ANTITRUST- LONGWELL- SPRING 20121

Antitrust Outline

Key Statutes & Assumptions

Sherman Antitrust Act

-§ 1 Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or w/ foreign nations, is hereby declared to be illegal. [Violators] shall be deemed guilty of a felony, and [punished by a fine and/or imprisonment]

-§ 2 Every person who shall monopolize or attempt to monopolize, or combine or conspire . . . to monopolize any part of the trade or commerce among the several States, or w/ foreign nations, shall be deemed guilty of a felony

-Key Differences

  • Collective v. Unilateral Conduct: § 1 requires collective action (i.e. contract, combination or conspiracy) while § 2 is principally concerned w/ unilateral conduct
  • Agmt v. Monopoly: § 1 deals w/ unreasonable trade restrictions while § 2 deals w/ monopoly or attempted monopoly

§ 7, Clayton Act: Incipiency statute allows prevention of acquisition or mergers when “the effect of such acquisition may be to substantially lessen competition, or to tend to create a monopoly”

FTC Act, § 5

-“Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared unlawful” 15 USC § 45

-Only FTC can use

-Can be used to purse Sherman violations

Economics

Antitrust promotes competition out of the belief that competition presses producers to satisfy consumer wants at the lowest price while using the fewest resources

-Basic Assumptions

  • Cartels must be able to reduce output either individually or collectively
  • In Microsoft, court found co. had unilateral monopoly power. Internal corporate e-mails cited this. Microsoft could reduce its own output and raise prices
  • Four necessary means to control output
  • Set a plan. Frustrated by competitor’s differing cost structures and achieving consensus on mkt allocation
  • Monitor
  • Punish deviants
  • Cope w/ entrants

-Benefits of Competition

  • Economic Benefits
  • Less transfer of wealth from buyers to sellers
  • Less Allocative Efficiency Loss
  • Non-Economic Benefits
  • Prevent Concentration of Wealth
  • Individual autonomy
  • “Competition is destruction in our industry” generally rejected

Which Horizontal Agmts Are Illegal

  1. Relevant US Laws and General Legal Standards

-Horizontal agmts are agmts between firms who operate at the same mkt level

  • Vertical agmts between firms that are in some supply relation
  • Ex: Agmt b/w steel supplier & car maker
  • Effects at both mkt levels: steel mkt = upstream, car mkt = downstream

Three statutes cover horizontal agmts

-The most important is Sherman Act § 1 - Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among several States, or w/ foreign nations, is declared to be illegal

Per Se

Everyagmt in restraint of trade or commerce is declared illegal

-But this was eventually held not to be taken literally, otherwise every contract would or partnership would be unlawful

-Traditional view is that “unreasonable” restraints of trade, w/ an unreasonable restraint being one whose anticompetitive effects outweigh its procompetitive ones

SCOTUS has held that certain agmts are so likely to be anticompetitive, and so unlikely to have procompetitive effects, that they are condemned “per se”

-i.e. price fixing, mkt divisions, output restraints and boycotts

-when pro se, SCOTUS will not consider procompetitive justifications or whether anticompetitive effects actually occurred

Rule of Reason

If not a per se violation, the Cts consider on a case by case basis whether the agmt has a plausible procompetitive justification

-must prove an anticompetitive effect either through direct proof or by showing mkt power that can be used to infer the anticompetitive effect

  • If shown, the  must prove the procompetitive justification and that this was the least restrictive means of accomplishing that pro-competitive virtue

-Then Ct must balance effects – does anticompetitive effects outweigh procompetitive?

However, no reason to keep pro se and rule of reason separate b/c SCOTUS stated:

  1. Even if a horizontal agmt literally constitutes price-fixing, an outright restraint or a boycott, it will not be deemed per se illegal when a procompetitive justification in fact exists
  2. Even if a restraint falls w/in rule of reason, it will condemned summarily as a naked restraint if not procompetitive justification is offered

One way to think about the cases will be to keep in mind the distinction b/w horizontal agmts among unrelated firms and those among firms that are in a productive business relationship (which seeks through joint efforts to produce some tangible product or service).

-When there is a productive joint venture, the pro-competitive justification may take a restraint out of the per se rules

-Unwilling to listen to unrelated horizontal businesses that restraints have a procompetitive justification

The distinctions between the pro and anti competitive agmts

-Courts have been less willing to condemn per se professional efforts to self-regulate through horizontal agmts that are not ancillary to any productive business collaboration

Sherman Act § 2: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire w/ any other person or person, to monopolize any part of the trade or commerce among the several States, or w/ foregin nations, shall be deemed guilty of a felony…”

-Agmts to form a corp’n that exercises monopoly power have long been held to constitute a violation of § 2

FTC Act § 5: “Unfair methods of competition in or affecting commerce . . . are hereby declared unlawful”

  1. Horizontal Price Fixing

The earliest cases acknowledged that explicit agmts by competing firms to fix process are a primary concern of § 1

-The idea of price fixing is so abhorrent, there should not be a reasonableness standard for such agmts

-“Any combination or agmt between competititors formed for the purpose and w/ the effect of raising, depressing, fixing, pegging or stabilizing the price of a commodity in interstate commerce is illegal per se.

Per Se Rule for Horizontal Price Fixing

United States v. Trenton Potteries (SCOTUS 1927)

-23 companies making up 82% of the toilet pottery mkt agreed to charge certain prices.

-Issue: whether it was correct to not instruct the jury to consider the reasonableness of the particular constraints charged?

-Holding: No matter how beneficial this agmt was, the potential for harm to competition meant the agmt was illegal

  • Agmts which create such potential power may well be held to be in themselves unreasonable or unlawful restraints, w/o the necessity to inquire about the reasonableness of a particular price
  • Unreasonable restraints on trade such as price fixing are illegal regardless of the price fixed

Potential for Rule of Reason Analysis in Horizontal Price Fixing Cases

1)The agmt is the most efficient way to protect the business of the s

BMI v. CBS (SCOTUS 1979)

-ASCAP’s members grant it nonexclusive rights to license nondramatic performances of works, issue licenses & distribute royalties to copyright owners

-BMI created later to do same thing

-CBS held licenses from both BMI and ASCAP

-Trial ct rejected claim that this was per se violation of § 1, i.e., price fixing

-Issue: whether issuance of blanket licenses to CBS y ASCAP and BMI to copyrighted music at fees negotiated by them is per se illegal price fixing

-Holding: not going to apply per se rule, but rule of reason b/c blanket license is not a “naked restraint of trade, but a more efficient way of monitoring and enforcement against unauthorized copyright use

  • Per se rule: “plainly anticompetitive” and “lack any redeeming virtue”
  • Difficult for individuals to enforce copyrighted use; restraint on the music stems from copyright law
  • Ask:Facially, does the effect or purpose appear to restrict competition?
  • ASCAP is really a separate seller offering a blanket license, it sets the price, price is not set by collaboration w/ all individual copyright owners
  • CBS can obtain individual licenses for each composition

Arizona v. Maricopa County Medical Society (SCOTUS 1982)

-Doctors belong to org’n in Maricopa Cty, establishing max fee that drs agree to accept as payment in full for services performed under insurance plans approved by Soc’y

-Patients covered by a plan endorsed by the Soc’y are guaranteed complete coverage for the full amount of his medical bills only if treated by a member dr

-Drs argue it is procompetitive b/c it provides consumers w/ a uniquely desirable form of insurance coverage

-Issue: did agmt among competing physicians setting max fees violate § 1?

-Holding:Price fixing by setting a maximum price is subject to the per se rule as it still interferes w/ the price mechanism and hinders competition

  • Claim that price restraint will make it easier for customers to pay does not distinguish medical profession from any other provider of goods & services
  • Rule of reason: decide whether under all circumstances of the case the restrictive practice imposes an unreasonable restraint on trade
  • Insurers are capable not only of fixing maximum reimbursable prices but also of obtaining binding agmts w/ providers guaranteeing the insured full reimbursement of a participating provider’s fee
  • Differ from BMI b/c individual practitioners still competing & are not in the business of selling insurance, deriving no profit from the actual policies

2)Productive joint ventures

Texaco v. Dagher (SCOTUS 2006)

-Texaco and Shell created a joint venture, Equilon

-Equilon refined and sold gas under the original brand names

-Equilon set the pricesfor gasoline

-Trial Ct use ancillary restraints doctrine:

  • is nonventure restriction a naked restraint on trade? Yes, invalid
  • is restrict ancillary to the legitimate & competitive purposes of the business ass’n? yes, valid

-Issue: was this price fixing per se illegal under § 1?

-Holding: When persons who would otherwise compete w/ each other pool capital and share risks of loss, such joint ventures are regarded as a single firm competing w/ other sellers in the mkt

  • Jt venture sold the gasoline, T & S were not competing, but sharing in profits as investors of the venture, so not per se illegal
  • Jt venture has discretion just as any other firm to determine the prices of its product
  • Do not apply ancillary restraint doctrine

Horizontal price fixing case  usually a per se violation, unless the s can come up w/ very strong procompetitive justifications to get the court to employ the Rule of Reason analysis

-Such justifications include

  • Only efficient way to control against copyright infringement
  • Productive joint venture that is a single firm competing w/ other sellers in the mkt
  1. Horizontal Output Restrictions

Given any particular mkt demand curve, every output level implies a price and every price implies an output level

-Thus, horizontal agmts to restrict output below the competitive level are just the flip side of horizontal agmts to fix prices

-Indeed, a horizontal agmt on output production is generally necessary for any price-fixing agmt, otherwise members of the cartel might increase production to greater mkt share at the cartel price, and, if left w/ unsold product, may be tempted to undercut the mkt to unload it

-Cartels like OPEC do this all the time and focus on agmts to restrict rather than fix price

Thus, like price-fixing, horizontal agmts to restrict output are typically regarded as per se illegal

-However, like price fixing, the Ct has recognized circumstances where an agmt that literally restricts output should nonetheless be characterized as falling outside the per se rule

NCAA v. Board of Regents of Univ. of Oklahoma (US 1984)

-NCAA negotiated TV rights w/ CBS & ABC, limiting any individual school to no more than 6 televised games

-NCAA threatened disciplinary action against OU & other major colleges that signed individual TV Ks w/ NBC

-Issue: does the NCAA’s restriction of freedom to negotiate & enter own TV Ks violate § 1?

-Holding: not per se illegal, but after applying rule of reason, agmts are still anticompetitive w/ no compelling & reasonable justification

  • This is a limitation on output b/c restraining quantity of TV rights for sale
  • What is critical in this case is that it involves an industry in which horizontal restraints on competition are ESSENTIAL if the product is to be available at all
  • Product cannot be preserved except by mutual agmt
  • But TV plan does not promote procompetitive efficiency
  • Absence of proof of mkt power does not justify a naked restriction on price or output, but NCAA does have mkt power b/c advertisers will pay a premium to reach this particular mkt audience
  • Rule of Reason does not support a defense based on the assumption that competition itself is unreasonable

When it is claimed that a certain degree of cooperation is essential for competition, the court may apply rule of reason

  1. Horizontal Mkt Divisions

Any agmt (explicit or tacit) among businesses performing similar services or dealing in similar products whereby the available mkt is divided up and each is given a share is illegal per se

-Such mkt divisions generally involve territorial divisions where each firm agrees to limit itself to a geographic area different from the other firm

Consumers may also be divided in other ways, such as having one rival sell to commercial users and another to regular consumers, or by having firms agree to restrict themselves to different products or lines of commerce

-Bid rigging is also a form of mkt division, where conspirators agree that only one of them will really bid for each particular job

Palmer v. BRG (SCOTUS 1990)

-BRG and HBJ were in competition in GA as providers of bar review courses

-Enter agmt in 1980, HBJ giving BRG exlcusive license to mkt HBJ materials and use BarBri name

-HBJ agrd not to compete w/ BRG in GA and BRG would not compete w/ HBJ outside of GA

-Rec’d $100/student and 40% of revenues over $350, increased course price from $150 to $400+

-Trial ct said not illegal b/c did not divide the rest of the mkt (outside of GA) b/w them

-Issue: was this an agmt that constitutes per se illegal price fixing even though constrained to a geographic area?

-Holding: Agmt is per se illegal b/c it was “formed w/ the purpose and w/ the effect of raising” the bar review course prices (US v. Socony-Vacuum Oil Co.) and agmts agreeing not to compete w/ any allocation of territory stifle competition making them illegal (US v. Topco Associates) Purpose or Effect Test

US DOJ/PTC Guidelines for Collaborations Among Competitors (2000)

-Competitor collaboration: set of one or more agmts, other than merger agmts, b/w or among competitors to engage in economic activity resulting therefrom

-Treat a competitor collaboration as a horizontal merger if:

  • Participants are competitors in that relevant mkt
  • Formation of the collaboration involves an efficiency-enhancing integration of economic activity in the relevant mkt
  • The integration eliminates all competition among the participants in the relevant mkt
  • Collaboration does not terminate w/in a sufficiently ltd period by its own specific & express terms

-Agmts Challenged as Per Se Illegal

  • If participants in an efficiency enhancing integration of economic activity enter into an agmt that is reasonably related to the integration and reasonably necessary to achieve its procompetitive benefits, the Agencies analyze the agmt under the rule of reason, even if it is of a type that might otherwise be considered per se illegal
  • Was there facially a good reason for the collaboration?
  • Ct may do some sort of balancing
  • Agmt may be reasonably necessary w/out being essential
  • Agencies consider whether practical, significantly less restrictive means were reasonably available when the agmt was entered into, but do not search for a theoretically less restrictive alternative that was not practical given the business realities
  • Undertake a limited factual inquiry to evaluate claim

-Identifying Procompetitive Benefits of the Collaboration

  • If agencies conclude that the agmt has cx-d or is likely to cx anticompetitive harm, they consider whether the agmt is reasonably necessary to achieve “Cognizable Efficiencies” = efficiencies that do not arise from anticompetitive reductions in output or service, and cannot be achieved through practical, significantly less restrictive means
  • Cognizable efficiencies are assessed net of costs produced by the competitor collaboration or incurred in achieving those efficiencies

-Safety Zone for Competitor Collaborations in General

  • Absent extraordinary circumstances, the Agencies do not challenge a competitor collaboration when they account for no more than 20% of the relevant mkt
  • Safety zone does not apply to per se illegal agmts
  1. Horizontal Agmts not to Deal w/ Particular Firms

These are known as “horizontal boycotts” and are considered to be per se illegal

-Not to protect competitors, just competition

Differ from other per se offenses such as fixing prices or output or dividing mkts

-1. Boycotts are often aimed at harming particular competitors rather than competition in general

  • But should it be condemned by antitrust law then?

-2. More likely to have plausible noneconomic justifications, such as punishing particular bad actors

Boycotts by Unrelated Rivals

Klors v. Broadway-Hale Stores, Inc (SCOTUS 1959)

-Two retailers of electronic appliances developed a strong dislike for each other

-Klor’s is the mom & pop, Broadway- Hale is a chain, right next to each other

-Competing manufacturers retail through both K and BH

-Manufacturers agrd at BH’s request to not to deal w/ Klor’s anymore

-he had enough mkt power to do so

-Issue: did this group boycott violate § 1?

-Holding: Yes, deprives Klor’s of freedom to compete on open mkt and manufacturers’ freedom to sell, interfeeing w/ the natural flow of interstate commerce. One-by-one elimination of small businesses tends to creep towards a monopolistic state

  • Group boycotts, or concerted refusals by traders to deal w/ other traders have long been held to be in the forbidden category

Fashion Originators Guild of America v. FTC (SCOTUS 1941)

-Members of Guild design, manufacture, sell, and/or distribute women’s clothing

-After make a design and sell it, others copy designs at lower prices  “style piracy”

-Boycott retailers and decline to sell to those who sell garment copies of those designs belonging to Guild members

-Retailers signed agmts agreeing to cooperate w/ boycott program for fear that the manufacturers would stop dealing w/ them

-Guild has card system they distribute to manufacturers: red = non-cooperators; white = cooperators

-Also audits members’ books and sends shoppers to retailers to see if violating agmts

-FTC issued a cease & desist order