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11 Regulation of Business Administrative Law P A R T Regulation of Business Administrative Law The Federal Trade Commission Act and Consumer Protection Laws Antitrust: The Sherman Act The Clayton Act, The Robinson-Patman Act, and Antitrust Exemptions and Immunities Employment Law Environmental Regulation

50 C H A P T E R The Clayton Act, The Robinson-Patman Act, and Antitrust Exemptions and Immunities If you think of life as like a big pie, you can try to hold the whole pie and kill yourself trying to keep it, or you can slice it up and give some to the people around you, and you still have plenty left for yourself. Jay Leno, 1999

Learning Objectives Identify anticompetitive behavior under the Clayton Act (§3, §7, §8) Discuss FTC and DOJ roles for proposed mergers Describe the three types of price discrimination Explain the antitrust exemptions

Overview of The Clayton Act Clayton Act enacted to fill a perceived weaknesses of the Sherman Act Only probability of significant anticompetitive effect required for Clayton Act violations Private plaintiffs may sue for injunctive relief and treble damages Dept. of Justice and FTC share enforcement of Clayton Act to seek injunctive relief or issue cease and desist orders

Clayton Act Section 3 Prohibits two potentially anticompetitive behaviors: tying agreements and exclusive dealing agreements Applies to commodities (goods) in interstate commerce No formal agreement required Act prohibited if it would substantially lessen competition or tend to create a monopoly

Tying Agreements Tying: agreement restrains trade by requiring a buyer to purchase one product (tied product) from a seller in order to purchase another product (tying product) from same seller Exclusive dealing: agreement in which buyer required to handle seller’s product exclusively or purchase all of buyer’s requirements for a commodity from seller Tying arrangements: Two separate products Seller must have sufficient market power Seller must restrain a “not insubstantial” amount of commerce in the tied product market Exclusive dealing illegal only if the agreement may (a) substantially lessen competition or tend to create a monopoly, and (b) involves a not insubstantial amount of commerce Quantitative substantiality test (Standard Oil): Courts look at the dollar amount of commerce involved Qualitative substantiality test (Tampa Electric): Courts examine the area of effective competition (total market for product within competitive region) and percentage of market the agreement covers

Clayton Act Section 7 Prohibits mergers to achieve monopoly Applies to acquisition of stock or assets of another company in any line of commerce or any activity affecting commerce Act prohibited if it would substantially lessen competition or tend to create a monopoly Requires Pre-Merger Notification & Report Form filed with FTC and Justice Department so they may review and clear the merger

Determining Relevant Market To determine probable anticompetitive effect of merger, one must first determine the line of commerce (relevant product market) and section of the country (relevant geographic market) likely to be affected by the merger

Determining Relevant Market To determine probable anticompetitive effect of merger, one must first determine the line of commerce (relevant product market) and section of the country (relevant geographic market) likely to be affected by the merger Functional interchangeability test is applied: Are the products manufactured by the merging firms reasonably interchangeable by consumers to serve the same purposes?

Horizontal Mergers Horizontal mergers – mergers among firms competing in same product and geographic markets – subjected to rigorous scrutiny since result is more concentration in the market Key question: what will be the market share of the resulting firm? Click to add notes

Vertical Mergers Vertical mergers are between firms that previously had, or could have had, a supplier–customer relationship Do not directly result in concentration Threatens competition if merger forecloses competitors, increases barriers to market entry, or eliminates potential competition Courts examine share of relevant market foreclosed to competition

Clayton Act Section 8 Prohibits any person from serving as director or senior officer of two or more competitor corporations, each with capital, surplus, and undivided profits more than $10 million Excludes banks and common carriers Per se standard of liability No illegality if competitive overlap between firms is an insignificant part of either firm’s total sales

Overview of The Robinson-Patman Act Congress enacted the Robinson-Patman Act to stop major chain stores from using their financial power to engage in primary, secondary, and tertiary price discrimination Pressures competitors and suppliers

Price Discrimination Primary: lowering prices in areas with competition and raising prices in areas without competition Secondary: using buying power to compel lower prices from manufacturer than prices offered to smaller, independent firms Tertiary: when customer who received lower pricing from a supplier passes on savings to its customers

Defenses to Sec. 2(a) Liability Cost justification Price differentials due to cost of manufacture, sale, or delivery Changing conditions Price differentials due to changing conditions in the market for or marketability of the goods Meeting competition Price differentials charged in good faith to meet an equally low price of a competitor Must be a response to an individual competitive situation Cost justification defense recognizes the reality that it may be less costly for a seller to service some buyers than others. Utilizing this cost justification defense may be difficult and expensive for sellers because quantity discounts must be supported by actual evidence of cost savings. Changing conditions defense narrowly confined to temporary situations caused by the physical nature of the goods, such as perishable goods.

Antitrust Exemptions Labor unions are not combinations or conspiracies in restraint of trade under the Clayton Act and Norris–LaGuardia Act The business of insurance subject to state regulation are exempt from federal antitrust scrutiny under the McCarran–Ferguson Act This statutory exemption does not exempt union combinations with nonlabor groups aimed at restraining trade or creating a monopoly.

Antitrust Exemptions Joint export activities of American companies are exempt under the Webb–Pomerene Act as long as activities do not artificially or intentionally enhance or depress U.S. prices Regulated industries receive some antitrust immunity since regulatory agencies have power to approve industry practices Agricultural cooperatives are exempt from antitrust liability under the Clayton Act and Capper–Volstead Act Agricultural cooperatives exemption extends only to legitimate collective marketing activities. It does not legitimize coercive or predatory practices that are unnecessary to accomplish lawful cooperative goals.

Antitrust Exemptions The state action exemption recognizes states’ rights to regulate economic activity Noerr Pennington doctrine: Sherman Act does not prohibit two or more persons from joining to petition government to obtain government action even if intended to eliminate competition Patent law promotes innovation by granting a limited monopoly to those who invent and develop products and processes The Armstrong case, in the text, discusses the state action exemption.

Thought Questions Do the exemptions for antitrust liability available for patents, changing conditions, and meeting competition, make sense if the goal of antitrust law is to promote competition? Is regulation a good method for promoting competition? Opportunity to discuss (a) why patents have been granted (under the U.S. Constitution) limited monopoly power, (b) why changing conditions and some of the other exemptions might – or might not -- make sense in a rapidly globalizing and economically interdependent world, and whether or not regulation is the only or the best method to ensure “free” competition. Also the opportunity to discuss whether the U.S. truly has “free” competition.