Chapter 45 Antitrust Law

Introduction Common law actions intended to limit restrains on trade and regulate economic competition. Embodied almost entirely in: The Sherman Antitrust Act of The Clayton Act of 1914.

§ 1: The Sherman Antitrust Act Section 1 and 2 contain the main provisions of the Sherman Act. Section 1: Requires two or more persons, as a person cannot contract, combine, or conspire alone. Concerned with finding an agreement. Section 2: Applies both to an individual person and to several people, because it refers to every person. Deals with the structure of monopolies in the marketplace.

§ 2: Section 1 of the Sherman Act Section 1 regulates what are called “horizontal” and “vertical” restraints.

Horizontal Restraints Horizontal restraints are agreements among Sellers (or Buyers) that restrain competition between rival firms competing in the same market.

Price Fixing An agreement between competing firms in the market to set an established price for the goods or services they offer. Price fixing is a per se violation of the Act.

Group Boycotts Agreement between two or more sellers to refuse to deal with a particular person or firm. Group boycotts are per se violations of the Act.

Horizontal Market Division Occurs when competitors in the same market agree that each will have exclusive rights to operate in a particular geographic area. Horizontal market divisions are per se violations of the Act.

Trade Associations Trade Associations are industry specific organizations created to provide for the exchange of information, representation of the business interests before governmental bodies, advertising campaigns, and setting of regulatory standards to govern their industry or profession. Rule of reason is applied to determine if a violation of the Act has occurred.

Joint Ventures A joint venture is an undertaking by two or more individuals or firms for a specific purpose. The rule of reason is applied to analyze the agreement if the venture has first been found not to involve price fixing or market divisions.

Vertical Restraints Vertical restraints are per se anticompetitive agreements imposed by Sellers upon Buyers (or vice versa) that may include affiliates in the entire supply chain of production.

Vertical Restraints [2] Agreements between firms at different levels of the manufacturing and distribution process. Vertical restraints may restrain competition among firms that occupy the same level in chain. Vertical restraints that significantly affect competition may be per se violations.

Territorial or Customer Restrictions Imposed by manufacturers on the sellers of the products, to insulate dealers from direct competition with each other. Territorial and customer restrictions are judged under the rule of reason.

Resale Price Maintenance Agreements An agreements between a manufacturer and a distributor or retailer in which the manufacturer specifies the retail price at which retailers must sell products furnished by the manufacturer or distributor. This is a type of vertical restraint and is normally a per se violation.

Refusals to Deal Unlike a group boycott, a refusal to deal is an action by one firm against another, and this is usually legal, unless: the firm refusing to deal has, or is likely to acquire, monopoly power, and the refusal is likely to have an anticompetitive effect on a particular market.

§ 3: Section 2 of the Sherman Antitrust Act Section 2 of the Sherman Antitrust Act deals with: Monopolization. Attempts to monopolize. Predatory pricing. Attempt by a firm to drive its competitor from the market by selling its product at prices substantially below the normal costs of production.

Monopolization Monopolization in violation of the act requires two elements: The possession of monopoly power and The willful acquisition and maintenance of the power.

Monopoly Power Exists when one firm has sufficient market power to control prices and exclude competition. Market power is often assessed by the use of the Market-Share Test. As a rule of thumb, if a firm has 70% or more of a relevant market, it is regarded as having monopoly power.

The Intent Requirement The intent to monopolize is difficult to prove. Intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior.

Attempts to Monopolize Firm actions are scrutinized to determine whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success.

§ 4: The Clayton Act The Clayton Act deals with: Price Discrimination. Exclusionary Practices. Mergers. Interlocking Directorates.

Price Discrimination Price discrimination is the charging of different prices to competing buyers for identical goods. Exceptions: Charge of lower price was temporary and in good faith to meet another seller’s equally low price to the buyer’s competitor. A particular buyer’s purchases saved the seller costs in producing and selling the good.

Exclusionary Practices Exclusive Dealing Contracts. A contract under which a seller forbids to purchase products from the seller’s competitors. Prohibited if the effect of the contract is to “substantially lessen competition or tend to create a monopoly.” Tying Arrangements. The conditioning of the sale of a product on the buyer’s agreement to purchase another product produces or distributed by the same seller.

Mergers Horizontal Mergers occur between firms at the same level in the production and distribution chain. Vertical Mergers occur between firms at different levels in the production and distribution chain. Conglomerate Mergers occur when a firm seeks to: Extend its product into a new market by merging with a firm in that market. Diversify by acquiring a firm that deals in unrelated products.

Interlocking Directorates Occurs when an individual serves on the board of directors of two or more competing companies simultaneously. These are prohibited if the two firms meet certain size requirements.

§ 5: The Federal Trade Commission Act FTCA provides that: “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal.” The Federal Trade Commission enforces the FTCA.Federal Trade Commission

§ 6: Enforcement of Antitrust Laws Federal agencies that enforce the antitrust laws are: U.S. Department of Justice (DOJ). Federal Trade Commission (FTC).

§ 7: U.S. Antitrust Laws in a Global Context U.S. laws apply to U.S. companies doing business in foreign nations. Foreign persons may have the right to sue in U.S. court for violations of antitrust law. Extraterritorial violations by U.S. companies will give rise to antitrust violations if there is a “substantial effect” on U.S. interstate commerce.

§ 8: Exemption from Antitrust Laws Most statutory exemptions to the antitrust laws apply to the following areas: Labor. Agricultural associations and fisheries. Insurance. Foreign trade. Professional baseball. Cooperative research and production Joint efforts y businesspersons to obtain legislative or executive action. And Others.

Case 45.1: Continental TV v. GTE Sylvania (Vertical Restraints) FACTS: Sylvania sold its televisions directly to franchised retailers which did not include an exclusive territory. Sylvania retained the discretion to increase the number of retailers in an area. Continental, a Sylvania franchisee, withheld all payments due for Sylvania products when the manufacturer licensed a franchisee in close proximity. Sylvania sued Continental for damages and return of secured merchandise.

HELD: FOR SYLVANIA. U.S. Supreme Court ruled that the legality of all similar restraints would be subject to the rule of reason. Vertical restrictions reduce intrabrand competition by limiting the number of sellers of a particular product competing for the business of a given group of buyers, but promote interbrand competition by allowing the manufacturer to achieve efficiencies in the distribution of products. Case 45.1: Continental TV v. GTE Sylvania (Vertical Restraints)

Case 45.2: State Oil v. Khan (Vertical Restraints) FACTS: Khan leased a gas station under a contract with State Oil which also supplied gas to Khan for resale. State Oil set suggested retail prices and sold gas to Khan for 3.25 cents per gallon less. Khan could sell the gas at a higher price, but he would have to pay State Oil the difference. State Oil terminated the contract and Khan sued for price fixing.

HELD: FOR STATE OIL. U.S. Supreme Court vacated the decision of the appellate court and remanded. The Court held that vertical price-fixing is not a per se violation of the Sherman Act but should be evaluated under the rule of reason. Case 45.2: State Oil v. Khan (Vertical Restraints)

Case 45.3: U.S. v. Microsoft (Monopolization) FACTS: In 1994, Netscape began marketing Navigator, the first popular graphical Internet browser. Navigator worked with Sun Microsystems, Inc.’s Java technology. Java technology enabled applications to run on a variety of platforms, which meant that users did not need Windows. Microsoft Corporation perceived a threat to its dominance of the operating system market and developed a competing browser, Internet Explorer (Explorer).

FACTS (cont’d) Microsoft required computer makers who wanted to install Windows to also install Explorer and exclude Navigator. Microsoft commingled browser code and other code in Windows so that deleting files containing Explorer would cripple the operating system. Microsoft offered to promote and pay Internet service providers to distribute Explorer and exclude Navigator. Case 45.3: U.S. v. Microsoft (Monopolization)

FACTS (cont’d) Microsoft also developed its own Java code which would only run on windows. The U.S. Department of Justice and a number of state attorneys general filed a suit in a federal district court against Microsoft, alleging, in part, monopolization in violation of Section 2 of the Sherman Act. Case 45.3: U.S. v. Microsoft (Monopolization)

HELD: The court ruled against Microsoft. Microsoft appealed to the U.S. Court of Appeals for the District of Columbia Circuit. The Court of Appeals rejected Microsoft’s arguments. The court responded, “Microsoft’s pattern of exclusionary conduct could only be rational if the firm knew that it possessed monopoly power.” This conduct included Microsoft’s restrictions on the computer makers’ Windows licenses. Case 45.3: U.S. v. Microsoft (Monopolization)

HELD (cont’d) “Microsoft’s efforts to gain market share in one market (browsers) served to meet the threat to Microsoft’s monopoly in another market (operating systems) by keeping rival browsers from gaining the critical mass of users necessary to attract developer attention away from Windows as the platform for software development.” This also included Microsoft’s other actions welding Explorer to Windows. In part, the court reasoned that the commingling of the browsing and other code deters computer makers “from pre- installing rival browsers, thereby reducing the rivals’ usage share and, hence, developers’ interest in rivals’ [operating systems].” Case 45.3: U.S. v. Microsoft (Monopolization)