Music: Machine is Uninterested in Music TODAY OTHER CONDUCT THAT MIGHT VIOLATE §2 INTRODUCTION TO THE STATE ACTION DOCTRINE

Conduct Requirement: Very Testable Issue Lots of Caselaw & Significant Policy Concerns Review Problem #5 is an old test question based on case in materials on BarBri (Am. Prof. Testing Servs.) Spring 2008 Question I explored conduct requirement Issue in many years in Question II

Conduct Requirement: Very Testable Issue Remember lower court decisions aren’t binding outside of own jurisdiction Remember that Supreme Court has shifted right since Aspen and even more since approving Alcoa and Shoe Machinery

Conduct Requirement: General Standards From Alcoa : OK if survivor of group of competitors by virtue of “superior skill, foresight, or industry.” OK if passive beneficiary of monopoly

Conduct Requirement: General Standards From Grinnell : Violation if “willful acquisition or maintenance of monopoly power” OK if “growth or development as a consequence of a superior product, business acumen or historic accident."

Conduct Requirement: General Standards From Barry Wright : Exclusionary conduct is conduct other than competition on the merits or restraints reasonably necessary to competition on the merits, that reasonably appears capable of making a significant contribution to creating or maintaining monopoly.

Conduct Requirement: General Standards From Berkey Photo : Cross-market benefits OK if any integrated firm could do (efficient production; complementary products; reduced transaction costs) Not OK if “using” monopoly power

Conduct Requirement: Recurring Concerns Tension Between: Harms caused by monopoly (high price; low output) Fear of deterring innovation and aggressive competition by monopolists

Conduct Requirement: Recurring Concerns Context for Conduct Requirement Must show Monopoly Power or DPS before finding liability Greater Market Power  Greater Range of Conduct is Problematic Liability often found re conduct that would be fine for a non-monopolist

Conduct Requirement: Recurring Concerns Aggregation Question Can you find liability by aggregating two or more types of conduct that, standing alone, would be insufficient? Several cases seem to allow this.

Conduct Requirement: Recurring Concerns Aggregation Question: Policy If overall effect of aggregate conduct meets is to create or maintain monopoly power, should be actionable BUT: Very hard for monopolist to know what is allowed Also don’t want to make AT case out of sporadic examples of business torts

Conduct Requirement: Recurring Concerns Aggregation Question: Approach 1.Discuss whether aggregation should be allowed at all 2.Discuss whether this particular set of acts should be actionable

OTHER CONDUCT THAT MIGHT VIOLATE §2 Non-Predatory Pricing Exclusive Dealing Contracts Predatory Hiring Other Predatory Conduct False Advertising & Other Bad Behavior

NON-PREDATORY PRICING 1.Monopoly Pricing 2.Limit Pricing 3.Price Squeezes

NON-PREDATORY PRICING Monopoly Pricing Not bad conduct for §2 purposes See Berkey Photo; USFL (2d Cir. 1988) –Not anti-competitive; invites competition –Can see as reward for innovation/skill –Can be evidence of market power

NON-PREDATORY PRICING 1.Monopoly Pricing 2.Limit Pricing 3.Price Squeezes

NON-PREDATORY PRICING Limit Pricing Price above monopolist’s marginal cost, but low enough that –Existing rivals can’t meet AND/OR –Potential rivals won’t enter Arises in Alcoa (re foreign producers); IBM Cases; BarBri case/Rev. Prob. #5

NON-PREDATORY PRICING Limit Pricing: Legal Treatment Suggestions in some lower court cases that can violate §2 Language in Brooke Group re price below cost suggests otherwise Liability may be more plausible if aggregated with other conduct

NON-PREDATORY PRICING 1.Monopoly Pricing 2.Limit Pricing 3.Price Squeezes

NON-PREDATORY PRICING Price Squeeze Monopolist re a raw material also makes finished product using that raw material. –Monopolist sets price of raw material high; finished product’s price low. –Rivals re finished product have trouble meeting monopolist’s price. Form of Limit Pricing

NON-PREDATORY PRICING Price Squeeze: Benign? Hovencamp: Low price of finished product may result from efficiencies of vertical integration. Monopolist at two levels may not be any worse in short run; can only extract same amount of monopoly profit from ultimate consumer.

NON-PREDATORY PRICING Price Squeeze: Concerns 2-Level Monopoly Increases Entry Barriers (more expensive to enter on both levels) Monopolist cautiously pricing on one level may feel freer to take full monopoly profit Rivalry at one level can encourage innovation and non-price competition

NON-PREDATORY PRICING Price Squeeze: Legal Treatment Alcoa says improper conduct (in dicta). Some courts have found liability. Good discussion in Town of Concord (1 st Cir. 1990) (Breyer) (no liability in highly regulated industry) After Brooke Group & Trinko: maybe only actionable if predatory.

OTHER CONDUCT THAT MIGHT VIOLATE §2 Non-Predatory Pricing Exclusive Dealing Contracts Predatory Hiring Other Predatory Conduct False Advertising & Other Bad Behavior

Exclusive Dealing Contracts Contracts with Suppliers or Purchasers Requiring That They Only Do Business with Monopolist E.g., Alcoa (pre-1912) contracts with power companies

Exclusive Dealing Contracts Can be pro-competitive: Insures that a dealer focuses on your product Guarantees sufficient supplies from supplier Reduces negotiation costs for party granting exclusivity

Exclusive Dealing Contracts Problems if Monopolist or Cartel: Raises costs to rivals b/c fore- closes some customers/suppliers If widespread, difficult for rivals to do business at all

Exclusive Dealing Contracts Leading Case: Lorain Journal (1951) Newspaper had effective monopoly of news & advertising in one Ohio city. Radio station opens nearby Paper refuses to run print ads for those advertising w radio station. SCt finds attempt to monopolize.

Exclusive Dealing Contracts More on Legal Treatment Seen as clearest example of bad conduct Like Prototype I boycotts PepsiCo = case in materials similar to Lorain Journal Might be defensible if monopolist can show significant efficiencies result

OTHER CONDUCT THAT MIGHT VIOLATE §2 Non-Predatory Pricing Exclusive Dealing Contracts Predatory Hiring Other Predatory Conduct False Advertising & Other Bad Behavior

“Predatory Hiring” Monopolist hires away key employees or potential employees of rivals Effect may be to make it harder for rivals to do business Claim can be seen as a subset of exclusive dealing

“Predatory Hiring” General Concerns Normal competition to want to hire best in the field Can only be problematic if limited supply of that type of employee Don’t want to impede ability of employee to market skills/self

“Predatory Hiring” General Concerns Most likely to be problematic if “predatory”: –Cost of employee to monopolist is greater than benefits –Only makes sense as way to harm rivals

“Predatory Hiring” Legal Treatment Several circuits have said claim might be actionable in some circumstances Some examples of tests in materials

“Predatory Hiring” Legal Treatment Most courts want greater showing than mere hiring away from rival. E.g., that employee didn’t help monopolist (BUT can be predatory even if help) evidence of harm to price or output part of larger pattern of bad conduct

“Predatory Hiring” Wichita Clinic (D.Kansas 1997) Seems to require least, although facts most compelling Following allegations state cause of action –D runs largest hospital in Wichita area. –P clinic refused D’s merger overtures –D hired away 20% of P’s doctors w intent to monopolize Wichita health care Note: rests a lot on intent w/o objective evidence of harm or predation

“Predatory Hiring” Abcor (4 th Cir. 1990) D hired 2 of Ps employees Not actionable where –P had hired # of employees from D, so “fighting back” –Both employees had strong personal reasons to leave & initiated contact w D Suggests very fact-specific inquiry

OTHER CONDUCT THAT MIGHT VIOLATE §2 Non-Predatory Pricing Exclusive Dealing Contracts Predatory Hiring Other Predatory Conduct False Advertising & Other Bad Behavior

Other Predatory Conduct Conduct that is not cost-justified in the short run. Sensible only if intending to recoup through long-term monopoly profits.

Other Predatory Conduct Alcoa: Predatory Expansion Theory Possible harms discussed in presentation of case & in outline Hovenkamp: Has pro-competitive aspect –Makes supplier very attractive to buyers –Insures won’t run out of supplies

Other Predatory Conduct Exclusion Cases that Require Predation Arguably Aspen/Trinko Some predatory hiring cases

Other Predatory Conduct Photovest v. Fotomat (7th Cir. 1979) D both owns and franchises kiosk photofinishing services P gets contract to run 15 franchises D discovers that company-owned kiosks are more profitable than franchises

Other Predatory Conduct Photovest v. Fotomat (7th Cir. 1979) Steps taken to eliminate franchises in the aggregate = attempt to monop.: Increases prices to franchises Conceals available discounts Placement of new kiosks

Other Predatory Conduct Photovest v. Fotomat (7th Cir. 1979) Kiosk placement predatory: Opened many kiosks to reduce value of franchises so D could buy back cheaply. E.g., 14 kiosks in Indianpolis, more than 1/2 on overlapping sites Evidence that new kiosks operating at below break-even point

Other Predatory Conduct Photovest v. Fotomat (7th Cir. 1979) Q: Should attempt by monopolist to rearrange own distribution system be actionable under AT laws (as opposed to breach of contract suits by franchisees)

OTHER CONDUCT THAT MIGHT VIOLATE §2 Non-Predatory Pricing Exclusive Dealing Contracts Predatory Hiring Other Predatory Conduct False Advertising & Other Bad Behavior

False Advertising & Other Bad Conduct Possible to interfere w rival’s business through lying, coercion, etc. Q is when should we treat as AT violation (v. use of other laws) Facts of three cases described in materials (Note that two of them are aggregate conduct cases)

False Advertising & Other Bad Conduct False Advertising (in Rev. Prob #5) Problem if discourages purchasers from using rivals’ products (tho can combat w own ads) At least 2 circuits say possible §2 claim Tests in cases in materials basically require harm to competition

The State Action Doctrine Sherman Act not intended to restrain ability of states to do economic regulation Acts that would otherwise violate AT laws immune if fall within exception E.g., Parker v. Brown (1943)

The State Action Doctrine Easy Cases: State officials acting pursuant to legislative scheme Harder cases (We’ll Discuss in Turn): –Private citizens acting pursuant to state scheme –Acts by municipalities

The State Action Doctrine Private citizens acting pursuant to state scheme: 2-prong test 1.“Clearly articulated and firmly expressed as state policy" 2.Conduct must be “actively supervised by State itself"