Antitrust Law Outline – Professor Kovacic
Fall 2012
Table of Contents
The U.S. Antitrust Enforcement System 3
Relevant Statutes and Guidelines 3
The Sherman Act 3
Section 1 3
Section 2 4
The Clayton Act 4
Section 3 5
Section 7 5
Section 8 5
The Federal Trade Commission (FTC) Act 5
Section 5 5
Structure of the Enforcement System 6
Leniency Programs 6
Remedies 7
Reasons for Antitrust Law 7
Economic 7
Noneconomic 7
Horizontal Agreements 8
Types of Conduct 8
Price Fixing and its Variants 8
Division of Markets 9
Concerted Refusals to Deal (Group Boycotts) 10
Collusive 10
Exclusionary 11
Other Types of Conduct 11
Hub and Spoke Agreements 12
Conscious Parallelism 12
Information Exchanges 14
Invitations to Collude 15
What you must show 15
In the pleadings 15
Antitrust Injury 16
Twombly Standard 16
At trial 16
Per Se Illegality 16
Quick Look 17
Rule of Reason 18
Summary and Analysis 20
Vertical Agreements 21
Types of Conduct 22
Intrabrand Price Restraints 22
Non-Price Intrabrand Restraints 24
Tying 24
Vertical Boycotts 27
Summary and Analysis 28
Mergers 29
The Rise and Fall of the Structural Presumption 30
Measuring Market Concentration 37
Market Definition 38
Pre-Merger Notification and the Enforcement Process 40
Proving that a Merger Will Cause Coordinated Anticompetitive Effects 41
Proving that a Merger Will Cause Unilateral Anticompetitive Effects 45
Defenses to a Merger Challenge 47
Entry 48
Efficiencies 50
Failing Firms 51
Differences and Similarities Between the US and the EU 52
Summary and Analysis 54
Monopolization 58
Market Definition and Market Power 58
Improper Conduct 59
Summary and Analysis 62
The U.S. Antitrust Enforcement System
- The US antitrust system is focused on preventing anticompetitive conduct.
- Anticompetitive conduct is conduct that is likely to lead to the creation, maintenance, or enhancement of market power, or that involves the actual exercise of market power.
- Market power is the ability to raise prices above a competitive level by manipulating supply.
- The consequences of anticompetitive conduct are:
o Higher prices,
o Consumer deception,
o Lower product quality,
o Less consumer choice among products,
o Little product innovation,
o Wealth transfer.
- Collusive and exclusionary anticompetitive effects:
o Collusive effects directly impair markets and typically will involve coordinated action by competitors that collectively possess market power and are attempting to emulate the behavior of a monopolist by restricting output and raising prices.
§ Such conduct does not depend on any follow-on activity for its anticompetitive impact.
§ Its effects are immediate and direct: output is reduced and prices are inflated.
o Exclusionary effects: confer market power by raising a rival’s costs, as by cutting it off from key inputs to its production, or limiting a rival’s access to the market, as by cutting off its access to a key channel of distribution.
§ They can result from the act of a single firm, or arise as the product of agreement among firms.
§ Effects of exclusionary conduct are always indirect: by excluding a rival, or impairing its ability to compete effectively, the predator hopes to obtain power over price or influence some other dimension of competition.
§ Exclusionary conduct will be condemned when the conduct establishes conditions under which a firm or group of firms is able to exercise market power.
Relevant Statutes and Guidelines
The Sherman Act
- This Act can be enforced by:
o The DOJ,
o The FTC, and
o Private parties
Section 1
- Section 1 declares every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade to be unlawful both civilly and criminally.
- Elements of a Section 1 offense:
o Concerted action: a contract, combination, or conspiracy
o Anticompetitive effects: restraint of trade
- There are two ways to prove anticompetitive effects:
o Circumstantial evidence: market definition, a calculation of market shares, and an inference from high market shares that the defendants had the capacity to harm competition.
o Direct evidence: evidence of actual anticompetitive effects, of the exercise of market power, such as reduced output, higher price, or diminished quality.
- Mergers can be challenged under this section as agreements in restraint of trade.
Section 2
- Focused on single firm conduct, usually the activities of actual or would-be monopolists.
- It also places a great deal of emphasis on the evaluation of the market effects of allegedly anticompetitive conduct
- The offense of attempted monopolization has two elements:
o Specific intent to accomplish the illegal result, and
o A dangerous probability that the attempt to monopolize will be successful.
- When evaluating the second element, the courts do not rely on hindsight but examine the probability of success at the time the acts occur.
- If a defendant had the requisite intent and capacity, and his plan if executed would have had the prohibited market result, it is no defense that the plan proved to be impossible to execute.
- An agreement is not an absolute prerequisite for the offense of attempted joint monopolization.
- Mergers can also be challenged under this section as monopolization or attempts to monopolize.
The Clayton Act
- This Act can be enforced by:
o The FTC
o The DOJ
o Private parties.
- Private plaintiffs still must demonstrate that they are harmed as a result of the practice they challenge as anticompetitive.
- In practice, most merger enforcement is conducted by the federal antitrust agencies.
- Some mergers in certain industries may also be reviewed on competition grounds by other federal agencies.
- The distinguishing characteristic of the anti-merger prohibitions of the Clayton Act is its objection to mergers that “may substantially lessen competition.”
o This gives agencies the authority to attack mergers when the trend to a lessening of competition in a line of commerce was in its incipiency.
o It also gives authority to attack mergers before they are consummated.
- The statutory test under Section 7 of the Clayton Act is whether the effect of the merger may be substantially to lessen competition in any line of commerce in any section of the country.
Section 3
- Vertical interbrand restraints can be addressed under Section 1 of the Sherman Act, under Section 2 of the Sherman Act, and under Section 3 of the Clayton Act, which has legally distinct standards of proof.
Section 7
- Most mergers are reviewed under Section 7 of the Clayton Act.
- Clayton Act requires market definition.
- An acquisition that appears likely to facilitate tacit collusion violates Section 7 of the Clayton Act, even if the coordinated behavior that results would not itself be subject to attack under the antitrust laws.
- Section 7 Clayton Act Test:
o First, the government must show that the merger would produce a firm controlling an undue percentage share of the relevant market, and would result in a significant increase in concentration of firms in that market.
o Such a showing establishes a presumption that the merger will substantially lessen competition.
o To rebut that presumption, the defendants must produce evidence that shows that the market-share statistics give an inaccurate account of the merger’s probable effects on competition in the relevant market.
o If the defendants successfully rebut the presumption of illegality, the burden of producing additional evidence of anticompetitive effects shifts to the government, and merges with the ultimate burden of persuasion, which remains with the government at all times.
o Note: This test can be used at both the merits stage and the preliminary injunction stage.
Section 8
- Interlocking directorates – the presence of common directors on the boards of rival firms – can also be an antitrust violation under Section 8 of the Clayton Act.
The Federal Trade Commission (FTC) Act
- Only the FTC can enforce this act.
Section 5
- Mergers can be challenged under this section as unfair methods of competition.
- The FTC can also reach invitations to collude under the broad unfair competition prohibition of Section 5 of the FTC Act.
Structure of the Enforcement System
- In cases involving regulated sectors, such as telecommunications, other government bureaus, such as the FCC, exercise competition policy functions concurrently with the federal antitrust agencies.
- Giving an executive department (DOJ) enforcement power increases presidential control over the law’s implementation and makes policy more responsive to presidential election results.
- Creating an “independent” agency (FTC) gives the legislature more ability to shape competition policy and divest dispute resolution in an expert body.
- Private rights of action ensure that the law is enforced even in the case of neglect or inadequate resources of the government.
- Rationales for diversifying prosecutorial power:
o To guard against default by any single prosecutorial agent.
o Private lawsuits can be more effective because the plaintiff has more information and stronger incentives.
o Competitive benefits of diversification (DOJ and FTC compete for cases)
- When federal law isn’t enforced as much for whatever reason, states usually increase enforcement of state law. There is also an increase in private suits.
- Costs of diversifying prosecutorial power:
o More governmental costs for duplication of personnel
o Reduces clarity and predictability of competition law (different standards and burdens of proof)
Leniency Programs
- Leniency exploits the tensions among cartel members suggested in the Prisoner’s Dilemma.
- By providing an incentive for such informants to come forward, DOJ’s leniency program has demonstrated the benefits of using decentralized monitoring to enforce antitrust laws.
- You get full immunity for yourself, your company, and its employees if you inform on a cartel if:
o You are the first in the door (set a “marker”), and
o You are not the ringleader.
- If there are cartels for products A, B, and C, and you come in to discuss the product A cartel, they may ask you about the other cartels for products B and C.
o If you lie about cartels B and C, you lose immunity for cartel A.
o You can always hope they don’t ask.
o It’s possible to use leniency to deflect attention away from bigger cartels.
- Sometimes companies reward executives who “take one for the team” after their prison terms.
- Beyond offering dispensations from criminal sanctions and encouraging pure volunteerism, the U.S. antitrust system provides no further incentives to gain the assistance of informers.
- If a company is granted leniency but breaches the conditions of those agreements, it can be subject to prosecution for their participation in criminal antitrust violations.
- Prior grant of immunity may be a defense to conviction, but it is not a defense to indictment.
Remedies
- Criminal enforcement is not very common and is reserved for the more egregious conduct. Potential remedies include:
o Imprisonment
o Fines, both for corporations and individuals
o Asset forfeitures
o Injunctive relief
- Civil enforcement is must for common. Potential remedies include:
o Treble damages
o Injunctive relief
§ Conduct prohibitions
§ Divestiture or other structural relief
o Attorney’s fees
Reasons for Antitrust Law
Economic
- Antitrust law prevents a transfer of resources from buyers to sellers.
- Those who look at aggregate welfare are not as concerned with this issue.
- However, those who look only at consumer welfare are concerned with this issue.
- Antitrust law prevents allocative efficiency loss (deadweight loss).
Noneconomic
- Fairness, social justice, and equity
- Protection of small businesses
- Political stability
Horizontal Agreements
Types of Conduct
Price Fixing and its Variants
- The formation of an agreement to fix prices or output is illegal per se.
- Price is composed of many components (see Catalano). To fix any one of these components is to fix prices. At its core, price fixing is essentially removing the ability to compete on price.
- According to case law, the per se illegality applies to both minimum and maximum prices (see Maricopa). It is unclear if this case would still be decided the same way today.
- Benefits: None.
- Anticompetitive effects:
o Raise prices
o Lower output
o Decrease consumer welfare
o Possibility of decreasing aggregate welfare.
- Illustrative cases:
o Trenton Potteries (1927): Agreements that create the potential power to keep prices fixed high due to the absence of competition may well be held to be in themselves unreasonable or unlawful restraints. Uniform price fixing by those controlling in any substantial manner a trade or business in interstate commerce is prohibited by the Sherman Law, despite the reasonableness of the particular prices agreed upon.
o Socony (1940): 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. Fixing output also fixes prices.
§ It doesn’t matter if the conspiracy is impossible. Just the agreement is enough.
§ Any combination that tampers with price structures is engaged in an unlawful activity.
§ Prices are fixed if the range within which purchases or sales will be made is agreed upon.
o National Society of Professional Engineers (1978): A ban on competitive bidding in the professional society’s code of ethics is not justified under the rule of reason. The rule of reason does not support a defense based on the assumption that competition in itself is unreasonable.
o BMI v. Columbia Broadcasting (1979): The challenged practice has redeeming competitive virtues. The courts will listen to an efficiency (or precompetitive) argument. This ruling clearly limits the per se rule to naked price-fixing (an agreement among rivals on price with no plausible efficiency justification).
§ In characterizing the conduct under the per se rule, the inquiry must focus on whether the effect and the purpose of the practice are to threaten the proper operation of our predominantly free-market economy.
§ Does the practice facially appear to be one that would always or almost always tend to restrict competition and decrease output (and in what portion of the market), or instead one designed to increase economic efficiency and render markets more, rather than less, competitive?
§ The per se rule is not employed until after considerable experience with the type of challenged restraint.
§ This case introduces the “quick look” prong of the analysis.
o Catalano (1980): It is per se illegal for competing wholesalers to agree collectively to refuse to sell on credit, as the wholesalers had previously used more favorable credit terms as a means of competition. A collective refusal to compete on credit terms was indistinguishable from an agreement to fix prices. This case is a reminder that price is comprised of many components. To fix a component of price is to fix prices.
o Maricopa (1982): Fixing a maximum price is illegal per se. It is unclear whether this would be decided the same way today.
o NCAA (1984): This case involves an industry in which horizontal restraints on competition are essential if the product is to be available at all (BMI argument), so it must be analyzed under the rule of reason despite the fact that it is, on its face, a horizontal agreement to set output. A naked restraint on price and output requires some competitive justification even in the absence of market power.
o Dagher (2006): Application of the per se rule is inappropriate to the price setting of a joint venture. It is price setting by a single entity. The plaintiffs in this case elected to pursue their claims under the per se rule or not at all, so judgment was entered for the defendants. The rule of reason would apply today.