What Conduct Is Illegal

A/T SHORT OUTLINE

WHAT CONDUCT IS ILLEGAL

Central Role for Economic Analysis
Economic effects: collusion or exclusion – focus on inc. prices, dec. output, loss of innovation
Substitution/Switching: demand elasticity
Entry
Surplus – consumer or producer (most juris favor consumers)
Collusive Effects – directly impairs mkts by coordinated activity btwn firms w/ mkt power to reduce own output
Exclusionary Effects – indirectly impair mkts by raising rival costs; single firm or collusive (cause others to reduce their output)
What factors effect if corporation will comply w/ rules:
Legal Standards
Per se
Evidence of a/c effect not req’d; presumed w/ no excuses allowed.
Used when have experience w/ the sort of conduct under consid
Makes most econ sense when: prohib conduct would likely harm competition severely, D will frequently claim conduct is reasonable; little pro-competitve conduct will be deterred
Rule of Reason, Quick Look – burden shifting, efficiencies.
Arg for more lenient rule – false positives more costly b/c deters precompetitive conduct and mkt power likely to be temporary
Arg for less lenient rule – mkt power results in immed harm and is often long-lasting
ANTITRUST INJURY REQUIREMENT – Brunswick Corp v. Pueblo Bowl-O-Mat (1977)
Arose at time of signif econ change – mid-70s see rise of foreign competition
Injury must be the sort that A/T laws sought to regulate – protect competition, not competitors
JTC Petroleum v. Piasa Motor Fuels (7th Cir 1999) – exclusionary group boycott
2 level cartel – producers and applicators –A gets P to enforce and to exclude JTC
Justification a pretext b/c were paying in cash
Bell Atlantic v. Twombley (2007) – elevated pleading requirement
Complaint must rise above speculative level – req’s some facts suggesting agreement.
ANALYSIS STEPS
Step 1 – concerted or exclusionary action
Step 2 – type of restraint/theory of anticompetitive harm
Step 3 – determine the mkt and mkt share allocation.

HORIZONTAL AGREEMENTS

Sherman Act S.1 – 2 elements: “contract, combination, conspiracy” & “restraint of trade”
Per Se Ban on Price-Fixing
Trenton Potteries (1927)
Aim and result of every price fixing is the elimination of 1 form of competition – can have no benefit to competition; thus no further analysis is necessary
“Reasonable” price today may be unreasonable tomorrow
Appalachian Coal – no monop menace b/c no mkt power – “honest effort to remove abuses”
US v. Socony-Vacuum Oil Co (1940)
Per se rule clearly established for ALL price-fixing
Need only to have intent (FN59) – not having mkt power is not a defense
Horizontal Agreements Subject to Per Se Condemnation
Price-Fixing – entire price or one term (incl. credit terms)
Output Restriction
Market Allocation
Customer Allocation
CHARACTERIZATION
Broadcast Music Inc v. Columbia Broadcasting System (1979)
Before condemning conduct as per se illegal, need to “characterize” the conduct – implicit in the framework.
To use per se, need to establish that the conduct is “plainly a/c” and “without redeeming value”
Here, this is not price-fixing in the literal sense
Would not expect any mkt arrangement reasonably necessary to effectuate [IP] rights to be deemed per se illegal
Blanket licenses accompany the integration, sale, monitoring, & enforcement
Clearing companies add value to the process
Catalano Inc. v. Target Sales - collective refusal to compete on credit terms indisting from price fixing (refused to deal with beer suppliers on credit; cash only)
Texaco v. Dagher (2006) – single firms cannot price fix. When firms pool capital and share risks, regarded as a single firm.
MARKET DIVISION – Per Se Illegal
Timken – div of mkts by competitors per se violation – group viewed as a cartel and action is an alternative means of price-fixing.
US v. Topco (1972)
Classic per se violation is agreement btwn competitors at the same level.
Justification - need mkt division to compete w/ larger chains.
Good intention is not a defense.
No authority to determine respective value of competition in a sector
Should have made the BMI new product argument (came 9yr later)
Palmer v. BRG of Georgia (1990) – straight forward geog allocation per se illegal
HYPO – how would Topco have come out under BMI or Sylvania?
OUTPUT RESTRICTION – Collusive Boycott(effort to bet higher price from rival)
FTC v. Superior Court Trial Lawyers Ass’n (1990)
Constriction of supply to raise price the essence of price-fixing – per se illegal
Social justifications do not make restraint any less lawful
Disting from Noerr b/c restraint was consequence of seeking new law
O’Brien only held that Court should apply A/T law w/ sensitivity to 1st Am concerns
“No mkt power” is not a cognizable defense
National Society of Professional Engineers v. US (1978) – Professional Services.
Sherman Act does not require competitive bidding, but does prohibit unreasonable restraints of trade.
Preventing competitive bidding illegal under RoR
Defense (quality would decrease) is not cognizable – impedes ordinary give and take of mkt place by not allowing price negotiations. Not NSPE’s job to determine whether competition is good or bad.
Impact of NPSE on burdens production/proof
Per se – only have to prove action is in per se category
RoR – multi-faceted analysis where P gets to intro more evidence
Reframed A/T law around core economic issues.
DEVELOPMENT OF QUICK LOOK FOR HORIZONTAL AGREEMENTS
Evolution of Unreasonableness
US v. Trans-Missouri Freight Ass’n (1897) – Every means Every, but did recognize that common law supported some exceptions
Standard Oil (1911) – reasonableness is intended in S.1
Addyston Pipe – separated naked and ancillary restraints (per se v. RoR)
Board of Trade of City of Chicago v. US (1918) – Origins of Rule of Reason
Must consider facts peculiar to business:
Condition before and after restraint – could still send bids after close, just temporary restriction on price
Nature of Restraint – restrained to small amount of daily business
Effect (actual or probable) – no effect generally on mkt price/volume
The Quick Look Analysis
NCAA v Board of Regents FN39 – “RoR can sometimes be applied in the twinkling of an eye”
Goal is to cut from RoR Analysis where conduct has obvious a/c consequences
Common Quick Look Test – burden shifting (Law v. NCAA)
P has initial burden of showing adverse effect – quick review shows harm to competition.
D then gets to show pro-competitive effects, must be cognizable and supported by evidence.
P can show that rule not reasonably necessary or can be implemented using less restrictive means
If met, then balance – generally based on weight of the evidence.
Board of Regents of University of Oklahoma (1984)
TV restriction illegal under quick look
Per se rule not applied b/c of characterization – need some agreement for product to exist
However, restrictions not linked to the product – removes price competition and decreases quantity.
Cannot protect weaker product by harming more attractive product – good motives will not validate an otherwise a/c restraint
Mkt power not essential to proof of illegality – absence of mkt power does not justify restraint
Cal Dental Ass’n v. FTC (1999)
Quick Look Analysis not sufficient – need more extensive inquiry.
Looking at circum, details, logic of restraint, the object is to see whether experience of mkt has been so clear that confident conclusion about principal tendency will follow from the quick look.
Polygram Holding Inc v. FTC (DC Cir 2005)
Use Quick Look, not per se b/c might be certain way to limit own venture to benefit common undertaking, but still see as dangerous.
In determ whether competition restrained, inquiry must be met for the case
JV inherently suspect, due to close resemblance to suspect practices.
Case seems to expand QL to where there may not be actual evidence of a/c effects, but only a high likelihood.
TEST
Commision determ whether it is obvious that consumers will likely be harmed (“inherently suspect” – consid earlier cases and econ theory
If “inherently suspect” D must come forward w/ justifications
Submit fuller evidence of harm
Commission must then address in 1 of 2 ways:
Confidently conclude that consumers likely harmed
Provide suffic evidence to show a/c effects likely.
D must show actual pro-competitive effects or that benefits outweigh harms.
Non-Cognizable Defenses for Horizontal Restrictions
Competition reasonable/destructive (NSPE)
Prices set were reasonable (SCTLA)
No market power (NCAA & SCTLA)
Restraint protected weaker product from stronger product (NCAA)

DETERMINING WHAT IS CONCERTED ACTION
Economics of Modern Cartels – what they have to do to succeed
Reach consensus
Deter and punish cheating
Cope w/ new or external threats – mavericks/hold-outs; new entry/subs; suppliers; buyer resistance.
Certain factors make collusion more or les likely
# of firms
Product heterogeneity
Excess capacity (yours or others)
Predictable Demand
Lumpy Sales/Large Buyers
Info Sharing
Mere sharing NOT ILLEGAL, nor is agreement to share
Considered a plus factor
Eval’d through rule of reason: common themes:
Legitimacy of sharing and decreased risk if smaller mkt share
Better off if info is aggregated
More likely to be acceptable if data is past info
If “benchmark” info, have 3d party do it w/ a template
American Column & Lumber (1921)
90% of members, extensive and detailed data, incl. name of buyer, seller and price; also suggested prices and production levels; not made available to buyers
HELD as a conspiracy to fix prices – could be understood as helping firms to reach consensus and deter cheating.
Maple Flooring (1925)
22 members, 70% of US production.
HELD to have competitively legitimate purposes
Disting from AC&L b/c didn’t ID buyer/seller, didn’t share current prices or make recommendations.
Parent & Sub – Copperweld Corp v. Independence Tube Corp (1984)
Parent and wholly-owned sub considered one entity, thus no S.1 scrutiny
Decision w/in a corporation to implement single firm’s policy – common purpose and should be able to choose own corp org structure
Holding been expanded to: parents and less than wholly owned subs; sister corps; other intra-enterprise conduct
Incomplete Coordination – In re Brand Name Prescrip Drug Litigation (7th Cir 1997)
Denied pharmacies discounts, but retained discounts for “preferred buyers”
Cartel may not be tight enough to prevent large, bulk buyers from shifting demand
Single price may not always be profit maxizing
Thin profits don’t disprove cartel – could have been thinner
Matsushita’s “no economic sense” test unavailing.
Oligopolistic Interdependence – is it concerted action?
Posner – YES, in some circum: equiv to negotiation, eventually get a pegged $
Turner – NO, it’s a natural thing for firms to do.

INFERRING CONSPIRACY
Interstate Circuit v. US (1939)
Distrib knew others also being approached and plan would only work w/ concerted action.
This constituted an AGREEMENT.
Unanimity of Action – enough that concerted action was invited and contemplated and that they participated.
Failed to provide contrary testimony – seen as estab the weakness of any counter-testimony.
American Tobacco v. US (1946)
Similar, subsequent actions of competitors can support finding of conspiracy
No formal agreement is necessary – can be found in course of dealing
Important Factors: concentrated oligopoly (community of interest), parallel conduct, falling cost and declining demand (yet $ increasing) – combo’d show firms knew what they were doing
Parallelism Plus Doctrine – Theater Enterprises Inc v. Paramount (1954)
Circumstantial evidence of consciously parallel behavior may have made strong inroads, BUT
It has not read “conspiracy” out of the Sherman Act entirely.
Current Doctrine
Circum proof can estab conspiracy, but…
Proof of parallel conduct alone not suffic to estab concerted action. Thus,
Proof of agreement req’s parallel conduct plus other proof.

Plus Factors (p310-311)
Industry conditions – structure, product characteristics
Firm Conduct – irrational behavior, info sharing, other communications
Past behavior indicating collusion.
Approaches to plus factors: Check the box; Link to Conspiracy/what cartel has to do to succeed; weigh according to past cartel experience.

PROVING CONCERTED ACTION
Invitation to Collude – US v. American Airlines (5th Cir 1984)
Mere suggestion of collusion can trigger S.2 violation (attempted monop)
2 req’d elements – Specific Intent & Dangerous Probability – at time act occur
Dangerous Probability – call btwn CEOs and high mkt share
Might have been okay if firms were smaller (threshold: 50%)
It is not a defense that plan proved impossible to execute.
Pre-Matsushita – Poller v. CBS (1962) – summary procedures should be used sparingly.
Monsanto (1984) – build up to Matsushita
Where illegal action appears same as legal action, P must show more likely than not due to concerted action.
Matsushita v. Zenith Corp. (1986) – standard for Summary Judgment
Evidence must “TEND TO EXCLUDE THE POSSIBILITY” that the action was for competitive benefits – “plausibility”
If evidence ambiguous, P must show more at trial.
Conduct as consistent w/ permissible competition as w/ illegal conspiracy does not support inference of A/T conspiracy. – circum evid + plausibility.
Pred Pricing is by its very nature speculative
To be rational, must have reasonable expectation of recouping
Also uncertain b/c req’s maintaining mkt power
Even more difficult when firms have to coordinate
Makes no “economic sense”
Three factors helf confer coordinated equilibrium
Behavior more complex than would be plausible w/o agreement
Justifications given are weak
Opportunity for firms to communicate.
Two Situations where Matsushita “no economic sense” test should shield firms
Industry structure not conducive to coordination (thus would be irrational)
Could have been achieved by leader-follower behavior, w/o agreement
Expanded Emphasis on Procedural Screens
Matsushita’s “plausibility” screen has been extended backward to the pleading stage
Twombley (2007)–complaints must rise above speculative level (motion to dismiss)
“Plausible” is greater than possible – parallel behavior is not enough; req’s some facts suggesting agreement
Arg – AT&T break-up firms should have been expanding to other mkts; defended by saying it was too risky – no req to compete, but can’t not compete

In re Text Messaging Antitrust Litigation (7th Cir 2010)
P must meet “plausibility” standard to survive dismissal of suit
Used economically grounded approach – looked at what factors make conspiracy more or less probable
Plus factors supplement communication, hard-to-understand conduct counts
Direct evidence not essential
In re Publication Paper Antitrust Litigation (2d Cir 2012)
P put forth suffic evidence to permit reasonable jury to find that higher prices resulted from agreement rather than independent action
Range of permissible inference depends on plausibility – broader inferences allowed when theory is more economically sensible.
Factors
Structural conditions – commodity prod, few subs, lmt’d #sellers, high barriers to entry
Counter-intuitive pricing
Excess capacity (closing mills)
Parallel pricing
Direct evidence – “we’re a follower”

DISTRIBUTIVE ARRANGEMENTS

Distinction btwn substitutes and complements
Relevant legal framework
Antitrust law (below)
State law (eg: dealer location restrictions)
Sector specific (eg: petroleum market)
History/Early Cases
Dr. Miles (1911) – vertical price restraints unlawful – once sold, cannot control price
Albrecht – extended Dr. Miles to maximum RPM
Colgate (1919) – weakened Dr. Miles; only applies where there is agreement
US v. GE (1926) – may set RPM when there is a genuine principal-agent relationship
Schwinn – per se rule for vertical, intrabrand non-price restraints (territorial)
Miller Tydings Act (1937) and McGuire Act (1952) – states may auth RPM laws
Consumer Goods Pricing Act (1975) – repealed Miller-Tydings and McGuire Acts – Dr. Miles now back in full force (has to do w/ econ conditions at the time).
Monsanto – rasied burden for proving RPM (Cong refused to fund arg for repeal of Dr. Miles)
Business Electronics Corp (1988) – raises Monsanto standard, harder to prove agreement, on price or price level
State Oil v. Khan – abandoned per se rule for max RPM
Vertical Non-Price Restraints – Continental TV Inc v. GTE Sylvania (1977)
Restriction per se violation under Schwinn, BUT Schwinn should be overturned.
RoR is the standard, and departure is only justified by demonstrable a/c effect (Northern Pacific)
These sorts of agreements are not manifestly a/c (“transaction cost literature” – Turner)
Schwinn did not distinguish actions based on the indiv potential for intrabrand harm or interbrand benefit
Recognized Justifications for Non-Price Intrabrand Restraints
Induce competent retailers to carry new products
Promote existing products
Defeat mkt imperfections
Insulate mnfctr from product liability exposure
Protect mnfctr reputation by ensuring quality.
Post-Sylvania – P has been successful only when D has interbrand mkt power or there is not evidence of pro-competitive purposes.

Vertical Price Restraints – Leegin Creative Leather Products v. PSKS Inc (2007)
Recent (econ) jurisprudence has rejected rationales justifying Dr. Miles’ per se rule
Cannot be stated w/ confidence RPM always or most always tends to restrict completion and decrease output – per se rule would inc. total cost to system.
Potential Harms – mnfct cartel; retail cartel; forestall innovation in distribution
Justifications
Can stimulate interbrand competition by suppressing intrabrand competitioin.
Encourage retailers to invest in tangible/intangible services/promos
Facilitate new mkt entry by inducing competent and aggressive retailers to invest in necessary capital/labor.
Also allows other pricing programs to be eval’d on their merits
Vertical v. Horizontal – Characterizing the Challenge – Nynex Corp v. Discon (1988)
Distribution chain choices are not per se illegal – freedom to switch from one retailer to another
Distinguish case here from Klor’s b/c this is a vertical chain
On remand – could still use RoR to estab a/c harm; kickback not an A/T issue.
Post Leegin Process
Apply BMI to RPM cases
Rule of Reason Standard
Screens – mkt power, cartels (producer or retailer)
Legal Issues from the Apple e-Book Decision
Parallelism Plus Doctrine
Entered same agreement w/ all publishers – resulting in uniform price increases
Evid of conspiracy can be found through direct evid (Job’s statements) and circum evid (goals, shift in model, simultaneous and sudden price increases) – suffic to infer collective action.
Apple’s Args:
Does not “tend to exclude”; however, evid here leaves ambiguity (go to jury)
Never intended to conspire; however, good motives don’t allow a/c injury
Distrib relationships in the EU – distinctions from US System
More particular categories of agreement articulated
EC can exempt indiv agreements/categories
Interpreted more broadly than S.1

HORIZONTAL MERGERS