Chapter 46

 

 

 

 

 

 

 

 

Antitrust Law

 

p  See Separate Lecture Outline System

 

Introduction

 

      The basis of antitrust legislation is a desire to foster competition.  Antitrust legislation was initially created, and continues to be enforced, because of our belief that competition leads to lower prices, more prod­uct information, and a better distribution of wealth between consumers and producers.

 

      To curb anticompetitive or unfair business practices, the federal government passed the Sherman Antitrust Act of 1890, the Clayton Act of 1914, the Federal Trade Commission Act of 1914, and other laws.  This chapter discusses these statutes, focusing primarily on the Sherman Act and the Clayton Act.

 

 

Additional Background—

 

Origins of Federal Antitrust Legislation

 

   Despite condemning anticompetitive agreements on the basis of public policy, the common law proved to be an ineffective means of protecting free competition.  These shortcomings became acutely ob­vious during the latter half of the 1800s as a concentrated group of powerful individuals began to ac­quire unrivaled market power by combining competing firms under singular control.

 

   After the Civil War ended, the nation renewed its drive westward.  With the movement westward came the expansion of the railroads and the further integration of the economy.  The growth of na­tional markets also witnessed the efforts of a number of small companies to combine into large busi­ness orga­nizations, many of which gained considerable market power.  These later type of organiza­tions became known as trusts, the most famous—or infamous—being John D.  Rockefeller’s Standard

Oil Trust. Participants transferred their stock to a trustee for trust certificates.  The trustee made de­cisions fixing prices, controlling production, and de­termining the control of exclusive geographical markets for all trust members.  As used by Standard Oil and others around the turn of the century, a trust was a device used to amass market power. Members could compete free from competi­tion with other members. Also, a trust might wield such eco­nomic power that companies outside the trust could not compete effectively.

 

   In some cases, an entire industry was dominated by a single organization.  The public perception was that the trusts used their market power to drive small competitors out of business, leaving the trusts then free to raise prices virtually at will. Many states attempted to control these consequences by enacting statutes outlawing trusts (which is why all laws regulating economic competi­tion today are referred to as antitrust laws).  Congress initially dealt with the railroad monopolies by attempting regulation rather than an outright assault on monopoly power.  The result was the Interstate Commerce Act of 1887.

 

   Congress next attempted to deal with trusts in a direct, unified way by passing the Sherman Act in 1890.  The Sherman Act, however, failed to end public concerns over monopolies.  The United States Supreme Court initially construed the statute too narrowly to give it much effect and subsequently ap­plied it so rigorously as to make the act unworkable.  Lackluster enforcement also contributed to the public’s dissatisfaction.  Concern over the trust problem continued to the point that it dominated the 1912 presidential election, and eventually, in 1914, led to enactment of the Clayton Act and the Federal Trade Commission Act, which proscribed specific acts and provided for more aggressive means of en­forcement.

 

   The Clayton Act (as amended by the Robinson-Patman Act in 1936 and the Celler-Kefauver Act of 1950) addressed specific acts that are considered to be anticompetitive.  The Federal Trade Commission Act created the Federal Trade Commission and invested it with broad enforcement powers to prevent, as well as correct, business behavior broadly defined as unfair trade practices.

 

 

 

Chapter Outline

 

I.   The Sherman Antitrust Act

      The Sherman Act is proscriptive rather than prescriptive.  It is the basis for policing, rather than reg­ulating, business conduct.

 

A.  Major Provisions of the Sherman Act

    Sections 1 and 2, which are excerpted in the text, contain the main provisions.  The differences be­tween the two are set out briefly in the text: Section 1 requires two or more persons; one person alone can vio­late Section 2.  Section 1 cases are often concerned with agreements that re­strain trade; Section 2 cases deal with the structure of a monopoly.  Both sections seek to curtail prac­tices that result in undesired monopoly behavior, but Section 2 requires that a “threshold” or “nec­essary” amount of monopoly power already exist.

 

B.  Jurisdictional Requirements

    Any activity that substantially affects commerce falls under the act, which also ex­tends to U.S. nationals abroad who engage in activities that have an effect on U.S. foreign commerce.

 

II.  Section 1 of the Sherman Act

      The text divides trade restraints into two categories:  horizontal and vertical.  Those that are blatantly anticompetitive are per se violations; those that are not so blatant are analyzed under the rule of rea­son.

 

A.  Per Se Violations v. the Rule of Reason

    Factors that a court might consider in a rule-of-reason analysis include the purpose of an ar­rangement, the powers of the parties, the effect of their actions, and whether a less restrictive means might have accomplished the same result.  As the text explains, the line between per se violations and reasonable agreements is not always clear.  To further muddy the analysis, the United States Supreme Court sometimes states that it is applying a per se rule when in fact it is weighing benefits and harms.  (The theory in these cases is sometimes termed the “soft per se rule” or the “narrow rule of reason.”)

 

B.  Horizontal Restraints

    Horizontal restraints result from concerted action by direct competitors.

 

1.  Price Fixing

    An agreement among competitors to fix prices is unlawful per se.  The text discusses the “definitive” 1940 United States Supreme Court case of United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 60 S.Ct. 811, 84 L.Ed. 1129 (1940), also known as the Madison Oil case. Major oil refining companies had agreed to buy excess supplies from independent produc­ers, with the intent to limit the supply of gasoline on the market. The refiners may have wanted to avoid a temporary situation driving the independents out of business, which would have made it difficult to secure crude later when the economic climate im­proved.  Nonethe­less, the agreement was considered to be too great a threat to open and free competition.

 

2.  Group Boycotts

    An agreement by two or more sellers to refuse to deal with, or boycott, a particular per­son or firm is a group boycott, or joint refusal to deal, a per se violation.

 

3.  Horizontal Market Division

    It is a per se violation for competitors to divide up territories or customers.

 

4.  Trade Associations

    Generally, the rule of reason is applied to trade association actions.  Like other anticompeti­tive actions subject to the rule of reason, if a trade association practice that re­strains trade benefits the association and the public, it may be deemed reasonable.  The text provides an example of a per se violation.

 

5.  Joint Ventures

    Generally, the rule of reason applies (unless price fixing or market divisions are involved).

 

C.  Vertical Restraints

    The text explains that vertical restraints arise from agreements between firms at different levels in the distribution process.

 

1.  Territorial or Customer Restrictions

    To insulate dealers from direct competition with other dealers sell­ing a manufacturer’s product, the manufacturer may institute territorial restrictions or attempt to ban whole­sal­ers or retailers from reselling the product to certain classes of buyers.  These restrictions are judged under the rule of reason.

 

 

Case Synopsis—

 

Case 46.1: Continental T.V., Inc. v. GTE Sylvania, Inc.

 

   GTE Sylvania, Inc., sold its televisions directly to fran­chised retailers.  A franchise did not con­sti­tute an exclusive territory, and Sylvania retained the discretion to increase the number of retailers in an area.  Continental T.V., Inc., a Sylvania franchisee, withheld all payments due for Sylvania prod­ucts when the manufacturer licensed a franchisee in close proximity.  John P. Maguire & Co., which handled the credit arrangements between Sylvania and its franchisees, sued Continental in a federal district court for payment and the return of secured merchandise.  Continental claimed that Sylvania’s franchise system violated Section 1.  The court ruled in favor of Continental.  Sylvania ap­pealed, and the U.S. Court of Appeals for the Ninth Circuit reversed.  Continental appealed.

 

   The United States Supreme Court affirmed and ruled that in the future, the legality of all similar restraints would be subject to the rule of reason.  Vertical restrictions reduce intrabrand com­petition by limiting the number of sellers of a particular product competing for the business of a given group of buyers, but promote interbrand competition by allowing the manufacturer to achieve efficiencies in the distribution of products.

 

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Notes and Questions

 

   Is it fair that some retailers of a particular product maintain costly service depart­ments and un­derwrite expensive promotional campaigns while others intentionally neglect to provide such ser­vices so that they can discount their prices more heavily?  Had the Supreme Court used its more tradi­tional rigid analysis, it would not have concerned itself with whether some retailers were “free-riders” but would have likely declared the vertical restrictions to be illegal due to their tendency to increase prices above the amount that could be offered by the free-riding deep discount stores.  Today, the Court is more likely to consider the merits of such vertical restrictions under a rule of reason analy­sis and will not so single-mindedly pursue the policy that makes available a product at the lowest pos­sible cost.

 

 

2.  Resale Price Maintenance Agreements

    A resale price maintenance agreement, in which a manufacturer tells a retailer at what price the retailer can sell the manufacturer’s products, is considered subject to the rule of reason.

 

 

Case Synopsis—

 

Case 46.2: State Oil Co. v. Khan

 

   Khan leased a gas station under a contract with State Oil Co., which also supplied gas to Khan for resale.  State Oil set suggested retail prices and sold gas to Khan for 3.25 cents per gallon less.  Khan could sell the gas at a higher price, but he would have to pay State Oil the difference.  When State Oil terminated the contract, Khan filed a suit in a federal district court against State Oil, alleging price fixing.  The court ruled in State Oil’s favor, and Khan appealed.  The U.S. Court of Appeals for the Seventh Circuit reversed.  State Oil appealed.

 

   The United States Supreme Court vacated the decision and remanded.  The Court held that verti­cal price-fixing is not a per se violation of the Sherman Act but should be evaluated under the rule of reason.  Applied to resale price maintenance agreements, “the per se rule .  .  . could in fact exacer­bate problems related to the unrestrained exercise of market power by mo­nopolist-dealers.  Indeed, both courts and antitrust scholars have noted that [the per se] rule may ac­tually harm consumers and manufacturers” when applied in this context.

 

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Notes and Questions

 

   In what circumstance can’t a manufacturer or distributor set the ultimate sale price of its prod­uct?  A manufacturer or distributor cannot set the price when doing so would undercut competition.

 

 

3.  Refusals to Deal

    Refusals to deal involve manufacturers who refuse to deal with retailers or dealers who cut prices to levels substantially below the manufacturers’ suggested retail prices.  A refusal to deal is not a violation of Section 1, although it may violate Section 2, depending on the monop­oly power of the firm refusing to deal and the anticompetitive effect on the market.

 

III. Section 2 of the Sherman Act

      Section 2 proscribes monopolization and attempts to monopolize..

 

A.  Monopolization

    There are two elements to a Section 2 violation:  (1) possession of monopoly power in the relevant market and (2) willful acquisition or maintenance of that power.

 

1.  Monopoly Power

    The text explains that monopoly refers to control by a single en­tity.  Monopoly power is the power to con­trol prices or exclude competition.  If a firm has sufficient market power to af­fect prices and output, it may be a monopoly even though it is not the sole seller in the market.

 

    To define a firm’s market power, courts look to its share of the rele­vant market.  The relevant market consists of: (1) a relevant product market and (2) a relevant geographic market.  A firm generally is considered to have monopoly power if its share of the relevant market is 70 percent or more (although this number is arbitrary).  In determining the relevant market, the key issue is the degree of interchangeability between products.

 

 

Additional Background—

 

The Relevant Market

 

   Finding the proper definition of the relevant market can take some effort.  For example:  Eureka Urethane, Inc., manufactured the “Bud Ball,” a bowling ball bearing the logo of Anheuser-Busch’s (A-B) Budweiser beer.  Eureka sought to hire certain professional bowlers to use the Bud Ball during tele­vised tournaments organized and controlled by PBA, Inc.,  a subsidiary of the Professional Bowling Association.  PBA had certain rules regarding the tournaments, including specifications on em­blems displayed on equipment used by tournament players.  Under these rules, bowling ball emblems were restricted to the name or logo of the original manufacturer of the ball.  The National Broadcasting Corporation (NBC), which owned the rights to televise the tournaments, and several corporate spon­sors, objected to the use of the Bud Ball during televised play.  As a result, PBA refused its permission for players to use the Bud Ball during televised portions of its tournaments.  Eureka sued PBA in fed­eral district court, alleging several antitrust violations under the Sherman Act.  PBA moved for summary judgment on several grounds, including its assertion that it lacked monopoly power.  In Eureka Urethane, Inc. v. PBA, Inc. [746 F.Supp. 915 (E.D. Mo. 1990)], the United States District Court for the Eastern District of Missouri held that the relevant product market was that for the advertise­ment of a bowling ball.  Although the court noted the many options offered by PBA for the advertise­ment of a bowling ball, it stated that only reasonably interchangeable products could be included in the same market.  PBA failed to prove the substitutability of other means of advertising.  In other words, the court refused to define the market as broadly as PBA contended it should be defined.  PBA pos­sessed considerable control over the more narrowly defined market.  The court denied PBA’s motion for sum­mary judgment.

 

 

2.  The Intent Requirement

    If a firm pos­sesses market power as a result of some purposeful act to acquire or to maintain that power through anticompetitive means, it is a violation of Section 2.  An action violates Section 2 if, without providing better production or products, it makes it more difficult for a firm’s rivals to compete in the relevant market.

 

 

Case Synopsis—

 

Case 46.3: United States v. Microsoft Corp.

 

   Netscape Communications Corp. marketed Navigator, which worked with Sun Microsystems, Inc.’s Java technology. Microsoft perceived a threat to its dominance of the OS market and developed Internet Explorer (IE). Microsoft required computer makers who wanted to install Windows to install

IE and exclude Navigator. Meanwhile, in Windows, Microsoft commingled code so that deleting files containing IE would cripple the OS. Microsoft offered to promote and pay Internet service providers (ISPs) to distribute IE and exclude Navigator. Microsoft developed its own Java code and deceived many independent software vendors (ISVs) into believing that this code would help in designing cross-platform applications when in fact it would run only on Windows. The U.S. Department of Justice, and others, filed a suit in a federal district court against Microsoft, alleging in part monopolization in violation of Section 2 of the Sherman Act. The court ruled against Microsoft. The U.S. Court of Appeals for the District of Columbia Circuit affirmed. Microsoft appealed.

 

   The U.S. Court of Appeals for the District of Columbia Circuit affirmed this part of the lower court’s opinion. The appellate court reversed other holdings, however, and remanded for a reconsid­eration of the remedy. “Microsoft’s pattern of exclusionary conduct could only be rational if the firm knew that it possessed monopoly power. .  .  . Microsoft’s efforts to gain market share in one market (browsers) served to meet the threat to Microsoft’s monopoly in another market (operating systems) by keeping rival browsers from gaining the critical mass of users necessary to attract developer attention away from Windows as the platform for software development.”

 

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Notes and Questions

 

   Microsoft is the leading supplier of operating systems for PCs. The firm transacts business in all fifty of the United States and in most countries around the world. Microsoft licenses copies of its soft­ware directly to consumers, but most of its business consists of licensing the products to manufactur­ers of PCs (original equipment manufacturers, or OEMs), such as IBM PC Co. and Compaq Computer Corp. An OEM typically installs a copy of Windows onto one of its PCs before selling the package to a consumer at a single price.

 

   In markets characterized by network effects, one product dominates because the utility of the product to the consumer increases with the number of consumers using it. Do “old economy” monopo­lization doctrines apply to companies competing in “dynamic” technological product markets “charac­terized by network effects”? The court left this question open, although noting that dominance in such markets can be short “because innovation may alter the field altogether.” There is no consensus as to whether antitrust laws should be changed to cover these markets. In this case, Microsoft did not ar­gue that it conduct should be treated differently, so the court did not decide the issue.

 

 

 

Additional Cases Addressing this Issue —

 

   Recent cases including claims of monopolization include the following.

 

•  PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101 (2d Cir. 2002) (in a cola syrup manufacturer’s suit against a competitor, alleging in part monopolization based on the defendant's distributorship agree­ments with independent food service distributors (IFD) that prohibited the IFDs from delivering the plaintiff's products to any of their customers, the competitor lacked market power to support the claim when it had only a 64-percent share of the total fountain syrup sales by the three largest suppliers).

 

•  Tate v. Pacific Gas & Electric Co., 230 F.Supp.2d 1072 (N.D.Cal. 2002) (a natural gas utility had monopoly power in the market of supplying specialized natural gas technologies in its service area, for the purpose of antitrust claims asserted by the seller of portable gas liquification devices, even though the utility was not yet in the business of selling such devices, because the essence of the seller's claim was that the utility had acted to protect its existing business and to clear the way for its future entry into the liquified gas supply business).

 

•  General Cigar Holdings, Inc. v. Altadis, S.A., 205 F.Supp.2d 1335 (S.D.Fla. 2002) (there was no dangerous probability that a Spanish cigar manufacturer would be successful in achieving a monop­oly, for purposes of an attempted monopolization claim, where the manufacturer had only a 39-per­cent market share in the markets for cigars and non-Cuban premium cigars, and there were no bar­riers to entry in markets).

 

•  Geneva Pharmaceuticals Technology Corp. v. Barr Laboratories, Inc., 201 F.Supp.2d 236 (S.D.N.Y. 2002) (a supplier of raw material for a drug manufacturer's product lacked power in the relevant market, for purpose of the manufacturer's monopolization claim, where the material was available from multiple sources and the manufacturer was not "locked-in" to dealing with the supplier).

 

 

B.  Attempts to Monopolize

    The requirements for this violation (intent, probability of success) are stated in the text.  The pri­mary difficulty in developing standards for assessing alleged attempts to monopolize is distin­guishing anti­competitive conduct from legitimate competition.  This difficulty is encountered in al­most every area of antitrust law, but identifying attempts to monopolize is one area in which the problem is particularly acute.

 

IV.  The Clayton Act

      The Clayton Act targets specific practices that substantially reduce competition or could lead to mo­nopoly power but are not clearly prohibited by the Sherman Act. The U.S. Department of Justice and the Federal Trade Commission (FTC) enforce the act.  Private parties may also sue for treble dam­ages and attorneys’ fees.

 

A.  Price Discrimination

    Section 2 prohibits price discrimination except in cases when the different prices are due to differ­ences in production, transportation, or other costs.  The effect of the discrimination must be to substantially lessen competition.

 

B.  Exclusionary Practices

    Sellers or lessors cannot sell or lease on condi­tion that the buyer or lessee not use or deal in goods of the seller or lessor’s competitor.  The text discusses exclusive-dealing contracts and tying ar­rangements. 

 

1.  Exclusive-Dealing Contracts

    An exclusive-dealing contract, like other anticompetitive agreements, is prohibited if it sub­stantially lessens competition or tends to create a monopoly.  The text discusses the leading case (Standard Oil Co. of California v. United States, 37 U.S. 293, 69 S.Ct. 1051, 93 L.Ed. 1371 (1949).

 

2.  Tying Arrangements

    The legality of a tying arrangement depends on many fac­tors, particularly the business pur­pose or effect of the arrangement.  A tying arrangement that involves services must be at­tacked under Section 1 of the Sherman Act (because the Clayton Act has been held to cover only commodities).  Once held illegal per se, such arrangements are now more likely to be subject to a rule-or-reason analysis.

 

C.  Mergers

 

1.  Horizontal Mergers

    Under guidelines set by the Federal Trade Commission (FTC) and the Antitrust Division of the Justice Department (DOJ), whether a merger between competitors is legal depends on the degree of concentration or market shares of the merging firms.  The United States Supreme Court has indicated that it will look at other potential effects of a merger—if a merger does not increase production or marketing efficiency, it will be declared unlawful.  Mergers are allowed when they enhance consumer welfare by increasing efficiency, so long as they do not increase the probability of hori­zontal collusion.

 

    Under the FTC/DOJ guidelines, the first factor to be considered in determining whether a merger will be challenged is the degree of concentration in the relevant market. The FTC and the DOJ also look at other factors, including the ease of entry into the rele­vant market, economic efficiency, the financial condition of the merging firms, the nature and price of the product or products involved, and so on.

 

 

Additional Background—

 

The Herfindahl-Hirschman Index (HHI)

 

   In determining market concentration, the FTC and DOJ employ what is known as the Herfindahl-Hirschman Index (HHI).  The HHI is computed by summing the squares of each of the percentage market shares of firms in the relevant market.  For example, if there are four firms with shares of 30 percent, 30 percent, 20 percent, and 20 percent, respectively, then the HHI equals 2,600 (302 + 302 + 202 = 202 = 2,600).  If the pre-merger HHI is less than 1,000, then the market is unconcen­trated, and the merger will not likely be challenged.  If the pre-merger HHI is between 1,000 and 1,800, the in­dustry is moderately concentrated, and the merger will be challenged only if it increases the HHI by 100 points or more.  If the HHI is greater than 1,800, the market is highly concentrated.  In a highly concen­trated market, a merger that produces an increase in the HHI between 50 and 100 points raises sig­nificant competitive con­cerns.  Mergers that produce an increase in the HHI of more than 100 points in a highly concentrated market are deemed likely to enhance market power.

 

 

2.  Vertical Mergers

    In determining a vertical merger’s legality, the FTC looks at such factors as the definition of the relevant product in geographic markets and characteristics identified as impeding com­petition (for example, whether the merger prevents competitors from competing in a part of the market that otherwise would be open to them).  The text lists “market concentration, bar­riers to entry into the market, and the apparent of the merging parties.”

 

3.  Conglomerate Mergers

    Conglomerate mergers often extend retail product lines, particularly among com­plementary products, and also occur among firms using similar suppliers.  A large number also occur between firms with no direct functional business link, in which there are no changes in market structure, market shares, or concentration ratios.  In many cases, conglomerate mergers serve to reduce overhead costs by spreading them over a larger range of output and reducing advertising and other promotional costs.  The text describes the three types of con­glomerate mergers as “market-extension, product-extension, and diversification mergers.”

 

D.  Interlocking Directorates

    Individuals can­not serve as directors on the boards of two or more corporations at the same time if either has capital, surplus, or undivided profits aggregating more than certain threshold amounts that are adjusted by the FTC every year.   

 

V.   Enforcement of Antitrust Laws

 

A.  The Federal Trade Commission Act

    The Federal Trade Commission Act created the Federal Trade Commission (FTC), and Section 5 gives it broad powers to prevent “unfair methods of competition in commerce and unfair or decep­tive acts or practices in commerce.”  Not noted in the text are that the primary enforcement mechanisms are cease-and-desist orders.  Businesses that disregard the orders are sub­ject to fines of up to $10,000 per day for each day of continued violation.  The orders can be appealed to the courts.

 

B.  Government Actions

    The U.S. Department of Justice (DOJ) prosecutes violations of the Sherman Act as either crimi­nal or civil vio­lations.  The DOJ can enforce the Clayton Act only through civil proceedings.  Remedies include di­vestiture and dissolution.  The Federal Trade Commission (FTC) enforces the Clayton Act and the Federal Trade Commission Act.

 

C.  Private Actions

    A private party can sue for treble damages and attorney’s fees under Section 4 of the Clayton Act if the party is injured as a result of a violation of any federal antitrust law (except the Federal Trade Commission Act).  Private parties may also seek injunctions.  The test of the abil­ity to sue is set out briefly in the text.

 

 

Case Synopsis—

 

Case 46.4: Paper Systems Inc. v. Nippon Paper Industries Co.

 

   In the 1990s, the five major producers of thermal fax paper used different distribution systems. Kanzaki Specialty Papers, Inc., and Appleton Papers, Inc., sold directly to firms such as Paper Systems Inc., which resold the paper to its own customers. Two other manufacturers, Oji Paper Company and Mitsubishi Paper Mills Limited, sold exclusively to distributors who resold the paper to firms such as Paper Systems. Nippon Paper Industries Co.’s predecessor, the fifth manufacturer, sold its output in Japan to Japanese firms, which resold through subsidiaries around the world. Paper Systems and two other buyers filed a suit in a federal district court against Nippon and the other producers, alleging violations of the antitrust laws. Four of the defendants reached a settlement with the plaintiffs, and the court dismissed the claim against Nippon. The plaintiffs appealed this dis­missal to the U.S. Court of Appeals for the Seventh Circuit. Nippon argued that even if it was liable, the presence of too many wholesalers, retailers, and others in the chain of distribution created compli­cations, including possible double recovery, too great to impose joint liability.

 

   The U.S. Court of Appeals for the Seventh Circuit reversed and remanded for a determination as to whether Nippon had been a member of the cartel. The appellate court held that if Nippon was a mem­ber, it was jointly and severally liable for the cartel’s entire overcharge to any direct purchaser from any conspirator, to the extent of the damages attributable to that buyer’s direct purchases. Under “the rule of joint and several liability *  *  * each member of a conspiracy is liable for all damages caused by the conspiracy’s entire output. *  *  * If Nippon Paper was among those conspirators, then it is respon­sible for the entire overcharge of all five manufacturers—and any direct purchaser from any con­spirator can collect its own portion of damages (that is, the damages attributable to its direct pur­chases) from any conspirator. This makes it impossible to dismiss Nippon Paper outright.”

 

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Notes and Questions

 

   Is a plaintiff like Paper Systems (that is, a party who buys a product for resale) entitled to collect damages without a reduction in the amount to account for the possibility that any overcharge was passed on to its own customers? Yes. As the court noted in this case, generally, “[t]he first buyer from a conspirator is the right party to sue. .  .  . [T]here is no passing-on defense.” Furthermore, “the first non-conspirator in the distribution chain [has] the right to collect 100% of the damages. Perhaps if a conspirator defects and sues its former comrade, that snitch would come to own the right to dam­ages.”

 

 

 

Additional Cases Addressing this Issue —

 

   Recent cases involving calculations of damages in antitrust litigation include the following.

 

•  Telecor Communications, Inc. v. Southwestern Bell Telephone Co., 305 F.3d 1124 (10th Cir. 2002) (damages awarded to independent pay phone service providers on their claim that a telecommunica­tions company exercised unlawful monopoly power in the pay phone market was not improperly based on a consideration of future misconduct, when the company was held accountable for past monopolis­tic behavior and nothing foreclosed the availability of damages based on the future enforcement of con­tinuing contracts).

 

•  Loeb Industries, Inc. v. Sumitomo Corp., 306 F.3d 469 (7th Cir. 2002) (recovery of damages in a suit by copper wire producers who bought copper cathode on the physical market, alleging manipulation of cathode prices in the futures market, was not so speculative and complex as to preclude the produc­ers' suit under the Sherman Act, when economic experts could evaluate the impact of manipulation on the futures market and recovery could be calculated by reviewing all of the producers' contracts and assessing damages based on an already computed overcharge).

 

 

VI.  Exemptions from Antitrust Law

      Some of the exemptions to antitrust enforcement are listed in the text.  Some of the most notable are the exemptions given to professional baseball, insurance companies, research among small business firms, research by consortiums of competitors to coop­erate in the development of new computer tech­nology, and efforts exempted under the Noerr-Pennington doctrine.

 

VII. U.S. Antitrust Laws in the Global Context

    The text explains that persons in foreign nations are subject to U.S. antitrust laws, as well as pro­tected by those laws from illegal anticompetitive acts committed by U.S. citizens.  Any conspiracy that has a substantial effect on U.S. commerce is within the reach of the Sherman Act, whether the viola­tion occurs outside the United States and whether it is committed by a foreign govern­ment or person.  Any per se violation automatically falls under U.S. jurisdiction.

 

 

Teaching Suggestions

 

1. Ask students to discuss whether they think there should be any restrictions on corporate merg­ers—ab­sent evidence that the merging companies intend to use their market power to stifle competi­tion unlawfully.  If the ultimate viability of a firm is determined by its products and its productivity, does the size of the firm or the concentration of its particular industry make any difference?

 

2. Do students think it is possible to acquire a monopoly position solely by virtue of hard work?  If so, do they believe it is possible for the monopolist to remain uncorrupted, when, as the maxim says, “ab­solute power corrupts absolutely”?

 

3. A simple understanding of economics can make it easier to understand antitrust law. This might be a useful topic to explain before covering the chapter’s material in depth.

 

Cyberlaw Link

 

   When a group sets uniform standards for others to use—in, for example, accessing the Internet, creating software, or designing Web pages—is this a violation of the antitrust laws?

 

 

 

Discussion Questions

 

1.    What is a monopoly?  A monopoly is a market in which there is but a single seller.  In legal terms, a monopoly may also describe a firm that, although not the sole seller in the market, can nonetheless substan­tially ignore rival firms in setting a selling price for its product or can in some way limit rivals from compet­ing in the market.  A monopolist, by virtue of its market power, has the ability to control the price of its prod­ucts.

 

2.    How were trusts such as John D. Rockefeller’s Standard Oil Trust operated?  The participants in the trust transferred their stock to a trustee and, in return, received trust certificates.  The trustees made de­ci­sions fixing prices, controlling output, and allocating geographic markets in which specified members could compete free from competition with other members.

3.    What factors contributed to the initial ineffectiveness of the Sherman Act when it was first enacted?  The United States Supreme Court construed the statute too narrowly to give it much effect and sub­sequently applied it so rigorously so as to make the act unworkable.  Lackluster enforcement also contributed to the pub­lic’s dissatisfaction.

 

4.    What is price discrimination?  Price discrimination occurs when sellers charge different buyers dif­fer­ent prices for identical goods.  Section 2 of the Clayton Act prohibits certain classes of price discrimination for reasons other than differences in production or transportation costs.

 

5.    What is a horizontal restraint?  A horizontal restraint is any agreement that in some way restrains competition between rival firms competing in the same market.

 

6.    What is the difference between a per se violation and a violation that is analyzed using a rule of rea­son?  Per se violations are found when firms make agreements to fix prices or restrict output that are bla­tantly anti­competitive in that they cannot be justified in terms of providing legitimate benefits to society.  A rule of reason approach, however, is used in situations in which the anticompetitive aspects of the agree­ments are not so clear as with agreements between rivals that might actually increase social welfare by mak­ing information more readily available or by creating joint incentives to undertake risky research and devel­opment projects. 

 

7.    When are price-fixing agreements lawful under the Sherman Act?  Never.  Because the dangers of such agreements to open and free competition are enormous, the Supreme Court has held that the asserted rea­sonableness of a price-fixing agreement is never a defense; any agreement that restricts output or artifi­cially fixes prices is a per se violation of Section 1 of the Sherman Act.

 

8.    Are resale price maintenance agreements lawful?  Even though the economic justifications for resale price maintenance agreements are often identical to those that govern court analyses of vertical territorial and cus­tomer restrictions (which are themselves judged under a rule of reason), resale price maintenance agree­ments are condemned as per se violations of Section 1 of the Sherman Act.  This classification is some­what curi­ous because such agreements were authorized for many years under so-called fair trade laws.

9.    What is an exclusive dealing contract?  An exclusive dealing contract is one in which a seller forbids the buyer from purchasing products from the seller’s competitors.  Such contracts are prohibited under Section 3 of the Clayton Act if the effect of the contract will “substantially lessen competition or tend to create a monopoly.”

 

10.   How does a tying arrangement work?  A tying arrangement is created when the seller conditions the sale of a product (the tying product) on the buyer’s agreement to purchase another product (the tied product) pro­duced or distributed by the same seller.  Tying arrangements are typically condemned as being per se vio­la­tions, but the Supreme Court has shown a greater willingness in recent years to look at factors that are im­por­tant in a rule of reason analysis—the so-called “soft” per se rule.

 

11.   How does the Sherman Act affect international business?   Section 1 of the Sherman Act declares that its provisions are applicable both in the U.S and abroad; it purports to reach any conspiracy (foreign or domes­tic) that has a substantial effect on U.S. commerce.  Foreign governments as well as natural persons can be sued for violating the Sherman Act regardless of whether the alleged violations occurred inside or outside the U.S.  Before a U.S. court will exercise its jurisdiction over an alleged antitrust violation, however, the party bring­ing the claim must demonstrate that the alleged violations have the requisite effect on U.S. commerce.  The jurisdiction of the court will be automatically invoked, however, if a per se  violation has been committed as would be the case if a U.S. firm had joined a foreign cartel and conspired successfully to control the produc­tion, price, or distribution of a good that substantially affected U.S. commerce.

 

 

Activity and Research Assignments

 

1.    Ask each student to write a short research paper analyzing whether the antitrust laws have had much effect in stemming anticompetitive behavior by major corporations  in the past decade.

 

2.    Ask students to bring in newspaper and magazine articles which discuss the present state of antitrust law enforcement in the United States.  Is the federal government abdicating its responsibility to enforce the antitrust laws?

 

 

Answers to Essay Questions in

Study Guide to Accompany West’s Business Law, Ninth Edition

By Hollowell & Miller

 

1.    How does Section 1 of the Sherman Act deal with horizontal restraints?  A horizontal re­straint results from concerted action by direct competitors in the marketplace.  Some horizontal restraints are per se viola­tions of Section 1, but others are tested under the rule of reason.  Price Fixing.  Price fixing occurs when direct competitors agree, for example, not to undercut each other’s prices.  They might, for instance, set minimum prices.  Any agreement that restricts output or artificially fixes price is a per se violation of Section 1.  Hori­zontal Market Divisions.  A horizontal market division occurs when competitors divide up territories or cus­tomers.  These are also per se violations of Section 1.  Trade Associations.  Trade associations may provide for the exchange of information among members, en­hancement of the trade or profession’s public image, set­ting in­dustry or professional standards, or representing members’ interests to various government bodies.  In most in­stances, the rule of reason is applied to these activities.  If  a particular practice or agreement re­strains trade, but is without an apparent intent to fix prices or limit output, and if the arrange­ment is benefi­cial to the public and association, a court will weigh the benefits against the harm to competition.  If the harm to competition is substan­tial, a trade association’s activities will be condemned as a Section 1 violation.  Group Boycotts.  A group boy­cott is an agreement by two or more buyers or sellers to refuse to deal with a particular person or or­ganization.  Group boycotts are generally held to be per se vio­lations of Section 1 (although some—such as those engaged in for political reasons—may be protected under the First Amendment right to freedom of expression).  Joint Ventures.  A joint venture is an undertaking by two or more firms or individu­als for a specific purpose.  Joint ventures are not necessarily anticompetitive.  Pooling research and develop­ment re­sources, for example, prevents firms from duplicating efforts.  Once research and development is complete, firms can compete in terms of price, quality, and consumer services.  If a joint venture does not in­volve price-fixing or market divisions, they are analyzed under the rule of reason.

 

2.    How does the Clayton Act deal with exclusionary practices?  Section 3 of the Clayton Act prohibits ex­clusive dealing contracts and tying arrangements.  Exclusive Dealing Con­tracts.  Exclusive dealing contracts are those under which a seller forbids a buyer from buying products from the seller’s com­petitors.  They are prohibited if their effect is to “substantially lessen competition or tend to create a monopoly.”  Tying Arrange­ments.  In a tying arrangement, a seller conditions the sale of a product (the tying prod­uct) on a buyer agree­ing to buy another product (the tied product) produced or distributed by the seller.  The legality of an arrange­ment depends on many factors, especially on consideration of its purpose and likely ef­fect on com­petition in the relevant markets.