Professor Morgan, Spring 2003

Antitrust

Professor Morgan, Spring 2003

1Summary

21st period – 1890 to 1914

2.1Common Law Precedents

2.2Jurisdiction and Scope of the Sherman Act

2.3Horizontal Combinations in Restraint of Trade

2.3.1.1US v. Trans-Missouri Freight Assn (US 1897, p. 38)

2.3.1.2US v. Addyston Pipe & Steel Co (6th Cir 1898, p. 55)

2.4Monopolization and Merger

2.4.1.1Standard Oil Co. of NJ v. US (US 1911, p. 82)

2.5Vertical Restraints of Trade – Resale Price Maintenance

2.5.1.1Dr. Miles Medical Co. v. John D. Park & Sons Co. (US 1911, p. 102)

2.6Adoption of the Clayton Act and FTC Act

2.6.1Clayton Act

2.6.2FTC Act

3Rule of Reason Period – 1915 to 1939

3.1Cases giving definition to the Rule of Reason

3.1.1.1Board of Trade of City of Chicago v. US (US 1918, p. 119)

3.2Trade Association Cases

3.2.1.1American Column and Lumber Co. v. US (US 1921, p. 133)

3.3Interplay between Patent and Antitrust Law

3.3.1.1US v. General Electric Co. (US 1926, p. 158)

43rd Period – 1940 to 1974

4.1Horizontal Combinations in Restraint of Trade

4.1.1Price Fixing

4.1.1.1US v. Socony-Vacuum Oil Co. (US 1940, p. 192)

4.1.2Group Boycotts

4.1.2.1Fashion Originators Guild of America v. FTC (US 1941, p. 221)

4.1.3Market Division

4.1.3.1Timkin Roller Bearing v. US (US 1951, p. 231)

4.1.4Cases Testing the Limits of the Per Se Rule

4.1.4.1US v. Topco Associates, Inc. (US 1972, p. 247)

4.2Monopolization

4.2.1.1US v. Alcoa (2d Cir 1945, p. 255)

4.2.1.2US v. United Shoe Machinery (D.Mass 1951, p. 273)

4.2.1.3Utah Pie v. Continental Baking Co. (US 1967, p. 303)

4.2.2Predatory Pricing

4.3Vertical Arrangements Perceived as Exclusionary

4.3.1.1International Salt v. US (US 1947, p. 316)

4.3.1.2Standard Oil (Calif) v. US (US 1949, p. 322)

4.3.1.3Fortner Enterprises v. US Steel Co. (US 1969, p. 352)

4.4Dealing with Dealers

4.4.1Resale Price Maintenance

4.4.1.1US v. Parke, Davis & Co. (US 1960, p. 368)

4.5Mergers

4.5.1.1Brown Shoe Co. v. US (US 1962, p. 419)

4.5.1.2FTC v. Proctor & Gamble (US 1967, p. 466)

5Modern Period – Since 1974

5.1Transition Cases

5.1.1.1U.S. v. General Dynamics Corp (US 1974, p. 486)

5.1.1.2Continental TV v. GTE Sylvania (US 1977, p. 495)

5.1.2Who Can Sue

5.1.2.1Brunswick Corp v. Pueblo Bowl-O-Mat (US 1977, p. 506)

5.2Section 1

5.2.1Horizontal Price Fixing

5.2.1.1National Society of Professional Engineers v. US (US 1978, p. 516)

5.2.1.2BMI v. CBS (US 1979, p. 523)

5.2.1.3Arizona v. Maricopa County Medical Society (US 1982, p. 538)

5.2.1.4NCAA v. U. Oklahoma (US 1984, p. 550)

5.2.2Group Boycott

5.2.2.1Northwest Wholesale Stationers v. Pacific Stationery and Printing (US 1985, p. 570)

5.2.2.2Rothery Storage v. Atlas Van Lines (DC Cir 1986, p. 577)

5.2.3Horizontal Market Division

5.2.3.1Jay Palmer f. BRG of Georgia, Inc (US 1990, p. 592)

5.2.4Dealing with Dealers

5.2.4.1Monsanto Co. v. Spray-Rite Service Corp. (US 1984, p. 595)

5.2.4.2Business Electronics Corp. v. Sharp Electronics (US 1988, p. 606)

5.2.4.3State Oil Co. v. Kahn (US 1997, p. 619)

5.2.4.4California Dental Association v. FTC (US 1999, p. 631)

5.3§ 2 – Mononpolization

5.3.1.1Aspen Skiing v. Aspen Highlands (IS 1985, p. 647)

5.3.1.2Matsushita Electric v. Zenith (US 1986, p. 664)

5.3.1.3AA Poultry Farms v. Rose Acre Farms ( 7th Cir 1989, p. 677)

5.4Tying and Exclusive Dealing

5.4.1.1Jefferson Parish Hospital vv. Hyde (US 1984, p. 690)

5.4.1.2Eastman Kodak Co. v. Image Technical Services ( US 1992, p. 704)

5.4.1.3US v. Microsoft (DC Cir 1998, p. 729)

5.4.1.4US v. Microsoft (DC District 2000, p. 741)

5.4.1.5US v. Microsoft (DC Cir 2001, handout)

5.5Mergers

5.5.1.1Cargill v. Monfort of Co. (US 1986, p. 991)

5.5.2Merger Guidelines

5.5.2.1FTC v. Stapes & Office Depot (DC 1997, p. 781)

5.5.3Antitrust v. Federal Regulation

5.5.4Antitrust v. State Regulation

5.5.4.1Southern Motor Carriers v. US

5.5.4.2Columbia v. Omni Outdoor Advertising

5.5.5Antitrust and International Regulation

5.5.5.1Hartford File Insurance Co. v. California

6Antitrust Economics

7Exam Review

1Summary

• Trans-Missouri
• (Addyston Pipe)

• Dr. Miles

• Addyston Pipe

• Standard Oil

21st period – 1890 to 1914

2.1Common Law Precedents

Concern about monopolies and restraints of trade extends at least as far back as early periods of developing British law.

The Case of Monopolies – across the board ban on restraints of trade.

Mitchel v. Reynolds (1711) – have to ask what effect of a given restrain of trade was. If restricted in scope and duration, benefits may exclude restraints.

2.2Jurisdiction and Scope of the Sherman Act

• Passed in 1890.
• Purpose, according to Bork, is to enhance the welfare of consumers.
• Trusts were the perceived evil the Act was directed at.
• Purports to regulate both interstate and foreign commerce.

§1 – forbids contracts, combinations or conspiracies in restraint of trade

• aimed at multiple firms conspiring

§2 forbids monopolizations of an industry

• directed at trusts
• aimed at acts of single firms buying up competition

Remedies and sanctions-

• Injunctions, breakups, jail time
• $10 million or 2xgross gain/loss (corporations)
• $350K + 3 years in prison (individuals)

Enforced by DOJ and private interests acting on their own behalf.

2.3Horizontal Combinations in Restraint of Trade

US v. E.C. Knight Co.

2.3.1.1US v. Trans-Missouri Freight Assn (US 1897, p. 38)

Facts: Price fixing. Western railroads (common carriers) form an association to establish rates and regulations to maintain continuous lines & not run each other out of business. Trying to solve, legitimate, logistical concerns re allocative efficiency. Δs argue subject to IC Act and not Sherman Act.

Result: 1) The Sherman Act applies to railroads; 2) the agreement is invalid under §1.

Legal Analysis:

1)

• RRs have ability to affect price of goods in interstate commerce.
• Natural changes in industry Ok; manipulated changes not.

2)

• Applies to all Ks in restraint of trade, not just Ks in unreasonable restraint of trade.
• Courts are not in a position to decide rates/results – does not analyze effects of restraint.

Significance:

• What we do in AT analysis is assess the conduct of the actors, not the results the conduct produced. That price is reasonable is not defense.
• White dissent claiming only “unreasonable restraints of trade” are prohibited. Wanted “rule of reason”

2.3.1.2US v. Addyston Pipe & Steel Co (6th Cir 1898, p. 55)

Facts: Market Division. 6 manufacturers of cast-iron pipe with 30% ms formed association to designate “reserved cities” in which one member could make all pipe sales. Bid among themselves for right to win contracts by contributing bonuses shared among all members. Penalty for selling outside own territory. Made it look like bidding for jobs was competitive.

Result: SA applies and agreement invalid under §1.

Legal Analysis:

• If it was illegal under common law, it is illegal under SA.
• Sees that almost any K can be seen to restrain trade, so exempts scenarios under common law, such those ancillary to a lawful K.
• Disagrees with White – thinks reasonableness will make us “set sail on a sea of doubt.”

Significance: Ancillary restraint doctine: reasonable restraints that are ancillary to lawful contracts are legal.

2.4Monopolization and Merger

2.4.1.1Standard Oil Co. of NJ v. US (US 1911, p. 82)

Facts: Monopolization. Oil discovered near Cleveland, needed to be refined. Transcontinental railroad ran from NY Chicago. Rockefeller approached RR to transport oil - in exchange for steady business gets a lower price. Rockefeller combines all local companies in process and ended up with over 90% of the refining market. Charter of NJ Corp changed to hold all stock of acquired companies.

Result: Violation of §1 and §2

Legal Analysis: Focus on effect of agreements. Where co:

1) reduces output

2) increases prices

3) restricts the entry or freedom of others to K

Here, real evil was in “destroying potentiality of competition” by erecting barriers to entry.

Remedy was divestiture.

Significance: Reads a “Rule of Reason” into the Sherman Act. Clear rejection of the “all contracts” rhetoric in Trans-Missouri. Seems to tie §2 violation to §1 violation.

2.5Vertical Restraints of Trade – Resale Price Maintenance

2.5.1.1Dr. Miles Medical Co. v. John D. Park & Sons Co. (US 1911, p. 102)

Facts: Vertical restraint – resale price maintenance. Manufacturer requires retailers to sign Ks fixing retail prices of medicines. Retailer sues. Π argues 1) goods sold on consignment; 2) like a patented good b/c made by a secret process.

Result: Violates §1

Legal Analysis: K not written as consignment agreement, cannot restrain right of alienation of goods sold. Goods not patented. Treats this as a horizontal combination of retailers because they are who profit most.

Holmes dissent -

• Market will take care of it if overpriced.
• Purpose of K is not to restrict competition – there are alternatives.
• All levels of manufacturing/retail are subject to competition at their level.

Significance: Resale price maintenance continues to be per se illegal perhaps because courts worry about a conspiracy at the manufacturer level if it allows vertical restraints. Later qualified by Colgate – if a firm makes a unilateral decision not to deal with someone, usually OK (unless essential facilities)

2.6Adoption of the Clayton Act and FTC Act

Two additional AT laws to go along with Sherman Act.

2.6.1Clayton Act

§2 – Robinson-Portman – small business protection prohibiting price discrimination.

• You may not charge different prices in different geographic areas if effect is to deter competition or to create a monopoly.

§3 – no exclusive dealing or tying – can’t sell or lease items, patented or unpatented, on condition customer won’t use someone else’s goods.

§4 – private right of action for treble damages

§5 - convictions in criminal cases are collaterally estopped from private action

§6 – labor union exemption

§7 – mergers that significantly decrease competition where it existed prior to the merger are invalid.

§16 – allows for injunction.

2.6.2FTC Act

Creates FTC to enforce Sherman and Clayton

§5 – allows FTC to define “unfair method of competition”

3Rule of Reason Period – 1915 to 1939

3.1Cases giving definition to the Rule of Reason

3.1.1.1Board of Trade of City of Chicago v. US (US 1918, p. 119)

Facts: §1 Rule of Reason. Board establishes “call” rule whereby members were prohibited from buying grain in transit to Chicago at any price other than the closing price of grain that day. Δ claimed rule passed for convenience of members and to break up monopoly of grain dealers in Chicago. Govt shows no ill effects of the rule.

Result: Reasonable regulation of business under §1

Legal Analysis: Test is whether the restraint merely regulates and thereby promotes competition, or whether it may suppress or destroy competition. To decide, looks at evidence and several factors. Here:

1) Nature of the rule – restraint on price-making period only.

2) Scope of the rule – limited: only on certain grain, only to Chicago, only to part of the day.

3) Effect of the rule –

a) anti – did not affect price or volume of grain sent to Chicago

b) pro – had identifiable beneficial effects on grain market in Chicago.

Significance: Evidence seeking to explain a business practice may be introduced.

Brandeis’ analysis is still relevant today.

3.2Trade Association Cases

3.2.1.1American Column and Lumber Co. v. US (US 1921, p. 133)

Facts: Trade associations – price fixing. Hardwood producers representing 30% of market create association wherein they exchange information relating to production, pricing, etc. No formal agreement with respect to production or prices. Mr. Gadd synthesized info into newsletter. Govt argued it allows members to control future market conditions.

Result: Invalid under §1 as price fixing

Legal Analysis: Court looks at motive and finds the underlying purpose was to enhance the economic standing of firms by decreasing output and increasing prices.

Significance: Abandons approach used in Board of Trade – to look at effects and see whether pro-competitive effects outweigh anti-competitive effects. (Brandeis dissent). Looks at motive instead. Highlights possibility that in oligopic industries, it is possible that an exchange of information may = implicit collusion. This case in effect overruled by Maple Flooring, allowing this behavior.

3.3Interplay between Patent and Antitrust Law

3.3.1.1US v. General Electric Co. (US 1926, p. 158)

Facts: Resale Price Maintenance. GE grants a license to Westinghouse to manufacture patented lightbulbs and sell them at the same price as GE does. Govt argues this is like Dr. Miles but worse due to size of company and importance of product. GE argues valid because consignment goods – GE holds title.

Result: Agreement valid because goods on consignment.

Legal Analysis: Attempts to combine co-equal principles of patent law and AT. GE has patent. Granting license and controlling price is OK because without the license GE would be the only producer and could still control price. » license has no effect of competition.

Significance: Courts will respect patent monopolies in licensing unless licenses attempt to exceed patent monopolies. Dr. Miles was weakened by this case because Ge was able to avoid the per se rule through a valid consignment agreement and the court acknowledged there may be benefits to small dealers from resale price maintenance.

43rd Period – 1940 to 1974

4.1Horizontal Combinations in Restraint of Trade

4.1.1Price Fixing

4.1.1.1US v. Socony-Vacuum Oil Co. (US 1940, p. 192)

Facts: Price fixing – per se illegal. Gasoline buying program challenged. Oil industry forms plan to allow major oil companies to buy distress gas from refiners and sell it slowly on the market, trying to stabilize industry and keep wells operating. Each major company selects refiner as “dancing partner” and agrees to purchase surplus gas. Keeps gas from alternate channels of distribution.

Result: Invalid under §1.

Legal Analysis: Sees purpose was to raise price, even if it did not curtail production. Price stabilization good enough. No price fixing required. No market power required. No overt act required. Here, Δs had a hope of affecting price.

Significance: Per se rule – invalid under §1 if there is a purpose or effect of raising, depressing, fixing, stabilizing price. Hope of affecting price is enough.

4.1.2Group Boycotts

4.1.2.1Fashion Originators Guild of America v. FTC (US 1941, p. 221)

Facts: Group boycott – per se illegal. Guild aims to prevent “style piracy” of dresses by boycotting retailers who sold copies of their designs. Claims reasonable to protect from evils.

Result: Unfair method of competition under §5 of the FTC Act.

Legal Analysis: Court sees restraint as creating a private government – restricting retailer’s freedom. Reduces # of sources of goods, makes it difficult for copiers to stay in business. Court looks at market power and intent, but does not allow evidence of reasonableness.

Significance: Exclusionary, commercial boycotts with no public benefit are per se illegal. These differ from ideological boycott in that here only Δ’s economic interests were at stake.

4.2Market Division

4.2.1.1Timkin Roller Bearing v. US (US 1951, p. 231)

Facts: Market Division and Price Fixing. British, French and US manufacturers of antifriction bearings form joint venture because local laws required a local presence in order for firms to be able to do business there. Divided world into three markets via trademark licensing and fixed prices.

Δ argues reasonable:

1) because ancillary to joint venture and TM licensing (valid Ks).

2) in light of current trade conditions.

Result: Per se illegal.

Legal Analysis: Drove up price in US because British and French Timkens can’t import into US. Ancillary restraint not a defense because per se illegal. Common ownership does not liberate from AT laws.

Jackson dissent – should be treated as a single enterprise.

Significance: Intra Enterprise Conspiracy Doctrine – integration or affiliation is not a defense to conspiracy. Leaves all joint ventures, etc. open to §1 action. (overruled for wholly owned subsidiaries 30 years later by Copperweld.)

4.2.2Cases Testing the Limits of the Per Se Rule

4.2.2.1US v. Topco Associates, Inc. (US 1972, p. 247)

Facts: Market Division and Group Boycott. Small grocers form co-op to act as purchasing agent for products to become private label goods. Allowed members to protect their territories via market division and group boycotts. Δ argues

1) agreement allows small firms to compete with large firms and increase competition – good for consumers.

2) territory division needed to avoid free rider problem.

Result: Per se illegal under §1.

Legal Analysis: Court is willing to use the rule of reason if it hasn’t seen the case before. Here, familiar because horizontal market division, » per se illegal.

Burger dissent - simply ancillary restraints on cooperative buying, which benefited consumers. Court should look at difficult economic problems and use economic analysis.

Significance: Market division becomes per se illegal for all firms – big and small even without price fixing. May have been weakened by NCAA and BMI. Burger’s dissent becomes the analysis for the 4th period.

4.3Monopolization

4.3.1.1US v. Alcoa (2d Cir 1945, p. 255)

Facts: Monopolization. Decided by 2nd circuit for the Supreme Court. Alco has legal monopoly due to patents on ingot aluminum and smelting process. Previously, dividing territories with foreign firms and exclusive dealings with electric company were struck down. Here, expanding capacity to meet demand.

Result: Monopoly in violation of §2.

Legal Analysis:

• Size alone is not sufficient to find monopolization.
• Choice between market definitions giving Alcoa 90%, 64% and 33% respectively. Chooses to exclude secondary market but include finished products.
• While Alcoa seems to be a “gentle giant”, just expanding to meet demand for its product, not to avoid potentiality of competition, it still intended to maintain its monopoly. .
• Exception to §2 per se rule if monopoly is “thrust upon a particular firm” – intent becomes relevant. Size alone is not enough.

Significance: Market power is a component of analysis. Shows relevance of definition of market to decision. L. Hand established market analysis used for next 35 years. Market share is ambiguous depending on how markets are defined. Made clear §2 would be applied to conduct beyond that condemned under §1.

4.3.1.2US v. United Shoe Machinery (D.Mass 1951, p. 273)

Facts: Monopolization. Maker of shoe manufacturing machinery revolutionized shoe making industry. United Shoe controls 75% of market of 1400 – 1500 shoe manufacturers. United figured out how to beat the 2ndary market problem (used machines) by leasing machines only.

Result: Violation of §2.

Legal Analysis: Court focuses on barriers to entry raised by United Shoe’s leasing terms, machine replacement policy and free repair. Also finds price discrimination.

Court wants to find §2 violation due to getting large by a violation of §1, but previously found no §1 discrimination. Therefore, uses Griffith and Alcoa rules.

Here finds 1) market power,

2) power excludes some potential competition (secondary market), and limits actual competition, and

3) power not the result of natural advantages, skill, etc. (excusable causes). Declines to break up company now (though that happens 10 years later), and orders United Shoe to remove restrictions from lease agreements.

Significance: Classic example of antitrust laws doing more harm than good.

4.3.1.3Utah Pie v. Continental Baking Co. (US 1967, p. 303)

Facts: §2 of Clayton Act – price discrimination. Utah Pie had 2/3 of frozen pie market in Salt Lake City. Evaporated milk companies came into market, and Utah Pie’s market share decreases to 45%. Claims competitors were price discriminating. Clayton Act §2 requires a showing that Δ: 1) charged less, 2) with an intent to monopolize.

Result: Violation of §2 of the Clayton Act.

Legal Analysis: Court found predatory intent. It viewed Utah Pie’s reduction in market share as evidence of erosion of competition.

Significance: Criticized as counterproductive AT decision. Example of court focusing on injury to competitor rather than on “competition” as a whole. Ironically, Utah Pie’s purported injury was likely a result of competition. Antithesis of Warren’s line in Brown: “It is competition, not competitors, which the Act protects.” Would likely not be heard today due to type of injury.

4.3.2Predatory Pricing

Selling at a price that would drive everyone else out of market so you can then raise prices above competitive level.

Areeda-Turner test – No pricing should be deemed predatory if it is above the short run marginal cost of the firm. Looks at “reasonably anticipated average variable costs.”

# unitsFixedVariableTotalAverageSale PriceCash Position

(total/units) (total – cum sale)

1 10 2 12 12 5 -7

2 2 14 7 5 -4

3 2 16 5.3 5 -1

4 2 18 4.5 5 +2

4.4Vertical Arrangements Perceived as Exclusionary

4.4.1.1International Salt v. US (US 1947, p. 316)

Facts: §3 of Clayton Act –Tying. Manufacturer of patented salt processing machines conditions lease on purchase of salt from International. Δ args – 1) not burdensome because only had to buy salt from International if couldn’t get it for less elsewhere, 2) necessary for quality control.