Trade Practices Common law –Covenant not to compete –Must be reasonable –Society demands laws against predatory business practices Legislation –Laws are vague –Reliance on court interpretation

Antitrust Laws Views –Chicago School Promote economic efficiency Large firm size derived from superior competition Less concern about vertical restraints –Traditionalists Promote social goals Favor more enforcement Large firms possess economic & political power

Penalties Pleas –Guilty, not guilty, nolo contendre Nolo contendre same penalty as guilty, but cannot be used in civil cases Criminal penalties –Prison –Fines up to $10 million

Penalties Civil remedies –Treble damages –Attorney fees Equitable remedies –Injunction –Dissolution (cease business) –Divestiture –Divorcement (separate) –Contract cancellation

Sherman Act Monopoly –Monopoly power Relatively inelastic demand curve Market share over 50% –Relevant market Geographic market Submarket Product market –Purposeful or willful attempt to monopolize –Attempt does not need to be successful, but to have a dangerous probability of success –Exception: monopoly acquired through superior skill, foresight & industry

Sherman Act “Contract, combination, or Conspiracy” –Joint action –“conscious parallelism” does not prove an agreement to joint action Rule of reason Per se violation

Sherman Act Horizontal Price-fixing –No defense –Minimum prices –Maximum prices –List prices –Following a price leader –Production limitations –Limitations on competitive bidding –Credit arrangement agreements

Sherman Act Division of Markets –Agreement to divide a market –Reduces interbrand competition –Per se violation Group Boycotts & Refusals to Deal –Well intentioned –Per se violation; unless firms do not have market power –Anti-competitive

Sherman Act Joint ventures –Subject to court consideration Exceptions –Noerr-Pennington doctrine –Prior approval

Vertical Trade Restraints Resale Price Maintenance –Minimums – rule of reason –Maximums – per se violation –Inhibits intrabrand competition –Consignments usually ok –No enforcement of “suggested retail price” Sole Outlets & Exclusive Distributorships –Subject to “rule of reason” –Amount of interbrand competition

Vertical Trade Restraints Customer & Territorial Restrictions –Subject to “rule of reason” –Free-rider problems –Interbrand v. intrabrand competition –Market power of manufacturer –More favorable to new manufacturers

Vertical Trade Restraints Tying arrangements –Distort competition –Per se violation Market power Tie-in affects substantial amount of commerce –Defenses New-industry Goodwill

Vertical Trade Restraints Exclusive Dealing or Requirements Contracts –Inhibit intrabrand competition –Treated more leniently than tying arrangements –Generally ok if manufacturer does not have great market power –Rule of reason Degree of competition decrease Duration of the agreement Entry barriers

Vertical Trade Restraints Price Discrimination (Robinson-Patman Act) –Purchases must be made at the same time –Can apply to indirect charges –Like grade or quality –Injury to competition –Defenses Legitimate cost differences Meeting the competition –Illegal for buyers as well

Horizontal Mergers Eliminates competition May increase market power to distort competition May increase industry concentration Supreme Court more lenient since the 70’s Failing company Small company International markets

Vertical Mergers May block competitors’ access to market May eliminate a potential competitor (firm itself) Eliminate benefits of threatened competition Courts historically have not examined efficiency arguments

Conglomerate Mergers Related businesses Geographic extension

Interlocking Directorates Illegal under the Clayton Act –Large firms –Anticompetitive agreements would violate antitrust laws

Exemptions State Act –Must be a formal state policy –Must be supervised by the state Petitioning the Government –Exempts political activity Unions –Monopolies –Group boycotts Specific regulated industries –Insurance –Banking –Airlines –Utilities –Financial services

Federal Trade Commission Deceptive Advertising –Claims that can be proven false –Implied representations Regulates franchising Cooling off periods Unsolicited mail Sweepstakes/contests Negative option plans Mail order merchandise Telephone solicitations

Lanham Act Trademark infringement Appropriating another’s name of likeness for commercial purposes Trade dress infringement “palming off” or “passing off”