Law 552-Antitrust

Elizabeth Little

Observation Memo

Case study one

Memo to Self

Re: ABC’s potential antitrust legal issues

Desired additional facts:

Market and the Products

What is ABC and XYZ’s respective market share?

What does MNO produce?

Are the companies public or private?

Are ABC and XYZ developing the technology together?

Is there any chance that this coordination is a joint venture?

Are ABC and XYZ US companies or will they be selling in the US?

Are there any patents at issue? Is there a valid IP issue? (as opposed to a IP sham)

What is the composition of the market?

  • Are the desktop product and the central server network product in the same potential market?
  • Can the two products be a substitute for the other?
  • Are ABC and XYZ currently horizontal competitors?
  • IS there an alternative choice to the tech on the market?

How are the two products produced?

  • How different is the manufacturing process? (i.e. can one factory easily produce both products or would they require two completely different facilities?)

How much does it cost to produce each product?

How far away are each of the companies from the production stage?

Who are the consumers of these products?

How innovative is the new technology?

Is there any evidence that this “agreement” or market division is actually enhancing competition?

Can this be considered a joint venture that is reasonably necessary to achieve efficiency in its operations?

The meetings

What happened during the meeting between Jane and Jason?

  • Who initiated the meeting?
  • What is the extent of their relationship?
  • Is there an actual agreement?
  • Is there a “meeting of the minds?”

Why did Jane agree to tell ABC if XYZ was going to enter the desktop market?

What is this professional courtesy? How bound to that courtesy is Jane?

Did Jason actually tell Jane that ABC would inform XYZ if ABC intended to enter the server market? Or is that a future intent?

What is Jason’s relationship with Linda? How much does Jason drink? How much weight can we give Linda’s statement that Jason said he had a “deal” with XYZ?

Do we have any (preferably concrete) evidence that ABC was going to limit its development/ manufacturing to the desktop model before the meeting? Of XYZ?

  • Such as any orders for manufacturing equipment, facilities…etc…

Do we have any additional evidence (direct or circumstantial) that each respective company made their manufacturing decisions independently? Or dependently?

If the decision was dependant on the decision of the other company, was each company’s manufacturing choice a part of an agreement or understanding – no matter how informal?

The investment company

How much money has Luke’s investment company invested in ABC?

Can they afford to walk away from this investment?

Is the investment company willing to pursue a legal action against ABC?

What is the Luke’s relationship with Jason?

Statement of issues

In a horizontal relationship, an agreement not to produce is a market division by product, which can increase the price and decrease the output of a product. These agreements are per se against Sherman 1. In order to be in compliance with the antitrust laws, there cannot be an agreement between ABC and XYZ not to produce. However, ABC and XYZ can independently make decisions as to how and where to enter the market. Antitrust laws are not intended to prevent companies from making sound economic decisions; they are intended to prevent companies from illegally restricting competition.

1) Whether there is a violation of the Sherman Act when two companies agree to limit production?

2) Whether there is a violation of the Sherman Act when two companies choose to limit their markets independently from the other company?

Preliminary analysis of issues

An express agreement

If this situation is an express agreement not to produce then it is in violation of the Sherman Acts. All efforts should be taken by ABC and XYZ to remove the agreement. As of right now, there is little to no evidence of any actual damages. It is therefore unlikely that a company will bring a suit at the present stage. This agreement should be nullified. The parties should express in writing that there is no agreement not to produce and any sense of a professional courtesy to inform the competitor of their intent to enter the market should be removed. This still may not be enough. The question arises if ABC can afford to compete with XYZ. If this is possible, ABC should consider producing the two products. The possibility of treble damages should be enough encouragement. The best advice may be for Luke’s investment company to pull all funding and possibly seek a return of their investment.

Absent an express agreement

This situation may not be a clear agreement. With some additional facts (such as proof that the companies made their decisions independently) it may be possible to avoid an antitrust suit. The crucial question is whether the parties’ conduct stemmed from independent decisions or from a tacit or express agreement. Theatre Enterprises, Inc v. Paramount (at 149).

Absent an express agreement, it is still possible to prove a Sherman 1 violation. It is possible to prove a “contract, combination or conspiracy” under Sherman 1 using direct or circumstantial evidence. (143) The amount of evidence in each case varies and the question of proof becomes important. The proof of the conspiracy or agreement to divide the market fix prices is the key element of a Sherman 1 case. The conspiracy must consist of an agreement, understanding or “meeting of the minds” between at least two competitors (or potential competitors) to unreasonably restrain trade. (143 & Interstate Circuit, Inc. v. United States) The agreement to restrain trade is the offense, for that agreement should be sufficient evidence of intent.

Regardless of the additional factors needed to make a meeting of the minds determination, this whole situation “smells of a rat.” Jason sent Luke an email that can easily be read as an agreement to divide the market by product. This market division will decrease competition because ABC and XYZ will not be competing with each other for those specific products. The email itself may be sufficient evidence of such an agreement. Linda has informed us that Jason told her that ABC had a deal with XYZ. Together this whole situation is problematic.

Absent an express contractual agreement, it is necessary to look to whether the parties’ conduct stemmed from independent decisions or from any form of horizontal agreement tacit or express agreement. Theatre Enterprises, Inc v. Paramount (at 149). The agreement does not need to be express or specified in a contract. Interstate Circuit v. United States (144-147). The parties not need to be contract signatories. All the agreement/conspiracy needs to be is a mutual understanding of the parties to combine or limit their efforts to restrict trade. This can be shown by evidence that: (1) the proposed restrictions constituted a departure from prior practice; (2) the nature of the proposals made on behalf of the parties; (3) the manner in which the proposals were made; (4) the amount of unanimity of action taken by the parties; or (4) the availably of witnesses who would have had knowledge of the existence or non-existence of this type of business agreement. Interstate Circuit v. United States (145). Using these factors with the available facts, it appears that the parties have a mutual understanding to limit their efforts in a way that will restrict trade. To negate these factors we would need evidence that the parties were acting consistently with prior practice, that there were no proposals made by either party (that they were just stating their intent), that the dinner conversation was among friends and was not an orchestrated dinner, that ABC and XYZ can act independently, and we would need the correct witnesses willing to testify that the companies were not acting pursuant to any agreement.

This may become a case where the parties would try to argue conscious parallelism, where factors other than collusion can explain the market division. Theatre Enterprises, Inc v. Paramount (at 150). As the Theatre Enterprises court pointed out, proof of parallel business behavior does not itself constitute a violation of the Sherman act. (at 150) However, in this case, there are some potentially dangerous plus factors against ABC. A plus factor is any fact that may make the inference of collusion stronger than the inference of choice. (147) In our case that fact that: (1) Jane and Jason had dinner where they discussed market decisions; (2) Jason told Linda that ABC had reached a deal with XYZ; (3) there is an agreement of professional courtesy to inform a competitor about market entrance; and (4) the fact that there is an email where Jason specifically said that ABC will be “confining…efforts” to a different part of the market than Jane. These factors seem to strongly weigh in favor of a conspiracy or a meeting of the minds – there is at least enough evidence to pass the Twombly pleading standard.

Absent facts to the contrary, there appear to be sufficient facts to begin an antitrust suit against ABC and XYZ. Under Sherman 1 there does not need to be an express agreement, all that is needed is more of a meeting of the minds over the idea of the conspiracy. It is still a violation of the Sherman act even if the conspiracy is not successful. If we can compile more facts in ABCs favor, this may be a difficult case for the plaintiff. Companies are not restricted from making sound business decisions – they are restricted from conspiring to restrict trade. If ABC can prove that it made its decision to focus on desktop units independently from XYZs, then there should not be a case against ABC. Even if ABC made its decision after it heard that XYZ was confining its efforts, this should be ok – this would be a wise business decision. Antitrust laws are not aimed at preventing companies from making wise business decisions; they are aimed at preventing unlawfully trade restricting ones.

Advice to Luke’s investment firm: tread carefully. Either cut your losses or make it very clear to everyone involved that there is no agreement between ABC and XYZ.

Elizabeth LittlePage 1 of 405/12/2019