American Bar Association Section of Antitrust Law American Bar Association Young Lawyers Division Antitrust Committee New York State Bar Association and State Enforcers jointly present THE ANTITRUST BASICS TELECONFERENCE SERIES Lesson I: Sherman Act Section 1 September 20, 2006 Eric A. Sacks Jenner & Block LLP

“Every contract, combination..., or conspiracy, in restraint of trade... is declared to be illegal.” 2 15 U.S.C. § 1.

3 Compare Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911), with United States v. Trans-Missouri Freight Ass’n, 166 U.S. 290 (1897); see also Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918), see also Phillip Areeda & Louis Kaplow, Antitrust Analysis ¶¶ (4th ed. 1988). Only unreasonable restraints are illegal.

Elements of Section 1 Claim Civil antitrust claims: Civil antitrust claims: − Standing − Antitrust Injury − Causation − Damages 4 Section 1: Section 1: − Agreement that is − Unreasonable

The Agreement Element Express – Direct Evidence Express – Direct Evidence – Circumstantial Evidence Tacit– Parallel conduct Tacit– Parallel conduct – Independent action? 5 See Phillip Areeda & Louis Kaplow, Antitrust Analysis ¶ 236 (4th ed. 1988).

Direct Evidence Contracts Contracts Corporate and Transactional Documents Corporate and Transactional Documents Rules Rules Testimony Testimony 6

Circumstantial Evidence “Conscious commitment to a common scheme designed to achieve an unlawful objective.” “Conscious commitment to a common scheme designed to achieve an unlawful objective.” Evidence that “tends to exclude the possibility” of independent conduct. Evidence that “tends to exclude the possibility” of independent conduct. 7 Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768 (1984). Id.; see also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986).

Circumstantial Evidence Parallel Conduct (“conscious parallelism”) and “plus factors” 8 See VI Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶¶ 1433, 1434 (2d ed. 2003); In re Baby Food Antitrust Litig., 166 F.3d 112, 122 (3d Cir. 1999); Petruzzi’s IGA Supermarkets, Inc. v. Darling-Delaware Co., Inc. 998 F.2d 1224, 1243 (3d Cir. 1993).

“Plus” Factors Suggestion of traditional conspiracy (“facilitating practices”) Suggestion of traditional conspiracy (“facilitating practices”) Action against economic-interests? Action against economic-interests? Motivation to conspire? Motivation to conspire? 9 See VI Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1434 (2d ed. 2003); In re Baby Food Antitrust Litig., 166 F.3d 112, 127 (3rd Cir. 1999); Petruzzi’s IGA Supermarkets, Inc. v. Darling-Delaware Co., Inc. 998 F.2d 1224, (3rd Cir. 1993).

Parties to the Agreement Competitors– Horizontal Agreement Competitors– Horizontal Agreement (Interbrand Competition) (Interbrand Competition) “Partners”– Vertical Agreement (Intrabrand Competition) “Partners”– Vertical Agreement (Intrabrand Competition) Corporate– No Agreement? Affiliates Corporate– No Agreement? Affiliates 10 Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). Compare Palmer v. BRG of Georgia, Inc, 498 U.S. 46 (1990), with Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977); see also United States v. Topco Associates, Inc., 405 U.S. 596 (1972).

Unreasonable Restraint Element Rule of Reason Rule of Reason Per Se Rule Per Se Rule Alternatives: “Quick Look” Doctrines Alternatives: “Quick Look” Doctrines 11

Rule of Reason Do one or more parties to the restraint have the ability to harm competition? Do one or more parties to the restraint have the ability to harm competition? − Market Power Gate Does the restraint help more than it hurts? Does the restraint help more than it hurts? − Balancing of benefits (pro-competitive virtues) with costs (anticompetitive vices) Can the benefits of the restraint be obtained without all of its costs? Can the benefits of the restraint be obtained without all of its costs? − “Least restrictive alternative” 12 See VII Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1502 at (2d ed. 2003); see also Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918).

Market Power Gate Indirect Proof Indirect Proof − Market share in properly defined “relevant market” Direct Proof Direct Proof − Increase price or decrease output without significant profit loss 13

Example of Business Justifications Restraint Increases Output Restraint Increases Output Restraint Lowers Price Restraint Lowers Price Restraint Promotes Brand Investment Restraint Promotes Brand Investment − Prevents “free-riding” 14

Per Se Rule Because of “pernicious effect on competition and lack of ANY redeeming virtue,” a restraint is “conclusively presumed to be unreasonable” Because of “pernicious effect on competition and lack of ANY redeeming virtue,” a restraint is “conclusively presumed to be unreasonable” Categories Categories Court experience Court experience 15 Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958) (emphasis added).

Per Se Illegal Restraints Horizontal Price Fixing Horizontal Price Fixing Vertical Price Fixing (Resale Price Maintenance) Vertical Price Fixing (Resale Price Maintenance) Horizontal Market Division Horizontal Market Division Some Horizontal Boycotts Some Horizontal Boycotts Some Tying Arrangements Some Tying Arrangements 16 United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940). Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990). Compare Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, (1985), with Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 212 (1959). Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, (1984).

Rigid Approach Old School No consideration of possible procompetitive virtues No consideration of possible procompetitive virtues Even when they are plausible Even when they are plausible 17 United States v. Topco Associates, Inc., 405 U.S. 596, (1972).

Alternative Approaches New School Ancillary restraints doctrine Ancillary restraints doctrine − Naked restraint? − “Quick look” Truncated rule of reason Truncated rule of reason − Condemnation without “elaborate industry analysis” − “Quick look” 18 See California Dental Ass’n v. FTC, 526 U.S. 756; (1999); Law v. NCAA, 134 F.3d 1010, 1020 (10th Cir. 1998); see also NCAA v. Board of Regents of Univ. of Okla., 468 U.S. 85, , & n.39 (1984); FTC v. Indiana Federation of Dentists, 476 U.S. 447, 459 (1986). See VII Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1511c at (2d ed. 2003); Polk Brothers, Inc. v. Forest City Enters., Inc., 776 F.2d 185, (7th Cir. 1985); see also Rothery Storage & Van Co. v. Altas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986); Joel I. Klein, Acting Assistant Attorney General, Antitrust Division, A Stepwise Approach to Antitrust Review of Horizontal Agreements, Remarks Before the American Bar Association’s Antitrust Section Semi-Annual Fall Policy Program (November 7, 1996) (available at 1996 WL ).

Challenging Section 1 Organizations Cooperative Ventures Cooperative Ventures Associations Associations Standard Setting Organizations Standard Setting Organizations 19

Cooperative Ventures Legitimate vs. Sham Legitimate vs. Sham − Pro-competitive Cooperation − Creation or Promotion of a Product or Service − Risk Sharing − Integration Ancillary Restraint? Ancillary Restraint? 20 Compare Polk Brothers, Inc. v. Forest City Enters., Inc., 776 F.2d 185, (7th Cir. 1985), with Polygram Holding, Inc. v. FTC, 416 F.3d 29, (D.C. Cir. 2005). Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951), overruled on other issue by Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984); see also Engine Specialties, Inc. v. Bombardier Ltd., 605 F.2d 1, 8-11 (1st Cir. 1979).

Associations Information Gathering and Sharing Information Gathering and Sharing Help for Cartel or Boycott? Help for Cartel or Boycott? 21 California Dental Ass’n v. FTC, 526 U.S. 756 (1999); Fashion Originators’ Guild of America v. FTC, 312 U.S. 457 (1941).

Standard Setting Organizations Opportunity for Pro-Competitive Virtues Opportunity for Pro-Competitive Virtues Opportunity for Exclusion Opportunity for Exclusion − Safeguards − “Subversion” 22 Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, , (1988); American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982); Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656 (1961).

Vertical Restraints Non-price– Rule of Reason Non-price– Rule of Reason – Free Riding Maximum Price– Rule of Reason Maximum Price– Rule of Reason Minimum Price – Per Se Minimum Price – Per Se 23 Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977); see also Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988). Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). State Oil Co. v. Khan, 522 U.S. 3 (1997).

Resources Phillip Areeda & Louis Kaplow, Antitrust Analysis (4th ed. 1988). Phillip Areeda & Louis Kaplow, Antitrust Analysis (4th ed. 1988). VI & VII Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law (2d ed. 2003). VI & VII Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law (2d ed. 2003). See also ABA Section of Antitrust Law, Model Jury Instructions in Civil Antitrust Cases, 2005 Edition (2005). See also ABA Section of Antitrust Law, Model Jury Instructions in Civil Antitrust Cases, 2005 Edition (2005). 24