 violation on agreement between Polygram and Warner on agreement not to market 3 Tenors albums; DC circuit applied "quick look"; o. Precompetitive Justifications: Ct named 5: p. Increasing output; q. Creating operating efficiencies; r. Making a new product available; s. Enhancing svc or quality; t. Widening consumer choice; 9. Continental Airlines v. United - X ray templates were installed, limiting luggage larger than a certain size; Continental claimed prevented airlines from competing based on the allowed size of carry-on luggage; Ct reversed lower Ct's application of "quick look," as limiting size of luggage could have procompetitive benefits (p334); Ct left to lower Ct whether to apply "modified quick look" or ROR.
CASE: BOC Intl v. FTC (2d Cir. 1977) Merger case w/ actual potential entrant theory of injunction lost b/c no showing of actual potential entry • Perceived potential entrant
: current market participants view these firms as constraining their behavior; if they raise prices to monopoly levels, the entrant would come in. ("in the wings" "fringe") o Having a current effect in the market, not nec. considering entry • Actual potential entrant ("toehold" or "de novo"): a firm is actually considering entering the market. o How 'actual" do they have to be? o Eventual: not soon enough. o Imminent: court doesn't take a position. o HELD: "in the near future" would be sufficient. The FTC did not show this was the case. • Potential perceived potential entrant: a firm that may in the future make its intentions to enter market known. Will then have effect of constraining market. • Actual potential entrant: having no effect on pre-merger market. o So, does its merger really "tend to substantially lessen competition"? (in conduct analysis, does potential entry lessen market power? ) o Without an oligopolistic market, there isn't going to be concern about a merger, and there won't be coordinated price increases for the perceived potential entrant to deter
Vertical agreements
= between suppliers and their customers. Two types: cc. Agreement that eliminates some aspect of competition among the dealers i. Restrains intrabrand competition ii. Differs from e.g. Topco, because imposed by top of chain ad not the middle dd. Agreement that lessens competition between manufacturer and its own competitors i. Restrains interbrand competition
CELLOPHANE FALLACY
= misuse of x-elasticity of demand. Concluding the relevant market as "flexible packaging materials" and not just "cellophane," the market was defined too broadly to make DuPont a monopolist.
Monopolization Generally Difficulty distinguishing legitimate competition from improper harmful conduct
Aim of competition is to eliminate rivals Also difficult to fashion a remedy that is effective Example Problem of Windmere attempting to enter market selling rotary electric shavers. Phillips dropped prices 35% and also filed patent infringement suits, drove them out of the market in 2 years, then raised prices. Windmere (Sears) filed suit for Sherman Act violations.
CASE: International Boxing Club v U.S., SCt 1959, Monopolization, market definition.
Allgd conspiracy of owners of sports arenas to monopolize TV broadcast of championship boxing. • Held that championship boxing matches were a separate market from all boxing matches, and attempts to monopolize that market were illegal. Court used economic data on revenue generated to find differentiation between title bouts and other matches.
Summing up
Analysis Per Se Quick Look Full Rule of Reason Harm vs Benefit class of arrangement very harmful, e.g., price fixing. Presumed Illegal, significant judicial economy competitive harm apparent, but benefits may be demonstrable, e.g. NCAA network TV contracts, BMI blanket licenses relevant market and competitive effects determination necessary, e.g., joint ventures, vertical price fixing
Particular Examples of Exclusionary Conduct 5. CASE: U.S. v Microsoft Corp., Ct of Appeals DC Circ. 2001 Monopolization, market definition, conduct
App Ct aff'd findings of possession of monopoly power and anticompetitive conduct to maintain it, BUT NOT per se claim of tying
What is legal standard for finding an agreement? Monsanto—"conscious commitment to a common scheme that excludes the possibility of independent action." Court says there is always some kind of agreement—this is too political and thus not something for antitrust.
Fact that government was acting anticompetitively was not material, since that is sometimes what governments do. Conspiracy with the government is too hard to prove; we don't want to go there with antitrust law. Looks like court is willing to allow any lobbying activity, and not address with antitrust action. If there is bribery, e.g., go after it with laws against bribery.
Why is ability to exclude competition evidence of power?
If conduct is exclusionary, does that mean you must have power, or the exclusionary conduct would be ineffective? Can we use this as a test? Is it hard to draw the line and identify conduct that is exclusionary? Does exclusionary conduct always harm consumers? Is exclusionary conduct possible without power? • Problem w/ market share is concept of market. Market definition is the problem in this case. o Case brought by Justice Dept alleging monopolization of cellophane market. 1. Du Pont had exclusive agreement with Swiss company holding marketing rights for cellophane, since 1923. Du Pont also had developed moisture-proof cellophane and patented it 1927. Sylvania manufactured and marketed cellophane under agreement with a Belgian company and also licensed Sylvania's process. 2. Modern trends in packaging led to booming market. In 1934, du Pont had 75%, before tax profit margin of 31% in 1937-47. 3. Defense claimed market to consider was flexible packaging market—not cellophane. 4. Trial court found for du Pont, and govt appealed
. Noerr-Pennington Doctrine Concerted action among competitors is specifically allowed for purpose of lobbying or influencing government, instituting judicial actions, or participating in regulation. In general, an effort to influence the exercise of government power, even for the purpose of gaining an anticompetitive advantage, does not create liability under the antitrust laws.
In Noerr, the Supreme Court held immune from antitrust liability a combination of rail freight interests which was formed in order to have legislation passed that would grant the members of the combination a competitive advantage over truckers. Noerr, 365 U.S. at 145. The Supreme Court has read Noerr broadly: "Noerr shields from the Sherman Act a concerted effort to influence public officials regardless of intent or purpose." Pennington, 381 U.S. at 670. "Joint efforts to influence public officials do not violate the antitrust laws even though intended to eliminate competition." Id. The Supreme Court has applied the Noerr-Pennington doctrine to courts and administrative agencies. California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 510-11 (1972) (California Transport). The Noerr-Pennington doctrine thus protects those who attempt to use the power of government organs, including the judiciary, to further private ends. There is an important exception: the Noerr-Pennington doctrine does not protect litigation from suit under the antitrust laws if the litigation is a "sham." The Supreme Court in Noerr recognized that if an action "ostensibly directed toward influencing governmental action, is a mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor [then] the application of the Sherman Act would be justified."
. Exclusive Supply and Exclusive Dealing Agreements Exclusive Dealing—a vertical agreement—not necessarily per se illegal § 3 of Clayton Act.
Note diff between exclusive dealing and exclusive distribution arrangement. Supplier supplier Supplier X X Dealer dealer dealer
Courts today look at market share rather than actual control of prices and exclusion of competition. Why?
Note that power to raise prices, if it existed, has been exercised (or else company is not maximizing profits) so you need to look at company's past behavior and cost information to determine whether they have done this. • Note: hard to find out what costs are. • Note: exclusionary conduct of keeping prices low to discourage competitors from entering market is a benefit to consumers, but might not prove lack of power.
At what point does an agreement become a violation of Sherman Act.?
Note: unilateral refusal to deal is OK from antitrust viewpoint unless you are a monopoly. Franchising is usually heavily regulated, by states, Example of California auto dealership regulation. Preserving Ability to Promote a Product—cost of promotional activity. Value of promotional activity is in imparting information, but it only affects decision-making on initial purchase. Question are you getting value if you think you are? As long as you don't know the truth? Consider two products, A and B, where A B Cost of production $20.00 $21.00 profit for manufacturer $ 3.00 $ 3.00 Cost to distributor $23.00 $24.00 and distributors pay for promotion costs of $ 2.00 $ 3.00 distributor profit $ 4.00 $ 4.00 retsil price of $29.00 $31.00 BUT manufacturer of B is not happy with this profit. He insists on a larger share, maybe $6.00. Then distributor must either cut his costs, or raise his price, or cut his profit. Raising price will cut demand, so he won't do that. This will lead distributor to minimize his promotion costs, but after he has done that, he can only cut into his own profits. Note that manufacturer doesn't care about distributor's profit if it is an independent distributor.
Predatory Pricing • Trend: consider pricing conduct in presence of monopoly power as possible bad conduct. • What constitutes predatory pricing?
OECD report defines it as "short-run conduct which seeks to exclude rivals on a basis other than efficiency in order to protect or acquire market power. Such exclusion can be attempted through short-run pricing so low as to induce exit or deter entry," • Can consider predation as investment in reputation (as tough competitor) and can have external effects (in other markets, e.g.) Chicago School argues that it doesn't happen.
CASE: City of Columbia v Omni Outdoor Advertising, SCt 1991
Opinion by Scalia: Two arguments for why N-P should not apply: sham and conspiracy. Sham argument fails because the goal of getting new city ordinance with anticompetitive effect was actually achieved. Sham can only mean that the process of government action was not being addressed in good faith, with an actual intent to influence government action. Court rejected possibility of conspiracy exception to Noerr Doctrine. Antitrust law is aimed at regulating business, not government. Agreement between company and government is not conspiracy, since persons always try to influence government to their advantage. Court looked at whether interference with competition was DIRECT or not; it was NOT, because it was done through the government. If some aspect of company activity was unlawful, that should not be addressed by antitrust law, but by charging violation of whatever law was being broken. Note that conspiracy here was alleged as being between COA and City, while in Noerr it was just among the RR executives..
CASE: Otter Tail Power v U.S., SCt 1973 Monopolization, refusal to deal, essential facilities doctrine
Otter Tail, electric utility co, had monopoly power in 510 municipal markets, used it to foreclose competition by refusing to deal when municipalities wanted to set up own retail power distrib systems, and by institution of litigation to delay establishment of municipal systs, and by contracts requiring other suppliers to refuse to deal. Use of monopoly power is violation if purpose is: • to foreclose competition or • to gain competitive advantage or • to destroy a competitor.
Test: Rule of reason
Possible defenses: Everything but ruinous competition Impermissible defenses: ruinous competition Court here held that a price-fixing conspiracy need not be effective to be illegal. Always ask: Is there a less restrictive alternative? Could one defendant do this alone? If they could, but it would be unprofitable, then it is a violation because it is anticompetitive. Patterson says AppCoal case was wrong, and is never cited, because it was just a Depression aberration.
CASE: Eastern Railroad Presidents Conference v Noerr Motor Freight Co, SCt 1961 Was the conduct of the defendants in Noerr in restraint of trade?
Primary allegation was violation of § 1, but also alleged § 2. Note that for a Sec 2 violation one company must have market power or dangerous possibility to acquire it. (Although it might be a conspiracy to monopolize, which we haven't really discussed. This is not usually a successful argument.) Opinion by J. Black—Competition between railroads and trucking industry for heavy freight business. Truckers alleged that railroads conspired to restrain trade by engaging PR firm to change laws by conducting fraudulent campaign against truckers. RRs admitted they had conducted campaign to influence state legislation, but denied motive was destruction of competition. District Court and Appeals Court had found for truckers that campaign had violated Sherman Act. Supreme Court reversed. Black articulated principle: "the Sherman Act does not prohibit two or more persons from associating together in an attempt to persuade the legislature or the executive to take particular action with respect to a law..." 1. Right of Petititon guaranteed by Constitution. 2. Restricting ability of people to freely inform the government of their wishes would regulate political activity, not business activity. Factors that might mitigate these considerations were 1. motive or purpose, but that cannot be criterion for determining violation. Sherman Act cannot be extended to deny a right based on intent of people who exercise that right. 2. use of third-party technique to disguise source of information.. This may be unethical conduct, but is not the purview of the Sherman Act. 3. Specific intent to destroy trucking industry through destroying goodwill. There were not specific findings of fact that RRs attempted to persuade anyone not to deal with truckers. Injury was "incidental." Note court dicta that action to influence government cannot be a sham to cover concerted action to persuade others not to deal. BUT this doesn't really happen.
Noerr-Pennington Doctrine
Private attempts to influence gov't decision making
Vertical Agreements Big lacuna in US antitrust is no way to control actions of oligopoly. Vertical Restraints cases have collusive elements as well as exclusionary elements, aiming at oligopolies Tying cases have exclusionary elements also.
Question is what level of refusal to deal is OK? Issues of whether or not agreement is price fixing and whether or not there is an agreement are important, because of per se v rofr analysis
The State Action Doctrine
State distorts market by regulation of some industry. Often result of lobbying by special interests. This is other side of issue presented in Noerr-Pennington—examination of whether state action is unjustified anticompetitive interference. Can include exclusive license, licensing in general, price fixing. Raises principles of federalism and state autonomy.
The Per Se Rule and the Rule of Reason
Sherm. Act § 1—"Every contract, combination ... or conspiracy in restraint of trade ... is declared to be illegal. Sherm. § 2 v § 1 — §1 is more structured—justifications basically the same.
CASE: US v Philadelphia National Bank, SCt 1963 Leading case and defines standard for mergers:
TEST: if result of merger is to produce "undue percentage share of the relevant market and significant increase in market concentration" it violates Clayton Act §7 • Court looks case at Concentration Ratio of top two firms in the market: CR2—sometimes they considered CR4 • Analysis: First, identify market. Product = commercial banking, and geography= greater Philadelphia. o Next, assess structure of market: After merger, new entity would control 30% of market—court says that is too much o Then, defenses and justifications. Court rejects: o There would still be competition. o Many other banks still in area. o Extensive gov't regulation of commercial banking would obviate anticompetitive effects. o Need to merge to move to suburbs. o Increased size of merged bank would enable competition with out-of-state banks. (cross market argument) o Larger bank will be good for business and stimulate development. • Court only looks to market share effects • Similar to the quick look analysis— market power evidence results in prima facie case or presumption of illegality resulting in burden shifting
Lower courts have continued to struggle with market definition issues.
Task of advocate is to help court assemble useful data on market power issue 1. assess nature of available substitutes 2. assess strength of consumer preferences 3. assess elasticity of supply (how quickly and at what cost can substitute be introduced?) 4. identify and weigh obstacles to market entry—legal and practical 5. other factors bearing on market power: other firms, suppliers, buyers 6. Note cost restrictions on information gathering efforts.
JUDGE will decide per se vs RoR. It is a matter of law, not for jury.
The per se rule provides that certain categories of restraints, such as horizontal price fixing or market allocation agreements among competitors, are presumed to unreasonably restrain trade without any analysis of market conditions or the business purpose of such restraints. Other restraints, such as exclusive dealing and vertical territorial or customer restraints, are deemed unreasonable only after an analysis of the market and their impact on competition. During much of the first two-thirds of the Twentieth Century, the ancillary restraint doctrine was relegated to an archaic principle as the per se rule was steadily expanded to include almost any arrangement among competitors which had a negative impact on competition.
CASE: FTC v Ticor Title Insurance Co., SCt. 1992 Note that insurance is a heavily regulated industry, under McCarran-Ferguson Act..
Uniform rates set in several states for practices of title search and examination. Commission sued under § 5 of FTC Act (unfair competition), and defendants claimed: 1. exempt because of McCarran Ferguson Act 2. ratemaking activities exmpt under Noerr-Pennington 3. State Action immunity. Court held: 1. Actions being challenged were not insurance activities, but ancillary 2. N-P immunity does not extend beyond petitioning government 3. State action did not confer immunity because state did not actively supervise. One Question here is whether behavior is authorized or required. Note that power to conduct reviews to supervise is not the same as exercise of that power. Provision in the plan that there could be objection by state within some time period was not sufficient supervision (negative option plan). Note that under Noerr-Pennington doctrine, action of title company in submitting prices was OK, BUT that actually using exactly those prices would not be protected under N-P. State may not confer antitrust immunity, but "it may displace competition with active state supervision if the displacement is both intended by the state and implemented in its specific details."
CASE: US v Colgate, SCt. 1919
Vertical RPM, pleading standard, publishing price list and notifying dealers of intent to refuse to deal if sold < RPM • Vertical RPM suit dismissed for failure to state claim no clear allegation of agreement in indictment • Rule: indictment must be specific that there was an agreement. Indictment alleged a "combination" (same as in §1 of the statute). Distinguished: there was no binding obligation in the arrangement between the manufacturer and the dealers. • Alleg of RPM agreement between manufacturer and dealers, but not of specific contract or agreement. • Mfr refused to sell to those who did not maintain prices by publishing price lists and notifying dealers that it would not sell to them if they did not adhere to the prices published. • Held: no charge of any contract was made in the indictment • Aspen Skiing cited, and court said no right to refuse to deal IF YOU HAVE MARKET POWER. Independent actors who are free to act in their own self interest are what Antitrust laws want. It's fine ig parties act jointly as long as interests are identical, and they are free to change their minds Colgate is too narrow an interpretation of "agreement": later cases (Schrader's Son) held that an explicit agreement was not necessary, that an agreement could be inferred from manufacturer's "course of dealing or other circumstances."
Current Issues in Antitrust Enforcement The IP-Antitrust Interface
XEROX In re Independent Service Organizations Antitrust Litigation (CSU, L.L.C. v. Xerox Corp.), 203 F.3d 1322 (Fed. Cir. 2000) U.S. Philips Corp. v. International Trade Commission, 424 F.3d 1179 (Fed. Cir. 2005) Sean Gates et al., The Federal Circuit Cipro Decision: Another Blow to the FTC's Fight Against Reverse Payment Settlements
Duty to cooperate?
a. "Improper exclusion (exclusion not the result of superior efficiency) is always deliberately intended." b. Contrast with: i. OLYMPIA (Telex case): firm with lawful monopoly power has no duty to help competitors (as long as cooperation is not indispensable to effective competition). J. Posner quote. c. Note, in Aspen, court is willing to intervene. Then J Posner (Olympia), not willing to intervene. Now (Trinko) no justices willing to intervene. Not so much different cases, but re-interpretation of Aspen.
Antitrust tries to mitigate problems, but not to achieve perfection.
a. Antitrust does not try to fix some kinds of problems, e.g. quality, safety, etc It only addresses market, economic, competitive issues. b. Note example that antitrust does not allow manufacturers to decide in concert to outlaw lead paint on toys. c. Note that antitrust does not condemn monopoly per se, just certain actions that might be done by monopolists
THREE approaches, in ascending order of breadth, for defining monopolization:
a. Classic test: Acquisition or maintenance of power through unreasonable restraint of trade is a violation of § 1 of Sherman Act, which is a necessary condition to violation of § 2. If one firm does what would be illegal under § 1 for two or more firms to agree to do, that is a violation b. Monopolization in violation of § 2 of Sherman Act is (a) attaining and (b) exercising or intending to exercise market power to exclude competition, regardless of whether actual unreasonable restraint of trade proved. (US v Griffith, theater chains exercising power over film distributors.) c. Monopolization is any and all deliberate activity by a monopoly, BUT company may defend against charges of monopolization by proving that its power is solely due to superior skills or products, or natural advantages, or superior efficiencies, or low margins of profit permanently maintained without discrimination. C. Held 1. US Shoe controlled market through its overwhelming strength. 2. Market strength limited and excluded competition. 3. Strength was not attributable to defendant's ability or other "proper" advantages.
Adverse effects on competition
a. Coordinated market? What factors make coordination likely? i. Homogenous; Good info about competitors; No maverick firms b. Unilateral: would firm have ability to raise prices? (see §2.211) c. Heinz: inquiry whether less competition at wholesale level would translate into less competition at retail market (does the competition redound to consumers)
Three steps for defining market share:
a. Defining the relevant market b. Calculating the market share c. Power to raise price above cost?
Exclusionary Conduct 4. S/A §1 test for exclusionary conduct:
a. Harm to competitive process/consumers not competitors i. Anticompetitive injury b. P shows exclusionary conduct c. D shows justification d. P shows anti outweighs pro e. Effect not intent i. Antitrust does not care about intent: if you try but don't succeed to hurt competitor, its ok 5. MICROSOFT: this case involved a lot of things. Looking at factors together, can be bad even though ok separately. Intent has nothing to do with monopolization.
Predatory pricing?
a. In EU: i. Prices below AVC = abuse per se ii. Prices below ATC (above AVC) = needs intent iii. AKZO: benefit of EU approach is that ATC plus intent is cheaper than finding AVC. 1. Note that there might have been intent here - threats may just be threats iv. IRISH SUGAR: "no objective justification for the rebates" in near-N-Ireland zone. Court focused on intent: predatory. EU focus on rivalry. b. In US: price < incremental/marginal cost(AVC)
Quick look rule of reason is a test sometimes applied.—falls between rofr and per se
a. Inquiry-- see case analysis by Souter -largely ignored by lower courts. See, e.g, "As interpreted by the courts, § 1 of the Act provides for three levels of review: i. a per se rule, under which certain conduct is definitively illegal under the act; ii. a "quick look" rule-of-reason rule, which applies to conduct the anticompetitive nature of which can be recognized even by observers with rudimentary economic knowledge; iii. full rule-of-reason test, which requires a sophisticated balancing of the anti- and pro-competitive effects of the restraint."
Merger Guidelines 5-step analysis whether to challenge a proposed merger. 1. Market definition, market share, concentration
a. Market definition: SSNIP = 5% for 2 years (so if entry happens after 6 months, OK) product market and geographic market b. Market share ( supply side) includes firms that enter quickly w/o high sunk costs ("uncmtd entrants) c. Concentration: HHI & ∆ HHI (> 1800 a problem; increase of 100 a problem) Thresholds: i. > 1800: highly concentrated; 1000-1800: moderately concentrated; < 1000unconcentrated
Efficiencies
a. Merger-specific (but-for the merger b. Verifiable c. Cognizable: reduction in cost not at the expense of quality; not a restriction of output. d. Issue: do they need to be passed to consumers? Agcy will consider whether the consumer benefits 5. Failing company defense: if a company is failing, allowing it to be acquired by another company. Company will not continue to operate independently. Alternative is going out of business, there is no other buyer who would be less anticompetitive, concerns in market about transition. Burden is on the ∆.
Ancillary restraint test:
a. Must have main & lawful purpose, and the challenged restraint must be ancillary to this purpose. i. Look at justification and fit b. Restraint may not have primary purpose to restrain trade c. ADDYSTON PIPE & STEEL: ancillary restraint test - must have main and lawful purpose, and the challenged restraint must be ancillary to it.
Pricing
a. Production > ATC PROFIT b. ATC > production > AVT makes sense b/c minimizing losses, profit per unit but not overall production c. AVT > production LOSSES
Proof of Agreement Parallel Conduct & Plus Factors
a. Rule: i. What is being done must be something that wouldn't make sense individually but does when all entities are doing it (only makes sense collectively) ii. Opportunities to meet/agree iii. Parallel conduct alone not enough b. INTERSTATE CIRCUIT: parallel conduct AND plus factors (e.g. 1 - only makes sense collectively; 2 - opportunities to meet/agree). c. THEATER ENTERPRISES: proof of parallel business behavior alone not enough - here made sense that each distributor would chose individually not to give first-run movies.
Entry (committed entrants: take longer to enter, greater costs incurred)
a. Timely: fairly soon (2 years) b. Likely (profitable at premerger prices?) c. Sufficient to resolve potential competitive effects
Court considered cross elasticity and noted that slight changes in cellophane prices significantly affected demand for other packaging products.
a. characteristics of competing products b. prices of competing products c. significant qualities sought by customers d. BUT Patterson points out that this is probably because they have already adjusted price to the maximum level consistent with deterring customer switching. 4. Concluded proper market was flexible packaging—not just cellophane. 5. Noted that du Pont had not temporarily lowered prices, and had never gone below costs to drive out competition, but had lowered prices in consideration of increased total expected return. E. Court concluded separate "cellophane market" did not exist. Affirmed judgment of lower court. No violation of Sherman Act because du Pont market share not sufficient to be monopolistic. F Warren dissent: concluded cellophane was a relevant market, noted that other sellers of packaging materials did NOT follow cellophane's price reductions, showing price freedom du Pont had. And cellophane was only feasible wrapping for some products, e.g., cigarettes, because of gas impermeability. • Information on market power from e.g. grocery store receipts for econometric analysis is widely used now in antitrust cases.
Definitions of competition—pure or perfect competition requires:
a. many sellers—note that just existence of other sellers does not create real competition b. homogeneous products c. perfect information d. easy entry to and exit from the market e. (sometimes) equal access to technology necessary for competition
Requires removal of anticompetitive features of lease agreements and offering for sale.
a. shorten lease term b. separate maintenance from lease c. eliminate full capacity clause d. eliminate discriminatory commutative charges (for early returns). 4. Pricing structure not addressed, to do so would be impractical 5. Required divestment of subsidiaries manufacturing supplies.
The Antitrust Laws Sherman Act
a. §1: Prohibits agreements in [unreasonable] restraint of trade i. Agreements between parties/competitors that lessen their freedom in some way i. Requires more than one actor. ii. Much easier to regulate agreements than to regulate unilateral decisions b. §2: Prohibits monopolization or attempt to monopolize i. Single actor ok
Overview 1. Competition
aa. Intrabrand - competition among sellers of the same brand of products bb. Interbrand - competition with other manufacturers
Behavioral inquiry
adds evidence—should statute limit firms in absence of behavioral problems? does firm act as if it had power?
Geographic market:
area of effective competition
Price Fixing Price Fixing as Per Se Illegal 1. Price or market manipulation among competitors is per se illegal, because this behavior is inherently anti-competitive (Socony)
b. Where all or the dominant firms in a market combine to fix the composition of their product with the design and result of depressing the price . . . they violate the rule against price-fixing agreements. c. NAT'L MACARONI MANUF: intentional action to fix the price in any way is price-fixing (e.g. fixing the nature of the product, quality, etc.)
Clayton Antitrust Act
c. §3: Prohibits certain tying/exclusive dealing agreements (commodities) i. Note that if they are not commodities, but services, go to S/A §1 d. §7: Prohibits mergers & acquisitions where the effect may be to substantially lessen competition or create a monopoly in any line of commerce
Burden Shifting 5. BURDEN SHIFTING IS CRITICAL - allocation of burden is outcome determinative
ccc. P bears initial burden to show existence of actual anticompetitive effects (and maybe market power). P usually can show this. ddd. Then shifts to D to show that challenged conduct promotes a sufficiently pro-competitive objective. eee. Shifts back to P to balance or show less restrictive alternative fff. NOTE: P must then show harm up at supplier side (i.e. does not benefit some competition) which is hard 6. Was outcome determinative in ToysRUs
"Purpose or effect" is to fix prices
d. And of course a practice that fixes prices can also be condemned even if that was not the intent.
Market Share as proxy for Power
d. Market power is the power to reduce output and raise prices above marginal cost, and make a profit by doing so. e. Monopoly power = large amount of market power
Procedural Requirements for Proof of Agreement
d. TWOMBLY: parallel course of conduct and non-competition is not enough to be liable under antitrust law, must actually have and agreement. i. Oral Arg: Minn-Chem, Inc. v. Agrium Inc. - Issue 2: Twombly i. Look for plausibility: 1. Does parallel pricing = price fixing? Even if global increase in prices higher than other farm goods? ii. Which is fair? Allowing anyone to bring complaint b/c they don't like outcome in honest market OR making innocent/harmed P come in with all info and research? iii. Nuisance value of an antitrust case once it passes pleading stage is V high, usually settled at that point. Makes stating a claim automatic win. 1. E.g. determining the global relevant market? Very expensive, will eventually need to show, past pleading stage.
Full capacity clause of lease affect policy?
deterrent to "trying out" another machine for direct comparison. If there were no possibility of competition, US Shoe would have no reason to require full utilization of machines. E. Defense: policies compelled shoe machinery market; policies had social benefits; court: irrelevant to the law F. Remedy (finally ineffective, Shoe remained king): Purpose of remedy must be to restore competition by extirpating anticompetitive practices. • Law requires elimination of monopoly power, regardless of whether it is being misused to social detriment, because it is beyond natural checks and balances of the market. • Absence of competition makes it impossible to objectively measure performance of monopolist • R&D budget irrelevant, although defense claims it shows their "good corporate citizenship" 1. Court will not accede to prosecution's request to break up company. 2. Court will not require sale instead of leasing of all machines
Conscious Parallelism—
differing definitions, differing opinions on whether it is sufficient without "plus factors." Court has sometimes seemed to be reluctant to dismiss cases alleging conspiracy without proceeding to jury trial.
Essential Facility Doctrine 4. "Essential Facility Doctrine" -
dominant firm controlling a qualifying "essential facility" may have a duty to share the facility with a competitor, and refusal to share the facility must give the D a monopoly (facility must account for a dominant share of a market). a. control of essential facility by monopolist b. facility cannot be duplicated c. facility denied to competitor d. feasible to provide
Justification/Fit - Moving Towards ROR 3. ROR means judgment for the D 4. JUSTIFICATION AND FIT
e. *BMI: price-setting is part of the creating of a new, efficient product, therefore it is allowed. f. Justifications are important - two justifications get you out of Per Se into ROR: i. Efficiencies: substantial lowering of costs 1. Settling of price necessary/ancillary? Court says middleman obviously necessary to avoid severe complications ii. Blanket license as a creation of a new product (each individual composer could not make this product on its own, "sum greater than the parts") 1. Setting of price is part of creation g. Factual price fixing v. Legal price fixing (per se) i. No clear answer - remember: "Elimination of competitive evils is no legal justification for price fixing" (Socony)
Robinson-Patman Act
e. Clayton §2 - Robinson-Patman Amendments (1936) f. Prohibits price discrimination (differential pricing - charging different prices for the same thing) where the effect is substantially to lessen competition or tend to create a monopoly in any line of commerce.
Vertical restrains can be divided into four categories (see p.651)
ee. Resale price maintenance (intra) ff. Nonprice vertical restraint (intra) gg. Exclusive-dealing arrangement (inter) hh. Tying arrangement (inter)
Court considered cross-elasticity of demand as determinative of market. 2. Definition of cross-
elasticity is percent change in sales of one good divided by percent change in price of another good, or E = %ΔSa / %ΔPb -Else Why is it "cross"? a. What validity do figures have? b. What constitutes "high" or "low" cross-elasticity? c. Note that these might not be simple linear relationships. d. Consider significance of production costs relative to prices—i.e. profit margins. See note 2(c) p 82.—but court ignored that—This is called "the cellophane fallacy." Demand is always elastic at point of profit maximization, even for monopolist.
Perceived v. Actual entry i. Perceived potential entry,
firms are feeling constrained, don't know whether the firm will enter the market or not. (a) They will keep the prices down. (b) If merger happens, then prices may go up. But until merger, other firms looking to see what firm will do.
JP Standard 1. Establish JP STANDARD:
ggg. Efficient to offer separately? 2. JEFFERSON PARISH: [anesthesiologist denied staff pos at hospital] must be sufficient demand for the two products that they may be sold separately. hhh. Note: SC finds that market share of 30% is insufficient to establish an illegal tying arrangement. iii. Restriction of buyer's choice 3. KODAK: [limit replacement parts servicing] tying between parts and service, court found tying, need economic power in the tying market 4. MARUS CORP v. AMEX: following JP standard - need MP and efficient to offer products separately. jjj. Argument: it's been done before, therefore efficient. 5. Tying, exclusive dealing - is subject to C/A §3 kkk. What about JP? Service: not a commodity - §3 applies only to commodities (goods, etc.) i. Tying arrangements in (business) service markets must generally be treated under § 1 of the S/A.
Why not a violation?
o BOT is already highly regulated, so we don't need antitrust scrutiny. o BOT offers a different product, like BMI, and o created efficiencies, and o still allows old individual transactions?? o Creates a market, which is pro-competitive under Ror analysis. Note CASE: US v Trenton Potteries, 1927, where court held that even agreeing to fix prices at a low level was illegal. Defense that prices were low was rejected. Power to set price could be used to detriment of competition, and had to be held illegal.
V. Mergers • Clayton Act § 7
governs mergers (could be covered by Sherm §1) not about conduct, about structure o No person engaged in commerce or ...shall acquire...the whole or any part of the stock or other share capital" of another where... o The effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly • Sherman Act for Antitrust and IP after mergers, since IP laws create statutory monopolies. • Why challenge a merger? Why not wait until it actually demonstrates anticompetitive effects and then enjoin the behavior. One reason is difficulty of unraveling something that already has been affecting the market. • Why merge? Reductions in cost from economies of scale. o Some things caused by mergers are not remediable under Sherman §§ 1 & 2.; e.g. oligopolistic effects, high prices created by a monopolist.—but US antitrust courts don't want to get into price regulation. • Concern about two kinds of effects: o coordinated effects; unilateral effects • Not specific like Corporate Law: a merger is any stock acquisition, asset acquisition, etc. causes consolidation of power.
Contrast: no justifications/inefficient
i. *MARICOPA: no new product means that price fixing is illegal. i. Price ceilings are also per se illegal - inefficient ii. Min/max price - manipulating the market mechanism which inevitably results in waste
Question of fit - do you need the lower level agreement to achieve the higher level one
i. Consider what the parties agreed to do ii. BMI - 1. Create ASCAP as JV but ultimately want to prevent difficulties in © enforcement (higher) 2. Also agreeing to have joint sales agent set sales price of blanket licenses; (lower) iii. Maricopa - 1. Doctors agreed to create a full coverage max fee pricing plan (higher); 2. But doctors were agreeing among themselves on max fees (lower);
Differences between BMI and Maricopa?
i. Court cares that the doctors are setting the prices ii. BMI the agreement does not help the composers set their own prices, no joint meeting, etc
Is restriction on retail locations a per se violation of §1?
i. Effects of Restraint: 1. prevent free-riding 2. Cartelization (Leegin) ii. Nature of restraint: 1. Sale v. consignment 2. Territory v. location (degree of restriction of competition) 3. price v. Non-price 4. Dual distribution aaa. LEEGIN: RPM does not always restrict competition and decrease output. Illegality of RPM depends on the circumstances: look at source of restraint and MP. i. Resale price maintenance can increase interbrand competition - may be difficult/inefficient for a manuf to enforce a K specifying services the retailer must perform 4. Anticompetitive effects? Illegal bbb. TOYS R US: follows Leegin. i. Court says: BRU is dominant BRU's communications are coercive Compliance w. them is anticompetitive
Three Examples on Horizontal Agreements
i. Example: Trade association of coach companies in coutry X disseminates individualized information on intended future prices only to the member coach companies (all info and restrictions on fares and sales etc.) Illegal? (a) Allows the companies to reach collusive outcome and therefore restricts competition by object. Bad because its directed to the future. (1) Restriction by object = don't have to prove bad motive, not per se, more like quick look ROR. (2) Restriction by effect = per se illegal. ii. Example: exchange of prices with sufficient efficiency gains for consumers. (a) Differences: current prices, publicly accessible information - helps the market (b) Is there any reason ever to exchange information privately among sellers? No. iii. Example: luxury hotels in country A exchange individual information about current occupancy rates and revenues, from which the parties can directly deduce their actual current prices. (a) The exchange of information would not constitute a restriction of competition by object because they exchange present data and not intended future prices/quantities HOWEVER, it gives rise to restrictive effects because such information would be likely to facilitate coordination of companies' competitive behavior.
Market Allocations Per Se Illegality of Allocations
i. When horizontal territorial division is used simply to eliminate competition among rivals it is illegal per se. ii. *TOPCO (Supermarkets): territorial limitations stifle competition. This was per se illegal as a form of horizontal price fixing. (a) PRO: Private label lets regional chains compete w/ national chains, giving people greater choice and cheap store-brands. This is vertical arrangement, where exclusive territory is incidental to TopCo's licensing agreement and ancillary restraint. Without the restraint, free-riding would impinge on advertising recovery revenues. (b) But free-riding is not illegal under antitrust law. (c) ANTI: Regional chains given exclusive territories and can't compete amongst themselves. iii. PALMER (Bar/Bri): market allocations are still per se illegal. Sharing profits = agreeing on price. Agreement not to compete (even though not originally in that market).
If not, is this restraint on balance anticompetitive? or more anti than pro competitive? a. rule of reason analysis:
i. joint ventures ii. information exchanges iii. standard-setting activities iv. most vertical agreements, including maximum resale price maintenance b. hardly ever criminally prosecuted
Basic inquiry of Sherman § 1 cases: 1. Is this a type of restraint that is always or almost always anticompetitive? Illegal per se a. horizontal agreements
i. price fixing, ii. output restrictions, iii. market allocations. (not often criminal prosecution for this) iv. concerted refusals to deal or group boycotts (not often criminal prosecution for this) v. Quality adjustment actually relates to price.
Unilateral effects analysis:
idea that the next best substitute may not be as good anymore once the merger happens a. *ORACLE: idea of the unilateral effects analysis (think diagram about how the next best substitute may not be as good post-merger) - DOJ views this as a failure. b. PS as a constraint on Oracle before the merger... but once they merge, will there be any constraints? 3. CCC/MITCHELL: always public policy aspect to antitrust should be aware even if not used. Note: countries used to use US as benchmark for antitrust but now noticing 2 different standards/processes and confused (DOJ/FTC).
AGREEMENT REQUIREMENT
ii. (1) Is there an agreement and (2) does it unreasonably restrain trade? jj. Agreement may have different meanings in vertical cases (v. horizontal) i. e.g. buyer's unwilling compliance with seller's demand may be an agreement 5. Proving the vertical agreement? kk. Focus on procedure
Consider basis for making decision on how to structure your business
sell products yourself vs use independent dealers Sell Yourself Sell thru Dealers profits all your own less risk more control local knowledge carryover of benefits no carryover of problems reduces focus/complexity problems
Vertical Agreements Vertical Agreements for grocery brands at issue in Topco Case
internal transactions market transactions ???? mfr.. D'Agostino Del Monte Topco stores D'Ag D'Ag D'Ag Gristede's grocery grocery grocery grocery
Federal instrumentality doctrine
is federal analog of state action doctrine. Example of recent case on URL domain name administration monopoly, where this doctrine was invoked to justify. "Fair trade contract" is euphemism for resale price maintenance agreement
Reasonable interchangeability **Reasonable interchangeability
is the defining issue for determining product market. The nature and quality of demand is not a question we ask—only how it is satisfied—no concern about luxury vs. necessity, how deluded the demand might be, etc.
True test of legality:
is the restraint imposed such as merely regulating and thereby promoting competition, or is such as may suppress or destroy competition? d. Then test is: Unreasonable considering everything? e. Consider facts particular to the business to which the restraint is applied: i. Nature of rule ii. Scope of rule iii. Effects of the rule f. CHICAGO BOARD OF TRADE: ["call rule" trading] test is "unreasonable considering everything" - consider facts particular to the business to which the restraint is applied. (ROR) 12. APPALACHIAN COALS: appointing one joint sales agent to represent all coal producers is price fixing. (BUT, 1933, middle of depression, went with economy). a. Outlier - looks like price fixing and would be prohibited today
Critical loss analysis
k. Loss in customers that makes enterprise unprofitable
Performance evidence also significant:
level of profits and level of prices in comparison with similar industries.
CASE: Calif Retail Liquor Dealers v Midcal Aluminum, SCt 1980
like Tampa Electric action against Midcal (actually a liquor wholesaler) for violating state law that required compliance with published wholesale prices for liquor, and Midcal responded that law was preempted by federal antitrust law. Not an antitrust case, but a federal preemption or Supremacy Clause case. Note that previously, Miller-Tydings Act had specifically exempted State actions to authorize resale price maintenance. That act had been repealed by Consumer Goods Pricing Act of 1975. Court accepted that Calif system was resale price maintenance in violation of Sherman I, then considered whether state action doctrine should provide immunity. ** Two part TEST as Standard immunizing state action from antitrust violation: 1. clear articulation and affirmative expression of policy AND 2. actively supervised by state. State's role here is OK wrt articulation, but supervision is limited to enforcement, and court doesn't think that is enough for active supervision. Active supervision requires examination of the process itself. Simply using courts to enforce does not amount to supervision. Scope of court proceeding did not examine reasonableness of the prices set, which were just established by private conduct. Patterson questions whether there is actually an agreement here, since the law is articulated as we establish, you comply, although part of problem is that the actual prices set were just set by wholesalers, not reviewed by state. However, this was a unanimous decision.
Legality of Vertical Agreements - Per Se 6. Origins of VA cases:
ll. DR MILES: [quack doctor] legality of vertical restraints, RPM is per se illegal - overruled by Leegin. i. Arguments: decision rested on the assertion that minimum resale price maintenance is indistinguishable in economic effect from naked horizontal price fixing by a cartel. 1. Subsequent decisions characterized Dr Miles as holding that minimum resale price maintenance is unlawful per se - that is, without regard to its impact on the marketplace or consumers. ii. Agreement cases as a "safety valve" - since it is per se illegal, can't argue that it's good (once it's there it's there) so they argue that there was no agreement to begin with 7. Refusal to Deal mm. COLGATE: manufacturer's right to deal with whomever it wanted - right of refusal to deal. (E.g. if fail to comply with terms, etc.). Unilateral minimum RPM allows manuf to influence price without agreeing on price. nn. Colgate is THE CASE allowing refusal to deal - allows manufacturer to influence the price at which its distributors and dealers resell its products to consumers without agreeing with resellers on price and thereby illegally price fixing. 8. PARKE DAVIS: courts want people to act independently (in best interest). Do not make a commitment/agreement either way, let companies below you act unilaterally. oo. What did they do that made it an agreement? i. Retailers indicated a willingness to go along - willingness as an acceptance? ii. Consideration: names of those who refused to give such assurances were given to the wholesalers (exchange of information) 9. Must be a conscious commitment to a common scheme designed to achieve an unlawful objective pp. Need to show agreement, and evidence that tends to exclude possibility that M acted unilaterally qq. MONSANTO: correct standard is that there must be evidence that excludes the possibility of independent action by the manuf/distributor. 10. PEPSICO: [fountain syrup] issue of when agreements are horizontal vs. vertical, need plus factors for horizontal agreements. rr. No evidence of direct communications among the IFDs, only that the competitor assured the IFDs that the loyalty policy would be uniformly enforced and encouraged them to report violations.
HHI 3. Herfindahl-Hirschman Index (HHI) -
mathematical formula used to determine market concentration (shares of each competitor are squared and sums added to result in a number which expresses concentration level of the market 4. Previous guidelines g. HHI <1000 = unconcentrated unlikely to challenge horizontal merger h. 1000 < HHI < 1800= moderately concentrated unlikely to challenge if increase <100 i. HHI > 1800 = highly concentrated unlikely to challenge if increase > 50 5. New guidelines: 2010 (higher now, suggesting less rigid enforcement) j. HHI <1500 = unconcentrated unlikely to challenge horizontal merger k. 1500 < HHI < 2500= moderately concentrated unlikely to challenge if increase <100 l. HHI > 2500 = highly concentrated unlikely to challenge if increase > 50 6. Increase calculated by doubling the product of the market shares of the merging firms m. Mergers which produce combined market shares of at least 35% often produce anticompetitive effects
H. Concerted Refusals to Deal & Boycotts Collective action by a group of competitors to exclude or interfere with another competitor. Horizontal in nature with a vertical component. Two basic types of boycott:
means/instrument (supplier) boycotter1 + 2, + [...]n boycotter1 + 2, + [...]n target (comp) targets • Question: where is the horizontal agreement? —can it be a purely horizontal relationship? • Patterson: there must be a vertical component because the transactions being prohibited are vertical. Are these two forms equally bad? o Second one is a form of cartel, but is allowed by insurance companies s under McCarran-Ferguson Act infra. o There is not a real difference between the two arrangements, and one can always be characterized as the other, unless there is not a real horizontal agreement. • Many forms—may be coercion, fraud, misrepresentation, concealment, etc.
Below cost: marginal cost or average variable cost?
o Areeda proposed average variable costs as more practical proxy for enforcement, accounting records unlikely to yield meaningful information on marginal cost. o AVC are those costs which can be changed in the relevant time period, i.e. the duration of the low pricing episode; the longer the episode, the more costs which become variable. o Also, consider e.g. that defendant monopolist might have excess capacity and thus marginal cost would be very low in comparison with average cost. • Monopolist might be much larger, and thus able to withstand losses for a longer time than a new entrant to market, but that does not seem to matter. o Patterson: "when low prices are the conduct we are considering, we want to be very careful about finding liability, so as not to discourage normal business conduct."
FTC v. University Health • ∆ has several non-statistical alternatives to cast doubt on the persuasive quality of the statistics which purport to predict future anticompetitive consequences:
o Ease of entry o Trend of mkt away from concentration o Continuation of active price competition o Unique economic circumstances that undermine predictive value of statisctics Two other cases where market share figures underrepresent the actual situation. CASE: US v El Paso Natural Gas Co., SCt 1964. effect of an actual potential competitor. negotiations for California gas supply from pipelines. CASE: US v Falstaff Brewing Co., SCt 1973 effect of a perceived potential competitor attempt to buy a brewery in New England to move into new geographic market
Defenses rejected by court:
o Entry into market: timeliness, likelihood, sufficiency others had tried and failed, as had mega-retailers o Efficiencies must be merger specific and not achievable by other means verifiable cognizable: drops in cost NOT due to cuts in production • not anticompetitive efficiencies, not anticonsumer actions • Appears to follow merger guidelines though Phil Bank is S Ct standard. (they don't follow, it but prob satisfied)
"Plus factors"
o Evidence that tends to exclude the possibility of independent action is usually dispositive. o In this case the result of an individual decision by a distributor not to deal with π was good for distributor—decision in interest of individual cannot be used to suggest conspiracy.
Anticomp effect?
o GPD would've lowered prices... o ...but this isn't men's underwear, if the price is cut, then services to this machinery will be cut. Chances are service and parts are very important for this graphics equipment. • Itek says by showing harm to intrabrand it has also shown harm to interbrand, but Patt disagrees
Cartel: an arrangement among competitors with the intention or effect of limiting competition.
o Generally a producer in a competitive market is a price taker. A cartel achieves monopolistic power over prices through agreements and cooperation. o Difficult for cartel to police itseld, so more likely to succeed with: small number of parties in market. inelastic demand (consumers unable to switch to another product.) elasticity of demand price provides incentive to cheat high barrier to entry for other producers. limited resource high start-up costs. licensing requirements output restrictions by government • Price fixing can be horizontal or vertical, can incorporate territorial divisions. • Allegation also used against professional societies and non-profits.
Covenant not to compete
o Is a covenant not to compete that is agreed to with the sale of a business "ancillary" to the sale? Why, or why not? Erstwhile competitors might agree on prices or on setting output levels to affect prices.
Relevant considerations to determine whether such foreclosure will occur:
o Market share o Define line of commerce o Relative strengths of the parties o Define geographic area of competition in line of commerce o Length of K o Can supplies reach the customers in other ways? • 1) How much of market is foreclosed; 2) pro-comp. justification. Recently a very high bar. • 30-40% would now be the necessary share • Very unsympathetic π in the case; share foreclosed: 77%; discovered docs: "Market is Florida; We have the whole Florida market o Harm: how much of the market is foreclosed to competing coal producers? 77% o Pro-competitive effect: 20 year contract enabled Tampa Electric to invest in building its plant
Ancillary restraint doctrine applies across most of these violations
o Under this doctrine, a restraint will be upheld if it "is reasonably necessary . . . to the legitimate ends of the existing partnership." o Taft: when a business partnership is formed, restraints on competition among the participants were to be "encouraged" since they were only ancillary to the main end of the union, and necessary for its success. —Addystone Pipe.
Three requirements of the doctrine
o actually exercise authority to review and ability to disprove o actually review and not merely rubberstamp o merely being staffed and funded with authorization is not enough to satisfy active supervision.
Some of these relate to market power, but it is not specifically mentioned here. Lower court erred in striking evidence relating to history and purpose of the rule. "Reasonable regulation of biz" consistent w/ Antitrust law. • effect of rule's operation and concluded, among other effects, that it
o created a more public market o brought more of trading into trading day instead of off hours o more direct relationships between buyers and sellers o broader distribution of market business among members o increased number of dealers o eliminated some risk o expanded available inventory? o allowed trade on smaller margins, making market more attractive • prices were in fact lowered by this agreement.
Per se analysis vs Rule of reason • In BMI we saw two reasons not to apply per se analysis:
o different product offered o major efficiencies provided. • In Maricopa, what was Stevens' concern about efficiency? That it could have been better if DOCTORS were not negotiating with themselves. BMI was at least a separate organization, whereas Maricopa County was just the group of not really competitive doctors. What we want is a real risk being borne by the group that is performing the price-setting function. • Often RoR/per se issue is decisive BECAUSE of cost and expense of pursuing a ror analysis. Loser drops out if RoR is chosen.
**Factors in RofR Analysis: Court said necessary to consider:
o facts peculiar to business to which restraint applied o condition of business before and after restraint imposed o nature of restraint o actual or probable effect of restraint. o history o reason for imposing restraint and condition to be addressed by it. o reason for adopting particular remedy.
Three kinds of merger:
o horizontal (most commonly challenged) o vertical (concern if evidence of possible foreclosure) o conglomerate. (not generally challenged in US today since Procter & Gamble-Clorox Case)
Determination that restraint is unreasonable can be based on:
o how nature and character of contracts affect competition o any surrounding circumstances indicating intention of parties to restrain trade and enhance prices.
A relevant geographic market is
some area in which a firm can increase its price without 1) large numbers of its customers immediately turning to alternative supply sources outside the area, or 2) producers outside the area quickly flooding the area with substitute products. i. MERCY: [hospital case] defining the geographic market. Elzinga-Hogarty case.
Issue: whether level of analysis by lower court was sufficient, Souter says no. Looked at standards set for quick look in NCAA: "naked restraint on price and output requires some competitive justification even in the absence of detailed market analysis."
o in NSPE that horizontal agreement not to discuss price was clearly anticompetitive. Quick look analysis is sufficient when "great likelihood of anticompetitive effects can easily be ascertained." • Souter believes it is feasible that restrictions established by CDA might have a procompetitive effect., and the issue should be considered, so quick look is not enough, especially given that this is a professional society affecting medical (dental) services, where consumer might not be in position to judge information easily. • Shifting burden of production to CDA of procompetitive effect without having required evidence of anticompetitive effect was not justified. Goes on to propose a continuum of analyses rather than just three separate levels. Fit analysis to the individual case, looking to circumstances, details, and logic of the restraint. • Since proof of effect is difficult, question of where burden is placed is very important. Patterson says Breyer's concurring opinion, evades the real question of did the court misallocate the burden of proof. Breyer thinks this is a naked restraint, which it possibly is, but not on dental services, just on advertising. Suggested "a traditional application of the rule of reason" comprised the following questions: >"(1) What is the specific restraint at issue? (2) What are its likely anticompetitive effects? (3) Are there offsetting procompetitive justifications? (4) Do the parties have sufficient market power to make a difference?"
Differences between Itek and Sylvania:
o nationally, Itek has 70% of the market o Horizontal agreement: Itek retailers making agreement w/ GPD, not Itek the manufacturer o even though restraints are treated as vertical, Itek's motivation to restrict competition from independent distributors is a factor in the ct's analysis o Not clear that the absence of mkt power is enough to dispose of a case alone
CASE: FTC v Superior Court Trial Lawyers Association, 1990 SCt. • ∆s trial lawyers collectively refused to accept clients through D.C.'s indigent criminal defense program unless city agreed to increase hourly rate • Fixed prices by the government are OK, because:
o no reason a monopoly cannot set its price o government is excepted from Sherman Act anyway • Held: agreement "classic restraint of trade" condemned without any showing of market power. • Assumption that absent a proof of market power the boycott disclosed by this record was totally harmless — when overwhelming testimony demonstrated that it almost produced a crisis ...and achieved its economic goal, is flatly inconsistent with the clear course of antitrust jurisprudence." • Not a real boycott: horizontal agreement in naked restraint on trade — demanding higher price
Antitrust Division investigated ABA and filed suit. ABA entered into consent decree that:
o prevented any standard affecting salaries or benefits of faculty or deans o prohibited collecting any info on salaries or benefits paid to faculty or deans. o prohibited using compensation data in determining accreditation o adopting any standard that prohibits schools from enrolling grads in post-JD programs or offering transfer credits or organizing for-profit
CASE: Weyerhauser v. Ross-Simons Hardwood Lumber (2007) • Π alleged predatory bidding by ∆, won at tc by establishing that ∆ purchased more logs than it needed or paid higher price for logs than necessary, to prevent π from obtaining logs it needed at a fair price. ∆ argued that a showing of predatory bidding was subject to the same stringent standards applicable to a showing of predatory pricing. • SCOTUS unanimously held theoretical and practical similarities of predatory pricing and predatory bidding warranted application of the established predatory pricing test to predatory-bidding claim:
o to show predatory bidding, π required to show competitor's bidding led to below-cost pricing of competitor's logs o and that competitor had a dangerous probability of recouping the losses incurred in bidding up log prices through the exercise of monopsony power o Bidding up log prices did not by itself establish predatory bidding since there were myriad legitimate reasons for such bidding, such as increased consumer demand and a hedge against future price increases.
Elements of Tying per se rule (differs from circuit to circuit, no SCOTUS definition)
o two products o tied together (can be a requirement to buy my product, or a requirement not to buy anyone else's product) o market power forcing or coercion (in some circuits) o not insubstantial amount of commerce in tied product o (some courts) where tying seller has financial interest in tied product. • ∆ argued that tying agreement was only to insure that quality salt was used in its machines. • Sherman Act §1 v. Clayton Act §3 --Clayton says "on the condition, agreement, or understanding" which might be construed more broadly than Sherman, but it is ONLY FOR GOODS—not services. • Categories defined by case law (maximum resale price setting, tying, concerted refusal to deal, etc.) • Tying claims usually are brought by competitors selling tied product.
Quantitative substantiality
ooo. *STANDARD STATIONS: quantitative substantiality (MS %) i. Ct says 7% is enough - now more like 30% ii. "Requirement Ks clogged competition" ppp. Different from Int'l Salt with $ amount standard.
Actual potential entry,
other firms don't know about the firm, so they are not constrained. (a) Merger prevents things from getting better (but does not make things worse) (b) Not in the market now, but may have a future effect (c) "Actual potential entrant" distinguished from "perceived" or "recognized" potential entrant: in the latter theory, insiders view the outsider as a likely entrant ("competitor waiting in the wings") and keep their profit margins lower than they would if there were not threat of the outsider entering the market. iii. What is just right? Entry in the "near future" iv. "Potential perceived potential entrant" - like a future PPE, cannot be a PPE now, other firms don't see it as a PPE, BUT, they think that next year, or near future, etc. will be a PPE. v. "Actual potential entrant" doctrine: proscribes as violative of § 7 of the C/A a company's acquisition of a large firm in an oligopolistic market if the acquiring company at some future date is expected to enter the market de novo or through a "toehold" acquisition of a firm lacking a significant share of the market. (a) BOC INTERNATIONAL: look at future effects - Must show that there is a reasonable probability of entry into the market in the near future even without the acquisition.
Monopoly Power and Market Share —issue is
power to raise prices, but problem is how to measure that power.
SSNIP 1. Mechanism to find market power:
product or group of products and a geographic area for their sale in which a hypothetical, profit-maximizing firm that was the only present and future seller of those products in that area could impose a "small but significant and nontransitory increase in price above prevailing or likely future levels" (SSNIP). c. Market is an area in terms of product and geographic boundaries in which a monopolist could be effective. d. Relevant market = smallest grouping of products which satisfy the test 2. Increment of price increase used to gauge consumer ability to substitute products = 5% e. Find smallest possible product grouping, raise price 5% - if the consumers move to another product, then you should expand the group and try again, until you find a grouping where the consumers will just pay the increase (monopolistic effect) f. Think DuPont - start with cellophane. Raise 5%, and consumers move to Glassene. So now the market grouping will be C&G, raise 5% again, see what happens.
Qualitative substantiality (* current test)
qqq. To determine substantiality, necessary to weigh the probable effect of the K on the relevant area of effective competition, taking into effect relative strength of parties, proportionate volume of commerce in relevant area, and probable immediate/future effects rrr. *TAMPA ELECTRIC: qualitative substantiality 4. *BLUE CROSS MI: doesn't fit into either exclusivity category but is still illegal.
CASE: Parker v Brown, SCt 1943
raisin growing market plan—created effective monopoly and set prices. Held a constitutional prerogative of state to regulate market. Created program and a commission made up of one state official (Director of Agriculture) plus representatives of growers. Petition of 10 growers would result in public hearings to determine whether to establish marketing plan within a zone. Commission then appoints committee to formulate program , more public hearings, and approval by Commission. Program approval by 65% of growers then required, and Committee administers program. Established doctrine of immunity of state action regulating commerce and restraining trade.
Vertical Dist now Under ROR
ss. If no market power, D wins tt. If increase in interbrand competition D wins i. E.g. Sylvania uu. If no showing of interbrand harm, D wins vv. Balance(RARE) i. Since Sylvania, only 2 cases where P wins
1. CASE: Topps Chewing Gum v Fleer
suit over monopolization of baseball card market through five-year exclusive contracts with ball players granting right to sell their names and pictures. (a) issue is what is the market: baseball cards, trading cards in general, novelties?? Market definition is inevitably imperfect. (b) difficult to determine market power—so do it with market share (c) note motivation of plaintiff Fleer might not be pure (d) note that market share is not equivalent to market power—because of barriers to entry that could preclude a potential competitor from entering (e) question of whether the power Topps has is over consumers or over ball players. (f) exclusivity is problem—does it confer any competitive benefit? Exclusive arrangements can lessen risk for investors, but that is not really an issue for this situation. (g) note that the damages to Fleer are only significant if Fleer can also show that there were damages to consumers resulting from their exclusion. Q. about Topps Case—don't the players have more power? There are labor law exceptions to agreements in restraint of trade. Do players want exclusive contracts? Only if that means that the pie is bigger, and they can therefore get a bigger piece. What level is the monopolization claim? Note that you can talk about players as a unit, but monopoly of the players as a unit does not enter into this problem. NOTE: Europe has concept in competition law of collective dominance, but US does not.
Monopoly power = ability
to control prices or unreasonably restrict competition. 2. Court looked at whether market should be cellophane or "flexible packaging materials" and considered whether access to du Pont's techniques was necessary to compete. a. Considered whether competition from other materials limited du Pont's ability to control price. b. Distinguished power of a producer of a trademarked product (assuming a real market differentiation) from monopoly power. Important point is ability to substitute another product. Notes need to clarify acceptable range of substitutes. i. "where there are market alternatives that buyers may readily use for their purposes, illegal monopoly does not exist merely because the product ...differs from others." ii. considered substitute products exhibited: Saran, Pliofilm, glassine, etc. c. Court determined it was necessary to consider "cross-elasticity" of demand.
The "Elzinga-Hogarty" test
was employed by the government (in Mercy) to argue that the relevant geographical market was quite limited. This test looks at the empirical data to determine (1) the area from which the hospitals draw their patients and (2) where the residents in that area go for hospital care. i. Analyze patterns of consumer origin and destination and then to use that information - how many people leave an area to get services (outflow) and how many people come into an area to get services (inflow). ii. When both numbers are at 90%, the market definition is said to be "strong". Numbers at 75% are said to constitute a "weak" market definition.
Effect of US Shoe's lease contracts
was to ensure continued close contact with customers, considerable barriers to entry for potential competitors, including maintenance availability and costs of surrendering leases. 1. original constitution of company by mergers, technical quality, and 2. leasing system: an improper business policy because its aim was to exclude competitors regardless of their quality by raising the barrier for clients to change suppliers. a. leasing arrangements restricted free market by excluding possibility of competitors. b. improper action in a firm that had market power. c. practices were not clearly predatory, that violation was solely based on economic analysis
The ancillary restraint doctrine began its modern comeback in Broadcast Music Inc. v. CBS,
where thousands of authors and composers had joined together and granted nonexclusive rights to two joint venture type entities to offer a blanket license to all their musical compositions. Although the 2d Circuit held the arrangement to be per se illegal price fixing, the Supreme Court reversed, noting that the blanket license accompanied the integration of sales, monitoring, and enforcement against copyright infringements and thus was potentially beneficial to both sellers and buyers. It remanded the case for review under the rule of reason.
Hallmark of analysis, under ror OR per se, is
whether or not the practice enhances competition. • "A restraint that has the effect of reducing the importance of consumer preference in setting price and output is not consistent with the fundamental goal of antitrust law."
Vertical restrictions may be allowed
ww. All non-price restraints governed by ROR xx. Market impact of vertical restrictions is complex b/c of potential for both reduction of intrabrand competition and stimulation of interbrand competition. yy. *SYLVANIA: [only allowed sales in certain location, closed D's shop when they tried to expand] under ROR, vertical restrictions without a negate e effect on competition or with redeeming virtues may be allowed.
Information Exchanges Price dissemination
—information necessary for properly functioning market. Pricing decisions almost always made with reference to competition. We are now considering facilitating practices with effect of restraint on competition Note that Socony Vacuum says that agreement with intent or effect to fix prices is per se illegal.
CASE: FTC v Heinz, DC 2000
• #s2&3 in babyfood market merged seeking certain efficiencies, held too much concentration, efficiencies not merger-specific • Adopts the merger guidelines into a statement of the agencies' prima facie case • "a central object of merger policy to obstruct the creation or reinforcement by merger of such oligopolistic market structures in which tacit coordination can occur." • The efficiencies could have been achieved without merging (invest in recipes); the biggest efficiency really here was that #s 2&3 would stop competing with each other so much • B. The Merger Guidelines. If a merger creates> • Undue percentage share of relevant market • Significant increase in concentration • It is so inherently likely to lessen competition substantially • That it must be enjoined, unless • [defense] There is evidence clearly showing it is not likely to have anticompetitive effects
CASE: Arizona v Maricopa County Medical Society, SCt 1982, 457 US 332 Horizontal agreement, max fees, per se illegal
• (JPS): Physicians set maximum fees to be charged to holders of specified insurance plans by agreement. State sued that it was violation of § 1. Appel Ct held necessary to consider purpose and effect of agreement, denied summary judgment; SCt reversed, granting summary judgment. • Distinguished BMI by noting that the combination of physicians did not offer different product from that offered by an individual doctor, e.g. a "blanket license" for medical care. What they offered was precisely and exactly an agreement to fix prices, and was therefore in violation of § I. • Held: Immaterial whether max vs min price; immaterial whether medical/professional market, • ∆s argued that medical profession should be treated differently and has procompetitive justifications. • Court considers cost and complexity of RoR inquiry. Stevens did not agree that ∆s offered different product, although standardization of a capped price plan allows management of risk for insurance company. Same position as in BMI/ASCAP, but now he has a majority. • Cites holding from Socony "law does not permit an inquiry into [the] reasonableness [of particular price-fixing agreements.]"
CASE: Jefferson Parish Hospital District v Hyde, SCt. 1984
• (Stevens): π Hyde anesthesiologist, applied for staff privileges at ∆ Hospital, which had a contract with Roux, an independent medical corporation, to provide all anesthesiological services at the hospital. Π sued seeking declaratory judgment that this was an contract illegal tie. • HeldL per se analysis only appropriate if forcing in the tied product was probable. • Court said per se analysis needed to consider market power in tying product o Patterson says: Really hard to show this--.predicts that per se analysis for tying will be completely overturned within next 10 years by this court. • Analysis: Per se or rule of reason? What are the products? Is there tying? Why should tying be considered a Sherman violation? What is the market? Is there market power? o Anesthesiology was a separate product, since it was billed separately, and some hospitals allowed independent selection of anesthesia services. o Roux contract with hospital was only an exclusionary dealing contract, (although it was not even that anymore, since exclusivity clause had been removed on paper), but hospital contract with patents might amount to tying. "No tying arrangement can exist unless there is a sufficient demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital services." Held: there was tying, but anticompetitive effects had not been shown, and a tying arrangement should not be considered a per se violation of the Sherman Act unless there is demonstrable exclusionary impact in the tied product market.
CASE: Mass School of Law at Andover v ABA, Pa. 1994 and U.S. v ABA, D.D.C. '96
• ABA denied accred to law school in state of PA. School sued that ABA had monopoly power by virtue of accreditation process and asserted that effect of ABA standards was anticompetitive and was to fix law prof salaries. District Court granted summary judgment to ABA, using ROR analysis, and appellate court affirmed.
CASE: Broadcast Music, Inc. v Columbia Broadcasting Sys, SCt. 1979 • Horizontal agreement, monopolization, but RoR necessary because new product
• Action under antitrust and copyright by CBS against BMI, claiming ASCAP and BMI were unlawful monopolies engaged in price-fixing and tying and misuse of licenses to copyrighted musical compositions. ASCAP (1914) and BMI (1939) organized as clearinghouses for performance rights to songs. Each has huge repertory of songs, and licenses nonexclusive performance rights, primarily to radio and television broadcasters, charging either on basis of percent of revenue or a flat fee, usually for a blanket license. Dist Ct held that, since individual negotiation with copyright holders is available, there is not undue restraint of trade. Appeals Court held that blanket license was price-fixing and illegal per se; blanket license not a "naked restraint," but lack of a per use license from ASCAP and BMI made policies anticompetitive. • SCOTUS HELD: reversed and remanded. Any agreement on a price in a K is literally "price fixing." Copyright is a statutory monopoly. • It is necessary to look to purpose and effect of practice as part of per se analysis. Per se analysis should only be applied to a practice that has been in existence for long enough (Blanket license different in nature from individual licenses; no individual owner could issue one) so we can evaluate its anticompetitive effects, so should be given rule of reason treatment. • "Not all arrangements among actual or potential competitors that have an impact on price are per se violations of the Sherman Act or even unreasonable restraints." • Different product. Blanket license examined under rule of reason reversed and remanded for lower court to do so. • Dissent(JPS): thought SCt should go ahead and do rule of reason analysis. His application of ROR decided blanket license without a possibility of lesser license from BMI/ASCAP was an unreasonable restraint of trade, since it impeded ability of new songwriter to license his works cheaply and break into the market. o He agreed that a per use or per composition license would correct the deficiencies. Note what effects of the pricing arrangements are, and how it limits opportunities for those who might be willing to sell their work cheap. • Issue is that pricing options could be offered that are not. ASCAP is empowered to set the price, and that is clearly price-fixing, BUT. • Is there a less restrictive alternative? Court doesn't think so.
CASE: Theatre Enterprises v Paramount Pictures, Inc., 1948 SCt. • Conduct: Agreement of refusal to deal
• Affirmed lower court jury verdict against Theatre Enterprises, which had alleged Paramount conspired to restrict first-run movies to downtown Baltimore theatres, citing as evidence the fact that no distributor would give π a first-run movie for its suburban theatre. • Crucial question: whether respondents' refusal to allow petitioner to run a first-run film was a set of independent decisions or an agreement not to deal, whether expressed or tacit. • Circumstantial evidence of conscious parallelism was not sufficient evidence of conspiracy in restraint of trade. Previous conspiracy in Texas case was not dispositive either. o Respondents had business reasons that justified refusal. o Whether there was conspiracy was issue of fact, for jury to decide, and they had done so. Conscious parallelism does not equal conspiracy.
CASE: National Macaroni Manufacturers Association v FTC (7th Cir. 1965) • Horizontal agreement, price and quality restriction, per se violation
• Agreement by association representing 70% of market in US to limit use of durum wheat in macaroni, due to drought and short crop and rise in expected price. FTC alleged violation of § 5 of the FTC Act. Court found clear agreement to limit quality of macaroni in order to control price of durum wheat, and this was illegal. Look at the rationale for doing this; if it is concerted action to minimize your risk, it is illegal. • Held: Setting quality = setting price "We meant well" not a defense (mfrs claimed was only way to keep market going, everyone better off).
Market Allocations CASE: U S v Topco, SCt 1972
• Agreement to allocate territories that appeared vertical, but really was horizontal. Per se analysis. • Topco was a co-op formed by independent grocers for purchasing. Set up as a corporation, with stock owned by members, and governed by board who were also members. Agreements with dealers included restrictions on territory, which Topco said was necessary so that it could compete with large chains. Court decided this did not matter, agreement was per se illegal. • Horizontal agreement. At the corporate level, competition is increased (between Topco and Del Monte); at store level, competition is increased, (between Gristede's and a Topco store). But, competition between Topco stores is reduced (because of agreements regarding territory.) o Court does NOT balance the increase of competition with stores outside the Topco co-op against the reduced competition among Topco stores BECAUSE market allocation is per se illegal. o Dissent (Burger) Advocates RofR analysis
CASE: Dr. Miles Medical Co. v Park & Sons, SCt. 1911 • Vertical Restraints, overruled in Leegin
• Agreements between mfr and distributors to fix retail price for the product; retailer refused to honor agreement, induced wholesalers to sell to him at lower prices than agreed. Sued by manufacturer for tortuous interference with contract; defended that agreement was unlawful restraint. • Held: manufacturer forcing dealers to charge the same price is an effective cartel, even if the agreement was not horizontal among dealers, and is therefore per se illegal. • Holmes (dissent): nobody forced to buy product if unsatisfied with price consumers not harmed and courts Patterson: Court made a mistake here; cannot look only at final effect to the consumer—need to look at internal pricing structure. Analysis • Dr. Miles court relied on uniformity of pricing produced by min. vertical price-fixing (minimum RPM) to conclude that effect was the same as a dealer cartel, and therefore that the RPM should be illegal per se. • Compare to Theatre Enterprises: distributors also acted in a uniform way, but there was an alternative explanation to a horizontal agreement all of them faced the same market conditions: lower revenues if they contracted with the Crest. In Dr. Miles, uniform condition was contracts that ∆ insisted on. o shows that there was not necessarily a horizontal agreement among the Dr. Miles dealer o In Theatre Enterprises, the absence of a horizontal agreement was enough to dispose of the case, because there was no allegation of any anticompetitive vertical agreement. • In Dr. Miles, in contrast, the Court took the view that the vertical agreements were anticompetitive. o But if you accept that uniformity is the product not of agreement among those acting uniformly, but of a single market condition faced by all of them, how do you easily conclude the effect is anticomp? • The analysis should consider whether Dr. Miles agreements were in fact anticompetitive, not just assume they are. o They would be, if Dr. Miles were orchestrating some horizontal cartel with other manufacturers • Possible to condemn RPM in Dr. Miles per se without asking whether it was in fact anticompetitive, if such RPM was always or almost always anticompetitive (standard for per se treatment). o E.g. if it almost always involved orchestration of a cartel-like effect. • Dr. Miles was decided long before prevention-of-free-riding explanation was developed. Presumably if the Court had had that alternative before it then, it might have decided differently. When Court was directly presented with the issue now, it decided rule of reason applies (Leegin).
Patterson says important issue is risk, and doctors do have something at risk, even though less at risk than composers did in BMI. (In a joint venture of any sort, venturers share risk of loss or failure, but this is not a joint venture—just an agreement to fix prices.
• Ancillary restraint: Is the restraint necessary to make a new product available? • Dissent (Powell), claiming this is just like BMI/ASCAP case. Doctors claim they are offering a different product by virtue of their agreement, and he accepts that. Patterson: distinguishes this case is that the doctors themselves are doing the setting of prices, while in BMI, a separate agency is setting prices for the composers.
CASE: California Dental Assn v FTC, SCt 1999
• CDA, including 75% of practicing dentists, published policy restricting advertising by member dentists, particularly on discount prices and quality of service claims. Restrictions required a lot more information in ads that claimed discount prices—making it more expensive (impractical) to advertise them and harder for consumer to find the information. • Did restriction on advertising constitute an antitrust violation? Was this a naked restraint? Product is dental services, not advertising. FTC said it was illegal per se, that it violated Sherman 1 under abbreviated rule of reason analysis, and that CDA had market power. • Appellate Court affi'd, analysis under truncated ror (quick-look rule of reason) was necessary rather than per se violation, restrictions "amounted in practice to a fairly naked restraint on price competition." • SCOTUS granted cert to rule on what conditions occasioned abbreviated rule of reason analysis. • Court reversed and remanded for fuller consideration of effects. Eliminated idea of three clear sets of standards of review—suggested continuous scale of examination appropriate to the case. Court rejected 9th Circuit's use of "quick look" to condemn advertising restrictions imposed by California Dental Association. Because restrictions were not ones whose "great likelihood of anticompetitive effects [could] easily be ascertained," a fuller rule of reason analysis was necessary.
CASE: Chicago Professional Sports v. NBA (7th. Cir. 1996)
• Can members of a sports league conspire among themselves? • Maybe, but likely not. Acting as a league to sell TV rights • Π member of ∆'s sports league sought to sell broadcast rights to π television station, while ∆ sought to restrict broadcast rights and impose additional fees. • Πs claimed this action violated antitrust laws, while ∆ argued it should be treated as a single firm under antitrust laws, possessing options to restrict licensing rights. However, the trial court invalidated the restrictive fees and held defendant could not be considered a single firm because defendant and its member teams did not have a complete unity of interest. • 7th Cir. held that this was erroneous reasoning because complete unity of interest was not a legal requirement of a single entity operation under antitrust law. The court refused to determine defendant's status, holding its power was only to review a district court's determination for its propriety. • The court held defendant's integration of operations warranted full application of the Rule of Reason inquiry on remand.
CASE: Copperweld Corp v Independence Tube Corp, 467 US 562 (1984)
• Can there be a conspiracy between a company and its wholly owned subsidiary? Copperweld owned subsidiary company Regal Tube, and sent letters to prospective financers, suppliers of new competitive company Independence warning of possible trade secret violations. Independence sued for conspiracy in restraint of trade, and jury found for them. Appeals Court affirmed. • Supreme Court reversed, because they have unity of interest, Copperweld could not have conspired with Regal. • ONLY applies to a wholly owned subsidiary, but court does not uphold that limitation in practice. • Distinction between antitrust law and corporate law here (Corporate law depends on how much control of subsidiary is in hands of owner) • Court reaffirmed in Copperweld Corp. that Congress authorized Sherman Act scrutiny of single firms only when they pose a danger of monopolization
CASE: US v General Motors, 384 U.S. 127 (1966) Concerted refusal to deal, horizontal agreement imputed from multiple interdependent and interrelated vertical agreements
• Chevy dealers convinced GM to coerce other dealers not to sell stock to discount dealers • Held: GM's agreements with many dealers that none of them would do business with discounters were interrelated and interdependent. • Agreement would only be effective if everyone participated, therefore there is no way they could be considered merely parallel. • Why does GM care? free riding effect of discount houses. Only reason GM would care was if dealers agreed that they would all e.g. leave GM for Ford if no change in policy toward nonconforming dealers. • When does a horizontal agreement occur here? GM was not in position to monitor and enforce the agreements not to deal with discounters, the other dealers were.
CASE: Brooke Group v Brown & Williamson, SCt 1993, 509 US 209. Monopolization conduct, predatory pricing.
• Cigarette price wars. Π charged that ∆ introduced generic cigarettes below cost pricing to force π to raise prices in line with oligopoly pricing practiced in branded cigarette market.
CASE: Appalachian Coals, Inc, v US, SCt 1933, 288 U.S. 344 • Horizontal agreement, rule of reason analysis
• Coal producers joined to organize Appalachian Coals as their sole selling agent, requested prior approval by DOJ, but DOJ sued that it was § 1 violation. District Ct granted injunction. • SCOTUS reversed, held: not a violation, coal producers not forming for purpose of fixing prices and did not have market power to fix prices. o claimed purpose was to improve methods of distribution, o achieve economies in marketing, o eliminate destructive trade practices in order to increase sales and production (problem with misrepresentations re: amount of coal avail, appearance of oversupply) o promote rather than restrain interstate commerce. o Coal industry suffered from significant overcapacity at this time. Practices like pyramiding and sale of distress coal made market even worse. • Held: reasonableness analysis necessary to obtain law's "fundamental objects." Necessary to analyze intent and effect of agreement. Conceded that parties were eliminating competition between themselves, but noted need for considering: o economic conditions in the industry o practices which have obtained o nature of plan of defendants o their reasons for adopting it o probable consequences of carrying out the plan. vast overcapacity rendered price fixing unlikely to be effective. No effect expected that would be detrimental to fair competition. Court did reserve jurisdiction in the event that effect of agreement was actually to raise consumer prices.
Cargill, Inc. v. Monfort of Colorado (Brennan, 1986)
• Compare § 4 and § 16 of the Clayton Act: §16: Threatened loss or damage caused by violation of antitrust laws o No room in text to say injury must be caused by the anticompetitive effect as in §4 ("injured by reason of anything in the antitrust laws" = anticompetitive effects is more plausible) • Rule: Threat of "antitrust injury" required for injunctive relief standing. • Rationale: the lure of treble damages that contributed to the change in standing requirements doesn't apply in the context of injunctive relief (government isn't subject to the elevated standing requirement) • Dissent (JPS): "A competitor plaintiff" — he's trying to empty out the standing requirement but hasn't really offered an alternative analysis.
Note CASE: Levine v Central Florida Medical Affiliates, 11th Cir 1996,
• Court granted SJmt to Healthchoice,. Inc, a PPO that negotiated agreements in which physicians accept max insurance payment for services to plan enrollees. Doctors were not setting the prices, so court deemed it OK; doctors free to opt out of the plan or to lower their prices even further. • Maricopa County was per se illegal price fixing, an agreement among competing doctors to adhere to a maximum fee schedule, but noted that such an agreement might be permissible under the rule of reason if the doctors had formed a partnership or otherwise pooled their capital or shared risk to achieve integrative efficiencies. • Later decisions picked up point and permitted physicians and other medical providers to fix fees when they were part of groups that achieved "integrative efficiencies" through risk sharing or otherwise. • Thus, modern antitrust jurisprudence recognizes that joint ventures among competitors can sometimes lower prices, improve products or channels of delivery, and that the success of such ventures is dependent in part on eliminating some aspects of competition among the joint venture participants.
CASE: Fisher v. Town of Berkeley rent control ordinances
• Court had to determine what the antitrust violation would be to see if it was immune under state action doctrine • Found that there really was not an agreement, more unilateral in nature • Statute should not be viewed as an agreement between gov't and the individual 1
CASE: FTC v Russel Stover Candies, 1983 8th Cir.,
• Court upheld suggested pricing arrangements as protected under Colgate • Consider tension between society's willingness to protect freedom to contract v. desire to condemn price fixing—has caused shift to procedural emphasis. • Compare to Monsanto, which does not so much clarify the standard of what constitutes a vertical price fixing agreement as it clarifies evidentiary standards: • "a conscious commitment to a common scheme" OR evidence that tends to exclude the possibility of independent action • Two aspects can make this illegal: 1. a binding or real agreement with a dealer (something beyond mere promises) OR 2. some horizontal aspect to the agreement.
Conspiracy Requirement
• Defendants usually try to win on summary judgment by claim that there is no agreement. Standard is that circumstantial evidence can show concerted action. • Second position is that agreement is vertical, not horizontal. • Note that antitrust law provides joint and several liability..
Test: Rule of Reason
• Defenses possible: everything except "competition is bad." • Defenses impermissible: Competition is bad. • Dealing with sellers here, and their interest is to make prices lower. • Problem is really lack of information to country dealers, who don't know what market was like during the day. Pro-competitive result is increased information, but anticompetitive result is that price was fixed. Information could have been transferred without the anticompetitive effect. Note that price set was closing BID, not closing SALE—so clearly would be lower than last sale made.
CASE: FTC v Indiana Federation of Dentists, 1986 SCt. Quick look RoR, preserved the presumption of competitive harm, inquired whether justifications demonstrated in fact
• Dentists' agreement to refuse to submit x-rays to insurers for benefit determination was "unfair method of competition" under FTC Act and violation of § 1 of Sherman Act • Rule of reason ("quick look") analysis of horizontal agreement o "per se limited to situations where firms with market power boycott suppliers or customer to discourage them from doing business with competitor" • Northwest rules don't apply: not an effort to disadvantage competitors. Those rules for secondary boycott. • IFD not exempt labor union: dentists are independent entities • Parallel to NCAA: RofR analysis very easy. Court found arrangement similar to cartel or price fixing arrangement. Denial of desired information to insurer is equiv to refusing desired service to customers. • No substantive evidence on market structure or market share to result in market power. ∆ argued that FTC failed to show market power. • Held: showing of market power was not necessary when anticompetitive effects had been shown. o Direct effect evidence, collective refusal ,demonstrates market power. • Held findings of the FTC substantially supported by the record, sufficient as a matter of law to establish a violation of §1 (hence § 5 of FTC Act), without extensive market analysis or a specific finding that the rule increased costs. • Court willing to say lack of information is detrimental, without evidence of actual economic harm. Note also conflation of insurers with patients. Compare CA Dental case (not clear what information consumers wanted)
CASE: U.S. v Container Corp of America, SCt 1969 • Conduct: information exchange—when is it price fixing?
• Exchange of information on past and future prices of corrugated boxes, but no overt agreement to adhere to a schedule of prices. District Court had dismissed charges, but SCt reversed (6-3), • Held: actual effect of information exchange was to stabilize prices, and that reciprocal nature of information exchange amounted to cooperative efforts (quid pro quo). o Low barrier to entry and overcapacity in market. • Concurrence (Fortas) sufficient evidence existed given nature of industry that information on price obtained from competitior would be dispositive in determining price and "stabilizing" competition. o Members of agreement controlled 90% of market in SE US, and products were substantially identical except for price. o "Irresistible inference." Information exchanges were specific, secret, and included future information. • "Price is too critical ... to allow it to be used even in an informal manner to restrain competition." Dissent by Marshall, Stewart, Harlan : wanted evidence of intent or of actual effect. Cited low barrier to entry as protecting consumers. Argued that government had not proved its case Issue that this is clearly not a contract, although it probably is an understanding. Today this case would probably still be held illegal, but it would go to jury.
CASE: US v General Dynamics, SCt 1974 "General Dynamics Defenses"
• HELD: market share is not nec. equivalent to market power. If ∆ presents evidence that MS is not accurate reflection of MP, burden shifts back to government for additional evidence of anticompetitive effect. • Two coal companies, one acquiring stock of the other over time until it had effective control. Government alleged that this acquisition was violation of Clayton § 7. • Geographic market definition: Acquired company had a large share of reserves, but with long-term restrictions on its output through contracts o Market share effects had to consider the limitations because of these commitments. o Market Share figures government used had overrepresented the actual Market Power situation. • Use of efficiency as defense increased after General Dynamics. • Confused with failing firm defense
CASE: Standard Oil Co v US, SCt. 1949 "The Standard Stations Act" a quantitative standard in terms of %
• Exclusive dealer arrangement; Appeal of review enjoining SO from enforcing or entering into exclusive supply K; Court addresses whether the quantitative substantiality test for tying cases should be applied to exclusive dealing cases - the Int'l salt test; confined the int'l salt holding to tying arrangements • Because advantages of K might be sufficient to account for their use, coverage K of substantial amount of business in industry gives weak inference that competition may be weakened by coverage with tying clauses. • Several factors to be considered in assessing the requirements K o Evidence that the competition flourished despite use of the K o Conformity of the length of the term to the reasonable requirements of the field of commerce in which they were used o Status of the D as a struggling newcomer or established competitor and D's degree of market control o Ability for other firms to enter market • Want to be able to reach the ultimate consumer judge in terms of ability of competitors to reach the ultimate consumer. • Rule if competition has been foreclosed in a substantial share of the line of commerce than the K is per se illegal under §3 of Clayton Act o Look at the % share of the market - quantitative std. in terms of % share • Held: Exclusive deal that has a not "insubstantial per cent" of market is a violation of Clayton Act § 3.—No longer good law.
CASE: Fashion Originators' Guild of America v FTC, SCt 1941 Concerted refusal to deal; policing
• FOGA insisted that piracy of designs (knock-offs) though not protected by IP laws, was an unfair trade practice. Coerced retailers not to carry designs from knock-off manufacturers, under pain of refusal to supply their products to retailers who carried KOs. FOGA was acting as a quasi-governmental agency in enforcing its practices on members and retailers. • Held: FOGA actions violated Sherman 1 even though they were not directly aimed at competitive process (pricing, etc), but rather aimed at restr of trade affecting by driving out some competitors. • Market Power: fact FOGA did not control majority of market immaterial: power was sufficient to coerce agreement. Able to pressure Textile suppliers to refuse to deal with KO mfrers, with heavy fines for non-compliant FOGA members. Also regulated advertising, discount schedules, sale schedules, etc. of members. • Court refused to hear evidence that restraint of trade was reasonable in light of desire to protect against piracy. • Is this refusal to consider reasonableness the same as a per se rule for boycotts? o There was concern about the evidence of effectiveness of boycott action; practices limited outlets to which sellers can sell and sources from which retailers can buy. o "purpose and object of petitioners' combination and its tendency toward monopoly." • Impermissible defenses: reasonable tactic in light of competitors' actions, reasonable in light of effect not being price fixing. Note that the dress designers could have collectively sued, or advertised about unfair piracy, or lobbied for congressional action without any problem.
Recent Merger Cases CASE: FTC v Staples, DC 1997
• FTC sued to enjoin the merger of Staples and Office Depot and, court followed DuPont analysis to determine relevant market • Analysis of Functional interchangeability: office superstores & Wal-mart type stores that sell supplies o Found: Supplies are interchangeable, but supplier is not (in a submarket) • No cross elasticity of supply: in markets with only 1 office superstore, but with Wal-Marts, the superstore was able to raise prices considerably higher than in markets where there was more than 1; even had separate pricing "zones"
CASE: Graphic Product Distributors v Itek, 11th Cir 1983 Vertical restraint held to violate RoR
• Good analysis of market power and interbrand vs intrabrand, but compartmentalizes instead of dealing with interrelationships o Interbrand-intrabrand competition relationship is dependent on product—not always inverse relationship o Dist intra from interbrand, but harm to one is harm to the other, unless ∆ can show they are inequivalent • Facts: π had distributorship for given territory from ∆, sold within another territory, other distributor complained π terminated • Court found sufficient evidence for jury to find intrabrand competition was important source of competitive pressure on price, and that ∆'s system of territorial restraints totally foreclosing intrabrand competition had substantially adverse effects on price competition and consumer welfare. • Held that it could not determine whether the facts and inferences pointed so strongly in the direction of a finding that defendant's restraints were pro-competitive in purpose and effect that reasonable persons could not have arrived at a contrary verdict. Effects of restraint of intrabrand competition on consumer welfare cannot be viewed in isolation from the interbrand market structure
CASE: Eastern RR Presidents Conference v. Noerr Motor Freight Co (1961), p 831
• HELD: No violation of SA can be predicated on mere attempts to influence passage or enforce legislation. • Antitrust laws do not prohibit people from associating together in order to petition a branch of gov't to take some action even if the desired action is anticompetitive - protected by 1st amendment o no matter how anticompetitive the behavior is, if the gov't is the one ultimately taking action, then it is immune from anti-trust activity. o There may be instances where the campaign to influence the gov't is a cover for an attempt to interfere with biz relationship, and then SA will apply o Don't disqualify people from a matter simply because they are financially interested would deprive gov't of source of info and deprive people a right to petition in matters that might be important to them
CASE: FTC v. Ticor (1992)
• HELD: To satisfy the "active supervision" req of state action immunity, private parties acting pursuant to a regulatory scheme enacted by state legislature must prove the State has played a substantial role in determining the specifics of the economic policy •
Indirect Purchasers Doctrine and Other Standing Issues CASE: Hanover Shoe
• HELD: defensive argument that π had not suffered damages because he a direct purchaser, had passed them on to his customers is irrelevant for assessing antitrust damages.
CASE: Town of Hallie v. City of Eau Claire (1985)
• HELD: in case involving a local gov't performing a traditional municipal function, active state supervision was unnecessary for Parker immunity to apply o enough that the State authorizes municipality to regulated the specific market. • Requiring such supervision as a prerequisite to immunity would also be unwise because it would erode traditional concepts of local autonomy and home rule that were express in the states statute • TEST: Municipality gets exemption if it can demonstrate that o it engaged in the challenged conduct pursuant to a clearly expressed state policy o that the challenged conduct is a foreseeable effect of the state law o state does not have to displace competition. It is enough that the statute authorized the municipality to regulate specified market and that displacement of competition was a foreseeable result
CASE: Illinois Brick v Illinois, SCt 1977 Standing, antitrust injury: No valid claim where π was not a direct purchaser of goods involved in the price-fixing agreement. Passing on of overcharges not sufficient.
• HELD: passing on fixed prices to indirect customers was not injury under Clayton Act. Fears of inconsistency, duplicative damages, complexity of cases. • Indirect purchasers sued, alleging pass-through of fixed prices o Likelihood of direct purchaser suing supplier not high, because of need for ongoing relationship. o Militates against incentive to sue established by treble damages. o NOT parens patriae state of Illinois was a customer of the brick company • Both parties argued that argument from Hanover Shoe should be symmetrically applied, or there would be a "double liability" concern. If indirect purchaser could sue and also direct purchaser could sue, there could be double liability for the cartel, or even triple. • Court indicated there might be exceptions, but declined to identify them, except pre-existing cost-plus contracts, or where indirect purchaser is a parent of subsidiary direct purchaser • Injunctive relief? No concerns about damages, so indirect purchasers may sue for injunctive relief • Some states still allow indirect purchaser actions under state antitrust law o Some §∆s have argued that federal law should preempt, otherwise multiple liability concerns • Two issues: duplicative recovery and apportionment.
CASE: Brunswick v Pueblo Bowl-o-Mat 1977 SCt. Antitrust injury
• HELD: Π must prove the existence of "antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." • HELD: π may not recover damages under § 4 Clayton Act merely by showing "injury causally linked to an illegal presence in the market." • Suit for lost profits suffered by competitors because ∆ acquired bowling centers in default and about to go bankrupt, kept them running. Reversed Apll Ct award of damages, because of difference between Clayton 7 violation alleged, which only looks at possibility of lessened competition, and remedy in private cause of action for real injury suffered due to prohibited actions. • Claimants were seeking damages caused by preservation of competition, not by restriction of competition, in contrary to purpose of the antitrust laws.
Case: Palmer v BRG of Georgia, 1990 SCT.
• HORIZONTAL agreement between HB and BRG that HB would not market in Georgia, and BRG could sell the BarBri course, and BRG would not operate outside of Georgia. • Is this just a sale of business with a covenant not to compete? Could this deal not to compete be procompetitive? • Of course, BRG would be competing with HB's own materials if they competed outside of Georgia. Clearly HB would not want this. This is copyrighted material, so there is IP concern for free riding. Problem is that there is a • Problem: agreed to combine market power in Georgia (sort of like a merger, but no per se rule in GA); Cross-license could have worked, but collusion problem? • Big problem: BRG can't compete with HBJ at all outside of Georgia; limiting its use of the copyright itself might have been OK o Reasonable to limit BRG to Georgia, because it could very easlity have gotten away with copyright infringement outside of GA on multi state materials • Held: whenever two parties agree to split up a market, the agreement is per se illegal under § 1. o Recharacterize as ancillary to agreement, probably RoR
CASE: Eastman Kodak v Image Technical Services, SCt. 1992
• Held illegal tie of parts and services when both switching costs and information costs are high enough to confer market power • ∆ implements policy limiting availability of repair parts to π making it more difficult for ISO to compete w/ Kodak in servicing Kodak equipment. 3 products: equipment, parts, service - alleged tie is between parts and service • Some courts have held that selling parts only to people who buy service is not tying it is condition of sale o Court found that there is sufficient agreement in Kodak's refusal to sell parts w/o services • Market power - o The aftermarket theory - Kodak argues that they 100% in parts, but that they have no power because if they raised prices consumers would not buy their equipment - that competing in the upstream market prevents them from gaining market power in a downstream market o But court says that theory does not explain actual market behavior information costs - consumers don't have enough info to do life-cycle pricing and Kodak can price discriminate against those that don't switching costs - switching equip will be too costly and create a lock in which will allow prices to be raised w/o switching you need both info and switching costs to have mkt power here: if info costs high and switiching low, you switch when you need repairs; if info costs low, you factor in switching costs @ the outset • Rule: nfo and switching costs may serve as a basis for finding market power in a tying case involving aftermarket parts and services • Dissent: power that the court condemned was the power that every manufacturer of equipment has over its own unique parts • Most cases of this sort lose—there was a flurry of them after the decision, but they didn't have much effect.
CASE: Parker v. Brown (1943), p 870
• Held that the federal AT laws were not intended to interfere substantially w/ decision by States to eliminate comp. in particular market. • If state expressly authorized the standard then it is ok.
CASE: Tampa Electric vs Nashville Coal, SCt. 1961 Rule of Reason for exclusive dealing under §1
• Held: In an exclusive dealing arrangement, it is necessary to evaluate probable effects of the contract—not only the share of the market, but also possible benefits • Tampa contracted w/ Nashville to supply all coal needs for new power plant. Later N said that K was illegal and would no longer be part of it. T brought action to declare that the K was valid and enforce it • Qualitative Substantiality Clayton Act violation only if performance of K will foreclose competition in a substantial line of commerce.
CASE: Leegin Creative Leather Products Inc. v PSKS (2007)
• Held: ovverules Dr. Miles, vertical price restraints are to be judged according to the rule of reason • Vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed. o It cannot be stated with any degree of confidence that resale price maintenance always or almost always tends to restrict competition and decrease output. o To the extent a minimum vertical RPM agreement is entered upon to facilitate a cartel, it, too, would need to be held unlawful under the rule of reason. • Per se rules confined to restraints that always or almost always tend to restrict competition and decrease output. Restraint must have "manifestly anticompetitive" effects, and lack any redeeming virtue. • Per se rule appropriate only after courts have had considerable experience with the type of restraint at issue, and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason. • Antitrust laws are designed primarily to protect interbrand competition, from which lower prices can later result.
CASE: NCAA v Board of Regents of University of Oklahoma, SCt. 1984
• Horiz agreement (joint venture), restricting output, but RofR analysis because of nature of business • OU contended NCAA unreasonably restrained trade in televising of football games. Dis Ct held they had violated §1 and issued injunction. Appls Ct aff'd, with modification, and SCt affirmed. • Facts: NCAA formed to regulate college sports.Has 850 members in divisions separated by size of athletic programs. Football teams are in Divs I-A and I-AA. NCAA set policies for television programming, amount of exposure, which network, prices. • Court noted that nature of agreement was such as had been considered per se illegal in other cases, since it o (1) restricted competition, (2) restricted output, and (3) set prices, o but held that nature of college football could dictate certain amount of horizontal restraint of competition, or product would not exist at all, and thus rule of reason analysis was necessary, as in BMI, with consideration of possible procompetitive justifications from NCAA.
Question: What can be gleaned from market performance data? Are profits relevant?
• How do we identify market and market share? 1. Demand side—what do consumers think market is?—price, uses, characteristics. demand substitutability--what will consumers substitute for the product? 2. Supply side—Who are current participants and possible entrants? question of how easy it is to get into market. supply substitutability—low barriers to entry mean market is of infinite size. 3. Calculate share: defendant's share / total market
CASE: Interstate Circuit v US, SCt, 1939 • Vertical and horizontal pricing agreement, infer and agreement
• Injunction granted against company, which appealed, affirmed. Vertical and horizontal?? YES. • Appellants were group of 8 motion pictures distrib who had 75% of market in US, and two theater chains, Interstate and Texas Consolidated, who had 74% of license fees in their respective territories. • Theaters had to request license to exhibit films from distributors, who held copyright in films. Theater chains had monopolies on first-run theaters in many Texas cities, and also owned subsequent-run theaters, but did not monopolize there. The two chains did not compete with each other in any city. Same management for two theater chains. • Mgr sent letter to distributors asking for a restricted pricing agreement involving guaranteeing minimum subsequent-run prices for showings of films that the two chains would show and promising not to allow double features. New prices were drastic change from earlier prices. Distributors entered into agreements to restrict and set pricing, and government sued. • HELD: Government could infer an agreement from unanimity of action and from fact that appellants did not call as witnesses anyone from mgmt who would have been likely to have a role in negotiating restrictive contracts with theaters. • Court said that, given supporting evidence of concerted action, burden was on appellants to show that they had NOT colluded. o Analysis action by theaters made no sense as an individual action, since other distributors clearly would undercut the price, so it only could have been effective if done in concert.
CASE: Klor's Inc v Broadway-Hale Stores, SCt. 1959 • Horizontal agreement, concerted refusal to deal, enforced by competitor, per se illegal.
• Klor's charged that Broadway-Hale, owner of a chain of stores, was conspiring with appliance manufacturers and distributors (GE, Zenith, RCA) that they should not sell to π, or only at discriminatory prices. ∆ sought 12b6 dismissal. • District & and Appeals held dispute private between π and ∆, not of the public nature intended for antitrust: Since nearby stores were not discriminated against by manufacturers, no discernible harm to consumers. • HELD: boycotts or concerted refusals to trade are illegal per se, with no need to show effect on prices, production, or quality or unreasonableness of actions. o Fact that effect is not significant to the market because this is only one merchant IS IRRELEVANT o Else, a group of powerful businesses could force out one competitor by depriving goods needed to compete effectively. • Distinguish: one agreement of wholesalers with a single retailer, not a series of exclusive contracts. • Distinction between arguments: not relevant b/c there are lots of competitors v. ∆ lacks market power. o ∆ has power relative to its suppliers, which makes allows effective enforcement of boycott
Professional Real Estate Investors v. Columbia Pictures (1993), p 859
• Litigation cannot be deprived of immunity as a sham unless the litigation is objectively baseless. o When court has found that an antitrust P claiming Noerr immunity has probable cause to sue, that finding compels the conclusion that a reasonable litigant in the Ps position could realistically expect success on the merits of the challenged law suit • Two parts of sham litigation: o lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits o subjectively intended to interfere with biz - whether baseless lawsuit conceals attempt to interfere directly w/ biz relationship of competitor
CASE: U.S. v E.I. du Pont de Nemours & Co. SCt 1956, 351 US 377. Monopolization, market definition The Cellophane Fallacy.
• Market power is issue here—not relationships of market, so no diagram needed.
Interbrand vs Intrabrand competition.
• Mkt power: ability to raise profits above costs profitably • Market power is not necessarily equal to market share. (product differentiation and different demand curves may lead to market power.)
CASE: United States v Aluminum Co. of America, 2d Cir 1945
• Monopolization, market definition • Held that Alcoa had an improper monopoly in the manufacture of aluminum ingots. Alcoa formed 1888 to produce aluminum ingots, using patents assigned from Hall, 1889 and licensed from Bradley, 1892, in exchange for pricing preference to patent holder. Beginning 1895, Alcoa contracted with power companies for their exclusive right to use power for aluminum extraction. Alcoa joined cartels with foreign producers to either fix prices on imports or prohibit them. Question whether market share of production was sufficient to constitute monopoly, depending on how market defined. • Also question whether profit percent was evidence for exoneration. Noted motivation for Sherman Act that "great aggregations of capital [should be prohibited]... because of the helplessness of the individual before them." Stated that, although an inadvertent monopoly was not illegal, showing of intent was irrelevant once monopoly was achieved that had originally been achieved through improper actions.
Failing firm defense
• Narrow scenario, more than mere financial weakness or lack of profits, sometimes tech weakness enough. • Effect of failure would be a more concentrated market anyway, although possibly less concentration than the effect of the merger. • Argument : government does not make a prima facie case if one of the firms is failing, because the market share figure overrepresents the actual market power. • BUT necessary to show that acquiring company is the ONLY available purchaser.
Most IP cases now have a Noerr Claim -
• P alleges patent or copyright infringement • D counterclaims w/ an AT c-claim - monopoly, attempted monopoly • P attacks with a NP claim ∆ responds with Sham exception • Patent infringement suit can't be an AT violation unless the infringement P obtained the patent by fraud or knew or should have known that the patent was unenforceable under the circumstances. 2. State Action doctrine
CASE Spectrum Sports v McQuillan
• Patent holder BTR marketed polymer thru wholly owned subsidiaries ∆ and Hamilton-Kent. Π was regional distributor for BTR as was ∆. BTR changed distributorship agreements, cut π out in favor of ∆. Π alleged attempted monopolization and brought suit. Could view this as a business tort case rather than having anything to do with acquisition of market—might just be about man giving his son a job. Jury found for plaintiffs and awarded $1.7 Million, trebled. • Supreme Court reversed because of erroneous jury instructions. jury instructed that 2nd and 3rd elements of offense (intent and probability of success) could be inferred from the first (the Lessig Rule). • Held: instruction not acceptable. element (intent) can be inferred from conduct, but probability of success cannot. Some evidence of the relevant market and defendant's power in it are necessary, so that due consideration to probability of success can be given. • Intent is pretty easy to find in direct evidence, IF you can get discovery of e-mails or conversations.
CASE: International Salt Co v United States, SCt. 1947
• Patented salt injection machines leased with contract clause requiring purchase of salt tablets from ∆ (only if they did not exceed market rates). [comp. Windows/IE tie, where claim was that it was not tying because IE was "free"; govt rejected that defense]. Harm here not directed against consumers, but competitors: ultimately consumer harm, but is indirect
Herfindahl-Hirschman Index (HHI): HHI = a2 + b 2 Herfindahl-Hirschman Index (HHI) is used to evaluate concentration—sum of squares of market shares of each competitor in the market. Change in HHI shows effect of merger; the use of squares weights large shares heavily.
• Pre merger concentration HHI1 = a2 + b2 + c2 + d2 • Post-merger concentration HHI2 = (a2 + b)2 + c2 + d2 • HHI2 - HHI1 = change in concentration (∆HHI) • Short cut: ∆HHI = 2ab • A postmerger HHI of 1800 with Δ > 100 creates a presumption of anticompetitive effects. • Postmerger level of <1000 not likely to be challenged.
CASE: ARCO v USA Petroleum, 1990 SCT.
• Question: whether a firm incurs an "injury" within the meaning of the antitrust laws when it loses sales to a competitor charging non-predatory prices pursuant to a vertical, maximum-price-fixing scheme. • HELD: such a firm does not suffer an "antitrust injury" therefore cannot bring suit under § 4 of the Clayton Act. • Π argued "Arco and its co-conspirators have organized a resale price maintenance scheme, as a direct result of which competition that would otherwise exist among Arco-branded dealers has been eliminated by agreement, and the retail price of Arco-branded gasoline has been fixed, stabilized and maintained at artificially low and uncompetitive levels." • Agreement per se unlawful at the time because of its potential effects on dealers and consumers, not its effect on competitors. Respondent's injury does not resemble any dangers described in Albrecht. • Competitor will be injured and motivated to sue only when a vertical, maximum-price-fixing arrangement has a pro-competitive impact on the market. Therefore, providing the competitor a cause of action would not protect the rights of dealers and consumers under the antitrust laws. ARCO v USA Petroleum Analysis Conduct Market Restraint Legal Violation Price Effect Plaintiff Injured Alleged by plaintiff? Antitrust Injury? Max RPM fewer dealer services; Yes, because per se illegal maybe up, services down Yes, because of increased direct competition Yes NO!! effectively min RPM Yes, because per se illegal, even now UP No Yes ----
The Legality of Vertical Price Fixing CASE: State Oil v Khan, SCt 1997 pg 617
• RULE: Vertical agreements set maximum resale prices examined under rule of reason • Issue: whether State Oil's controls on the maximum resale prices of the gas station operators to whom it sold gasoline were per se illegal under Albrecht (1968), and whether Khan was entitled to recover damages based on those resale limitations. • Π Khan was dealer (leased a service station) who entered agreement with ∆ State Oil, lessor, to supply gas. State set a price for the gasoline. Any price over that minimum had to be rebated to State. Any price below that would cut into dealer's allocated 3.25 cent per gallon profit. ∆ evicted π for nonpayment of lease, & allowed new dealer to charge more for gas without rebates. Khan then sued that State had engaged in price fixing by preventing him from adjusting retail prices. • Held: Albrecht overruled and maximum resale price maintenance agreements between a supplier and its reseller customers tested under the Rule of Reason and not the per se rule. • Rationale: "Primary purpose of antitrust laws is to protect interbrand competition." Pro-competitive benefits of vertical max price fixing. o Actual result of Albrecht had been to encourage forward integration by suppliers into distribution, eliminating independent dealers, and increasing likelihood of monopoly power. • Mfr can announce suggested resale prices and refuse to deal with distributors who do not follow them. • SCOTUS overturned the per se rule for vertical nonprice restraints, adopting the rule of reason in its stead. • The per se rule applies only to specific agreements over price levels and not to an agreement between a manufacturer and a distributor to terminate a price-cutting retailer. • Vertical maximum price-fixing agreements should be evaluated under the traditional rule of reason. • Vertical minimum price-fixing agreements should be evaluated under rule of reason unless they can be shown to be entered in to facilitate a cartel [where it sounds like they're advocating truncated RoR]
CASE: NYNEX Corp v Discon, SCt 1998 Per se rule for group boycotts does not apply to vertical restraint where 1 buyer favors 1 seller over another even if improper & anticompetitive
• Refusal to deal, Rule of Reason, buyer's choice of seller competitively justifiable • Issue: does rule that group boycotts illegal are per se apply to buyer's decision to buy from one seller rather than another, if decision cannot be justified for competitive reasons? • Removal service firms take out old switching equipment so that new equipment could be installed to allow local customers access to compete with long distance services. Π was a removal service in NY, sold svcs to MECo, subsidiary of ∆. Π alleged that MECo and ∆ cut off dealings with π unfairly, forcing it out of business, partly because π refused to participate in their kickback scheme. • Dismissed on 12b6; affirmed on appleal with exception for one claim: scheme involving high rates and kickbacks. • Held: antitrust violation was not the claim to be litigated regarding the regulation avoidance. Lots of antitrust actions involve regulatory avoidance. • Is it per se illegal to boycott someone who refuses to participate in a regulatory avoidance scheme? If there is not evidence of a horizontal agreement, could it ever be a per se violation? • Held: §1 per se rule for group boycott horizontal agreements does not apply in the case of a vertical restraint where single buyer favors one seller over another, even decision improper and unjustifiable terms of ordinary competitive objectives.
Government Action and Antitrust Limits on what sectors of the economy should cover
• Regulated industries - but antitrust law will cover if they exceed their regulated sphere • Exemptions for other areas such as organized labor • Judicial exemptions - State and local economic regulation: combination of state and local actors may make it a violation. Anyway. 3 areas: o private parties seek come gov't action intended to disadvantage their competitors or otherwise have anticompetitive consequences o state or local gov't officials enact and enforce a program with anticompetitive results o private parties act pursuant to state or local gov't program and their conduct has anticompetitive effects
CASE: Business Electronics v Sharp Electronics, SCt 1988
• Rule of reason for termination of price-cutting distributor, • Distributor for ∆ complained that π another distributor for ∆ was price-cutting; π terminated. • Held: -fixing agreement to terminate dealer who is price cutting is not the same as agreement on price level. • It gets rofr analysis, not per se. Scalia: "Vertical non-price restraints...had real potential to stimulate interbrand competition." Primary focus of antitrust law is interbrand competition. • Vertical nonprice agreements are effectively LEGAL.
Law school tying hypo
• School adds significant new fee. Aftermarket is currently enrolled students. Information cost is very high, because no way to anticipate that the charge would be added. Also question of whether there would be a separate product. • Consumer protection aspect to tying—because information cost of determining true cost of product is high. Definition of product becomes difficult. Note efficiency aspect of product definition. • Discussion of franchise agreements with possible tying issues: subway franchise, or napkins?
CASE: City of Columbia v. Omni outdoor advertising (1991), p 854
• Sham exception to Noerr; No conspiracy exception to Noerr. • HELD: Denial of Omni of access to city admin was achieved by CoC in course of attempt to influence gov't was not a sham, but in earnest. Though it might not be legal, it is not a violation of SA • Sham exception to Noerr - situations in which persons use governmental process as opposed to the outcome of the process as an anticompetitive weapon. Involves D whose activities are not genuinely aimed at procuring a favorable gov't action • Sham can only mean that the process of government action was not being addressed in good faith, with an actual intent to influence government action
SSNIP — how to define relevant market SSNIP—small significant nontransitory increase in price—monopolist has presumed ability to do this
• Small = 5% (to 10%) • Nontransitory: "foreseeable future" not specified, but used to say 1 year. o Real numbers are not available—this is just a thought experiment in most instances. • Includes potential competitors: enter market within 2 years without significant sunk cost
Procedural Requirement for Proof of Agreement CASE Matsushita 1986,
• SupCourt had seemingly changed its position. In Matsushita v Zenith, charge of dumping by Japanese, court reversed denial of summary judgment for Matsushita, holding that predatory pricing was implausible and there was thus no motivation for the alleged conspiracy • Further, that ambiguous conduct in light of plausible reasons would not necessarily be enough to create a triable issue. • Π required to negate competing inferences to survive SJ. Note that Burden in motion for summary judgment is usually on mover to show absence of any issue of material fact. In these cases, allegations of conspiratorial activity must be rebutted by something. • Party may be forced to show that of the inferences that can be drawn, competing inferences are out of the question - allows for stronger inference in pre-trial
US v Paramount (1948) [insert] CASE: Toys R Us v FTC, 7th Circ. 2000 • Conduct: Agreement of refusal to deal
• Toys R Us induced agreements with major toy manufacturers that they would only sell to warehouse clubs on different and limited terms—effectively a boycott. • Circumstantial evidence of agreement to limit supplies and terms to warehouse clubs was sufficient for conspiracy under FTC Act (equiv to Sherm §1) o 1): that actions taken were not in the interest of individual competitors unless all suppliers agreed, o 2) ∆ did not provide any incentive for such actions except its market power. o If this were a non-price vertical agreement, it could be prosecuted under Sherman § 1, but analysis would be more stringent RoR, while a horizontal agreement would be much lower evidentiary standard. • Court held this was a boycott led by TRU and was per se illegal as well as illegal under full RoR analysis because of anticompetitive effects of price-fixing (output limit) Patterson: Not really clear that this is a horizontal agreement, although the terms of a vertical agreement like this would also be illegal. The free riding really becomes an issue in talking about vertical agreements.
CA Retail Liquor Dealers v. Midcal (1980), p 880
• Two part test for immunity under Parker v. Brown o the challenged restraint must be one of clearly articulated and affirmatively expressly stated policy o the policy must be actively supervised by the State itself • Here, the court found a flaw in the plan because agency merely assented to the prices set by the private parties w/o supervising the process of setting prices
CASE: Associated General Contractors v Calif. State Council of Carpenters (1982) Case to cite: Five factors to consider in determining standing
• Union, provide service to union members and employees who then provide services to union contractors who supply services to landowners. Landowners could also use nonunion Contractors who worked for nonunion employers. Allegation that there was a conspiracy between contractors and landowners to send business to the non-union contractors. • Held: Union no standing, look to five factors: o causal connection o nature of injury—is it an antitrust injury? o directness o duplicative recovery possible o existence of better plaintiff
D. Tying Arrangements
• Why tie? price discrimination/metering - supercompetitive price for tied product like toner cartridges is a way of actually recouping profit on the printer that you charge a very low price for. • Increasing market share may cause improved profits from economies of scale as well as an absolute profit increase o Vertical integration avoids double marginalization. o Quality control argument by manufacturer/tier
CASE: Bell Atlantic Corp. v. Twombly (2007)
• complaint must allege enough facts claim plausible on its face; allegation of plausible conduct requires further factual enhancement to be plausible; conclusory allegation of conspiracy insufficient • Class Action against ILECs for violation under § 1 of Sherman antitrust act; alleged: big phone companies (ILECs) inhibiting growth of local phone companies (CLECs) & limiting competition among CLECs for territory • Pleading: "upon information and belief that [ILECs] have entered into a contract, combination or conspiracy to prevent competitive entry in their respective local telephone and/or high speed ISP markets and have agreed not to compete with one another and otherwise allocated customers and markets to one another." • HELD: negative language ("no set of facts") of Conley not a the conclusory allegation doesn't give adequate notice to the ∆; gives ∆ no basis to respond to the allegation. See footnote 10 "pleadings mentioned no specific time, place, or person involved in the alleged conspiracies." • HELD: "A statement of parallel conduct, even conduct consciously undertaken, needs some setting suggesting the agreement necessary to make out a § 1 claim; without that further circumstance pointing toward a meering of the minds, an account of a ∆'s commercial efforts stays in neutral territory." o "An allegation of parallel conduct is thus much like a naked assertion of conspiracy in a §1 claim: it gets [π] close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of 'entitlement to relief.'" • Court "not" requiring heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face. • Dissent (JPS) majority ignores relevant allegations that have some factual specificity. Also, allegations of parallelism could be evidence of either conscious parallelism or an agreement. What is being alleged is smoke, and there may or may not be fire. FN 6: judge won't be able to limit discovery costs Stevens disagrees. o FN 10 "pleadings mentioned no specific time, place, or person involved in the alleged conspiracies." • Dissent: majority ignores relevant allegations that have factual specificity. Allegations of parallelism could be evidence of conscious parallelism or an agreement. Allegation: smoke, there may be fire (or not).
Attempted Monopolization Conduct: Attempted monopolization—prohibited in Sherman § 2.
• frequently raised in dealer termination, refusal to deal, predatory pricing, patent fraud, and product disparagement. • difficult doctrinally, because requires o predatory/exclusionary conduct o specific intent to monopolize (only situation in which intent matters) and o dangerous probability of success. • Problem is that "robust" competitive conduct is desirable and we don't want to outlaw it. This offense deals with a single actor rather than any conspiracy
Facilitating practices include:
• information exchanges • Cal Dental Assn: advertising practices • basing-point pricing—these are schedules based on a particular location, where every shipper's freight costs are considered the same, regardless of actual location of the supplier, so that everyone can tell if people are cheating on the agreed-upon prices. (Can't claim a special deal from the railroad.) • most-favored-nation clause—promise to other customers that their prices will be the best you offer to anyone—tends to keep prices up.
Ancillary Restraint Doctrine Test: "Although an ancillary agreement among competitors with a main and lawful purpose is not necessarily illegal, price fixing itself is per se illegal." Defenses: Agreement had some other main and lawful purpose Defenses not permissible:
• to avoid ruinous competition (competition is bad)—would have to get legislative relief • prices set were reasonable (court does not want to evaluate pricing) power to set prices is what is wrong • not a monopoly, because they did not have power: court sees they were setting prices and spending resources to do so, so must have had a purpose in doing so The ancillary restraint doctrine simply provides that a restraint among competitors that would otherwise be illegal may not be illegal where it is part of a broader business combination that may lower prices, provide better products, or otherwise benefit consumers
CASE: Verizon Communications v Law Office of Curtis V. Trinko, SCt 2004 Monopolization, refusal to deal.
• Π Alleges anticompetitive conduct by Verizon in failing to adequately provide access to Operation Support Services. Held: failed to state a claim for violation of Sherman Act § 2. • essential facilities doctrine mentioned here—but explicitly NOT ruled on either pro or con. • Held: since other fed regs imposed the duties upon Verizon asserted by Trinko (effective refusal to deal), and industry was highly regulated, claim in antitrust did not stand. o Verizon already under consent decree and had made "contribution" to federal treasury as part of consent decree. o Holding despite clause in regulation stipulating antitrust claims were not to be affected o Product that Verizon allegedly refused to provide was a brand new product, brought into existence only by the regulation itself.
CASE: Blue Shield of Va. v McCready, SCt 1982
• Π alleged Psychiatric Society conspired with ∆ to refuse to reimburse subscribers to plan for treatment by psychologists & this conspiracy was in restraint of competition, in violation of Sherman §1. • Held: In determining whether π has § 4 standing or is too remote from the antitrust injury, courts look to o "physical and economic nexus" between alleged violation and harm to the plaintiff, and o more particularly to relationship of injury with forms of injury Congress was likely to have been concerned in providing a private remedy under § 4 o With both standing • No possibility of double recovery here: only harm was to π & injury was not remote from agreement. • TEST: is the injury foreseeable and integral? Is plaintiff the means of the conspiracy? Is it "inextricably intertwined"?
CASE: Northwest Wholesale Stationers v Pacific Stationery and Printing, SCt 1985 Per se rule for boycotts applies to buying coop if it has market power or denied access to essential element
• Π member of co-op purchasing organization challenged expulsion as § 1 boycott . Robinson-Patman Act excepts co-ops from price discrimination for its membership. Π actually larger than the entire co-op. • Held: not a typical boycott, not a joint effort to disadvantage competitors by denying something they need in the competitive struggle. A reasonable rule for expulsion is NOT a recognized justification for avoiding per se examination. o Efficiency improved by π competing vigorously as wholesaler, even possibly setting up own warehouse o Restraint ancillary to operation of joint venture • Held: when a party challenged expulsion from a joint buying coop, to establish a per se violation, some showing must be made that the coop: o possessed market power or o unique access to a business element necessary for effective competition (which it could deny) Per se rule applies TO COOPERATIVE BUYING ARRANGEMENTS if excluder: • has market power OR • has denied access to an essential element.
CASE: Monsanto v Spray-Rite, SCt. 1984
• π herbicide distributor terminated by ∆, sued alleging price fixing agreements, termination and subsequent boycott was because of its pricing policies. Issue what proof required to find vertical price fixing agreement. • Held: "more than evidence of competitor complaints is needed. There must be evidence that tends to exclude the possibility that the manufacturer and non-terminated distributors were acting independently." o Evidence must support "conscious commitment to a common scheme designed to achieve an unlawful objective." • Important point that complaints of price cutting when manufacturer already knew that the distributor was price cutting make it harder to support position that there was no common scheme. Need to provide a separate business reason for independent action. Book: Lords of the Harvest Any action beyond proclaiming the policy is possible evidence of a conspiracy. Acting in response to complaint not necessarily same as acting following a complaint • Distinguished (1) concerted from independent action (but note that concerted is not necessarily horizontal) and (2) concerted price setting (p/s illegal) from concerted non-price setting (rofr) actions
Analysis after Sylvania-
• π must show evidence of anti-comp. effect (e.g. less intra-brand competition) • ∆ must show pro-competitive benefit (e.g. more inter-brand competition) • π must show then that the anticompetitive effect outweighs the benefit • Court typically finds for the ∆ by employing one of the four tests: o If ∆ produces only small share among several brands in a competitive market π shows no actual market power D prevails o If ∆ makes showing of some gain in inter-brand competition D wins o If π makes no showing of diminished inter-brand competition ∆ wins o Balancing the consequences of the vertical restraint, but in effect yielding to evidence of inter-brand benefits ∆ wins (unusual)
CASE: U.S. v Addystone Pipe & Steel Co., SCt. 1899 Horizontal price and territorial division agreement—per se illegal.
• ∆ entered into agreement with other manufacturers not to compete in certain geographic areas in the sale of cast iron pipe, for purpose of enhancing price of pipe. Companies participated in sham bids arranged in advance. Winner of K paid a share to all others in the group. Prices kept too low for new competition to enter, but higher than they otherwise might have been with real competition. Territory identified as pay, free, or reserved and pay markets companies would privately compete among themselves for, then award bonus to assoc to be divided based on output. Reserved cities kept to particular company but assoc still set prices. • ∆ argued that their group only controlled 30% of tonnage of the country, and did not cover all of the states or all cities within the covered states, and thus could not be construed monopolistic. • Offered defense that not agreeing would result in "ruinous competition." Loser.
CASE: Continental TV v GTE Sylvania, SCt. 1977 Vertical non-price restraints no longer per se illegal, subject to RofR; Schwinn per se analysis explicitly overruled, but new line is not set by this opinion
• ∆ established franchise arrangements to handle distribution retail distribution to increase sales, and it worked. Issue: whether restrictions on franchisees to only sell from specified locations were a violation of § 1. • Relevance of market share to market power: "brand loyalty" distorts market power, as does low barrier to entry. Effect of advertising is to add slope to the demand curve for a particular firm: Market power = market share AND product differentiation. o Different approach ∆ could have used: consignment instead of franchise (would have dictated RofR from Schwinn), unilateral enforcement of policy (Colgate clear win, no agreement). • Court: price restraints worse than non price b/c facilitate cartels. o But, Topco was a market allocation cartel w/o not price (but it was horizontal) • Explicitly adopts price theory as rationale
CASE: US v Parke Davis, SCt. 1960
• ∆ notified dealers that it would not sell to them if they continued discounting; this in itself is fine. • ∆ went to retailers, told them there would be no shipments if they continued to sell at discounts, told wholesalers which retailers were not complying with policy • Held: additional behavior was evidence of a coercive agreement. Note that court is not really applying a contract analysis here.
