chp 20

Antitrust law

Chapter 20

Meiners, Ringleb and Edwards

The Legal Environment of Business, 13th Edition

©2018 Cengage Learning®. May not be scanned, copied or duplicated or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

The Sherman Act

Passed by Congress in 1890.

Regarded largely as a way to reduce concerns that large business interests dominated some industries.

The major sections of the Act are so broad that one could find almost any business activity to be illegal.  No restraint of trade  Cannot monopolize or attempt to monopolize

The Clayton Act

• Enacted in 1914

• Wanted government to have the ability to attack a business practice early in its use to prevent a firm from becoming a monopoly.

• Practices are illegal that “substantially lessen competition or tend to create a monopoly.”

The Federal Trade Commission Act

• Enacted in 1914

• Established the FTC as an agency to investigate and enforce violations of antitrust laws

• Declares it illegal to be engaged in “unfair methods of competition” • Any business activity that may create a monopoly by unfairly

eliminating or excluding competitors from the marketplace

Exemptions

Clayton Act exempts some activities of nonprofit and certain agricultural, fishing and some other cooperatives. The Export Trading Company Act allows limited antitrust immunity for sellers of exports.

• Domestic producers may be allowed to join together to enhance their ability to export products to other countries.

Parker Doctrine allows state government to restrict competition in public utilities, professional services, and public transportation. McCarran-Ferguson Act exempts insurance (as long as states regulate). Noerr-Pennington Doctrine says lobbying to influence a legislature is not illegal. Most labor union activities are exempt.

Enforcement

• Sherman Act - ~Violations of Sections 1 and 2 of the Sherman Act can

be felonies. ~Private parties or the government can seek injunctive

relief under the Act in a civil proceeding. ~Private parties who have been harmed by a violation of

the Sherman Act can sue for treble damages • Clayton Act – Private parties may bring civil actions; often

FTC issues cease and desist orders that prohibit further violations by a party.

• FTC Act - Penalties range from an order preventing a planned merger to substantial civil penalties.

The Per Se Rule and The Rule of Reason

• Per Se Rule certain business agreements or activities are automatically held to be illegal by the courts (especially price fixing).

• Rule of Reason the court will look at the facts surrounding the business practice before deciding whether it helps or hurts competition.

• Courts Consider: –Business reasons for the restraint –The restraining business’ position in the industry –Structure of the industry

U.S. v. Apple Inc. • 2009 Apple was preparing to introduce the iPad. Wanted to compete with

Amazon’s Kindle. Encourage iPad owners to buy e-books. • Amazon was selling all books, including best sellers, for $9.99. Some sales

were at a loss. Amazon willing to incur losses as a strategy to attract loyal Kindle users.

• Book publishers (the “Big Six” firms dominated the market) did not like Amazon’s pricing. Apple agreed with Big Six to sell new releases for $19.99 and $14.99, depending on category.

• Big Six stopped doing business with Amazon for best sellers. • Department of Justice and 33 states sued Apple and Big Six for conspiring

to raise prices across the e-book market. Only Apple proceeded. • Trial Court: Found that heads of Big Six met regularly to discuss common

issues, including Amazon problem. • One executive wrote to Steve Jobs, “Amazon is definitely not liked much

because of selling below cost.” Executives discussed Apple offer – that it was a better deal.

• “Apple wanted quick and successful entry into the e-book market & to eliminate retail price competition with Amazon.”

• In exchange: “It offered publishers an opportunity (called an agency model) to confront Amazon as one of an organized group . . . to eradicate the $9.99 price point.”

• Trial Court held: Apple organized a conspiracy to raise e-book prices and so violated the Sherman Act. Apple appealed.

U.S. v. Apple Inc.

• Section 1 of Sherman Act bans restrains on trade “effected by a contract, combination, or conspiracy.”

• Question: Did the challenged conduct stem from independent decision or from an agreement?

• Need to determine if there was “a conscious commitment to a common scheme designed to achieve an unlawful objective.”

• Apple portrayed its Contracts with the publishers as, at worst, “unwittingly facilitating” their joint conduct. Apple claimed all it did was attempt to enter the market on profitable terms.

• Apple offered each Big Six publishers a proposed Contract that would be attractive only if the publishers acted collectively.

• Under Apple’s proposed model, publishers stood to make less money per sale than under wholesale agreements with Amazon.

• Publishers were willing to take the loss because the model allowed them to sell new releases and bestsellers for more than $9.99.

Continued

U.S. v. Apple, Inc.

• Apple was aware that its proposed Contracts would entice publishers only if they perceived an opportunity to shift Amazon to their model.

• Although Sherman Act prohibits every agreement “in restraint of trade”: • Intent was to “outlaw only unreasonable restraints.”

• Plaintiff must prove that scheme by conspirators “constituted an unreasonable restraint of trade either per se or under the rule of reason.”

• Evidence is sufficient to support the conclusion that agreement to raise e-book prices was a per se unlawful price- fixing conspiracy. . . .“

• AFFIRMED.

Mergers Merger – When two or more firms come together to form a new firm.

Horizontal merger – The firms were competitors on the same level of business before the merger.

Mergers should not be permitted to create or enhance market power.

Premerger notification to the Antitrust Division of the Department of Justice or the FTC.

Determining Market Power

Product and Geographic Markets – Percent of relevant market controlled by the firm

Product Market – A monopoly exists when there is only one firm producing a product for which there is no good substitute

Geographic Market – Generally limited to the area where consumers can reasonably be expected to make purchases

Potential Competition

•The Supreme Court has stated •That the possibility that the two companies are potential competitors may be enough to stop a merger.

•FTC v. Procter & Gamble (in text): •Merger between Proctor & Gamble and Clorox was prohibited because of “potential competition.” •The Court wanted Clorox to be faced with the threat of strong potential competition by a company like P&G.

When Mergers Are Allowed • Merger Guidelines – Major reason to approve merger is that it will enhance

the efficiency in the market, benefiting consumers by better resource allocation.

• Failing Firm Defense – If one of the firms involved in a merger is facing bankruptcy or financial threats the firm, the Court will look favorably upon the merger. The firm must show:

–Not likely to survive without merger –No other buyers, or this one will least affect competition –Tried and failed at all other ways to save firm

• Power Buyer Defense – A merger that increases concentration can be defended by showing that the firm’s customers are sophisticated and powerful buyers.

Horizontal Restraints of Trade

When businesses at the same level of operation come together in some manner, they risk being accused of restraining trade.

Rival firms that come together by some form of agreement in attempt to restrain trade (restricting output & raising prices) is called a cartel.

Restraints include:  Mergers  Price-fixing  Exchanges of information  Territorial restrictions  Cartels such as Organization of Petroleum Exporting Countries (OPEC)

Price-Fixing • Firms selling the same product agree to fix prices; the agreement will almost

certainly violate the Sherman Act.

• Should Per-Se Illegal or Rule of Reason apply?

• In United States v. Trenton Potteries: When competitors get together to fix prices, there is a violation of the Sherman act – whether or not the prices they set are reasonable.

• Most price-fixing is a per se illegal horizontal arrangement.

• Blanket licensing is not illegal if no other a way certain market can work.

Exchanges of Information Information Sharing • Does sharing information among businesses help or restrain

competition?

• U.S. v. United States Gypsum Co.~ The gypsum companies defended their practice of verifying competitors’ prices as a good-faith effort to meet competition. The Supreme Court did not apply a per se rule against such price information exchanges; it warned that such exchanges would be examined closely and would be allowed in limited circumstances.

Conspiracy to Restrict Information • May be illegal to band together to restrain non-price information.

• FTC v. Indiana Federation of Dentists ~ Court held that dentists’ organization policy requiring members to withhold X-rays from dental insurance companies is a conspiracy in restraint of trade upheld under rule of reason.

Todd v. Exxon Corporation

o14 oil companies organized to gather information about salaries they paid to managerial, professional and Technical (MPT) employees. Reps of companies met to talk about jobs. Consultant analyzed and distributed data to the firms – data used to set salaries.

oTodd sued under Sec. 1 of Sherman Act saying purpose of sharing info was to hold down MPT salaries. District Court dismissed the suit. Plaintiffs appealed.

oHELD: Remanded. Price fixing is per se illegal. If can prove an agreement to fix salaries, then there’s a violation.

oData exchange claims are close cousins of traditional price fixing. If plaintiff can prove 1) defendants exchanged info deemed anticompetitive and 2) activities had an anticompetitive effect on MPT labor market, then may have a cause of action.

oCourt should consider whether plaintiff demonstrated “anticompetitive effects” on the market power of the defendants. Must consider if data made public. If so, the exchange is more likely to be approved by the court.

Territorial Restrictions

• Occurs when firms competing at the same level of business reach an agreement to divide the market geographically to eliminate competition among the firms.

• Territorial Allocations: These are often held to violate antitrust law.

• An activity that is legal if undertaken by a single firm may be illegal if undertaken by a group of firms.

Vertical Restraints of Trade

Vertical restraints of trade concern relationships between buyers and sellers (producers, distributors and retailers)—firms up and down the business chain. Includes vertical price fixing and vertical non-price constraints.

Resale Price Maintenance – (RPM) - An agreement between a manufacturer, supplier and retailers of a product under which the retailers agree to sell the product at not less than minimum price.

Resale Price Maintenance

• Small retailers generally favor RPM because it gives them a better chance to compete with big box stores and big chains by earning higher margins.

• Producers of well-known, established products often favor RPM because it allows retailers to earn higher profits for the sale of their products.

• Mass retailers oppose RPM because they have grown large by slashing retail prices and working on small margins.

Leegin Creative Leather Products vs. PSKS Leegin makes & distributes leather goods under the brand name “Brighton.” Sold

mostly to independent specialty stores.

Leegin refused to sell to retailers that discounted Brighton goods below suggested prices (RPM).

Leegin: “In this age of mega stores . . . consumers are perplexed by promises of product quality & support of product which we believe is lacking with these large stores.” Consumers are confused by the popular “sale, sale, sale,” etc. Leegin policy: Consistent prices allowing selected retailers to earn profits and support the Brighton brand. Leegin would tell retailers when to have sales.

Leegin discovered that Kay’s Kloset discounted Brighton brand by 20%. Told Kay’s to stop price cutting below suggested retail price. Kay’s refused. Leegin stopped selling to Kay’s.

Kay’s sued Leegin for violating Sherman Act. Trial court would not allow expert testimony about economic benefits of Leegin policy.

Held the resale price maintenance was per se violation. ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Leegin Creative Leather Products vs. PSKS

Jury awarded Kay’s $1.2 million damages. Appeals court affirmed. Leegin’s appealed to Supreme Court. Held: Reversed and remanded. A manufacturer’s use of vertical price restraints (RPM) eliminates intrabrand

price competition. This has the potential to give consumers more options so they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between. Absent vertical price restraints, retail services that enhance interbrand

competition might be under-provided. This is because discounting retailers can free ride on retailers who furnish services and capture increased demand those services generate. Resale price maintenance, also can increase interbrand competition by

facilitating market entry for new firms and brands. Vertical price restraints are to be judged according to the rule of reason.

Vertical Nonprice Restraints

Manufacturers frequently impose non-price restraints on their distributors and retailers. Example: Coke and Pepsi have territorial restrictions on the sale

of the manufacturer’s products. Delivery in competition with another bottler is grounds for

revocation of the franchise agreement. Customer restrictions may be imposed on distributors and retailers when

manufacturer elects to sell directly to a certain customer. The courts apply the rule of reason in such cases.

Exclusionary Practices

Various practices are designed to indirectly exclude competitors from a particular market.

Such practices, which include tying arrangements, exclusive-dealing agreements, and boycotts, may violate antitrust laws if their net effect is anti- competitive.

Tying Arrangements (Tie In Sale) Agreement by a party to sell a product (tying product) conditioned that

buyer purchases a different (tied) product. Tie-ins meet a rule of reason test if competitive alternatives exist. If a tie-in creates a monopoly when there are no or few good

alternatives, it is likely illegal; if products or service are tied together when there are other competitors, the tie-in will likely pass the rule of reason test. Supreme Court is likely to impose a per se illegality only when three

conditions are met – Vertical Restraint Guidelines  The seller has market power in the tying product  Tied and tying products are separate  There is evidence of substantial adverse effect in the tied product market

In other situations: rule of reason is to be employed.

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Boycotts

• Boycott: When a group conspires to prevent the carrying on of business or to harm business.

• Any group can promote this – consumers, unions, retailers, wholesalers or suppliers.

• Act together to inflict damage on a business.

• Boycott is often used to force compliance with a price- fixing scheme or other restraint of trade.

• Usually falls under per se illegal rule.

Robinson-Patman Act

• Enacted in 1936, it amends the Clayton Act.

• Controversial law states that a seller is said to engage in price discrimination when the same product is sold to different buyers at different prices.

• Price Discrimination - Many cases under Robinson Patman allege economic injuries either from a firm charging different prices in different markets or from bulk sale discounts given to larger volume retailers.

• Predatory Pricing - When Company A attempts to undercut Company B in an effort to drive Company B from the market. When B is gone, A raises prices again.

• Analysis has been extended to “predatory bidding”

Price Discrimination To win a predatory pricing case a plaintiff must present evidence that

• Defendant priced below cost • Below cost pricing created a genuine prospect for the defendant to

monopolize the market • Defendant would enjoy monopoly long enough to recoup losses suffered

during price war Are the volume discounts given to large-volume retailers legal? DEFENSES

• Cost justification - Difference in transportation costs – a) more expensive to drive further and b) it’s cheaper per unit to deliver 500 refrigerators versus 10.

• Meeting competition - Firm cuts its price in order to meet competition. It must be done in good faith, not in an effort to injure competitors but to stay competitive.

Henderson v. Johnson & Johnson

• 18 retail pharmacies sued Johnson & Jonson and other pharmaceutical makers.

• J&J gave discounts on prescription drugs to “favored purchasers” Primarily HMOs that dispensed drugs directly to their clients rather than sending

them to drug stores for prescriptions.

• Drug stores contended lower prices offered by the drug makers is a violation the Robinson-Patman Act. As they paid higher prices it hurt their ability to compete.

• J&J admitted the practice. Contended it had minimal impact.

• District Court: Dismissed the suit.

• Drug stores appealed.

Henderson v. Johnson & Johnson

• AFFIRMED: Type of competitive injury that appellants assert is “secondary line injury.” An injury to competition between different purchasers of the same product.

• “Secondary line injury” price discrimination, must show 1) the seller discriminated in price as between the two purchasers;

2) product sold to competing purchasers was of the same grade and quality; and

3) the price discrimination had a prohibited effect on competition.

• Injury is the diversion of sales from disfavored purchaser to a favored purchase. Impact must be substantial to affect competition. If loss is de minimis, then practice cannot have “substantial” effect on competition.

• Plaintiffs occasionally lost customers, but only about 3%--de minimus.

• This price discrimination did not harm competition.