Antitrust Law and Unfair Trade Practices Chapter 22 Antitrust Law and Unfair Trade Practices

Antitrust Laws A series of laws enacted to: Federal antitrust law Limit anticompetitive behavior in almost all industries, businesses, and professions operating in the United States Federal antitrust law Comprises several major statutes that prohibit certain anticompetitive and monopolistic practices Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Federal Antitrust Statutes Sherman Act Makes certain restraints of trade and monopolistic acts illegal Clayton Act Regulates mergers and prohibits certain exclusive dealing arrangements Federal Trade Commission Act (FTC Act) Prohibits unfair methods of competition Robinson-Patman Act Prohibits price discrimination Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Government Actions The federal government is authorized to bring actions to enforce federal antitrust laws May seek civil damages, including treble damages, for violations of antitrust laws Treble damages: Damages that may be awarded in a successful civil antitrust lawsuit, in an amount that is triple the amount of actual damages Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Private Actions Section 4 of the Clayton Act: A section which provides that anyone injured in his or her business or property by the defendant’s violation of any federal antitrust law (except the Federal Trade Commission Act) may Bring a private civil action Recover from the defendant treble damages plus reasonable costs and attorneys’ fees Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Effect of a Government Judgment Government judgment: A judgment obtained by the government against a defendant for an antitrust violation It may be used as prima facie evidence of liability in a private civil treble-damages action Section 16 of the Clayton Act Permits the government or a private plaintiff to obtain an injunction against anticompetitive behavior that violates antitrust laws Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act A section that prohibits contracts, combinations, and conspiracies in restraint of trade Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act Rule Description Rule of reason Requires a balancing of pro- and anticompetitive effects of the challenged restraint. Restraints that are found to be unreasonable are unlawful and violate Section 1 of the Sherman Act. Restraints that are found to be reasonable are lawful and do not violate Section 1 of the Sherman Act. Per se rule Applies to restraints that are inherently anticompetitive. No justification for the restraint is permitted. Such restraints automatically violate Section 1 of the Sherman Act. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 22.1 Horizontal Restraint of Trade Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Price Fixing A restraint of trade that occurs when Competitors in the same line of business agree to set the price of the goods or services they sell Thus, raising, depressing, fixing, pegging, or stabilizing the price of a commodity or service Price fixing is a per se violation of Section 1 of the Sherman Act Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Division of Markets A restraint of trade in which competitors agree that each will serve only a designated portion of the market Also known as market sharing It is a per se violation of Section 1 of the Sherman Act Group boycott (refusal to deal) A restraint of trade in which two or more competitors at one level of distribution agree not to deal with others at another level of distribution Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 22.2 Group Boycott by Sellers Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 22.3 Group Boycott by Purchasers Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Other Horizontal Agreements Some horizontal agreements entered into by competitors at the same level of distribution examined using the rule of reason Unreasonable restraints violate Section 1 of the Sherman Act Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 22.4 Vertical Restraint of Trade Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Resale Price Maintenance A per se violation of Section 1 of the Sherman Act Occurs when a party at one level of distribution enters into an agreement with a party at another level to adhere to a price schedule that either sets or stabilizes prices Also known as vertical price fixing U.S. Supreme Court has held that setting minimum resale prices is a per se violation of Section 1 of the Sherman Act as an unreasonable restraint of trade However, there is insufficient economic justification for per se invalidation of vertical maximum price fixing Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Nonprice Vertical Restraints Restraints of trade that are unlawful under Section 1 of the Sherman Act If their anticompetitive effects outweigh their procompetitive effects Nonprice vertical restraints include situations in which a manufacturer: Assigns exclusive territories to retail dealers Limits the number of dealers that may be located in a certain territory Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Unilateral Refusal to Deal A unilateral choice by one party not to deal with another party This does not violate Section 1 of the Sherman Act because there is not concerted action Conscious parallelism A doctrine which states that if two or more firms act the same but no concerted action is shown: There is no violation of Section 1 of the Sherman Act Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Noerr Doctrine A doctrine which says Section 2 of the Sherman Act Two or more persons can petition the executive, legislative, or judicial branch of the government or administrative agencies to enact laws or take other action without violating antitrust laws Section 2 of the Sherman Act A section that prohibits monopolization and attempts or conspiracies to monopolize trade Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Monopolization: Section 2 of the Sherman Act Element Description Relevant product or service market The market that includes substitute products or services that are reasonably interchangeable with the defendant’s products or services. Relevant geographic market The geographic area in which the defendant and its competitors sell the product or service. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Monopolization: Section 2 of the Sherman Act Element Description Monopoly power The power to control prices or exclude competition. If the defendant does not possess monopoly power, it cannot be held liable for monopolization. If the defendant possesses monopoly power, the court will determine whether the monopolist has engaged in an act of monopolizing. Act of monopolizing The defendant’s engagement in a willful act of monopolizing trade or commerce in the relevant market Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Attempts and Conspiracies to Monopolize Firms that attempt or conspire to monopolize a relevant market may be found liable Under Section 2 of the Sherman Act Defenses to monopolization Innocent acquisition Natural monopoly Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Merger: Section 7 of the Clayton Act Element Description Line of commerce The market that will be affected by a merger. It includes products or services that consumers use as substitutes for those produced or sold by the merging firms. Section of the country The geographic market that will be affected by a merger. Probability of a substantial lessening of competition A probability of a substantial lessening of competition after a merger, in which case the merger may be prohibited. The statute deals with probabilities; actual proof of the lessening of competition is not required. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Horizontal Merger A merger between two or more companies that compete in the same business and geographical market Such mergers are subjected to strict review under Section 7 because they clearly result in an increase in concentration in the relevant market Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Vertical Merger A merger that integrates the operations of a supplier and a customer It does not create an increase in market share because the merging firms serve different markets It may cause anticompetitive effects such as foreclosing competition Backward vertical merger: A vertical merger in which a customer acquires a supplier Forward vertical merger: A vertical merger in which a supplier acquires a customer Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Market Extension Merger A merger between two companies in similar fields whose sales do not overlap Conglomerate merger A merger that does not fit into any other category A merger between firms in totally unrelated businesses The unfair advantage theory holds that A conglomerate merger may not give the acquiring firm an unfair advantage over its competitors in finance, marketing, or expertise Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Defenses to Section 7 Actions The failing company doctrine A competitor may merge with a failing company if There is no other reasonable alternative for the failing company No other purchaser is available The assets of the failing company would completely disappear from the market if the merger is not allowed The small company doctrine Two or more small companies are allowed to merge without liability under Section 7 If the merger allows them to compete more effectively with a large company Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Premerger Notification Hart-Scott-Rodino Antitrust Improvement Act (HSR Act) An act that requires certain firms to notify the Federal Trade Commission and the Justice Department in advance of a proposed merger Unless the government challenges a proposed merger within thirty days, the merger may proceed Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Section 3 of the Clayton Act An act that prohibits tying arrangements involving sales and leases of goods Tying arrangement: A restraint of trade in which: A seller refuses to sell one product to a customer unless the customer agrees to purchase a second product from the seller Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Section 2 of the Clayton Act A federal statute that prohibits price discrimination in the sale of goods if certain requirements are met Section 2(a) of the Robinson-Patman Act Prohibits direct and indirect price discrimination by sellers of a commodity of a like grade and quality, where the effect of such discrimination may be To substantially lessen competition To tend to create a monopoly in any line of commerce Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Direct Price Discrimination Necessary elements to prove a violation of Section 2(a) of the Robinson-Patman Act Commodities of like grade and quality Sales to two or more purchasers Injury to the plaintiff Indirect price discrimination: A form of price discrimination that is less readily apparent than direct forms of price discrimination Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Defenses to Price Discrimination Description Cost justification A defense in a Section 2(a) action which provides that a seller’s price discrimination is not unlawful if the price differential is due to “differences in the cost of manufacture, sale, or delivery” of the product. Changing conditions defense A price discrimination defense that claims prices were lowered in response to changing conditions in the market for or the marketability of the goods. Meeting the competition defense A defense provided in Section 2(b) of the Robinson-Patman Act that says a seller may lawfully engage in price discrimination to meet a competitor’s price. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Federal Trade Commission Act Federal Trade Commission: A federal government administrative agency that is empowered to enforce the Federal Trade Commission Act Section 5 of the FTC Act Prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exemptions from Antitrust Laws Type of Exemption Description Statutory exemptions Exemptions from antitrust laws that are expressly provided in statutes enacted by Congress. Implied exemptions Exemptions from antitrust laws that are implied by the federal courts. State action exemption Business activities that are mandated by state law and are therefore exempt from federal antitrust laws. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

State Antitrust Laws State antitrust statutes are usually patterned after federal antitrust statutes They are used to attack anticompetitive activity that occurs in intrastate commerce Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.