Antitrust Chronological Outline

Professor Pierce

Spring 2002

Antitrust Chronological Outline

I. Introduction: Common Law Antecedents of the Sherman Act

A. The Case of Monopolies (1603 England)

1. The queen granted a monopoly on playing card making, viewed cards as a social ill.

2. Queen was getting paid for the monopoly grant.

3. Court finds it is a monopoly and doesn’t see a justification. Holds the decree invalid. Court sees same effects of monopoly as queen and says the queen is not entitled to them.

4. Court recognizes that monopolies generally lower quality. They say Parliament could grant a monopoly but the queen cannot.

B. General Economics

1. Marginal Revenue Curve – basis for decision-making. The monopolist will produce up to the price of the curve. The monopolist will supply up to where the marginal revenue intersects with marginal costs. And will charge the price where the Demand curve intersects with that quantity.

2. Would rather have competitive markets that don’t result in artificially high prices for lower than optimum output as well as artificial transfer of rents.

C. Reasonable restraints on trade incident to legitimate transactions are okay.

1. Mitchell v. Reynolds (1711)

a) Owner of a bakery wants to lease his bakery for 5 years. AS part of the lease agreement the owner agrees that he will not open a competing bakery within the parish of the original lease. The owner violates this.

b) Even though contracts in restraint of trade, all contracts are in restraint, and reasonable restraints incident to legitimate transactions are okay.

c) Court balances potential adverse effects on public and the good effect.

II. Chapter I: The first 25 Years under the Sherman Act: 1890-1914

A. Generally

1. Sherman Antitrust Act (US 1890)

a) §1 outlaws every contract in restraint of trade (courts add unreasonable)

b) §2 outlaws monopolization or attempts to monopolize. (Also means unreasonable, some attempts can be good for the market.)

2. Initially the court treats the Sherman Act as applying in an extraordinarily narrow context. Via the interstate commerce clause.

B. Jurisdiction and the Scope of the Act

1. Sherman Act does not apply when there is not interstate commerce present.

a) US v. Knight (1895) – Knight controls 98% of sugar market by the time it gets to court. But the court rules that sugar manufacturing is entirely local so Sherman Act does not apply.

(1) The decision is essentially dead but it has never been overruled.

(2) Problem – just because sugar in one area does not mean that it does not have effects on I/C. This decision would make the Sherman Act only applicable to transportation.

b) The Supreme Court has been notoriously inconsistent without overruling in this area.

(1) E.g. Baseball is just a sport that does not affect interstate commerce, however football does affect interstate commerce – and baseball case was never overruled.

2. Extraterritorial Jurisdiction of the Sherman Act

a) Congress did not mean to apply the Sherman act to extraterritorial jurisdiction. American Banana (1909).

(1) United Fruit and governments of Panama and Costa Rica destroyed American Bananas’ plantations in order to preserve the United Fruit monopoly.

(2) Demonstrates the pragmatical limits of US antitrust law.

b) Today, Courts are more likely but still hesitant to apply Sherman Act to foreign commerce.

C. Horizontal Combinations in Restraint of Trade

1. The practice of setting prices is a restraint on trade (curbs each firm’s freedom and commerce and is in violation of § 1. Court found that the Sherman Act outlaws all contracts in restraint of trade, although it abandoned this finding one year later. Also, the Sherman Act can apply where the Interstate Commerce Act applies. Nothing in the ICC says that the Sherman Act does not apply. US v. Trans-Missouri Freight Assoc (1897) (Found that the cartel practice of agreeing on prices was in fact a contract in restraint of trade and thereby gave rise to a Sherman Act violation.)

a) Government was claiming that the purpose of the association was to unjustly and oppressively increase rates. Filed suit claiming a violation of § 1 (price fixing – restraining trade by not letting everyone set their own price).

b) Must ask whether or not the practice, not the result, is reasonable.

(1) As applied here, the reasonable price is no defense, the practice of setting prices (and therefore suppressing competition) is a restraint on trade.

(2) The practice of price-fixing is not reasonable. Basically saying that price fixing agreements are within the prohibition of “every” trade restraint without regard to reasonableness.

2. Note on Cartels –

a) Cartel meetings decide who will cut back on production to set price higher.

b) Only real strategy is to bargain hard in the meetings and then cheat.

c) The only ones that are effective use the power of the state. (E.g. American Banana cartels.)

d) Small producers love cartels. Despite the fact that half of the Congress enacted the Sherman Act with the idea that if they get rid of cartels, it would help small producers.

3. Horizontal minimum price fixing and horizontal allocation of markets are per se illegal unless they are necessary as ancillary to a legitimate transaction. US v. Addyston Pipe & Steel (6th Cir 1898) (This per se rule does not in fact become the law until 30 years later by the supreme court.)

a) Leaves possibility for a narrow “incident to legitimate transaction” defense.

b) An example of where the behavior would be ancillary to a legitimate transaction would be Mitchell v. Reynolds (Bakery lease.)

c) Court defines a market as consisting of a product market and geographic market.

d) Geographic market

(1) Determinate of scope is transportation and shipping costs.

4. Market Allocations Generally:

a) Can create separate markets giving monopolistic charachteristics in each area.

b) This behavior has the same effects on consumers as a monopoly.

c) Geographic allocation of market has the same effects as horizontal price fixing and monopoly.

D. Monopolization and Merger

1. Rejection of per se rule and adoption of rule of reason –

a) Standard Oil in 1911 says that the will never adopt a per se rule in these cases, instead they will look to the rule of reason.

(1) Adopts the rule of reason for all cases.

(2) Therefore government cannot win without proving:

(a) That Δ did something to have a bad effect on consumers

(b) That the action did in fact have a bad effect on consumers

(c) And must allow Δs to defend and present all evidence to show that the practice was necessary.

(3) Even finding that the rule of reason applied, the Δ (Rockefeller) still lost, as the firm’s behavior was clearly anticompetitive. Created an oil refinery trust of over 90% of the refineries in country where they set prices and quantity. Court ordered divestiture.

(4) Here, Rockefeller’s vertical integration undoubtedly lowered prices and made it more effective but he also formed a cartel that ripped off the country.

2. Essential Facilities – there are essential facilities to which private actors must provide access to all. In these disputes the remedy will be to allow an ownership interest and access to facilities.

a) Terminal RR Case (Where Δ owned 3 rail bridges over Mississippi must allow other railroads to use them for a fee, and regulate the prices that will be charged.)

E. Vertical Restraints of Trade – Resale Price Maintenance

1. Dr. Miles Medical company & John D. Park & Sons (1911) - Illegal because selling to distributors and requiring a price.

a) Dr. Miles sold medicine prepared by means of secret methods and formulas to jobbers and wholesalers. It fixed the price, not just of its own sales, but also the wholesale and retail prices that its product could be sold at. Department stores, sold the medicine at “cut rates” (below the price fixed by Dr. Miles.) Dr. Miles claims that Δs in combination and conspiracy with a number of wholesale and retail dealers sold the remedies at cut-price levels and therefore unlawfully and fraudulently procured them from Dr. Miles agents by means of false and fraudulent representations and statements.

b) What he was afraid of was discount sellers ruining his reputation.

c) Court says that the secret processes used were not the same as a patent. A general restraint upon alienation is ordinarily invalid. You cannot fix the future price of sales.

d) Court says it is a restraint on trade

(1) Purpose of the agreement is to maintain prices after he has parted with the articles and prevent competition among those who trade with him – Same as the dealers getting together and fixing prices.

(a) Once he has sold the product he has no control over the subsequent traffic of articles.

(2) While you can always set your own price, when you attempt by contract to limit someone else's freedom to set their own prices it becomes illegal.

2. For § 1 you can’t violate it by making unilateral (private) decisions not to deal with others. Colgate Case (1919) – Set uniform prices (by way of a price list) and you don’t have to do it, but if you do then you have to set our prices or else we’ll stop selling to you. Court says that is not a violation. This modifies Dr. Miles but Dr. Miles still dominates.

F. Adoption of the Clayton and Federal Trade Commission Acts

1. 1914 FTC Act

a) Gives the FTC concurrent jurisdiction with the DOJ

b) Power to prohibit unfair or deceptive acts or practices (Illegal even if it doesn’t violate the antitrust laws.)

2. Clayton Act

a) Exempts labor unions from antitrust laws (§ 6) (says nothing about independent contractors banding together) – also exempts employees

b) Outlaws price discrimination (§ 2), exclusive dealing, or tying.

c) Applies only when practice lessens competition or tends to create a monopoly (The courts must figure this out.)

d) Outlaws mergers that substantially lessen competition.

III. The Rule of Reason Period – 1915 to 1935

A. Cases giving definition to the rule of reason

1. Chicago Board of Trade v. US (US 1918)

a) Board would close in the afternoon but could still buy at different prices until Board enacted rule prohibiting grain trade from 2 p.m. until open of business (next day or Monday). Could only trade grain then at the price set by the board until 2 p.m.

b) DOJ alleged this was horizontal price fixing – the suppliers were agreeing on prices.

c) Not a violation of the Sherman Act by applying the rule of reason the government proved neither an illegal intent nor any illegal effects.

d) The Δ asserted the good effects –

(1) Before rule there were only a few grain dealers buying off hours and they had undue market power.

(2) Allowed grain dealers to work better hours. (But later courts have failed to recognize this as material.)

e) Court said, “every board of trade and nearly every trade organization imposes some restraint upon the conduct of business by its members.”

f) Just because the government cannot prove bad effects does not mean that bad effects don’t exist.

g) Case shows that Δs can win a § 1 claim under the rule of reason.

2. United States v. US Steel Corp (US 1920)

a) Shows that Δ can win § 2 claim under rule of reason.

b) US Steel formed a holding company trust that has acquired shares of 12 steel producing firms (50% of production) that used to compete, now US Steel makes the output price decisions. (It is a cartel).

c) Government alleges it to be a contract in restraint of trade and an attempt to monopolize.

d) Government tries to extend the theory that it was a cartel of 100% of firms by “Gary Dinners” where they would send VPs to Gary Indiana to discuss.

e) The majority applies rule of reason and says that the government must prove bad effects on the market. The court finds the government hasn’t shown this.

(1) It was an unsuccessful cartel (never got to 100%)

(2) Incomplete monopoly (Never got to 100%)

(3) No proof of abuse of power

f) Unsuccessful cartel and incomplete monopoly are now defenses after this case.

B. The Trade Association Cases

1. Recent Supreme Court decisions don’t tell much more than the following. Similar cases in similar markets with differing decisions probably more a result of changing court.

2. Trade association was organized in restraint of trade as “its purposes and effects were increased pricing and production restriction.” American Column & Lumber Co v. US (US 1921)

a) Members of trade association participated in behavior that violated the Sherman act.

b) Firms provided information tot eh trade association and association provided information back to the firms.

3. Trade associations that discusses business and statistics, but do not act in restraint of prices, production, or competition are legal. Maple Flooring (US 1925).

4. Five conditions favorable to conclusion that implicit collusion in the industry being examined:

a) A concentrated market of sellers and a lack of a fringe market of small firms.

b) A standard product sold primarily on the basis of price.

c) Issues pertaining to the “need” or at least the incentive to collude.

d) An inelastic demand at the competitive price.

e) An industry in which entry takes a long time.

5. What can trade associations do?

a) Send information to other firms and agencies (DOJ & FTC)

(1) Not trying to hide anything. Reporting data back is where the problems are caused.

(2) Form specific information. Very valuable for putting together cartel – average, aggregate data is not.