ANTITRUSTSPRING 2008: INFORMATION MEMO #2
ADDITIONAL INFORMATION RE UNIT IV
Contents:
(A) Overview of the Causes of Action Under Sherman Act §2
(B) §2 Conduct Requirement: Exclusion
(C) §2 Conduct Requirement: Predation
(D) Tying
(A) Overview of the Causes of Action Under Sherman Act §2
I. Blackletter Elements
A. Monopolization (from Grinnell)
1. possession of monopoly power in relevant market
2. willful acquisition or maintenance of power as distinguished from growth as consequence of superior product, business acumen or historic accident
B. Attempt To Monopolize (from Spectrum Sports)
1. specific intent to monopolize
2. dangerous probability of achieving monopoly power
3. predatory or anticompetitive conduct
II. Some Explanation of the Elements
A. Monopoly Power/Dangerous Probability of Success (DPS)
1. DPS essentially shorthand for some market power
2. Spectrum Sports: demonstrating DPS "requires inquiry into the relevant product & geographic market and the defendant's economic power in that market."
3. Courts often rely on market share for this element
a. 60% can be sufficient for monopoly power
b. 30% can be sufficient for DPS depending on market structure
i) 30% with only very small competitors (Toys R Us) maybe enough
ii) 30% with 3 rivals of 20% each not enough
4. Questions
a. How precisely must you define market for attempt claim?
b. Can you show market power through evidence of success of scheme?
B. Specific Intent to Monopolize
1. controversial element; unclear what you need to show
2. can infer from conduct or simply say intent = specific intent to do bad conduct
3. formulations from AppCts (largely unhelpful):
a. intent to vanquish one's rivals
b. intent to achieve monopoly power or power to control price
c. intent to exclude competition
C. Predatory or Anticompetitive Conduct
1. need worse conduct for Attempt than for Monopolization
2. Grinnell Test: willful acquisition or maintenance of monopoly power "as distinguished from growth or development as a consequence of a superior product, business acumen or historic accident." Yields focus on 2 processes. Caselaw says illegal if
a. acquisition of market power improper (even if never used improperly)
b. use of market power improper (even if legitimately acquired)
3. Examples of Bad Conduct
a. Merger to monopoly illegal; address mainly in Unit V
b. USFL (2d Cir 1988): monopoly pricing is not bad conduct
i) not anticompetitive; rather invites competition
ii) can be evidence of market power
c. Most other conduct in two categories that sometimes overlap
i) Exclusion: keep rivals from access to needed supplies or customers.
ii) Predation: monopolist’s acts that create short-term losses;
A) intent to recoup with long-term monopoly profits
B) often create/heighten barriers to entry
(B) §2 Conduct Requirement: Exclusion
I. Exclusionary conduct is “conduct other than competition on the merits or restraints reasonably necessary to compete on the merits, that reasonably appears capable of making a significant contribution to creating or maintaining monopoly.” Barry Wright (1st Cir. 1983) (Breyer, J.):
II. Exclusive Dealing Contracts
A. conduct raises costs by foreclosing purchasers, difficult for competitors to do biz
B. Alcoa pre-1912 (contracts with power companies)
C. Lorain Journal (US 1951): Newspaper had essential monopoly of news & advertising in OhioCity. Radio station opens nearby; paper refuses to run print ads for those advertising w radio station. SCt finds attempt to monop. Co. has right to select own customers (like Colgate) as long as no intent to maintain or create monopoly
D. PepsiCo. v. Coca-Cola Co. (S.D.N.Y. 1998): Pepsi stated a cause of action by alleging that Coke, which already has 90% of market for soft drink sales to movie theaters and restaurants for use in fountain-dispensers, tried to enforce contracts with vendors requiring that they not do business with Pepsi as well.
III. Exclusion: Refusal to Do Business with Rival (Aspen & Trinko)
A. Twin Labs (2d Cir. 1990): P & D both sell mineral supplements for muscle-builders (no market power) and muscle magazines (D has market power). D stops allowing P to advertise P’s supplements in D’s magazines.
1. No violation because P lost no market share after the ads stopped running, so there was no evidence of harm.
2. Court not asked to address whether the mere attempt to utilize market power by monopolist, whether or not effective, could violate the statute.
B. Zschaler (D. Vermont 1997): P & D compete in providing rental accomodations near a popular ski resort. D also runs an 800 number providing information to tourists about accomodations in the area. The court allowed P’s §2 claim to go to trial where Ps proffered evidence that 80% of the reservations in the area were made through the 800 number and that the Ds had stated that they would steer callers to their own units first.
C. Virginia Vermiculite (W.D. Virginia 1997): 2 major processors of Vermiculite
1. D has 57% of market; P has 23%. D has substantial holdings allegedly containing 40% of known vermiculite. P offers to purchase, but instead D donates to a non-profit organization whose stated purpose is to prevent the mining of vermiculite in the area. D gets big tax deduction and vermiculite supply is severely limited.
2. Trial Court holds these allegations state §2 cause of action for attempting to give D monopoly power by excluding P from the supply of the mineral.
3. D claim that tax benefits provided a legitimate business reason for donation is a fact question that can’t be settled on a 12(b)(6) motion.
IV. Exclusion through Innovation in Marketing or Product Design
A. Shoe Machinery (D.Mass 1953, affd US 1954) Govt §2 suit. Court defines market as all shoe machinery. While complete factory can be assembled w/o any United machines, United had 75-85% of US mkt as defined. United only provides more complicated machines through leases. Others in industry do same. Customers happy: uniform rates, repair service fast & efficient w/o separate charge. Court enjoins the leasing system, finding that it creates barriers to entry:
1. Incentives in leases to use machines for whole 10-yr period of lease
2. requirement that if work available, must use machine to full capacity
3. more favorable terms if replacing United machine w United
4. repair process means that independent repair services have not arisen
B.Berkey Photo v. Eastman Kodak. (2d Cir. 1979)
1. Kodak w film monop, competes in camera mkt. P is small comp-or in camera mkt
2. K developed new 110 camera, needed new film w diff type of processing. Wildly successful: sells about 3 million cameras in 1st 9 mos; 5 million following yr. At introduction:
a. Only offers new film for new size camera
b. Has doubts as to the quality of the new film
c. Aware that wd hurt photo-finishing comp-ors
d. Considers sending out specs to comp-ors early to allow photo-finishers to prepare; chooses not to.
e. Allows comp-ors to purchase specs about 2 months before introduction
3. P claim = predatory innovation: Note Berkey metaphor: all Kodak does infected by monop pwr in film & camera mkts
a. Kodak won't make film for sizes for which it doesn't make cameras
b. shd have to provide info to rivals re new innovation so they can compete.
c. To buy great new film, had to buy Kodak camera, no others for year or so. Jt intro was anticomp.
d. Wanted finding that Kodak had to predisclose or not intro together. 2d Cir says no.
4. 2d Cir. rejects claim
a. Notes tension in §2: harm from monop p’ing v. not wanting to discourage comp
b.tension results in arguably conflicting statements
i) use of monop pwr in 1 mkt to gain comp advantage in another violates §2 even w/o att to monop 2d mkt
ii) integrated biz doesn't offend ShAct whenever one of its depts benefits from an assoc w division possessing monop in its own mkt.
c. elaboration of conduct requirement
i) bad = use of monop pwr (taking adv of things ord integrated comp-or cd not)
A) Not OK: refusing to deal, tying and price squeezes
B) here refusal to mkt film in formats camera comp-ors need wd be illegal if purpose to impede comp-ors
(1) BUT: Kodak’s ads weren’t designed that way:
(2) even if true, no ev Berkey harmed by
ii) OK if if the cross-mkt bnfts are due to "more efficient production, greater ability to develop complementary products, reduced transaction costs and so forth"
A) keeping innovation secret normal biz practice so OK;
1. otherwise wd lessen incentives to innovate & integrate
2. Hard to administer predisclosure rules in practice (like refusal to deal)
B) jt intro OK: any integrated co. might do that w/o monop
5.Signif of case?
a. Keep in mind Berkey is just a 2d Cir case, tho cited a lot
b. Posner: reads as overruling Alcoa on conduct (but USSCt had endorsed Alcoa)
c. Why is Berkey diff from Aspen?
i) Maybe b/c pre-existing relationship in Aspen?
ii) maybe helped by nature of jury verdict in Aspen re no legit biz reason
C. IBM Cases
1. 1960s, computers sold as entire units; incompatible w each other. IBM 70%; others divided 30%. Brand loyalty b/c incompatible; expensive to switch. Independent components priced to maximize system as a whole.
2. late 60s, compatible parts developed. Entry barriers much lower; could come into market w just 1 product. By early 1970, some erosion of IBM share.
3. IBM Undertakes study and develops 3 responses
a. PRICE CUTS: E.g., sells disk drives at below its estimate of average minimum price competitors could afford. No evidence below its own costs.
b. FIXED TERM PLAN: used long-term leases on most products; discounts for longer leases (had used 1-month); peripherals only on long-term leases. Plus increases price of CPUs. Drastically reduced profits of competitors
c. BUNDLING OF SEPARATE UNITS: IBM restructured new disc drives to be part of CPU & lowered price for leasing that way.
4. Several competitors (and U.S.) sued IBM in mid-70s re "extent to which a dominant firm can take explicit actions to protect itself from the attacks of competitors" w/o violating §2. IBM won all cases. Sample Points from Cases:
a. Telex (10th Cir) describes as "aggressive skillful businessman, seeking to market a product cheaper and better than that of their competitors"
b. Cal Comp (9th Cir 1979)
i) no duty to help competitors by providing info re products
ii) no need to constrict product development to facilitate rival's sales
iii) IBM can redesign as long as plausible technical rationale (e.g., lower cost or price or improve performance)
c. TransAmerica (9th Cir. 1983): making product worse to protect it from competition would be no good
D. Intel (see AR350-72)
V. False Advertising and Other Bad Conduct:
A. False advertising designed to discourage purchasers from using competitor’s products
1. At least two circuits have held can violate §2
2. 9th Cir.: Violation only if it has a “significant and enduring impact on competition”
3. 2d Cir. Defense to claim if no harm OR customers wouldn’t believe ads
4. E.g., Nat’l Ass’n of Pharmaceutical Mfrs (2d Cir 1990): Sufficient allegation: D sent letter to pharmacists making false claims about worth of their product v. generic version
B. Caribbean Broadcasting System (D.C.Cir. 1998): Court held that P radio station stated cause of action under §2 where it alleged that D, a rival station:
1. made false statements to advertisers about D’s broadcast range to discourage them from advertising with P
2. filed sham objections to P’s application for a broadcast license; and
3. conspired to have P’s telephone number listed incorrectly in the phone book.
C. Dooley v. Crab Boat Owners Assoc. (N.D. Cal. 2004)
1. §2 claim ag. Ass’n w 96% of boats used for crabbing in region
2. Conduct reqmt met by evidence that, to protect hi prices, D tried to exclude Ps (small rivals) by:
a. using threats and violence ag. Ps
b. boycotting customers who purchased from Ps
c. tortious acts like cutting more than 2/3 of Ps crab pot lines
VI. Predatory Hiring
A. 2d & 9th Circuits: Difficult Tests to Meet
1. MacNeal-Schwendler (9th Cir 1990) :
a. Stealing employee just to frustrate competition might be actionable conduct.
b. Not violation where primary motivation was to get productive employee.
c. Test: Either
i) must harm P without helping D OR
ii) D must not really use services
2. Walsh Trucking (2d Cir. 1987)
a. generally hiring rival’s ees is insufficient
b. can be violation in conjunction w other wrongful acts
c. Natsource (SDNY 2004) follows Walsh finds no AT violation from hiring where no evidence of harm to consumer through hi prices or lower quantity
B. Wichita Clinic v. Columbia/HCA Healthcare Co. (D.Kansas 1997): Defendant Columbia runs the largest hospital in the Wichita area. Plaintiff clinic alleges that after it refused D’s merger overtures, D hired away 20% of its doctors with the intent to monopolize the Wichita health care market. The court found the allegations stated a cause of action.
(C) §2 Conduct Requirement: Predation
I.Overview of Predation & Predatory Pricing
A. Predation is conduct by a monopolist that involves incurring short term losses intending to
1.drive out or deter a potential competitor AND
2.subsequently recoup the losses by earning monopoly profits
B. Thus, predatory pricing is keeping prices artificially low to drive competitors out of market, intending to reap high profits with monopoly prices afterward
C.Unclear empirically how often happens; most plausible for multi-market players
D. Concerns with aggressive attacks on monopolist prices that appear predatory:
1. We don't want to discourage low prices
2. Theoretical argument: Unlikely b/c very risky strategy
a. High Entry Barriers: rival will stay long time
b. Low barriers: rivals come back as soon as raise prices to monopoly level
3. Failed predatory pricing strategy helps consumers (cf. failed cartel)
II.Supreme Court on Predatory Pricing
A. No §2 cases, so info from horizontal conspiracy cases:
1.Matsushita: Alleged agreement by Japanese electronics firms to drive out American firms
2. Brown & Williamson: Alleged use of predatory pricing as cartel enforcement mechanism
B.Generally
1. Language in these cases suggests gen’l applicability to all predatory pricing claims
2. Court displays skepticism about likelihood, but willing to allow claim if enough evidence
3.Two Necessary Elements
a.Price below appropriate measure of cost
b.Dangerous probability of recoupment
C.Price below appropriate measure of cost
1. SCt hasn’t specified
2. E.g., “Areeda/Turner Test”: below AVC pricing only
3. Leaves open what to do about “limit pricing”
a. above marginal cost, but below monopoly profit-max
b. low enough to scare off most likely entrant
D. Dangerous probability of recoupment (from Brown & Williamson)
1.w/o recoupment, aggregate benefit to consumers.
2. must show capable of having effect on intended target
3. then show objective evidence of likely rise in prices sufficient to recoup
a. evidence of actual supra-competitive prices in market –OR-
b. market evidence that conduct likely to have led to monopoly/oligopoly pricing
4.subjective belief insufficient b/c without recoupment, consumers not harmed.
III. Predation Beside Predatory Pricing
A. Alcoa: Predatory Expansion
B. Exclusion Cases Sometimes Seem to Require Predation for Liability
1. Aspen/Trinko
2. Predatory Hiring
C. Photovest v. Fotomat (7th Cir. 1979)
1. Fotomat directly owned & franchised kiosk photofinishing services
2. Photovest Corp. set up to run Fotomat franchises; gets contract for 15.
3. Fotomat decided to eliminate own franchises b/c discovered co. kiosks more profitable than franchises
4. Among conduct held to violate §2: predatory placement of new kiosks, which meant
a. F flooded market w co. kiosks to reduce value of franchises so F could buy back.
b. F placed 14 kiosks in P’s city; more than 1/2 on overlapping sites
c. Evidence that new kiosks operating at below break-even point
D.Last word: Weyerhaeuser (U.S. 2007): Predatory Bidding claim
1.D runs sawmills & has dominant market position in region
2.Claim: predatory bidding
a. using monopsony power to drive up prices of logs above what competitors could afford
b. predatory b/c losing money in short run by paying too much with intent to recoup when competitors gone
3.Court says analytically like predatory pricing, so Brown & Williamson standards apply
(D) TYING
I. OVERVIEW
A.DEFINITIONS
1.Producer sells product only to those who agree to buy 2d product. (E.g. can only buy can-closing machines if also buy cans from same mfr.
2.Desired product (can-closing machine) is "tying" product
3.Forced products (cans) are "tied" product
B.RELEVANT STATUTES
1. Clayton Act §3:
a.Limited to goods (not services)
b.Conduct only violates act if “the effect … may be to substantially lessen competition or tend to create a monopoly in any line of commerce.”
2.Sherman Act §1:
a.Only thing available for ties between services or goods/services
b.SCt has read ShAct§1 to have same standards as ClAct§3
c.issue whether coerced tying agreement = §1 concerted action
i) Circuits say yes
ii) E.g., Systemcare (10th 1997)
C.BUSINESS JUSTIFICATIONS FOR TYING
1.attain monopoly/increase market share in tied product
2.more favorable joint pricing of products
3.price discrimination (charge more to those who use more)
a.counting device (hard to do without tie)
b.Note debate re whether price discrimination is bad
c.If in context where horizontal producer cartel seems possible, industry wide-use could indicate horizontal agreement
4.Achieve efficiencies
a.packaging in bundles
b.force dealers to put full line before public
5.quality control: tying service/parts/complementary prods
a.insures successful operation of product
b.creates consumer goodwill
II.ECONOMIC ANALYSIS OF TYING
A.Traditional Arguments Against
1.Attempt to spread monopoly from 1 market to another
a.harms competition in market for tied product
b. competitors lose opportunities for customers
c.“leverage”
2.limits buyers’ freedom of choice
B.Chicago Critique
1.fixed sum: can get only so much leverage out of monopoly
a.doesn't matter where you take it.
b.no possible harm if 2 products used in fixed proportions
2.most ties benign/pro-competitive
3.if there is monopoly, should attack it directly
C.Responses to Chicago
1.fixed sum is static analysis; over time may lead to loss in comp:
a.discourage innovation
bdiscourage entry (have to come in at 2 levels)
2.Concerns with counting justification
a.can use less restrictive alternatives (metering)
b.must have market power to do price discrimination.
3.Concerns with “just attack the monopoly directly”
a.breaking up monopoly complex and expensive
b.maybe better to permit monopoly; control behavior
4.Alternative Managerial motivations
a.people believe they can “leverage” even if they can't
b.sales & growth maximization (cf. mergers)
III. EARLY TYING CASES:
A. International Salt (1947): patented salting machines tied to sale of salt
1.Gov’t suit under ShAct1 & ClAct3
a.DCt: Summary Judgment for Govt.
b.D claim: need trial on either:
i) “unreasonable” (ShAct1) OR
ii) “tends to create monopoly/lessen competition” (ClAct3)
2.SCt says NO.
a.Unreasonable per se to foreclose competitors from a substantial market