CHAPTER 13
ANTITRUST LAWS – REGULATING COMPETITION
I. LEARNING OBJECTIVES
This chapter introduces the student to antitrust law. The purpose of the chapter is to familiarize
the student with basic antitrust laws, the Sherman Act, the Clayton Act, and the Federal Trade
Commission Act. The student should understand that these antitrust laws were enacted to make
our competitive economic system work. The antitrust sanctions will be emphasized. Students
should become familiar with the fundamental aspects of the Sherman Act, its exemptions, and
typical violations of this act. Furthermore, students should gain an appreciation of how Congress
and the courts attempt to close loopholes left by the Sherman Act. This understanding is gained
through the study of three sections of the Clayton Act and one section of the FTC Act.
II. REFERENCES
Ewing, K.P., Competition Rules for the 21st Century: Principles from America’s Experience.
Kluwer Law International (2003)
Gordon, R.L., Antitrust Abuse in the New Economy: The Microsoft Case. Edward Elgar (2002).
Greider, K., The Big Fix: How the Pharmaceutical Industry Rips Off American Consumers.
Public Affairs (2003).
Haas-Wilson, D., Managed Care and Monopoly Power: The Antitrust Challenge. Howard
University Press (2003).
Holmes, W.C., Antitrust Law Handbook, 2004 Edition. Clark, Boardman, Callaghan (2004).
Kwoka, J.E. and L.J. White, The Antitrust Revolution: Economics, Competition and Policy.
Oxford University Press (2004).
Sullivan, L.A. and W.S. Grimes, Hornbook on the Law of Antitrust: An Integrated Handbook.
West Publishing (2000).
Wells, W.C., Antitrust and the Formation of the Postwar World. Columbia University Press
(2002).
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III. THE BUSINESS DECISION
A. What legal worries do you have about each of these situations?
With respect to dividing territories with competitors, you might worry whether this is
competitively advantageous. You also should focus on the potential antitrust violation
based on a restraint of trade.
With respect to the customer requesting a more favorable pricing program, you need to
focus on how to provide any resulting favorable treatment to all your customers.
B. What type of information should a training/education program for your sales force
include?
Detailed instruction on the Sherman Antitrust Act, the Clayton Act, and the Federal
Trade Commission Act should be shared with this sales force.
C. What are the ramifications if you decide to ignore these situations as you try to return to
your “happy” state of mind?
A violation of the Sherman Antitrust Act could result in criminal penalties of up to
$10,000,000 imposed on your company. You personally could face a $350,000 fine and
up to three years in prison. There also is the potential of liability arising from civil
claims of as much as three times the damages proven.
IV. TEACHING OUTLINE
1. Historical Development
A. Emphasize:
(1) The definition of a trust. Illustrate how the trust device was used to form some of
the first monopolies. Explain that trusts still have many legal uses such as in estate
planning.
(2) The meaning of the term "antitrust law."
(3) The reasons for the adoption of the Sherman Act.
(4) The reasons for the adoption of the Clayton Act.
(5) The reasons for the adoption of the Federal Trade Commission Act.
(6) That the Justice Department and the FTC enforce the antitrust laws on behalf of
government.
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(7) The private attorney general concept and the importance of suits by individual
competitors and customers.
(8) The importance of state antitrust laws.
B. Additional Matters for Discussion
(1) That the goal of antitrust law is WORKABLE COMPETITION.
(2) The validity of the assumption made in defining "workable competition."
THE SHERMAN ACT
2. Restraint of Trade
A. Emphasize:
(1) Not all contracts that limit competition are illegal. For example, a contractual
restraint of trade that is partial as to the time and area of its operation, and that is
reasonably designed to protect some legitimate interest, will be enforced by the
courts and is not a violation of public law.
(2) A parent corporation and its subsidiary are incapable of conspiring to violate the
Sherman Act. The coordinated activity of a parent and a wholly owned subsidiary
is viewed as that of a single enterprise for purposes of Section 1 of the Sherman
Act.
B. Case for Discussion
A physician claimed that a hospital and its medical staff conspired to misuse a
congressionally regulated peer review process to exclude him from the market for
ophthalmological services in Los Angeles. Issue: Is there a sufficient nexus with
interstate commerce to support federal jurisdiction under Section 1 of the Sherman Act?
Held: Yes. A proper analysis of the alleged conspiracy in restraint of interstate trade in
violation of Section 1 focuses upon potential harm that would ensue if conspiracy were
successful, not upon its actual consequences. If the conspiracy is successful, there will
be a reduction in the services available. The boycott of a single surgeon may have a
general impact on the market. Summit Health Ltd. v. Pinhas, 111 S.Ct. 1842 (1991).
C. Additional Matter for Discussion
The National Cooperative Production Amendments Act of 1993. This law encourages
joint production ventures. The joint ventures, which must notify the Justice Department
and the FTC, are judged under the rule of reason standard. Also, in a private
enforcement action, the plaintiff can recover only actual damages -- triple damages are
not allowed.
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3. Monopoly
A. Emphasize:
(1) A company that has a "monopoly" may be guilty of violating the Sherman Act even
if it does not and has not used its monopoly power to obtain unfair prices or profits.
(2) Proof of intent to monopolize is significant. If a company unintentionally ends up
with a monopoly, is it guilty? No, but as a practical matter there is usually some
proof of intent to acquire or to maintain it.
(3) Factors including product and geographic markets are used by courts to determine
if monopoly power exists.
B. Case for Discussion
Through a series of relationships and transactions, Spectrum Sports, Inc. became the
national distributor for sorbothane (a patented elastic polymer) in athletic shoes.
Sorboturf, Inc., which had been a distributor of sorbothane, failed as a business.
Sorboturf, Inc. sued Spectrum Sports, Inc. for violating § 2 of the Sherman Act. The
jury found that Spectrum Sports, Inc. was "monopolizing, attempting to monopolize,
and/or conspiring to monopolize." The court of appeals upheld the jury's verdict
($1,743,000 to be tripled plus almost $100,000 in attorney's fee) even though there was
no specific finding by the jury as to Spectrum's precise violation. Issue: Is a jury
required to focus on the alleged violator's intent to monopolize a particular (relevant)
market? Held: Yes. Intent to monopolize alone is insufficient to establish the
dangerous probability of success which requires inquiry into the relevant product and
geographical market and the alleged violator's economic power in that market.
Spectrum Sports Inc. v. McQuillan, 113 S.Ct. 884 (1993).
C. Additional Matters for Discussion
(1) The concept of predatory conduct.
(2) The boxed example based on Aspen Skiing Co. v. Aspen Highlands Corp.
(3) The box labeled “Proving an Illegal Monopoly Exists.”
4. Analysis in Antitrust Law
A. Emphasize:
(1) The rule of reason and the concept of per se illegality. Note that if an activity is
per se illegal, all that is required is proof of the activity. Proof of anticompetitive
effect is not required.
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(2) That the test of the rule of reason is the impact of the business activity on
competition. Some activities have so clearly a negative impact that no further
analysis is required. For example, price fixing.
(3) That there are several business practices that are not illegal per se but may be
declared to be illegal because of their impact on competition. For example:
a. Price protection plans, under which sellers formally assure customers that they
will meet any lower quote offered by a competitor. Such guarantees may
actually be a device to curb price cutting, since they obviously destroy the
incentive of a market newcomer to cut prices in order to build volume.
b. "Delivered pricing," which averages out transportation costs and thus reduces
the competitive advantage of plants located close to major customers.
c. Industry-wide pricing on the basis, not of costs or of competitive pressures, but
on some independent data source such as the averages compiled by commodity
news services.
d. Split agreements in a particular market allocate distributors by which exhibitors
in a particular market allocate among themselves the right to negotiate or bid
for films offered by distributors for showing in that market. The exhibitors
also agree to refrain, completely or for a stated period, from bidding against
each other for the right to exhibit the firms so allocated.
(4) The case of California Dental Association v. Federal Trade Commission.
(Appendix, Case 13-1)
Answers to CASE QUESTIONS:
1. The FTC claims jurisdiction over the California Dental Association on the
grounds that the Association violated § 5 of the FTC Act.
2. These phrases are the types of analysis used by courts in determining whether
business activity restrains trade illegally.
3. The FTC and the 9th Circuit uphold the Commission’s jurisdiction and the
finding that the Association’s Code of Ethics restrain truthful, nondeceptive
advertising.
4. The Supreme Court agreed that the FTC has jurisdiction. However, the Court
found that the per se illegal and quick-look analysis are inappropriate in this
case. The Court remands the case for a more thorough analysis.
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5. Sanctions
A. Emphasize:
(1) The sanctions: (a) criminal, (b) equitable, (c) legal, and (d) seizure of property.
(2) That employees of corporations that are guilty of a Sherman Act violation may be
sent to prison as well as fined and that the typical sentence is at least 18 months.
(3) The three possible pleas in a criminal case, and note the reasons that business
frequently pleads "nolo contendere." Tie this plea to the treble damage remedy by
emphasizing that a guilty plea of finding in a criminal case is prima facie evidence
of a violation in a subsequent civil action for treble damages.
(4) The latest increase in fines:
a.
b.
Individuals $100,000 to $350,000.
Corporations $1 million to $10 million.
(5) That the Sherman Act empowers courts to grant injunctions at the request of the
government or a private party that will prevent and restrain violations of its
provisions.
(6) That an injunction may issue even though a criminal case has resulted in a finding
of "not guilty."
(7) That injunctions may be used to order divestiture by mergered firms.
(8) The growing importance of treble damage suits and that many suits are brought by
competitors. Note that a philosophy of "if you can't beat them, sue them" has
developed.
(9) That the "treble" or "triple" damage remedy that allows victims to collect three
times the damages they have suffered is perhaps the most important sanction.
Examples of triple damage recoveries include the following:
a.
b.
c.
d.
e.
Nintendo paid $30 million for price-fixing of video games.
Delta, American, United, TWA, Northwest, and U.S. Air airlines paid $44
million in cash and $458 million in coupons to travelers to settle a case
involving the use of reservation systems to set prices.
Mead Johnson paid $38.8 million in a price-fixing of infant formula case.
Twenty-two manufacturers of corrugated cardboard agreed to pay $300
million to 300,000 firms that purchased corrugated cardboard between 1960
and 1978.
Recording companies have agreed to grant discounts on purchases of CDs to
settle a class action claim of price fixing.
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B. Cases for Discussion
(1) Monfort is the country's fifth-largest beef packer. Excel Corporation (Excel), the
second-largest packer, is a wholly owned subsidiary of Cargill, Inc., a large
privately owned corporation with more than 150 subsidiaries in at least 35
countries. Excel signed an agreement to acquire the third-largest packer in the
market, Spencer Beef, a division of the Land O'Lakes agricultural cooperative.
Spencer Beef owned two integrated plants and one slaughtering plant. After the
acquisition, Excel would still be the second-largest packer, but would command a
market share almost equal to that of the largest packer, IBP, Inc. (IBP). Monfort
brought an action to enjoin the prospective merger. Its complaint alleged that the
acquisition would "violate Section 7 of the Clayton Act because the effect of the
proposed acquisition may be substantially to lessen competition or tend to create a
monopoly in that it would impair Monfort's ability to compete. Issue: Is Monfort
entitled to an injunction? Held: No. A plaintiff seeking injunctive relief must
show a threat of antitrust injury, and that a showing of loss or damage due merely
to increased competition does not constitute such injury. Cargill, Inc. v. Monfort
of Colorado, Inc., 107 S.Ct. 484 (1986).
(2) Brunswick is one of the two largest manufacturers of bowling equipment selling its
equipment to bowling centers on credit. When the bowling industry declined in the
early 1960s, many bowling centers went into default. In order to combat its own
financial difficulty, Brunswick began acquiring and operating defaulting bowling
centers. Although these acquisitions made it the largest operator of bowling
centers, it controlled only 2 percent of the bowling centers in the United States.
The plaintiffs, operators of bowling centers, sought treble damages, claiming they
would have made a higher profit if Brunswick had allowed the defaulting centers
to close. Issue: Do they state a valid claim for damages? Held: No. Antitrust
damages are not available when the injury alleged is that competitors were
continued in business, thereby damaging plaintiffs' anticipated increase in the
market share. The plaintiffs' loss of income that would have accrued had the
failing centers acquired by manufacturer of bowling equipment gone bankrupt was
not the type of injury the Clayton Act was intended to cover. The antitrust laws
were enacted to protect competition -- not competitors. Brunswick Corp. v.
Pueblo Bowl-O-Mat, Inc., 97 S.Ct. 690 (1977).
(3) Several states who were indirect purchasers of cement brought class action suits
against cement producers alleging a conspiracy to fix prices. Suit was based on
state antitrust laws which allow suit by indirect purchasers to recover overcharges
passed on to them by direct purchasers. Issue: Are state antitrust statutes that
permit indirect purchasers to recover overcharges pre-empted by federal law?
Held: No. The Illinois Brick doctrine does not prevent recovery under state laws.
California v. ARC America Corp., 109 S.Ct. 1661 (1989).
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C. Additional Matters for Discussion
(1) That an attorney may be individually liable under the antitrust laws if he exceeds
his role as a legal advisor and becomes an active participant in formulating policy
decisions to restrain competition.
(2) The immunity granted municipalities under the Local Government Antitrust Act.
(3) That the U.S. is now entitled to collect triple damages.
(4) The concept summary on Antitrust Sanctions
6. Exemptions
A. Emphasize:
(1) The exceptions to the Sherman Act coverage, and note the reasons for each
exception.
(2) That these exceptions are narrowly construed.
(3) That the "state action" exemption was created in the famous case of Parker v.
Brown. It held that the Sherman Act does not cover the sovereign action of a state
that chooses to replace competition with regulation when the state actively
supervises and regulates the anticompetitive conduct.
(4) That the Noerr-Pennington doctrine provides that bona fide attempts to influence
legislative bodies are immune from antitrust scrutiny, regardless of anticompetitive
purpose.
(5) That the First Amendment is the cornerstone of this doctrine. Point out the
importance of the free flow of information and the right to petition government for
a change in the law.
B. Cases for Discussion
(1) Professional Real Estate Investors, Inc. (PRE) copied hundreds of videotapes for
use by hotel guests for in-room viewing. Several movie production studios sued
PRE for copyright infringement. PRE counterclaimed that these defendants were
engaged in a conspiracy that violated the antitrust law. The defendant moved for
summary judgment on the counterclaim since their infringement suit is exempt
under Noerr-Pennington. Issue: Is the infringement suit a sham that denies the
studios the exemption from the antitrust law? Held: No. The existence of
probable cause to begin a legal proceeding precludes a finding that the litigation is
a sham. The Court agrees that the studios had probable cause to institute the
infringement lawsuit. Professional Real Estate Investors v. Columbia Pictures,
113 S.Ct. 1920 (1993).
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(2) A group of lawyers who regularly acted as court-appointed counsel for indigent
defendants in District of Columbia criminal cases agreed to stop providing such
representation until the District increased their compensation. The boycott had a
severe impact on the District's criminal justice system, and the District government
capitulated to the lawyers' demands. After the lawyers returned to work, the
Federal Trade Commission (FTC) filed a complaint alleging a conspiracy to fix
prices and to conduct a boycott that constituted unfair methods of competition in
violation of § 5 of the FTC Act. Issue: Are Noerr-Pennington and the First
Amendment a defense? Held: No. A per se violation (price fixing). The Noerr
doctrine does not extend to horizontal boycotts designed to exact higher prices
from the government simply because they are genuinely intended to influence the
government to agree to the conspirators' terms. F.T.C. v. Superior Court Trial
Lawyers Assn., 110 S.Ct. 768 (1990).
(3) The country's largest producer of steel electrical conduit attempted to prevent the
National Fire Protection Association from approving the use of plastic conduit in
the National Electric Code. Issue: Is this action exempt from the Sherman Act?
Held: No. Efforts to influence private associations that set product safety
standards that are routinely incorporated into state and local laws are not immune
from antitrust liability under the Noerr-Pennington Doctrine which protects
petitioning of government officials. The association is not a quasi-legislative body.
Allied Tube & Conduit Corp. v. Indian Head, Inc., 108 S.Ct. 1931 (1988).
(4) A surgeon alleged that a competing clinic's physicians initiated and participated in
peer review proceedings to terminate his privileges in the city's only hospital. He
asserted that the proceedings were brought to reduce competition rather than to
improve patient care. Issue: State action exemption? Held: No. The state does
not actively supervise the peer review process. The state does not actively
supervise the termination of hospital staff privileges unless a state official has and
exercises ultimate authority over private privilege determination. A state official
has this kind of authority only if he or she has power to review private peer-review
decisions and overturn a decision that fails to accord with state policy. Patrick v.
Burget, 108 S.Ct. 1658 (1988).
(5) Rate bureaus representing common carriers in five southeastern states provided a
forum for carriers to discuss and agree on rates for intrastate transportation of
commodities. These rates were then proposed to the public service commissions
for approval. The U.S. instituted action to enjoin this activity. Issue: Is the state
action exemption applicable? Held: Yes. It is not enough that the anticompetitive
conduct is prompted by state action; it must be compelled by the state. The rate
bureaus are entitled to Sherman Act immunity under the state action doctrine.
Southern Motor Carriers Rate Conference, Inc. v. United States, 105 S.Ct.
1721 (1985).
(6) Government brought antitrust action against a nonprofit cooperative association
whose members were involved in production and marketing of broiler chickens.
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Certain members of the association owned neither breeder flocks nor hatcheries
and maintained no grow-out facilities to raise flocks. Issue: Are they exempt?
Held: No. Such members were not "farmers" under the Capper-Volstead Act, and
thus association was not entitled to the act's limited protection from antitrust laws.
National Broiler Marketing Ass'n. v. United States, 98 S.Ct. 2122 (1978).
TYPES OF CASES
7. Horizontal Price Fixing
A. Emphasize:
(1) The reasons that price-fixing is illegal per se under the Sherman Act. Note that
price-fixing is a common violation and that price-fixing cases have top priority of
the Justice Department and the FTC.
(2) That even the fixing of reasonable prices is illegal. It is illegal to agree to:
a.
b.
c.
d.
raise or lower prices;
charge a fixed price;
not charge above a stated price; or
limit supply.
(3) The box labeled “Examples of Horizontal Price-fixing Cases.”
B. Cases for Discussion
(1) Plaintiffs, beer retailers, brought suit alleging that their wholesalers had engaged in
an unlawful conspiracy to restrain trade by refusing to sell beer unless plaintiffs
paid cash in advance or at the time of the delivery. The wholesalers had an
agreement that none of them would grant short-term credit although such credit had
been extended in the past. Issue: Is the agreement illegal per se? Held: Yes.
Extending interest-free credit for a period of time is equivalent to giving a discount
equal to the value of the use of the purchase price for that period of time. Thus,
credit terms must be characterized as an inseparable part of the price. Catalano,
Inc. v. Target Sales, Inc., 100 S.Ct. 1925 (1980).
(2) The National Society of Professional Engineers adopted a rule in its code of ethics
which prohibited competitive bidding by members. This was done to minimize the
risk that competition would result in inferior engineering work which would
endanger the public safety. The United States brought a civil suit to nullify the
canon of ethics. Issue: Is the canon a violation of Section 1 of the Sherman Act?
Held: Yes. The act does not require competitive bidding; it prohibits
unreasonable restraints on competition. It is the restraint that must be justified
under the rule of reason. Petitioner's attempt to do so on the basis of the potential
threat that competition poses to the public safety and the ethics of its profession is
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nothing less than a frontal assault on the basic policy of the Sherman Act. Even
assuming occasional exceptions to the presumed consequences of competition, the
statutory policy precludes inquiry into the question of whether competition is good
or bad. National Society of Professional Engineers v. U.S., 98 S.Ct. 1355
(1978).
(3) Plaintiffs contracted to buy a home in Fairfax County, Virginia. They were
unsuccessful in finding a lawyer who would perform the required title examination
for less than the fee prescribed in a minimum-fee schedule published by the Fairfax
County Bar Association and enforced by the Virginia State Bar. They brought a
class action suit seeking injunctive relief and damages alleging that the minimumfee schedule constituted price fixing, in violation of Section 1 of the Sherman Act.
Issue: Are minimum-fee schedules subject to Section 1 of the Sherman Act?
Held: Yes. A rigid price floor resulted from the defendants' activities. The
schedule was enforced through the threat of professional discipline. The title
examination is an integral part of an interstate transaction and therefore affects
commerce. There is no evidence that Congress intended a sweeping exclusion for
learned professions. The fact that the state bar is a state agency for some limited
purposes does not create an antitrust shield that allows it to foster anticompetitive
practices for the benefit of its members. Goldfarb Et Ux v. Virginia State Bar,
Et Al., 95 S.Ct. 2004 (1975).
8. Vertical Price Fixing
A. Emphasize:
(1) The reasons that manufacturers often desire to maintain retail prices.
a.
b.
c.
d.
It guarantees retailers big enough profits to provide services to consumers,
such as extended warranties or knowledgeable salespeople.
Higher profits will convince more retailers to stock a product, which could
promote interbrand competition.
Uniform pricing prevents "free riders," discount stores that rely on full-price
competitors to teach customers about sophisticated products.
Higher prices add to a product's prestige.
(2) The reason that economists and discount retailers are against resale price
maintenance schemes.
a.
b.
c.
d.
Fixed prices do not ensure that stores will use their fatter profits to provide
service; they may simply pocket the extra money.
While interbrand competition may be fostered, vertical price-fixing kills
interbrand competition between stores carrying the same brands.
If a manufacturer deems service to be essential, it can be required of all
retailers through dealership contracts.
Artificially high prices cheat consumers.
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(3) The Colgate Doctrine.
(4) The case of State Oil Company v. Khan. (Appendix, Case 13-2)
Answers to CASE QUESTIONS:
1. State Oil Company controlled the price of gas its retail outlets charged through
a policy that any amount collected above the suggested retail price would be
rebated to State Oil Company. Any amount below the suggested retail price
reduced the retail outlet’s profit.
2. The Supreme Court believes that the rule of reason analysis will allow the
effective identification of situations in which vertical maximum price fixing is
anticompetitive. This analysis brings vertical maximum price fixing in line
with the antitrust analysis used in most commercial transactions.
3. This decision does not change the fact that both vertical minimum price fixing
and all horizontal price fixing are illegal per se.
B. Cases for Discussion
(1) Monsanto manufactures agricultural herbicides. Spray-Rite was an authorized
Monsanto distributor. Monsanto canceled Spray-Rite's distributorship after
receiving complaints from other distributors that Spray-Rite was cutting prices.
Spray-Rite sued for triple damages. Monsanto contended that the distributorship
was terminated because Spray-Rite had failed to hire trained salespeople and
promote sales adequately, not because of the complaints. Issue: Is proof of
termination following a competitor's complaint enough to make the conduct illegal
per se? Held: No. There are two distinctions in distributor-termination cases.
First, there is the distinction between concerted and independent actions:
concerted activity is illegal; independent action is not. The second distinction is
between concerted action to set prices and concerted action on nonprice
restrictions. The former are illegal per se, and the latter are judged under the rule
of reason. A price-fixing agreement cannot be inferred from the existence of
complaints from other distributors or even from the fact that termination came in
response to such complaints. Something more than evidence of complaints is
needed to prove price-fixing. Note: The evidence here was sufficient to prove the
violation. Monsanto Co. v. Spray-Rite Service Corp., 104 S.Ct. 1464 (1984).
(2) Union Oil requires lessees of its retail service stations to sign "consignment"
agreements which allow Union Oil to set the prices at which the retailer sells
gasoline. The agreement provides that title to the gas remain in Union Oil until
sold by the retailer and that all property taxes be paid by Union Oil. Retailers were
then to be paid by a commission on sales made and had to pay all the costs of
operating the station. Simpson, a retailer of Union Oil gasoline, sold gasoline at 2
cents below the price set by Union, and because of this, Union refused to renew his
lease. Simpson sued for triple damages claiming the consignment contract violated
the Sherman Act. Issue: Should Simpson recover? Held: Yes. Although
consignment agreements serve useful purposes, they only control and allocate the
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risks and rights between the parties and do not necessarily control the rights of
others. Therefore, no matter how lawful it is under private contract law, a
consignment agreement must comply with federal antitrust policy. Dealers are
independent business people -- they have all the characteristics of entrepreneurs
except setting prices. Their return is affected by the rise and fall of market price.
These agreements allow Union Oil to impose noncompetitive prices on retailers by
the use of coercive consignments. Simpson v. Union Oil Co., 377 U.S. 13 (1964).
(3) Parke Davis announced that it would sell its products only to those wholesalers and
retailers who observed minimum resale prices suggested by Parke Davis. To
promote compliance, Parke Davis refused to sell to any wholesaler who supplied
its products to any retailer who did not observe the suggested minimum retail
prices. Several retailers continued to sell Parke Davis vitamins at a discount, and
when their names were furnished to the wholesalers, both Parke Davis and the
wholesalers refused to fill their orders for any of the manufacturer's products.
Issue: Were these actions a violation of the Sherman Act? Held: Yes. The
program upon which Parke Davis embarked to promote general compliance with
its suggested resale prices plainly exceeded the limitations of the Colgate Doctrine.
Parke Davis did not content itself with announcing its policy regarding retail prices
and following this with a simple refusal to have business relations with any
retailers who disregarded that policy. United States v. Parke, Davis & Co., 362
U.S. 29 (1960).
9. Indirect Price Fixing
A. Emphasize:
(1) "Conscious parallelism" in pricing and its significance.
(2) The Concept Summary on Price Fixing.
B. Case for Discussion
The only two daily newspapers of general circulation in Tucson, Arizona, the Citizen
and the Star, signed a joint operating agreement. Under this agreement, each paper
retained its own news and editorial department and its corporate identity. Tucson
News, Inc. (TNI), owned equally by both parties, was formed to manage all other
departments for each paper. The agreement eliminated competition between the parties
through three control devices: (a) price-fixing -- distribution, sales and placement of
advertising were all handled by TNI, while subscription and advertising rates were set
jointly; (b) profit pooling -- all profits were commingled and distributed pursuant to an
agreed ratio; and (c) market control -- neither paper nor its stockholders could engage in
the other competing business, that is, publishing, in the Tucson metropolitan area.
Issue: Is this arrangement illegal? Held: Yes. It is a Sherman Act violation. Pricefixing is illegal per se. Profit pooling at a set ratio reduces, and possibly eliminates,
incentive to compete. The market control arrangement is a "division of fields,"
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prohibited by the Sherman Act. Citizen Publishing Co. et al. v. United States, 89
S.Ct. 927 (1969).
10. Territorial Agreements
A. Emphasize:
(1) Examples of territorial restrictions and exclusive arrangements that would aid
competition by allowing competitors to survive.
(2) Examples of restrictions and exclusive arrangements that would tend to destroy
competition.
(3) Horizontal territorial agreements are illegal per se; vertical territorial restrictions
are subject to the rule of reason. They may be illegal. If a plaintiff can establish
that the inter-brand market structure is such that intra-brand competition is a
critical source of competitive pressure on price, a plaintiff may recover triple
damages. The plaintiff is required to show the nature and effect of the territorial
restriction were such as to adversely affect market competition.
B. Case for Discussion
A manufacturer of television sets marketed its products through a retail franchise
system that required franchisees to sell its products only from the locations at which it
was franchised. A disenchanted franchisee claimed that defendant had violated Section
1 of the Sherman Act by entering into and enforcing these agreements. Issue: Are
vertical territorial restrictions per se violations? Held: No. Territorial restrictions are
subject to the rule of reason. Vertical restrictions reduce intra-brand competition but
promote inter-brand competition. As such, inquiries as to the harm, if any, on
competition are required. Continental T.V., Inc. v. GTE Sylvania, Inc., 97 S.Ct.
2549 (1977).
11. Concerted Activities
A. Emphasize:
(1) The impact of the 1984 NCAA case on college football and T.V.
(2) The current concerns being expressed by presidents of colleges which are not
members of the BCS conferences.
(3) That cases in this area are subject to the Rule of Reason.
B. Additional Matters for Discussion
(1) The National Cooperative Research Act.
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(2) The box labeled “Basic Provisions of the National Cooperative Production
Amendment Act.”
THE CLAYTON ACT
12. Introduction
A. Emphasize:
(1) The provisions of the Clayton Act and its policy to stop anti-competitive practices
in their "incipiency" by making the Sherman Act more specific.
(2) The "crystal ball approach" of the Act in outlawing certain practices if they may
lessen competition substantially or just have a tendency to monopoly.
B. Additional Matter for Discussion
The Clayton Act:
(1) Excluded labor unions from the prohibitions of the Sherman Act.
(2) Allowed private individuals to obtain injunctions.
(3) Contained the provisions allowing suits for triple damages.
13. Price Discrimination
A. Emphasize:
(1) The reasons why the original Clayton Act was considered to be weak and in need
of amendment.
(2) That the Robinson-Patman Amendment was designed to eliminate illegal price
discrimination between large and small buyers.
(3) That the amendment applies only to activities in interstate commerce.
(4) The various levels of competition that may be involved.
(5) That the Robinson-Patman Amendment to the original Clayton Act made it illegal
to sell at unreasonably low prices to drive out a competitor. Discuss the reasons
for outlawing such activities.
(6) The fact that a dominant manufacturer has priced products above their average cost
does not conclusively establish that such pricing is not predatory. However, proof
of such pricing requires that a plaintiff show by clear and convincing evidence that
the price is predatory.
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(7) That a prima facie case of predatory pricing is established by proof that the price is
below average variable cost. Such pricing is proof of anticompetitive conduct.
Pricing below average variable cost will not always constitute a violation, and
evidence is admissible to show some other reason for the price. If a price is below
average total cost but above average variable cost, the plaintiff has the burden of
proving that the pricing was predatory.
(8) Take the case of Texaco, Inc. v. Hasbrouck. (Appendix, Case 13-3)
Answers to CASE QUESTIONS:
1. That Texaco sales were in interstate commerce; that the gasoline sold was the
same grade and quality; that Texaco discriminated in the price of gas sold; and
that this discrimination negatively impacted the competitive abilities of one of
the buyers.
2. The lower courts held for Hasbrouck finding that Texaco was involved in
illegal price discrimination.
3. Texaco argues that Gull and Dompier were wholesalers, thereby placing them
on a different competitive level from Hasbrouck.
4. The Court concludes that there is no benefit being received by Texaco that
justifies the functional discount offered to Gull and Dompier but not to
Hasbrouck.
(9) The various defenses to price discrimination charges.
(10) That the burden of proof is on the defendant, since these are affirmative defenses.
B. Cases for Discussion
(1) The University of Alabama Medical School operates a pharmacy. Drug
manufacturers sold drugs to these pharmacies at lower prices than they sold the
same drugs to other pharmacies. Issue: Is the sale of pharmaceutical products to
state and local government hospitals for resale in competition with private retail
pharmacies exempt from the proscriptions of the Robinson-Patman Act? Held:
No. The statutory language -- "persons" and "purchasers" -- is sufficiently broad to
cover governmental bodies. Jefferson Cty. Pharmaceutical Ass'n v. Abbott
Labs, 103 S.Ct. 1011 (1983).
(2)
The plaintiff, a former automobile dealer, brought suit against the defendant
automobile manufacturer, alleging that the defendant's "sales incentives"
programs over a certain period violated the Robinson-Patman amendment. Under
these programs, Chrysler paid a bonus to its dealers if they exceeded their sales
quotas. The plaintiff alleged that its quotas were higher than those of its
competitors, that it ultimately received fewer bonuses than did its competitors,
and that the net effect was that it paid more for its automobiles than did its
competitors. It sought as damages the amount of the price difference multiplied
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by the number of cars purchased. Issue: Is the plaintiff entitled to "automatic
damages" upon a showing of a substantial price discrimination? Held: No. By
its terms, Section 2(a) of the Clayton Act as amended by the Robinson-Patman
amendment is a preventative statute. It does not require that the price
discrimination must in fact have harmed competition. In contrast, Section 4 of the
Clayton Act is essentially a remedial statute; under it a plaintiff must make a
showing of actual injury attributable to something the antitrust laws were designed
to prevent in order to recover triple damages. Proof of a violation of Section 2(a)
establishes only that injury may result; therefore, proof of a violation does not
mean that a disfavored purchaser has been actually "injured" within the meaning
of Section 4. A plaintiff must prove more than a violation of Section 2(a). (The
court remanded the case so that the Court of Appeals could consider the
sufficiency of the evidence of injury.) J. Truett Payne Co. v. Chrysler, 102
S.Ct. 1923 (1981).
(3) Standard Oil sold gasoline at a lower price to another oil company, which in turn
sold it to a wholesaler, who in turn sold it to a competitor of the plaintiff at a price
that was still lower than the price paid by the plaintiff for similar gasoline. Issue:
Is this type of price discrimination within the coverage of Robinson-Patman?
Held: Yes. The law does not immunize Standard's price discrimination simply
because the product in question passed through an additional formal exchange
before reaching the level of Perkins' actual competitor. From Perkins' point of
view, the competitive harm done him by Standard is certainly no less because of
the presence of an additional link in this particular distribution chain from the
producer to the retailer. Perkins v. Standard Oil Company of California, 89
S.Ct. 1871 (1969).
C. Additional Matters for Discussion
(1) The near impossibility of proving costs and the cost justification defense. (Review
the role of indirect costs in cost accounting.)
(2) The definition of "good faith" and the reasons for the meeting of competition
defense.
(3) That the meeting of competition defense applies to buyers as well as sellers.
(4) The concept summary on Robinson-Patman Amendment.
14. Special Arrangements
A. Emphasize:
(1) That the rule of reason analysis applies.
(2) That a determination of the relevant market and the probable future anticompetitive
effects must be made to show that a violation of Section 3 of the Clayton Act
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exists, just as a determination of these facts must be made to test the legality of a
merger under Section 7 or of a price discrimination under Section 2 of the Clayton
Act.
(3) That a tying contract may be in violation of the Sherman Act as well as Section 3
of the Clayton Act.
(4) That some tying agreements may be illegal per se. This occurs if coercion is
involved or if it results from the exercise of market power that is exploited.
(5) That coercive reciprocal dealings in which two parties, one with more economic
leverage than the other, agree to buy each other's goods have the same
anticompetitive effects as tie-ins and, thus for the Sherman Act purposes, should be
judged by the same per se analysis. Such contracts are per se illegal if [1] there is a
very local contract; [2] there must be some modicum of coercion shown, i.e., a
showing of an onerous effect on an appreciable number of buyers coupled with a
demonstration of sufficient economic power in the market; [3] the defendant must
have sufficient economic power in the tying market to impose significant
restrictions in the tied product market; and [4] the amount of commerce in the tied
market must not be insubstantial.
(6) That an exclusive dealing contract may be a requirements (needs) contract whereby
the buyer agrees to purchase all its business needs of a product from a certain
seller, or it may be an output contract under which the buyer agrees to buy all of
the seller's output.
B. Case for Discussion
A hospital had a contract with a firm of anesthesiologists requiring all anesthesiological
services for the hospital's patients to be performed by that firm. Because of this
contract, the plaintiff anesthesiologist's application for admission to the hospital's
medical staff was denied. The plaintiff sought an injunction. He claimed that the
exclusive contract was illegal because it forced the users of the hospital's operating
rooms (the tying product) to purchase the hospital's chosen anesthesiological services
(the tied product) and therefore constituted an illegal "per se" tying arrangement. Issue:
Is the arrangement by the hospital illegal? Held: No. It is not a per se violation and no
unreasonable restraint of competition. The essential characteristic of an invalid tying
arrangement lies in the seller's exploitation of its control over the tying product to force
the buyer into purchasing a tied product that the buyer either does not want at all or may
have preferred to purchase elsewhere on different terms. When such "forcing" is
present, competition on the merits in the market for the tied item is restrained and the
Sherman Act is violated. For a per se violation, the existence of forcing must be
probable, and there must be a substantial potential for impact on competition. Here,
there was no forcing of patients to purchase the services. Since patients are free to enter
a competing hospital and to use another anesthesiologist instead of the firm, no such
forcing element is present in this case. Jefferson Parish Hosp. Dist. No. 2 v. Hyde,
104 S.Ct. 1551 (1984).
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15. Illegal Mergers and Acquisitions
A. Emphasize:
(1) The history of the Clayton Act with emphasis on the Celler-Kefauver Amendment.
(2) That Section 7 of the Clayton Act covers persons and is not limited to corporations.
Thus, acquisition by partnerships is covered. Also emphasize that the law covers
persons engaged in commerce or in any other activity affecting commerce.
(3) The ways in which one business may acquire another business and the technique in
which mergers and acquisitions are accomplished.
(4) The definition of horizontal, vertical, market extension, and conglomerate mergers.
Contrast product extension with geographic extension mergers.
(5) The reason that the law seeks to prevent mergers that are anticompetitive.
(6) That a company has standing under the Clayton Act to enjoin a competitor's
acquisition of another competitor if it can demonstrate the likelihood of
competitive injury from the acquisition.
(7) That before a given merger or acquisition by one company of the stock or assets of
another can be illegal under Section 7, two basic facts must be established:
a. The relevant market (product line of commerce) and geographic section of the
country.
b. The probable future anticompetitive effects of the merger (if the effect may be
to substantially lessen competition or just have a tendency to create a
monopoly).
(8) That Section 7 can be enforced by the Department of Justice, the FTC, and private
parties. State enforcement is of growing importance.
(9) That the basic remedy is the injunction.
B. Case for Discussion
American Stores, the fourth largest supermarket chain in California, acquired all of the
stock of the largest chain. The state filed suit to stop the acquisition under Section 7 of
the Clayton Act. Issue: Can litigants other than the federal government obtain
divestitures? Held: Yes. Divestiture is a form of "injunctive relief" authorized by §
16. Note, however, that simply because a district court has the power to order
divestiture in appropriate § 16 cases does not mean that it should do so in every
situation in which the Government would be entitled to such relief. A private litigant
must establish standing by proving "threatened loss or damage" to his own interests,
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and his suit may be barred by equitable defenses such as laches or "unclear hands."
California v. American Stores Company, 110 S.Ct. 1853 (1990).
C. Additional Matters for Discussion
(1) The "incipiency" rule and the importance of the potential entrant doctrine.
(2) The failing-company doctrine. Note that it is being used more and more to justify
mergers and that it is being used before companies actually fail. Also, the doctrine
has been applied to failing divisions and failing subsidiaries.
(3) That enforcement seems to be relaxed with respect to mergers within the defense
industry, the communications industry, and the healthcare industries.
(4) Examples of mergers that were disallowed; i.e., General Mills and RJR Nabisco,
Microsoft, Intuit, Office Depot and Staples.
THE FEDERAL TRADE COMMISSION ACT -- UNFAIR COMPETITION
16. Enforcement
A. Emphasize:
(1) That for the FTC to find the particular business conduct is an "unfair method of
competition" or "unfair or deceptive act or practice," it is not required under
Section 5 of the FTC Act to make a determination of the relevant market involved
or a finding of its probable future anticompetitive effects.
(2) The case of Toys “R” Us, Inc. v. Federal Trade Commission. (Appendix, Case
14-4)
Answers to CASE QUESTIONS:
1. Warehouse clubs had the lowest markup on toys and thus offered significant
competition to Toys “R” Us.
2. Toys “R” Us adopted a policy that in essence required suppliers which wanted
Toys “R” Us as a customer to limit the toys available to warehouse clubs.
3. The FTC concluded that Toys “R” Us led a manufacturer boycott of warehouse
clubs that was illegal per se, that the boycott was unreasonably anticompetitive,
and that the agreements between Toys “R” Us and the manufacturers violated
section 1 of the Sherman Act. Taken together, these conclusions support a
finding that § 5 of the FTC Act is violated.
4. Toys “R” Us argues that its arrangements were of a vertical nature and were
negotiated as separate agreements with each toy manufacturer.
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5. The appellate court affirmed the district judge’s decision that § 5 was violated.
B. Additional Matter for Discussion
The case of FTC v. Brown Shoe Co., 384 U.S. 316 (1966). This case sets forth the
Supreme Court’s view that § 5 of the FTC Act stands apart from the provisions of the
Sherman and Clayton Acts.
17. Prevention
A. Emphasize:
(1) The use of trade regulation rules.
(2) That the FTC is empowered to gather and compile information concerning any
corporation engaged in commerce. For example, this includes the power to
investigate advertising practices of the cigarette industry without showing that the
investigation is reasonably likely to gather evidence of unfair or deceptive
practices.
(3) That the only remedy for a violation of Section 5 of the FTC Act is that of a ceaseand-desist order issued by the FTC. Note that these must be issued on a case-bycase basis and that after a cease-and-desist order is issued and becomes final
against business X, X is subject to a fine of $10,000 per day for continuing to
violate it. However, the order directed to business X has no bearing on business Y,
which can engage in the same type of "unfair" practices as X did, without penalty,
until a cease-and-desist order is issued against Y itself and becomes final. (This is
assuming the practice is not in violation of any other law but Section 5.)
B. Case for Discussion
The Indiana Federation of Dentists promulgated a "work rule" forbidding its members
to submit x rays to dental insurers in conjunction with claim forms. The Federation's
membership was small, numbering less than 100, its members highly concentrated in
and around three Indiana communities. Issue: Is this an unfair method of competition?
Held: Yes. The Federation's policy of requiring its members to withhold x-rays
amounted to a conspiracy in restraint of trade that was unreasonable and hence unlawful
under. . .§ 1 of the Sherman Act. The Federation's policy had had the actual effect of
eliminating such competition among dentists and preventing insurers from obtaining
access to x-rays in the desired manner. A rule of reason decision. F.T.C. v. Indiana
Federation of Dentists, 106 S.Ct. 2009 (1986).
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V. ANSWERS TO REVIEW QUESTIONS AND PROBLEMS - CHAPTER 13
INTRODUCTION
1. Historical Development
(a) The Sherman Act declares illegal restraints of trades and monopolies or attempts to
monopolize.
(b) The Justice Department’s Antitrust Enforcement Division and the Federal Trade
Commission.
(c) State attorneys general are authorized to bring civil actions for damages and injunctive
relief.
(d) Yes, usually through triple damages actions and for injunctive relief.
THE SHERMAN ACT
2. Restraint of Trade
Yes. These agreements among the orthodontists likely would be found to be unreasonable
restraints of competitive pricing. In fact, at least the agreement to charge the $200 initial
fee is so unreasonable as to be illegal per se.
3. Monopoly
Yes. Grinnell has monopoly power in the market with 87 percent control if the proper
market was chosen. The geographic market is the nation. The product market is central
station hazard-detecting systems. The court must consider whether there are "substitutes"
that should be considered in determination of market share. None of the substitutes for the
accredited central station service meet the interchangeability test. The market power was
achieved by unlawful and exclusionary practices that establish the violation. United States
v. Grinnell Corporation, 86 S.Ct. 1698 (1966).
4. Analysis in Antitrust Law
(a) The actual language of the Sherman Act makes every agreement that restrains trade
illegal. The rule-of-reason analysis clarifies that only unreasonable restraints are to be
challenged.
(b) When an activity is per se illegal it is presumed to be so anticompetitive that it has to
be unreasonable.
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5. Sanctions
(a) A Sherman Act violation is subject to
•
•
•
•
3 years imprisonment or a $350,000 (individual)/$10,000,000 (corporation) fine or
both
an injunction
triple damage suits
seizure of property
(b) A finding of guilt or a guilty plea in a criminal case establishes proof of wrong in the
civil case.
(c) The nolo contendere plea does not establish guilt in the criminal case and hence does
not offer proof of a antitrust violation in a civil case.
6. Exemptions
These operators would use the Noerr-Pennington Doctrine as their defense that they are
exempt from the Sherman Act’s application.
7. Horizontal Price Fixing
No. To expel Hillary would be a violation of the Sherman Act since such expulsion would
be for the purpose of enforcing an illegal price fixing scheme.
8. Vertical Price Fixing
(a)
Vertical minimum-price fixing is permissible under the Colgate Doctrine. The
supplier must announce the minimum price its customers can charge, and the supplier
must directly enforce this pricing policy. The use of any intermediary in the enforcing
program likely will result in a finding of an illegal price fixing arrangements.
(b)
The courts will use the rule-of-reason analysis when determining the legality of
vertical price fixing. This analysis is appropriate since vertical price fixing is not
inherently anticompetitive. Such practices might actually increase interbrand
competition.
9. Indirect Price Fixing
Yes. This exchange of information is likely to be held as an unreasonably anticompetitive
activity.
10. Territorial Agreements
(a)
No. The granting of exclusive territories to franchisees may reasonably enhance
competition.
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(b)
Any product where the price is relatively low and ease of availability determines the
buying decision. Small electronic appliance products, food items, and beverages are
examples where intrabrand competition may need to be limited to increase interbrand
competition.
11. Concerted Activities
Not necessarily. If the manufacturers act independently of one another, there is no illegal
activity.
THE CLAYTON ACT
12. Introduction
(a)
Injunctions and triple damage suits are the sanctions provided under the Clayton Act.
(b)
The use of the word “incipiency” means that the Clayton Act was designed to stop
anticompetitive behavior at the earliest possible stage.
13. Price Discrimination
(a)
Perhaps, giving a discount to only one customer violates the Robinson-Patman
Amendment to the Clayton Act.
(b)
Your other customers’ claim for triple damages should be your most likely problems.
Either these customers or the government could also seek an injunction to stop similar
discounts.
(c)
No, the same offer of the discounted price to all customers removes the price
discrimination.
14. Special Arrangements
(a)
No. This exclusive supply contract likely could be justified as a reasonable means of
maintaining quality standards.
(b)
The exclusive nature of the supply contract for paper products and cleaning suppliers
is less reasonable. Requiring franchisees to purchase these types of items does not
necessarily enhance the franchiser’s quality image.
15. Illegal Mergers and Acquisitions
The government’s best argument is that P&G is a potential entrant in the liquid bleach
market. As a potential competitor, P&G should not be allowed to purchase this product
position through the acquisition of Clorox.
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THE FEDERAL TRADE COMMISSION ACT – UNFAIR COMPETITION
16. Enforcement
Yes. The outcome of this case turns on the application of various exemptions from the
antitrust laws (which the Supreme Court concludes are not applicable here). However,
what is clear is that the case brought by the FTC is entirely within that agency's authority
under Section 5. FTC v. Superior Court Trial Lawyers Assn., 110 S.Ct. 768 (1990).
17. Prevention
VI.
(a)
Any actions that violate the Sherman or Clayton Acts likely could be analyzed as a §
5 violation. Advertising campaigns also may be declared unfair or deceptive. Other
activities challenged by the FTC do not have to violate the Sherman and Clayton
Acts.
(b)
No. Section 5 of the FTC Act is independent from both the Sherman and Clayton
Acts.
TERMINOLOGY REVIEW
1. (1) - (c)
(2) - (e)
(3) - (g)
(4) - (i)
(5) - (d)
(6) - (f)
(7) - (h)
(8) - (k)
(9) - (b)
(10) - (a)
(11) - (m)
(12) - (l)
(13) - (j)
VII. BUSINESS DISCUSSION
Monopoly Worries
A. Do you have any concerns about this proposal?
The movement away from the all-area pass likely will damage relationships with your
competitors. If the new two-slope pass adversely impact the financial condition of your
competitors, they may argue your company is attempting to monopolize the ski-slope
ticket business.
B. What issues, including factual findings, should you pursue?
You should investigate the interest of customers in having access to your company’s
slope as opposed to all slopes. You will want to be aware of the language and
application of section 2 of the Sherman Act.
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Best Customer Prices
A. Are you in trouble no matter what you do?
Yes. If you fail to explain the reasons that you cannot favor one customer over another,
you may lose one-third of your sales.
B. If you agree, have you broken any law?
Yes. Robinson-Patman Amendment of the Clayton Act Section 2.
C. If you have violated a law, what are the potential consequences?
Liability for triple damages to other customers.
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