Antitrust
For the assignments there may be references to statutes with an appendix of the Sherman
Act, these are often in the back of the book.
Semi-Socratic
Page 170 has all the economics you need to know for this course. The case law, however,
involves a great deal of economic language.
Open book, handwritten exams
Exam: 2-3 questions, one likely about mergers.
Introduction to Antitrust Law
What is it, what it does, who it is designed to protect, and so on.
We generally like markets in the western world, but should they be regulated and for
what purpose?
Sherman Act, Sec. 1: There are certain types of actions and conduct that in some way
restrain trade.
Bork revolutionized the thinking about antitrust in that he postulates that legislative intent
is opaque and it can be safely ignored in the efforts to achieve economic efficiency.
Posner is also a big name, became famous because of his work in antitrust.
Hovencamp tries to argue that there are several points where the Chicago School is
wrong in that it does not conform to the conservative goal of economic efficiency.
Philip Areeda is one of the critical people in the field (from Harvard), wrote the leading
treatise in antitrust. One of the first academics to bring economic thinking to the doctrinal
analysis of antitrust law. Died about five years ago.
Elhaughe has taken up Areeda’s mantle.
Pitofsky is a leading moderate in antitrust (Georgetown).
Salop also falls into this realm (also from Georgetown presumably).
The liberal position is more enforcement; the conservative position is less enforcement.
The FTC can only bring civil cases; the antitrust division of the DOJ can bring civil and
criminal cases. They share jurisdiction. Somewhat ironic that those who are charged with
economic efficiency are configured inefficiently.
Demand Curve (p170)
The reserve price is the
maximum price a consumer will pay for a good.
The excess money that people would pay over the price one pays for a good is called the
consumer surplus.
To say something is inelastic is to mean that demand doesn’t change much even if the
price changes.
The competitive cost is the consumer price that includes a reasonable profit for the
business.
The monopoly price is the price a vendor can demand if that vendor as monopolized the
market (read: some price higher than the competitive price.
The are certain points which represent the monopoly price and quantity within the
market, as well as the Optimum price and quantity.
The dead weight triangle (far right) represents those who would buy the good but will not
buy because of the monopoly.
The monopoly overcharge (left rectangle) is reserved for those who are willing to
overpay for a good.
Review of last class
There are different possible goals of anti-trust; the legislative history is not entirely clear
(and not entirely authoritative according to some):
1. We don’t like single-sellers in any market (populist reading); possibly supported
by legislative sources
2. Antitrust laws are designed for consumer welfare, protecting them from the higher
prices arising from monopolies (prices would be lower and products most widely
available if trade was unconstrained and there was open competition). This can
play itself out in various ways: Chicago School (Bork, Posner) – Economic and
allocation efficiency; others are open to finding a wider harm to consumers in
different circumstances (Stanford school?). This is where modern case law (over
the last 30 years) lies.
3. Potovsky: Even though efficiency/consumer welfare is the guiding principal, there
is an undercurrent of political and ethical concern that allows a degree of
prosecutorial discretion.
Much of this comes in the context of mergers, which ostensibly eliminates competition
from the market. Agencies can operate from a position of presumptive unlawfulness, and
can move to investigate mergers (liberals will block, conservatives have a heyday.
We then reviewed the graphic on page 170.
Individuals are willing to pay different amounts for the same good or service, but there is
a sweet spot of intersection between the maximum consumer reservation price and
profitability. Consumers who are willing to pay more (but actually pay less) are surplus.
For extra units that could be produced unprofitably but would therefore attract more
consumers, those consumers are not considered.
The monopoly price is where profits are maximized (anything higher would reduce
consumer purchases to the point where none would buy).
“Leaving a mutually beneficial transaction on the table is inefficient. A tragedy, really.”
This is deadweight loss.
Any price that is above cost (supra-competitive) is a potential anti-trust problem, even if
below the monopoly price. Some arrangements, such as price-fixing, do not approach the
monopoly price and yet are still in violation of anti-trust laws.
To determine if there is an anti-trust violation, one needs to look at what the competitive
price should have been, versus the price charged. Damages are trebled for the amount of
money unlawfully taken in.
Alex Walter: But what of market power? What if there is a single buyer? No answer was
so forthcoming.
Is the conduct in question that the quantity would be reduced, and has price been raised?
Predatory pricing: Collusion between companies to drive out competition by lowering
prices below cost and then, once vanquished, raising prices back toward monopoly
prices. The problem, of course, is that other competitors could come back into the
vacuum.
Antitrust law evolution
Some restraints of trade at common law were considered unlawful in the sense that if you
created a contract that in some way restrained trade, the contract would be void and
unenforceable.
There are other ways to enforce, however, through inducement, reputation, etc.
Sherman Act, Sec. 1, sentence 1: Costs are (artificially, through contract or conspiracy)
driven up and thereby a segment of consumers are being deprived of the benefit of goods
as fewer are being transacted for in the market.
We’ll be spending half the term on this. You can’t violate section one unilaterally,
requires at least two actors are required.
You can be liable both civilly as well as criminally. Fines and prison time could be the
result.
Sherman Act, Sec. 2: Every person who monopolizes, or attempts to monopolize
(dangerous probability of success, and yet fail to), is liable for violating the statute.
Other provisions:
Section 4 (jurisdiction, who has standing): Federal courts have jurisdiction, under
common law the government could not bring a case, but now the government can. Any
person can also bring suit.
Section 7: “Person” includes corporations.
Clayton Act (passed 1914, amends Sherman Act)
Section 4: Anyone who is injured in cash or property by an antitrust action has standing
to bring suit in district court and can recover treble damages. Prevailing plaintiff rule:
You can recover attorney’s fees as well.
Section 16 (not here): You can also get injunctive relief.
US v. Trans-Missouri Freight, p51 – Suit in equity, government looking for injunctive
relief.
18 carriers west of the Mississippi who fix rates, rules and regulations for traffic, and so
on.
District Court dismisses complaint, affirmed by Circuit Court, makes it to SCOTUS.
Defendants argue that the agreement would not have been void at common law. SCOTUS
disagrees, the statute is broader than common law and forbids any restraint of trade.
Good news in notes cases and Addyston Pipe, p56: SCOTUS backs of from this extreme
position. In Addyston, only unreasonable restraints are unlawful (the birth of reason).
Unreasonable is defined by reducing quantity and raising price; if this standard is not
met, then the restraint is per sé reasonable.
There are per sé violations (e.g., price fixing), that even though they don’t increase
price/reduce quantity they are still regarded as a violation. At this point, the
reasonableness standard does not need to be met and the government.
Review
We are once again drawing the chart showing the demand function as shown on p170 of
the text.
Any price between the competitive price and the monopoly price is the
“supracompetitive” price.
The triangle of lost transactions that represent sales between the competitive price and the
monopoly price is the social loss or “deadweight” cost. These sales represent the restraint
of trade in violation of section 1 of the Sherman Act. These people have no remedy.
Those in the near rectangle, whose reserve price is greater than the competitive price and
who purchase the good or service at the (artificially) higher price are those who are
harmed, and they may have a remedy (possibly treble damages plus attorney fees). These
sales are in violation of the Sherman Act.
You have to monopolize or attempt to monopolize when otherwise you wouldn’t be to
violate the Sherman Act.
U.S. v. Trans-Missouri, p51 - The act previously was not construed to make new items
unlawful that were lawful under common law, but instead to statutorily make unlawful
those things prohibited under common law. In this decision, the reach of the Sherman Act
was extended beyond that recognized by common law.
As it turns out, it is the collusion – price fixing – that constitutes the violation.
Sharfman: Cartel’s are inherently unstable as the incentive to defect always preys upon
the members.
Reasonable definition of restraint is any action that has the effect of reducing the quantity
of a good or service to the public and raising the price.
U.S. v. Addyston Pipe, p56 – Boasts a fact pattern of geographic division of sales
territories with price fixing (higher in reserve territories, lower in the free territories),
collusion, bid rigging, and general misbehavior.
At common law, there was prior no remedy for private persons to get damage for
suffering artificially high prices (only the contract was voided), but under the Sherman
Act, of course, consumers who paid an artificially high price have standing to sue and
recover.
One of the items the court always considers is the market share of those accused of
actions that violate antitrust statutes. The higher the market share, the more scrutiny your
transactions will receive.
Geographic market division is per sé in violation of the Sherman Act.
This was not a case where there was monopoly pricing, instead there was merely
“imperfect competition.”
Note Cases
Northern Securities, p63 – Is a merger between two railroads to prevent access by a
third railroad (Union Pacific) to a lucrative line (The Burlington Line) in violation of the
Sherman Act? Yes, although this is later covered specifically in section VII of the
Clayton Act.
American Tobacco, p66 – Essentially overrules Trans-Missouri and sets a standard of
reason for evaluating antitrust cases (rather than saying all contracts could be in
violation).
Standard Oil of New Jersey, handout – There are three phases of conduct; the first two
preceded the enactment of the Sherman Act.
1870 – 1882: Standard gobbles up as many Ohio refineries as it can lay its hands on
1882 – 1899: All stock gathered together and stuffed into a trust to escape the clutches of
Ohio (NJ thought to be more pro-business). Placing the companies in a trust unites their
interest and means that there is someone who must maintain a fiduciary duty to all firms;
they will also not compete with each other.
1899 – 1906: The trust reconsolidates and recapitalizes and begins to spread west.
Decision: 38 companies and seven individuals go down, the company was broken up.
Trans-Missouri Freight: The court got the ruling right, as there was price fixing, but the
language was very broad. In Addyston Pipe, the rule of reason came along. The Sherman
Act moved beyond the Common law in that it provided for damages for those harmed, as
opposed to merely declaring the agreement void.
P59, Addyston Pipe: Ancillary restraints v. naked restraints. Ancillary means there is
something else in the transaction that restrains trade; such as when there is an agreement
to sell a business that contains a covenant to not compete. The non-compete covenant
would be ancillary. A naked (per sé) restraint of trade would be an agreement to fix
prices or a geographic decision of territory between sellers. This stems from the common
law and is explored on p59.
Ongoing, we will see a divide between per sé illegality and rule of reason illegality.
Northern Securities is an example of ancillary restraint, as since it does not directly
restrain trade, but the court found that it would indeed restrict trade in a manner violative
of the Sherman Act. Teddy Roosevelt, vis á vis the Holmes dissent in Northern
Securities, said Holmes had as much backbone as a banana – Teddy was a big trustbuster.
After this comes Standard Oil. The Court is feeling its way into an understanding of the
statute.
A review of the phases:



Early – acquiring refineries in Ohio
Middle – transferring the assets of the Ohio companies into nine trusts in NJ (AG
of Ohio brought an action against them using quo warranto proceedings. This
means the corporations were formed in an illegal fashion. This also precipitated
the move).
Late – After recapitalization and reorganization, the trust begins expanding itself
west.
NJ was a haven for businesses until Woodrow Wilson became governor; we were
Delaware before Delaware was Delaware. After Wilson, companies moved south to
Delaware.
The court objected to individuals and corporations working together to restrain trade
through working with railroad companies, using unfair practices against operators of
competing pipelines, price cutting at points to suppress competition, espionage on
competitors, operating bogus independent companies, payment of oil rebates, dividing
areas into districts for sales and limiting operations of subsidiaries to those districts, and
earning enormous and unreasonable profits.
Important case from Burger Court: Copperweld. The decision held that a parent
corporation and its wholly-owned subsidiary cannot conspire under Section 1 of the
Sherman Act.
Duties of board members of wholly-owned subsidiaries owe their allegiance to the parent
firm, although transactions must be conducted at an arm’s length basis. There are some
cases that argue subsidiary must be majority owned for a Section 1 violation, others are
less.
Evidently a ham sandwich can be indicted under section 2.
Under the rule of reason, plaintiffs must show prices are higher.
The remedy in Standard Oil is very severe, basically the corporate death penalty – a
breakup. P90 in handout. Note that the Standard Oil breakup burped out money so that
the University of Chicago Business School be formed.
Remedies
Look to sections 4 and 16 of the Clayton Act (which revised the Sherman Act) to see the
universe of remedies available for antitrust violations.
Section 4: trebled damages and attorney fees
Section 16: Injunctive Relief against threatened loss or damage suffered under violation
of antitrust laws. This provides for a breakup – Microsoft narrowly avoided this.
Chicago Board of Trade, p207: In order to participate in the exchange one must become
a member by buying a seat. There were three types of transactions: Spot (in Chicago),
Futures (not yet harvested), and in transit (on its way to Chicago).
The “Call” only applied to members who wanted to buy “in transit” grain outside of
working hours.
District court overruled because they precluded pro-competitive evidence from
consideration.
Sharfman underwhelmed by opinion. He believes that the opinion was based upon the
importance of the function of the exchange, and that perhaps it’s a “free ride” decision, in
essence preventing outsiders – or insiders – from gaining an unearned enjoyment of the
work the market performed during the day.
Brandeis at the bottom of p208 says that you need to look into the purpose and effect of
the rule, and then fails to do so.
The main thing to take away from the case is not just to condemn an artificial restraint on
trade, but instead look at its intent and effect. This is the rule of reason.
Appalachian Coal, p211: Has all the hallmarks of a price fixing agreement, but the
SCOTUS disagrees. The District Court decreed it illegal on the logic of Addyston Pipe.
The SCOTUS took a look at the overall condition of the industry and decided that since it
and the poor people working in it were teetering on the edge of disaster that maybe it
wasn’t so bad. Hideous logic, but another instance of “reason” when discerning whether
there is a violation. Note, too, that what was being decided was merely the lifting of an
enjoinder of a plan, not an actual practice.
Add 9/5/2006 notes here
Socony-Vacuum case, p214 – Investigation of vertically integrated petroleum company
who purchased spot market, “distress” oil to create an artificial baseline for prices. This
begins our descent into per sé liability rules. By this we mean that they are condemned as
unlawful under section 1; as such practices cause more harm than good. There is no need
to investigate whether prices increased or quantity decreased.
Footnote 59: “Prices are the central nervous system of the economy.” This is the
justification of Douglas to condemn price fixing.
Other per sé categories: Geographic market division, division by category of consumers,
naked restraint on output/prices.
One of the challenges of section 1 is to characterize the reason; is it a per sé problem, or
is it a rule of reason problem?
Section 1 talks of conspiracy to restrain trade; section 2 is about attempts to monopolize.
BMI case, p233 – CBS is arguing that BMI and ASCAP are conspiring to make licenses
available only in blanket form and refuse to make only portions of their catalogs
available. CBS is arguing that ASCAP/BMI should offer a different product. This is a
rule of reason case.
“When you are performing a rule of reason evaluation, look at the purpose as well as the
effect.” – Brandeis, Chicago Board of Trade
The court is essentially narrowing the definition of price fixing, and what behavior
qualifies as per sé price fixing.
The claim of tying was dismissed as well as plaintiff could go to artists themselves.
A short discourse on vertical vs. horizontal price fixing; in the horizontal it is two
manufacturers or two retailers that collaborate to fix prices; in the vertical it would be a
manufacturer and a retailer that set their prices. It is unclear if vertical agreements on
prices is a per sé violation.
Note that the scope of per sé violations has been continually narrowed, leading Sharman
to quip that we are moving towards the safe harbor of per sé legality.
NCAA, p249 – NCAA creates contracts with CBS and ABC to broadcast football games,
NBC would like to broadcast an Oklahoma game. More powerful schools get more
money as they draw more ratings, and there are limitations on how many times teams can
appear on television.
NCAA argues that by limiting the number of games broadcast and rotating the teams
whose games are broadcast, a greater interest in games will come forth.
So, Stevens asks if the NCAA has power in the market for televised college football
games. “Of course,” is the answer.
Stevens forms the “quick look” doctrine on page 258. There is no need to prove market
power, as there is a naked restraint on output restraint. It’s in essence “per sé lite.”
“Quick look” rarely results in good news for the defendant.
Last time we spoke of horizontal agreements, NCAA and BMI.
Broadcast Music looked like price fixing; musical content producers getting together and
forming associations to regulate the sale of content. The District Court felt that under the
consent decree that there was no price fixing; CBS challenged the arrangement. The
SCOTUS on the other hand felt CBS theoretically could go to individual artists for
content and thus there was no per sé price fixing. A rule of reason analysis found that
there was no decrease in output; instead the association created a new product and
therefore there was an overall increase in available product. Justice Stevens’ dissented.
In NCAA, Stevens’ view prevailed. The NCAA had rules about how many times a team
could appear in a season; this was not found to be a per sé violation of Section 1 of the
Sherman Act as it reduced the overall available quantity of product. In the “twinkling of
an eye” (a “quick look”), he found there was an overall limitation on quantity. There
were other rules such as not paying athletes, limiting roster sizes and scholarships, and so
on, to make the sport competitive. The NCAA said that their efforts to curtail the quantity
of product on TV leveled the playing field for smaller colleges and increased overall
interest in the sport, as well as preserving in person attendance at live events. Stevens
didn’t buy the argument as it related to television contracts. He gives a quasiConstitutional argument, stating that the “least-restrictive” means were not being used to
maintain competitiveness. The NCAA argued that in order to find a violation of Section 1
under the rule of reason analysis that it had to be proved they had market power. Stevens
found it by narrowing the market to that of televising college football games (much turns
on the definition of the market). Stevens says under the “quick look” analysis market
power needs not be proved as long as the reason is proven, and the defendant fails to
show a pro-competitive reasoning for the action. In Rule of Reason analysis, you need to
show an anti-competitive effect of the action.
California Dental Association v. FTC, p276: The end of the quick look and a resultant
increase of the plaintiff’s burden. Action was originally brought before the ALJ (a trial)
that was appealed to the Commission, and then went through the Circuit Court to the
SCOTUS.
According to Stevens, only do a “quick look” when there is a naked restraint on price
competition or quantity of services or goods available to consumers.
Sharfman: FTC and Administrative Law. Administrative Law is by far the most
burgeoning area related to regulation. Agencies are created and what else are they going
to do? A bit of discourse on wonks. The FTC emerged as part of the Clayton Act, which
was passed to make the Sherman Act stronger, and its purpose is to enforce antitrust
laws. The FTC is limited to civil matters; criminal matters must be handed to the DOJ.
Look to pp20-21 of the Appendix, which is the FTC Act, and Section 5 covers “unfair
methods of competition in or affecting commerce.” This reads broader than the Sherman
Act, but Souter in CDA says that a violation of Section 5 of the FTC Act is the equal to a
violation of Section 1 of the Sherman Act. In fact, Section 5 of the FTC Act is a superset
of Section 1 of the Sherman Act.
The penalties for violation of section 5 is outlined in sections (f) ($10K for each violation
of a commission order, of which there are always many) and (m)(1)(A), (B), and (C)
which says the commission can commence a civil action with the same $10K per
violating fine.
The Standard of Review for agency and District Court decisions is substantial evidence
of error, whereas the standard of review for the Circuit Court is clearly erroneous.
A rather non-Chicago argument about advertising confusing consumers and thereby
driving up prices ensued. A nod to the knowledge-gap between dentists and patients.
Breyer dissent evaluation limited to the standard of review (substantial evidence) needed
to reinforce the decision of those below. The questions on pp 287-88 were explored:

What is the specific restrain at issue?

What are its likely anticompetitive effects?

Are there offsetting pro-competitive justifications?

Do the parties have sufficient market power to make a difference?
The case boils down to the allocation of the burden of persuasion, found in the last
paragraph of Breyer’s dissent. In the world “quick look,” the defendant must show a procompetitive reason for the action. In rule of reason, the plaintiff must show an
anticompetitive effect. The rule of reason is where we are today.
Last time we did CA Dental, which bid adieu to the “quick look doctrine,” which
emerged in NCAA. What this did was relieve the plaintiff of some of the burden borne in
the “rule of reason” process, and affected only those cases which expose a naked restraint
of commerce, but do not exhibit a Section 1 Sherman Act violation per sé.
Coke at a dollar per can, agreements not to advertise, and other limitations on
availability. There are lots of intermediate possibilities in this range.
BMI cuts back in a sense in that while it did restrict the way content could be purchased,
it instead created a new product for the market.
NCAA was a clear inhibition of available quantity.
In Cal Dental, however, the quick look failed because only advertising was restricted,
and there was a question (on the part of the majority) about whether the Association had
market power. It also went through the question of whether the intended effect, that of
reducing misleading advertising, wasn’t a worthy goal.
So what was the item being reduced? The availability of dental services, or just the
advertisements themselves? And what of the disparity of level of knowledge between the
service providers and the consumers of the product? Does this make the inhibition of
advertisement pro- or anti-competitive? Pro- or anti-consumer? It is in this way that the
Court approaches the question, and thus on remand the Court says that only a
thoroughgoing rule of reason permits a decision in antitrust cases.
Note that NCAA was not explicitly overruled, it’s just the manner in which that case was
decided, using the “quick look,” does not satisfy the needs of antitrust cases, which
makes this essentially a doctrinal decision. This means the plaintiff must not only prove
market power, but also anti-competitive effects.
Breyer is probably the best antitrust person on the Court, perhaps even better than
Stevens.
Back to the questions on 297-288 (see above).
The question for Sharfman: Is cutting advertising inherently anti-competitive?
Sharfman is with Breyer in Cal Dental, but is no fan of the quick look. He also finally
mentioned the horrid way that Cal Dental prevailed on remand.
The per sé rules are also being diminished in Section 1 cases as we move forward, as
well.
Back to Section 1 as we move into a new area of enforcement. Today we probe the
amount of evidence required to prove a case.
Interstate Circuit v. US, p493. Sure, there is a vertical agreement between the eight
theater chain owners, but the agreement is inferred because of the unanimity amongst the
owners. It was also important that none of the officers of the theater owners testified at
trial.
The fact that all participants in a market are doing the same thing (theater owners have air
conditioning and popcorn) is called that they are “consciously parallel” in the lingo of the
trade.
Tacit collusion is not enough; the Court also looks for “plus factors,” such as the decision
of defendants not to testify; the seeming lack of witnesses to testify, and so on.
Douglas in Socony Vacuum says that Section 1 violations can be construed through
conspiracy, which only requires an overt act; there is no need to prove market power or
anti-competitive effect in order to obtain liability against the defendant.
Ex ante/post ante (before and after). Often the examination of prices is dispositive, be it
the stock price or the price of the good or service, in terms of how they fluctuate up or
down once the challenged behavior/agreement is made.
Theater Enterprises v. Paramount Film Distributing, p500. Paramount is merely acting
consciously parallel with all other distributors, maximizing revenue by delivering first
run to urban, well serviced theaters, and that in effect to offer the films to Theater
Enterprises out in the hinterlands would detract from the cache, as well as the fact that
there was not a shred of evidence that there was any form of agreement. Lastly, it was
wondered if the offers made by Theater Enterprises to Paramount were in good faith.
Also, there was a question as to whether Theater Enterprises would be freeriding on the
advertisements of the downtown theater owners.
Toys “R” Us v. F.T.C., p505. The vertical TRU agreement creates in effect a horizontal
agreement between the toy manufacturers that restrains trade. Judge Wood then finds
substantial evidence supporting the FTC’s decision.
California Dental did away with the “quick look” doctrine, and as such demands rule of
reason analysis.
We then rocketed through a series of cases, all of which implicated contract, collusion or
conspiracy, showing that for a section 1 violation of the Sherman Act you need to have
more than one actor.
Interstate Circuit had a vertical agreement between film exhibitors and distributors; the
smoking gun was the letter in which the distributor sent out a letter to all exhibitors and
named all of them in it. It showed an agreement between the exhibitors (the exhibitors
wanted the letter according to Sharfman?)
In Paramount there was no plus-factor evidence; merely an exhibitor outside the
downtown area that wants to show first run movies and therefore alleges the downtown
exhibitors were conspiring against him. There was no evidence of an agreement
horizontal or vertical, and Crest Theater went down.
We also touched on a 3rd Circuit note case that touched on plus factors, page 499,
including acting contrary to economic interests and having motivation to enter into a
price fixing conspiracy. There was evidence showing (1) a pattern of parallel price
increases during the certified time period, (2) documentary and testimonial evidence of
price matching among competitors, and (3) reciprocal exchanges of price information.
Toys ‘R’ Us, p505: Strong evidence of a conspiracy between TRU and mfrs to restrict
distribution of toys to club stores. The issue on appeal was whether there was substantial
evidence (standard of review for an administrative decision) of collusion. Sharfman
considers this a “gray area” case, although the evidence seemed to be pretty strong,
despite the lack of a smoking gun. On p512, the evidence is merely an inference of an
agreement; there is no hard evidence. There was also a question of whether TRU had
market power, which is necessary in a non-per sé case such as this one. Sharfman gave
lots of lip service to the “free riding” argument of TRU, which the 7th Circuit didn’t buy.
American Column and Lumber, p587: Cartel case where firms gathered to share
information, reduce quantity, and increase prices. There was evidence of a conspiracy,
especially since the members of the Association’s Plan agreed only to share such a large
amount of information.
This section of the course covers the minimum level of evidence needed to show that
there is an agreement between ostensible competitors under Section 1 of the Sherman
Act. Sharfman goes on to say that if you are advising a trade association, you would want
to counsel them against sharing prices, and particularly not as frequently as happened in
American Column and Lumber.
Now we have a series of cases related to the Toys R Us situation. First case is a note case,
Montague v. Lowry, tile sellers in San Francisco who join to boycott non-cartel members
and charge them higher prices.
Fashion Originators’ Guild, p331: FOGA tells retailers they will boycott retailers who
sell copycat products. Basically, you can’t agree to sell to somebody if it is on condition
that they refuse to deal with someone else. Somewhat a violation of Section 3 of the
Clayton Act, which now seems to implicate an automatic violation of Section 1 of the
Sherman Act.
Recap: American Lumber was the last in a series of cases where there was scant evidence
of an agreement for the purposes of section 1, and we were looking at the minimum
amount needed for the court to determine there was collusion. Price leadership, etc.
required. Amer. Lumber had a trade association that worked for the benefit of the firms in
the association who ostensibly should be competing. The arrangement at issue was price
and quantity sharing. The smoking gun was the meeting in Cincinnati to constrain
production in order to raise prices.
Should this have been a rule of reason or per sé case? Under Socony Vacuum rule, it does
seem to be per sé. What we were focusing on, however, was the minimum to show an
agreement. Today, trade associations are cautious about sharing pricing and quantity
information, and the penalties imposed on members if they fail to share.
This was a case like Interstate Circuit in which the evidence was pretty thin.
We then moved on to refusals to deal. Unilateral refusals to deal are defensible (this is till
undergoing evolution), but concerted (group) refusals to deal are prohibited.
This brings us to the San Francisco tile case of Lowry, which triggered section 1 liability,
which then segues to Fashion Originators. The FTC refused to hear evidence about
copycat’s freeriding, as there was no federal basis for the claim, only a state tort claim.
There was also no showing by the defendant that their action of restricting retailers from
selling copied designs improved competition. The bottom line was whether consumers
were better or worse off because of the agreement.
Next we had Klor’s, p336, in which a competing vendors/customers created an agreement
amongst manufacturers to boycott Klor’s. Didn’t matter if Klor’s was tiny, or if
appliances were available elsewhere, it was the agreement that was the violation; in
particular that it had no pro-competitive effect.
Nynex v. Discon, p339: Purely a case of a single consumer refusing to purchase from a
single vendor (despite the presence of multiple subsidiaries); fraud not a component of a
Sherman Act violation.
Radiant, p351: PGL&C refuses to sell gas to customers of Radiant burners as the AGA
would not grant them certification. Lost in District court, aff’d on appeal in Circuit court,
SCOTUS reverses and remands.
Northwest Wholesale Stationers v. Pacific Stationary and Printing, p354:
Last time we looked at Nynex, in which a purchaser dropped a supplier and picked up
another supplier despite a higher cost. The court ruled no violation, since it was a vertical
agreement instead of a horizontal one, and thus it needed to be subjected to the rule of
reason.
Next was Radiant Burners, in which the American Gas Company refused to certify the
product and thus AGA members would not sell gas to owners of the product. It looked
into whether this was a concerted refusal to deal, and decided that yes, it was per sé
unlawful.
There was an update to this analysis in Northwest Stationers, in which there was a buying
cooperative and Pacific was thrown out of the cooperative with no process for appeal.
There is a question as to whether it would be decided the same way if Pacific had never
been allowed in, but what these cases show is that there has been a gradual narrowing of
the per sé rule in favor of using the rule of reason analysis.
Associated Press v. US, p381: AP created bylaws that prohibited members from selling
news products to non-members. There was another bylaw that members, through voting,
could exclude non-members from joining the group. US brought the case against AP. In
district court the government argued that the arrangement restricted the distribution of
news (quantity argument). Essentially 600 out of 1800 newspapers were being cut out of
the market. District court found there was a restraint of trade that violated section 1, so
AP did a direct appeal to the SCOTUS.
Turns out that Microsoft tried the same trick and failed. This is a unique characteristic of
the antitrust act.
SCOTUS decided that this was not a per sé violation, in spite of the fact that there was no
price fixing and no monopoly. AP eventually was enjoined from allowing newspapers
from the same city from excluding papers from the same city or field.
Interesting question about how this case compared to BMI, which was brought to the
course as a price fixing case. Sharfman went off on a detailed economic tangent, looking
for the transaction cost to be as close to zero as possible.
Extended digression into Starbucks’ exclusionary real estate tactics in the current news.
Noerr, p410: The most famous of antitrust cases, and referred to as the Noerr-Pennington
exclusion. There is an area of conduct which does not have explicit statutory immunity,
but where the Sherman Act does not apply (lobbying government, publicity campaigns
relating to government action, eventually legitimate legislation).
The court in this instance is construing the Sherman Act narrowly to avoid conduct that
would be protected under the Constitution.
Allied Tube, p421: Another standard setting organization that behaved poorly through
packing a standards body.
Missed the recap
Mass Law at Andover v. ABA, p434: So where does the limit of lobbying exist? Well, if
states have true sovereignty, then they can select whatever standards they want for
accrediting lawyers (it is a form of consumer protection). The Clinton DOJ managed to
settle with the ABA and obtain immunity.
Professional Real Estate Investors v. Columbia Pictures, p443: Studios want hoteliers to
use a technology that is more profitable to them, they bring a copyright suit, and hoteliers
in response bring section 1 & 2 allegations against the studio. The act of litigation is
equated to petitioning the government. The suit itself was legitimate so there was no
sham exception. Two part sham test shown on page 446, “objective baselessness” (no
chance of succeeding), and the action “subjectively attempts to interfere with the business
relationships of the competitor.” Stephens concurrence indicates that the standard should
be that a “reasonable litigant should reasonably expect to succeed.”
Parker v. Brown, p450: The essence of state sovereignty to govern the sale of raisins
under the Sherman Act.
Goldfarb, p453: State bar association cannot set minimum prices.
Cal Retail Liquor Dealers Assoc. V. MidCal Aluminum, p458: State cannot enforce prices
set by private parties and then not oversee the actions. Wine dealer sold below the lowest
posted price. The Miller-Tydings Act used to support this but this was repealed. There is
a two-prong test at the bottom of p460:
1) The challenged restraint must be “clearly articulated and affirmatively expressed
state policy”
-and2) The policy must be actively supervised by the state.
Tunc: Exactly how much state supervision is required? Sharfman: “Who the hell knows?
The law covers a person, the state is not a person, devise a solution. Make it up like the
court did. Shut up.”
Columbia v. Omni Outdoor Advertising, p472: A conspiracy with municipal officials
does not a Sherman Act violation make. It’s lobbying, even if it’s criminal. Columbia
claims Noerr immunity, the city argues for Parker immunity.
Scalia dies a MidCal test (clearly articulated/actively supervised). Interesting.
Last time we discussed Noerr immunity, in which the Court holds that the Sherman Act
is construed narrowly so as to avoid the Constitutional speech question.
Then there was Mass Law, who lost up and down the federal courts because of Noerr
immunity. The ABA was petitioning the government to uphold ABA standards so as to
control admission to the bar. Sharfman felt that the reasoning was somewhat skewed, as it
wasn’t the lobbying that was being challenged, although the decision was correct.
Next we had the Columbia Pictures case, in which litigation that a reasonable plaintiff
can reasonably believe to prevail is also granted Noerr immunity. This also fleshed out
the sham exception to the Noerr immunity. There is a two part test for sham, (1)
“objective baselessness” (completely wacko), and (2) if the process of the litigation
subjectively shows intent to interfere directly with the business relationships of a
competitor.
Stevens in his concurrence (joined by O’Connor) thought the sham exception should be
broader, that perhaps if there 20-30% chance of success would be enough (see first line of
this paragraph).
In Parker v. Brown, the question of whether a state could have a policy that results in
anti-competitive conditions (the answer is yes and concerns state sovereignty, and a clear
policy must be articulated).
Federal jurisdiction, In re Younger, in which jurisdiction was extended to state officers
for official misdeeds. This could be interesting some other time.
MidCal brought forth another prong to this analysis, in which California enacted a
statutory scheme for setting minimum prices for wines but failed to adequately supervise
adherence, despite the fact there was clear state policy (Miller-Tydings Act of 1937 had
been overturned).
Columbia Billboard Case touched on both Parker and Noerr. Omni Billboard sued both
the city (who argued Parker) and Columbia Outdoor Billboards (who argued Noerr).
Ultimately the scoundrel Scalia decided that there was no conspiracy exception to either
doctrine. Also found that zoning restrictions, as provided by the state, were in and of
themselves a de facto indication of a state policy for anti-competitive behavior. Scalia
closed by indicating the laws themselves were closely monitored by the responsible
government agency.
Question: If one party enjoys immunity under Section 1, is the other party automatically
immune? Nobody seems to know.
Note: Sherman Act does not create immunity for states that are market actors, although
the law indicates applicability to only persons.
Dr. Miles, p624: Case began as a state tort case, and then escalated after defendant raised
the anti-trust issue. Dr. Miles made vertical price fixing a violation per sé, based upon
theory of alienation of property. Defendant John Park convinced authorized wholesalers
to sell the medicine to them, and then sold at below market prices. Plaintiff’s theories of
trade secret, agency, and consignment did not fly. “The greater cannot include the lesser;”
essentially if Dr. Miles had sold the product directly, they could charge whatever they
wanted, but if they use a middleman, they have to obey anti-trust laws.
Continental TV v. GTE Sylvania, p651: Non-price setting vertical agreements are not
violations per sé, must be evaluated under the rule of reason. Exclusive territories are not
per sé unlawful, overruling Schwinn.
Last class: Dr. Miles, p624, stands for the finding the vertical price maintenance is per sé
unlawful (although there was no per sé rule at the time). It is, of course, unclear to
Sharfman as to why this is anti-competitive, and proceeded to spin a pro-competitive
argument. The plaintiff was not required to show that Dr. Miles Co. had market power,
which leads the ruling to appear to us per sé reasoning.
Minimum retail price maintenance is all that remains of the per sé rule.
Dr. Miles began to be eroded with Continental TV, p651. in which the court found that
vertical, non-price setting agreements were not illegal per sé, but instead required rule of
reason analysis.
Note: “Severability clause” is the term for language used in a contract that provides that
if the contract is found void for any reason, the severed components remain in effect
(such as trade secret clauses).
The court finds that vertical non-price restraints can often be pro-competitive and thus
must be subjected rule of reason analysis.
State Oil v. Khan, p634, stands for the proposition that maximum retail price fixing is not
a violation per sé, and also must be suggested to rule of reason analysis.
See Cal Dental, p276 for the evidentiary burden in antitrust cases.
Monsanto, p686: Reaffirms that rule of reason analysis must be applied to vertical
agreements, meaning per sé plus ancillary evidence (in this case, the newsletter, the
complaints, and so on).
Sharp Electronics, p696: This case involves a reseller who was let go because a
competing reseller complained the plaintiff reseller sold equipment to far below the
suggested retail price. The fact that the argument was based around the suggested retail
price lifted this from the per sé analysis; it also was pertinent that it was only an issue of
intrabrand competition.
State Oil v. Khan, p634: Maximum resale price set by State Oil, which owned the station
Khan leased. Posner in the 7th Circuit invited SCOTUS to overrule Albrecht (p637), the
newspaper case, which it did.
In our last class we spoke of Continental v. Sylvania, p651. Non-price vertical
agreements/conditions are not subject to per sé analysis, but instead must be subjected to
rule of reason scrutiny. Case involved a television dealer (Continental) who wanted to
open a store in Sacramento. Treaded the fine edge of Schwinn.
Monsanto, p686: The case does maintain the Dr. Miles rule of per sé condemnation of
vertical price fixing, but the twist is the standard of evidence that must be met to prove
that there is an agreement of vertical price fixing. In this case, other dealers complained
about Spray-Rite and there was, perhaps most importantly, other ancillary evidence such
as newsletters, and so forth, that proved the allegation of vertical price fixing. So,
minimum retail price maintenance is still per sé unlawful.
BEC v. Sharp Electronics, p696: Sharp suggests a retail price, BEC sells below the street
price, undercutting Hartwell, who was the second, later-introduced reseller of Sharp gear
in Houston. Hartwell asked Sharp to terminate BEC and they did. SCOTUS felt because
the price was only a suggestion, not mandatory, that the case needed to be analyzed under
the rule of reason.
Colgate, p679 (not assigned) stands for the right of a company to unilaterally decide not
to deal. This will not trigger a violation under section 1.
Albrecht, explicated starting on p636, was overruled in State Oil v. Khan. This was the
morning newspaper case.
State Oil v. Khan, p634 says that vertical maximum price agreements are not per sé
unlawful, but instead should be decided using rule of reason analysis. O’Connor said that
stare decisis is a policy decision and not a duty.
Type of Restraint
non-price
min-price
max price
suggested
Horizontal
depends (AP)
per se
per se
per se
Vertical
rule of reason (Continental)
per se (Dr. Miles)
Rule of Reason (State Oil v. Khan)
Rule of reason (BEC v. Sharp)
And, at last, we come to Section 2.
What is a monopoly?
3 kinds of situations:
“Perfect competition” such as the market for wheat. 1000’s of farmers, and no one can
unilaterally set the price. A thick market with lots of sellers.
“Complete Monopoly” such as a holder of a patent, and there is no alternative product
that does the same thing that product does (such as a unique pharmaceutical). It used to
be that if a defendant held a patent, there was a presumption of market power, but now
that is no longer the case. The ink-jet case (plaintiff was refilling ink jets) was decided
last year.
“Intermediate cases” in which there is imperfect competition, and there is an oligopoly.
Individual participants in such a market can influence the price.
In these cases, market definition becomes pre-eminent. How the market is defined
inevitably decides whether a case is won or lost for either party. The plaintiff always
wants a narrow definition, the defendant a broad definition. These markets are always
defined in terms of both product and geography.
At the bottom of p129 the “supply-side” theory is looked at, which considers who else
could participate in a particular market, should the price climb to particular point. This
gets a decreasing amount of attention as the cases march forward through time, with the
exception of mergers, covered later.
Alcoa, p130: Alcoa first exploited patents to gain their position in the virgin aluminum
ingot market, and while they had their patent developed contracts with hydroelectric
suppliers to prevent others from entering the market. This case governs actions by Alcoa
subsequent to 1912, during which time Alcoa was operating under a consent decree that
constrained them from engaging in and precluding the enforcement of such illegal
contracts. Alcoa’s market share fluctuated between 68-91% during this time period.
Market is defined by the sales of virgin aluminum ingot in the USA.
Section 2 judgments often hang on the projected market share of an accused firm; this is
called a projected market share of an accused firm; this is called a dynamic market
analysis. After all, the past position of a firm is gone, although it can be used as evidence
of a projected market position.
Because the covenants with the power companies were outlawed in 1912, and all Alcoa
did was continue to increase their capacity, it was deemed that Alcoa had had monopoly
“thrust upon them.” The highlighted quotes on p138 about not punishing victors in the
market, and that size alone does not indicate guilt are indicative of where the court was
going.
It turns out that you can be liable under section 2 if you are diligently using your skill to
pre-empt entry into a market. There has been quite a bit of criticism of this opinion.
Consider Standard Oil, which acquired every independent oil producer and marketer it
could lay its hands on; clearly an active effort and indicative of an intent to monopolize.
Last time we began our discussion of Section 2, monopolization, and analyzed the Alcoa
decision. The firm looked like it was a very strong competitor and sure they may have
been a monopolist in the market of virgin ingot. Being a monopolist is not in violation of
the statute, it is the attempt to monopolize or monopolizing. The end analysis is the kind
of behavior is required to be in violation.
As in rule of reason cases under section one, market definition is of primary importance.
This includes fungible products, geography, and so on. In Alcoa, the product definition
was for virgin ingot, and secondary ingot was not included. The broader of the market
definition, naturally, the less a firm looks like a monopolist. The geographic definition in
Alcoa was restricted to the U.S., again, the broader the market analyzed, the better it is
for the defendant.
Judge Hand’s footnote 4 on page 133 in Alcoa, which says a greater than 90% market
share, the dominance is a de facto monopoly. 64% to 89% would be doubtful. If the
market share is 33% then this is a safe harbor. The statute of course says nothing about
this; the numbers were pulled from thin air. In the Domed Stadium Hotel case, 50% was a
safe harbor. In Syufy, 60-69% was held to be proof of monopoly. 49% was held to be an
acceptable level for a jury finding of monopoly in Broadway Delivery v. UPS.
Perhaps the most dubious part of the case is the theory of conduct for which Alcoa was
condemned. Hand focuses on the expansion of capacity by Alcoa, which in essence preempted the entry of new firms into the market. Sharfman quite correctly questions this.
The case goes on to say, however, a monopoly position is “thrust” upon a firm, and then
you cannot be convicted under Section 2. There is no specific intent requirement in
section 2, but you do have to engage in actions that would bring about the results that
Section 2 forbids (eliminating, excluding, or precluding competitors). However, the firm
accused of a violation of Section 2 must both have the power to monopolize as well as
the intent to monopolize. A successful competitor, after being urged to compete, should
not be penalized (although Alcoa was).
Let’s (finally move on to the cellophane case, US v. DuPont, p147. Note that there is an
odd antitrust statute that allows direct appeal from district court to SCOTUS.
Last time we looked at DuPont, p147, which continued our discussion of market
definition – very important when analyzing monopolization cases under Section 2. The
smaller the market, etc.
There are two parts to the definition; (1) the product space and the (2) the geographic area
the market encompasses.
In DuPont the relative market geographically speaking was the United States, and the
product area (tougher to define) was flexible wrappings. If the market was defined only
as cellophane, then DuPont had a 75% share. Ultimately the court decided on the broader
market definition and DuPont was let off the hook. Sharfman thought perhaps the market
could be defined as only the market of cigarette wrappings.
If a product is not fungible, in economic terms it is called “inelastic.” This refers to how
demand responds to changes in price.
So on to predatory pricing which is defined as:
1) Below cost pricing
2) With intent (Section 2 needs intent) and/or effect (Section 1, no intent needed,
Robinson-Patman Act also does not require intent) of eliminating competition
3) With a likely prospect of recoupment through monopolistic (supracompetitive)
pricing later – once competitors are gone.
Finally, we move to Brooke Group v. Brown & Williamson, p847. Liggett argues that the
moves by Brown and Williamson to offer volume discounts and rebates to wholesalers
brought the price of the cigarettes below the average variable cost of manufacturing the
cigarettes (see footnote 49 on p853), making the price predatory under Section 2 of the
Clayton Act as amended by the Robinson-Patman Act.
Sharfman can’t understand why Liggett raised it’s prices in the face of B&W’s predatory
pricing, but the logic is plain: Because the amount of product Liggett was going to be
able to move in the face of the predatory pricing, they had to raise prices in order to
increase their per unit profit. Also, as the price for generic cigarettes increased, smokers
would go back to the branded cigarettes where the margins were higher (the goal of
B&W all along). Note that the cigarette producers change prices regularly in lock step
anyway.
The SCOTUS has never met a predatory price case that it liked. They aren’t going to
wipe it out as a theory of harm, but making a successful argument under this is close to
unwinnable.
In our last class: Predatory Pricing
What is it? An instance where a manufacturer sells below cost with the purpose of
harming competitors that also features a likelihood of recoupment through
supracompetitive rates. The statutory predicate is Section 2 of the Sherman Act, as it is a
strategy for monopolizing a market.
Robinson Patman Act: In which price discrimination is outlawed when selling to
distributors (sale for later resale) – note this does not apply to different prices for end
consumers – is covered in Brooke Group (Liggett) v. Brown & Williamson. The plaintiff
has to show that competition in the distribution market, as opposed to the market as a
whole, is harmed.
Under Section 2, naturally, the plaintiff would need to prove that Brown and Williamson
was working to monopolize the market.
Liggett failed because the market for cigarettes was crowded with competitors and the
Court could not find a “dangerous probability of success” in the effort for
monopolization.
In sum, it is very hard to win a predatory pricing case. The SCOTUS does not close the
door on the theory, but the standard is very high.
Footnote 49 on page 853 in Brooke Group describes “cost” in “below cost” as the
“average variable cost” for the good or service. Sharfman feels that the marginal cost
(the cost of the last item produced) is very low and should be accounted for when
determining the cost.
Tying Arrangements
Tying is when you take a product that has a dominant market position (the tying product)
and condition the sale of the tying product upon simultaneous purchase of another
product that has a weaker market position (the tied product).
Section 3 of the Clayton Act: A seller cannot lease or sell goods (not services) on the
condition that the purchaser will not lease or purchase the goods of a competitor.
Section 3 is the foundation for a tying claim, but the last part of the section, which
concerns whether competition has been harmed, echoes the sentiment of Section 1 of the
Sherman Act. Of course, in Section 3 of the Clayton Act, there is no need for two parties.
Indeed, the statute is broader than tying, but it encompasses tying.
There are different elements to establish a tying claim:
1. Are there two distinct products?
2. Is there market power in the tying product?
3. Is there foreclosure (a forcing effect) on the purchaser to take the tied product
preventing purchase of a competing product?
4. Does the tying relationship between the goods have the effect of reducing
competition through increasing the market power of the seller? (O’Connor’s dicta
in Jefferson Parish Hospital v. Hyde, p886, dicta on p901).
5. Lastly, does the activity at issue have relation to interstate commerce?
A brief description of United Shoe Machinery v. US, p876. Sharfman described the
“restricted use, exclusive use, supplies, patent insole, additional machinery, factory
output, and discriminatory royalty clauses. Note that United Shoe Machinery had 95% of
the market at the time.
Northern Pacific v. US, p881. Railroad conditioned purchase of land on use of railroad to
carry freight (crops) produced on the land. The Court’s concern was the use of leverage
by the seller, using its leverage in one market to gain pre-eminence in another market.
Sharfman feels that an introduced incompatibility into a product (requiring purchase)
may be a basis for a Section 2 violation.
On page 882, there is language in the case that talks of a per sé rule against tying. This
comes from the Times-Picayune case, described briefly on p880, which contemplated
typing only in a monopoly setting. This approach has never been fully adopted and has
been significantly watered down in later years.
Jefferson Parish Hospital v. Hyde, p886. Hospital charged with violation of Section 1 of
the Sherman Act (it looks like Section 3 of the Clayton Act but Section 3 of the Clayton
Act, of course, does not cover services) by signing a contract with Roux’s group of
anesthesiologists.
Note that even though the 5th Circuit court applies the per sé rule to the case, they still do
a geographic market analysis. Sharfman noted this with glee.
Some people read this opinion as a 30% share representing a safe harbor, indicating that a
share of 30% or less indicates that there is no indicia of market power.
O’Connor’s concurrence is now the gold standard of analysis. This is a fixed proportion
case.
Kodak v. Image Technical Services, p903. Kodak makes copiers, and sells parts and
services for said machines. There are 18 or so independent service organizations (ISOs)
that would like to service the machines, but Kodak denies them parts by insisting that to
by parts, the purchaser would also have to buy Kodak services. Kodak has a pretty low
market share in the overall market for copiers, but essentially has a monopoly for parts to
repair Kodak copiers. So, how is the market judged?
The majority says the tying product is parts, in which Kodak has a 100% share. Scalia, in
his dissent, says that the market cannot be measured by only Kodak parts but instead the
case should turn on the size of the overall copier market.
District Court gives summary judgment to Kodak, the 9th Circuit overturns and says there
should be a trial.
Last time we talked about tying products, the tying product is what you want to buy, the
tied product is the product the company wants you to buy for whatever nefarious reason.
Here are the criteria:
1) Are there two products?
2) Is there some kind of forcing (foreclosure) effect on the consumer (making the
consumer buy more than is wanted/needed)?
3) Is there market power in the tying product? (Harm to competition by the tie would
be considered here.)
4) Is a significant amount of interstate commerce affected by the tie between
products?
I like the list above better.
Under Sherman Act Section 2, the marketer/manufacturer may be trying to either
maintain its dominance in the market for the tying product, or possibly could be
attempting to gain share in the market for the tied product.
Our first case last class was United Shoe. A leasing contract forced consumers to lease all
shoe manufacturing machinery from the manufacturer, as well as refrain from creating
goods using other manufacturers’ machinery.
Northern Pacific p881 gave the definition of tying: A condition set by a seller that for a
consumer to buy one product, the consumer would have to buy another product.
Note cases on p882 make mention of a per sé rule for tying, which is kind of wacky
because there are five elements that need to be examined and met. Not much of a per sé
rule, indeed.
A bit of digression into proportional markets (such as that for left shoes and right shoes)
as opposed to two separate markets, such as printers and paper.
Jefferson Parish Hospital, p886: Is anesthesiology a separate product from surgery?
Stevens thought they were, O’Connor didn’t. Stevens felt the plaintiff’s case foundered
by the geographic market area the SCOTUS adopted (all of New Orleans), O’Connor
wisely saw that there was only one product being offered.
Kodak, p903: The product market itself was defined as service on Kodak machines.
Kodak stood no chance of prevailing, as Scalia correctly pointed out (they had a
monopoly on parts for Kodak machines). On remand, the independent service offerors
(ISO’s) had the chance to prove there was a separation of market between Kodak parts
and service for Kodak copiers. Contract with parts OEM’s prohibiting sale of parts to
ISO’s exposed Kodak to Sherman Act Section 1 liability.
Extended digression as to whether antitrust laws apply to non-profits (they do).
And, at last, we get to Microsoft.
Bottom line: From a tying standpoint, if Microsoft could prove that Windows was new
and better through the integration with IE, according to the ruling of the Court of Appeals
for the DC Circuit, then despite hitting all of the criteria for a tying product violation, a
defendant can still prevail.
Exclusive Dealing
Clayton Act Section 3: When the lease or sale of goods (services are not mentioned) are
conditioned on the buyer must agree to not purchase any competing good from a
competitor, and competition is thereby harmed.
Standard Fashion v. Magrane-Houston, p936: Contract between pattern manufacturer
and retailer which prohibits retailer from selling patterns made by competitors is in
violation of Section 3 of the Clayton Act. Actually arose as a countersuit against a
breach of contract claim made by Standard Fashion against Magrane.
Standard Fashion had 40% of the market – this was a fact given great credence by the
Court; interesting point in the merger context that when two smaller firms want to merge
and become the largest firm in a market (leapfrogging the current largest firm) there is
also a plausible argument on the part of the firms desiring to merge that they want to
grow in order to become more competitive.
Another interesting comparison was drawn to Fashion Originators, p331, which also
concerned an alleged violation of Section 3 of the Clayton Act, but was brought under
Section 5 of the FTC Act.
FTC v. Brown Shoe Co., p948: Shoe mfr. turning a quarter of a billion dollars in sales in
1957 that required franchisees to not sell shoes made by other mfrs. that competed with
the Brown Shoe lines. Again covered by Section 5 of the FTC Act. Brown Shoe
questioned FTC’s authority to preemptively use Section 5 of the FTC Act to prevent a
violation of Section 3 of the Clayton Act (implicating Section 1 of the Sherman Act),
SCOTUS assures Brown Shoe that indeed the FTC has the power. This case is considered
a reach by even the most activist antitrust people.
US Healthcare v. Healthsource, p953: Considered to be a much better case than Brown
Shoe, certainly more modern (1993). There was still the “quick look” doctrine, but Judge
Boudin who presided decided that the case needed to be judged under the rule of reason.
This was a vertical boycott, note, in which doctors went along with the demands of
Healthsource to not deal with US Healthcare. US Healthcare had over 80% of the market
for medicine in the state of New Hampshire. This stands in sharp contrast to the exclusive
dealing decisions of earlier cases.
Note that this was decided before Nynex, p339, which said vertical agreements
challenged under an antitrust statute need to be examined using the rule of reason.
A brief return to Microsoft, p776: This concerns exclusive dealing arrangements
demanded by Microsoft for OEMs to not pre-install Netscape on computers sold that
used its operating system. The argument was that the aforementioned exclusive contracts
were used to preserve and cement Microsoft’s monopoly position in the Intel-based
computer operating system market in violation of Section 2 of the Sherman Act.
Again the bottom line: We have come a long way from Brown Shoe; if a defendant can
prove it is delivering an improved product to consumers through its actions, then there is
no violation.
Last time we talked about exclusive dealing (deal with me – don’t deal with a
competitor). This can be a by-product of a tying arrangement, such as in United Shoe,
p876.
This is covered by Clayton Section 3.
Our first case was Standard Fashion v. Magrane-Houston, p936, in which section 3 of
the Clayton Act violated. Standard Fashion had 40% of the market. The Court held that
the exclusivity portion of the contract was unenforceable, and in and of itself violated
Section 1 of the Sherman Act.
Brown Shoe: The worst decision evar. Franchisees were prevented from selling
competitor’s products out of franchise stores. The Court knows the decision is weak, and
they speak of incipiency on p951: Even though the plaintiff shows no proof of anticompetitive effect, this type of action must be “nipped in the bud.”
A much better case is US Healthcare, and this represents the modern view of antitrust
law in terms of exclusivity clauses. Doctors were paid better rates if they agreed not to
affiliate with a competing HMO. US Healthcare held 87% of the HMO-participating
physicians in New Hampshire. The judge said in terms of a violation of Section 1 of the
Sherman Act the burden of proof is on the plaintiff.
1) Rule of reason applies – no per sé rule
2) Many of the purposes of exclusivity clauses are benign (assurance of
quality/availability, etc.)
We then turned to Microsoft, in which Microsoft made deals with OEMs and ISPs to
reduce the access of Netscape to the most effective means of distribution. This was
analyzed under a Sherman Act Section 2 violation (maintaining or preserving a
monopoly). The analysis is still the same as US Healthcare, in that the defendant is found
to have market power.
Sharfman regards this material as very important – mergers and acquisitions. Let’s start
with the statute, and the Northern Securities case which applied Section 1 of the Sherman
Act.
Section 7 of the Clayton Act is more explicit, however. “You can’t acquire the whole or
part of an entity if the result would have the overall effect of substantially reducing
competition.”
The second paragraph concerns firms subject to the jurisdiction of the FTC.
Note: DOJ brings criminal prosecutions (e.g., price fixing), whereas the FTC brings only
civil prosectutions.
Section 7(a), however is key. Prior to the passage of Section 7(a) through the Hart-ScottRodino Act, mergers could only be challenged after that had been transacted – the
“unscrambling the egg” problem. Section 7(a) requires filing notifications by the
transacting parties to the government and a waiting period for merger. Section 1 of the
Sherman Act and Section 7 of the Clayton Act are ex post, whereas Section 7(a) of the
Clayton Act is ex ante.
If the acquirer’s value is greater than $200M, or worth more than $50M but less than
$200M and have net sales or assets of greater than $10M, then mergers are subject to
federal notification. The parties have the obligation to notify and wait.
Characteristics of anticompetitive mergers:
1) Market concentration
2) Cost of entry
3) Whether the merger creates a broader portfolio (vertical, which can be
anticompetitive unless you’re Robert Bork)
The government has the ability to extend the review periods for transactions from 90 to
120/180 days, and so on, requesting more documentation (“everything relevant”), go to
Washington to argue, and so on.
The merger can be allowed, there can be an injunction under Section 16 of the Clayton
Act, there can also be orders to divest some assets to permit the merger, requirements of
certain practices, and so on.
Now we go to the horizontal merger guidelines on p1034.
The guidelines are nothing more than a statement of prosecutorial intent, non-binding but
damn persuasive.
1) Market definition, measurement and concentration (Sherman Section 2)
A product or a group of products and the geographic area in which it is sold in
which there is hypothetically only a single producer and seller. The question is
what is the smallest product range and geographic area where this hypothetical
monopolist could profitably impose a significant (5%) but non-transitory (6
months to 2 years) increase in price.
2) What is the cost of entry into the market?
Identify the market participants, then look at any other participants who are not
currently in the market but could enter.
3) Next you calculate the market shares, each firm then combined. Can be done
either in dollars or in units.
4) Next you look at the concentration (the HHI)
It’s the “sum of the squares of the market shares” – the highest possible is 10,000.
5) Now look at the pre-merger HHI, and then look at the post-merger HHI.
HHI < 1000 is unconcentrated
1000 < HHI < 1800 moderately concentrated
HHI > 1800 is a highly concentrated market
If post merger HHI is still less than 1000, no problem. If the HHI delta pre- to
post-merger is less than 100 points, then likely it will be OK. If the delta is greater
than 100 points or the final HHI is greater than 1800 or – worse – both, then your
proposed merger is likely in trouble.
HHI Delta
<50
50-100
Post
merger
HHI
>100
<1000
no challenge no challenge no challenge
1000-1800 no challenge no challenge high scrutiny
>1800
no challenge high scrutiny possibly illegal
Chart on page 1059 is illustrative.
FTC v. Heinz, p1067: Presumptively illegal because of high HHI and delta. Sharfman
likes the result but felt the DC Circuit did not accord enough deference to the findings of
fact by the District Court.
We then spoke a little about FTC v. Staples, p1062: A glorious example of bad reasoning
according to Sharfman.
Last time about mergers:
Note: There is usually a question about a merger on the exam, worth something
between 33-50%
Section 1 of the Sherman Act covers mergers under Northern Securities, as this was an
agreement that has an adverse affect on competition (despite Holmes dissent).
So we now have Section 7 of the Clayton Act that explicitly covers mergers. Basically:

If you purchase the securities of another firm and this action may substantially
lessen competition, this is unlawful.
All the same remedies: money damages, injunctive relief, and so on up to the corporate
death penalty which is a break-up. There is no intent/attempt liability in section 7 of the
Clayton Act, this is under section 2 of the Clayton Act.
Now there is pre-merger review under Section 7(a), the Hart-Scott-Rodino act, which is a
notification then a 15 day (cash tender) or 30 day (all other deals, such as a stock
transaction) waiting period. This waiting period can be extended relatively indefinitely
through a second request for more information.
If upon determination you find that the delta of the HHI is in an area that demands higher
scrutiny (which, naturally needs a full review to determine), then the facts and
circumstances require full analysis.
From Administrative Law, Chevron: An administrative agency interpreting it’s own
ambiguously worded statute will be deferred to by the courts.
Question about the “single seller” hypothetical, meaning if such a thing existed could this
seller increase the price in a non-transitory fashion by 5%, would this cause defection
among purchasers?
Extended discussion of the merger guidelines, including the ridiculous aspects of the
efficiency argument as to why mergers should be allowed. As bit more deference was
given to the “failing firm” argument in which the assets of the failing firm would be lost
from the market.
There is private standing within section 7, but no private standing under section 7(a) of
the Clayton Act (only the government can object under section 7(a).
A nod to the Timothy Muris speech, which served to say there really isn’t much change
in antitrust; there is only change in the margin but, according to Sharfman, this is not the
case.
Attempted Monopolization
Lorain Journal, p832: Newspaper refused to sell space to advertisers that also placed ads
on radio. Case brought under Section 2 of the Sherman Act accusing the Lorain Journal
of attempting to monopolize. Market was defined as the advertisement. Lorain Journal
can refuse to deal except in an attempt to monopolize.
Aspen Skiing, p736: The third worst case in antitrust history. The Supreme Court bought
into the theory of attempted monopolization; that if the behavior was exclusionary or
predatory then the malfeasing firm loses its qualified right to refuse to deal. Issues: (1)
Why is Aspen the relevant? (2) Why is lowballing an attempt at monopolization? (3) Isn’t
this thrusting towards a section 1 issue, as a firm is being forced to cooperate with its
competitors?
Spectrum Sports, p837: The only way you will be liable under section 2 is where you
have predatory intent and there is a dangerous probability of success.
Microsoft, p798: This section of the decision points out the failings of the district court’s
logic when evaluating the penetrability of the browser market.
Last time we spoke about the Robinson-Patman act, which seems to only cover goods
(unless services are tied with the goods).
Remedies under the Robinson-Patman Act is only available to wholesalers.
Affirmative defenses are listed in 2(c) through 2(e), the biggest is due allowance for cost
(such as delivery to smaller retailers who require greater service during distribution).
Utah Pie, p1292.: Firms competing with Utah Pie in the Utah market by charging below
cost, plaintiff argued using the predation theory. It was not clear the price differentiation
was the problem in this case; in that it is in essence an anti-competitive argument.
Although the defendant went down (Utah Pie was the dominant seller at the time),
Utah Pie is a “primary line” case, as the question of where the harm arose, in this case the
harm was theoretically between the manufacturers and wholesalers (secondary would be
between wholesalers and retailers).
Morton Salt, p1302: Different prices for purchasers of different volumes of salt. The
question was whether the discount made due allowance for difference of cost. SCOTUS
overruled the decision of the Circuit holding that the defendant had the burden of proof
for the affirmative defense brought forth by the defendant.
The SCOTUS and enforcement branches of the government (FTC, et al) have
consistently been narrowing the Robinson-Patman act.
Volvo analogy ensued with disfavored dealers who don’t receive as low a price as
favored dealers. SCOTUS held last year that disfavored dealers could only recover after
proving lost sales, not for lost profits. Courts are essentially reducing private claims
under the Robinson-Patman act by reducing the damages that can be claimed under such
suits. Damages are cost differences and lost sales (possibly trebled), and attorney fees –
but damages must be direct.
So:
1) What would be the motivation for a seller to price discriminate?
2) Why would there be a Robinson-Patman Act at all?
The original motivation for the Robinson-Patman Act was to protect competitors rather
than competition; in fact, as time goes on the chorus is growing to repeal the statute
altogether.
Borden, p1321: Supermarkets and independent grocers have different prices. SCOTUS
decided Borden’s calculations for deciding on price difference policy (averaging costs
across groups) was contrary to the policy promulgated by the Robinson-Patman Act. The
burden of proof is on the defendant once the plaintiff has made a case that there are/were
indeed price differences for wholesalers
Falls City, p1334: Beer sellers near KY and IN border. Defendants are allowed to present
a case for price differences based upon geographies. The lower court disallowed a the
defendant’s affirmative “good faith of meeting the competition” defense, which falls
under section 2(b) of the Robinson-Patman Act.
Interesting start to tonight’s discussion, questioning about standing. It turns out you need
to show injury in fact in order to meet the Constitutional Article 3 requirement of a case
or controversy and you must show injury in fact.
Hanover Shoe, p104: Decision held that passing on the cost to downstream buyers by
plaintiffs is not a valid defense for defendants accused of price fixing.
Illinois Brick v. Illinois, p100: The pass on theory of harm cannot be used by end
consumers to make a claim against wholesalers or manufacturers.
This policy is to avoid duplicative awards of damages.
But what of Brennan’s passionate dissent, citing Section 4 of the Sherman Act in Illinois
Brick? Gone with the wind I’m afraid.
Kansas v. UtiliCorp United, p105: SCOTUS rules that a state has no federal standing
under the Hart-Scott-Rodino Act through parens patriae, but that there may be room
under state anti-trust laws.
Two general means for calculating damages (no matter which method uses, under the rule
of reason the markets need to be defined during the period of the infraction):
1) The Yardstick Method
(For price fixing) Compares the price charged in a geographic region where price
fixing is alleged during a particular period, then comparing the process of a
similar region. So, a competitive region’s prices are compared with an allegedly
non-competitive similar reasons (all factors which make the regions dissimilar
must be removed).
2) The Before, During, and After Method
Look only in a single area but examine conditions prior to the alleged misconduct,
during the misconduct, then after the misconduct.
Section 16 of the Clayton Act provides injunctive relief; cease and desist, actions in order
to allow a merger, etc.
Brunswick, handout: Brunswick, after incurring a quarter of a billion in 1960-dollar debt,
starts purchasing failing bowling alleys in possession of their equipment after the collapse
of the bowling fad. Competing bowling alleys in the areas where Brunswick is taking
over the failing lanes complain; Brunswick has deep pockets, anticompetitive, etc.
Pueblo et al ask for injunctive relief to divest itself of the bowling alleys plus damages.
SCOTUS rules that the plaintiffs have no real standing, as the harm they are suffering is
the same as if the failing bowling alleys had acquired more financing, been purchased by
another concern, etc. The only way a plaintiff can acquire standing under antitrust law
(and have a shot at the treble damages, etc.) is to prove the harm the plaintiff suffered
stemmed directly from the anticompetitive actions of the defendant.
In theory, consumers have standing to challenge a merger under Section 7 of the Clayton
Act (Section 7(a) gives standing to the government).
Brunswick stands for the concept that for a plaintiff to have antitrust standing under
Section 7 of the Clayton Act, the harm the plaintiff suffers must be directly tied to the
anticompetitive actions of the defendant.
There is standing for competitors under Section 2, because the theory is that the Sherman
Act is there not only to protect consumers and competition, but also to protect
competitive profit. If all three prongs are met, then a competitor has standing.
Last time, the key notion we discussed was the notion of antitrust standing. The holding
in the Illinois Brick and Hanover Shoe cases bear repeating.
Imagine 2 manufacturers, a wholesaler, a retailer, and a consumer.
If the manufacturers price fix, only the wholesaler can sue (not the retailer nor the
consumer). The government can also sue. This is the key holding of Illinois Brick:
“passing on” overcharges cannot be used offensively by a downstream buyer.
Hanover Shoe says that should the wholesaler sue the manufacturer, the wholesaler’s
passing along is not a defense for the violating manufacturer.
Now let’s take a case of a class action and a defendant manufacturer attempts to discover
the sales invoices of the wholesalers and retailers. The discovery request will be denied
as the information of how much the wholesalers and retailers charged in the downstream
transaction is irrelevant to the harm suffered by the wholesaler within the context of the
antitrust suit.
The essence is there must be privity (a direct contact/transaction) to obtain standing in an
antitrust suit.
The Brunswick case was based on section 7 of the Clayton Act, establishes that in order
to obtain a decision in an antitrust suit, the harm the plaintiff suffers must arise directly
from the type of harm the antitrust statutes were designed to prevent. So, even though the
plaintiffs suffered harm from the actions of Brunswick (who was taking over failing
bowling alleys that had overstretched themselves by purchasing Brunswick equipment),
this type of harm (reduced profits through increased competition brought about through a
deep pocket competitor) was not that envisioned by the writers of the antitrust statutes.
There then ensued a
Consent Decrees (Microsoft and Intel)
A consent decree is essentially a contract; that is an agreement between the plaintiff (in
these cases some form of government); typically the consent decree requires a change in
behavior of the defendant; they also often contain no admission of wrongdoing on the
part of the defendant.
Intel: The world is defined as the market (Intel’s share is greater overseas than it is just
here in the US). Intel was refusing to share advance information about and product
samples of their processors with Intergraph, Digital Equipment Corp., and Compaq
unless each of those firms agreed to share patented intellectual property with Intel. Suit
was brought under section 2 of the Sherman Act. The defendants prevailed, and the
consent decree contained a proviso allowing the three companies to resume their civil suit
if they so chose.
Only the FTC has standing to sue for breach of the consent decree.
Microsoft: Contains provisions for prohibited conduct in section III, and also contains
some affirmative obligations such as revealing its source code to vendors. Microsoft
cannot retaliate against independent software developers. OEMs can add their own and
remove Microsoft’s icons.
Paragraph J is where Microsoft wins. They don’t have to document or disclose certain
parts of its API, they are not precluded from licensing said code components, and so on.
In Section IV, a private monitoring system is set up to enforce the consent decree. Only
the plaintiffs (governments) have access to this process – and it’s cumbersome. Microsoft
also has to hire a compliance officer.
Page 13, paragraph 13: Third parties are forced to go through an alternative dispute
resolution – not sure if this is enforceable. Another huge Microsoft win.
Page 15, top: The decree is in effect for five years.
Review:
Back to the original chart; as price drops, more of a commodity or service will be sold.
As price increases, less will be sold. There is a competitive price (socially optimal price
and quantity), and a monopoly (profit maximizing) price. Between is a super-competitive
price, which is greater than the competitive price but maximizes profitability despite
reducing the amount of a commodity or service sold.
In theory, the antitrust laws are promulgated to protect competition, the efficient
distribution of goods, and consumers.
The reserve price is the maximum price consumers will pay for a commodity or service.
The triangle of consumers whose reserve is at the competitive price and those who are
willing to pay the higher price is the societal loss – in essence, those who do not purchase
because the price has become too high – and those transactions are left on the table.
Those who have been overcharged in the transaction have standing
Sherman Act Section 1 – requires two actors acting unison to unreasonably restrain trade.
All that matters is effect, although the purpose and intent of the agreement can also be
admitted as evidence.
Rule of reason mostly prevails, but Socony Vacuum introduced the per se rule in 1959.
Price fixing is usually bad, but BMI, who essentially created a new product through price
fixing, was found not to be a violation.
Next came the Quick Look doctrine. NCAA looked like a horizontal restraint on trade or
output through a quick look; California Dental seems to have eliminated the quick look.
Next line of cases explored whether an agreement can be found.
Interstate Circuit (theater case) looked at whether parallel conduct in the absence of an
external agreement could sustain a finding of an antitrust violation. As it turns out, no,
something more – a plus factor - is needed (a letter in the case of Interstate Circuit).
Compare Theater Enterprises.
One last note on Section 1 cases: The plaintiff needs to show the defendant has power in
the relative market for the case.
Group Boycotts are illegal only when horizontal (e.g., Fashion Originators); in a vertical
group boycott a full rule of reason analysis must be done (Nynex).
Denial of access to a joint venture is akin to group boycotts (think AP).
Immunities: There are a number of items immune from antitrust law (patents, copyright,
trademarks, and baseball).
Noerr-Pennington immunity when petitioning the government. Not so for Allied Tube,
however, which was lobbying a standards setting body and was found to be in violation.
Remember, too the decision in Columbia Pictures, in which a countersuit can give cover
to a defendant accused of an antitrust came. There is a “objectively baseless” standard for
evaluating such claims. Sharfman mused aloud, wondering if settling a baseless case was
a violation of an antitrust claim.
State action was covered in Parker, which stands for the proposition that the antitrust
laws govern persons not statest.
Dr. Miles indicates that maximum retail price setting is per se unlawful.
Sylvania stands for rule of reason prevailing in vertical non-price restraints.
Now, on to Section 2 cases.