Chapter 46 Antitrust Laws and Unfair Trade Practices

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

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Federal Antitrust Law Government enforcement of federal antitrust laws divided between the Antitrust Division of the Department of Justice and the Bureau of Competition of the FTC Sherman Act only major antitrust act that includes criminal sanctions Government may seek civil damages, including treble damages, for violations of antitrust laws Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Federal Antitrust Law Section 4 of the Clayton Act: Permits any person who suffers antitrust injury in his or her “business or property” to bring a private civil action against the offenders To recover damages, plaintiffs must prove that they suffered antitrust injuries caused by the prohibited act Successful plaintiffs may recover treble damages Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Federal Antitrust Law Treble damages: Damages that may be awarded in a successful civil antitrust lawsuit, in an amount that is triple the amount of actual damages Damages may be calculated as lost profits - rule applies to all violations of the Sherman Act, the Clayton Act, and the Robinson-Patman Act Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. Federal Antitrust Law Government judgment: A judgment obtained by the government against a defendant for an antitrust violation that 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 Section 1 of the Sherman Act: Prohibits contracts, combinations, and conspiracies in restraint of trade Outlaws contracts, combinations, and conspiracies in restraint of trade U.S. Supreme Court developed two tests for determining the lawfulness of a restraint: Rule of reason Per se rule Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act Rule of reason: Only unreasonable restraints of trade violate Section 1 of the Sherman Act Per se rule: Applicable to restraints of trade considered inherently anticompetitive Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act Horizontal restraints of trade: A restraint of trade that occurs when two or more competitors at the same level of distribution enter into a contract, combination, or conspiracy to restrain trade Most fall under the per se rule Some examined under the rule of reason Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 46.1 – Horizontal Restraint of Trade Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act 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, raising, depressing, fixing, pegging, or stabilizing the price of a commodity or service Division of markets: A restraint of trade in which competitors agree that each will serve only a designated portion of the market Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act Group boycott: 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 46.2 - Group Boycott by Sellers Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 46.3 Group Boycott by Purchasers Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act Other horizontal agreements: Trade association activities and rules, exchange of non-price information, participation in joint ventures Reasonable restraints are lawful Unreasonable restraints violate Section 1 of the Sherman Act Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act Vertical restraint of trade: A restraint of trade that occurs when two or more parties on different levels of distribution enter into a contract, combination, or conspiracy to restrain trade Court applies both per se rule and rule of reason Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Exhibit 46.4 - Vertical Restraint of Trade Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act Resale price maintenance (vertical price-fixing): A per se violation of Section 1 of the Sherman Act that 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 Setting maximum resale prices examined under rule of reason Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act Nonprice vertical restraints: Restraints of trade that are unlawful under Section 1 of the Sherman Act if their anticompetitive effects outweigh their procompetitive effects Unilateral refusal to deal: Unilateral choice by one party not to deal with another party Not a violation of Section 1 of the Sherman Act because there is no concerted action with others Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Restraints of Trade: Section 1 of the Sherman Act 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 Noerr doctrine: 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 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Monopolization: Section 2 of the Sherman Act Section 2 of Sherman Act: Prohibits act of monopolization as well as attempts or conspiracies to monopolize trade Proving that a defendant is in violation of Section 2 means proving that the defendant: Possesses monopoly power in the relevant market Engaged in a willful act of monopolization to acquire or maintain that power Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Monopolization: Section 2 of the Sherman Act Relevant product or service market: Includes substitute products or services that are reasonably interchangeable with the defendant’s products or services Relevant geographical market: 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 Monopoly power: The power to control prices or exclude competition Measured by the market share the defendant possesses in the relevant market Willful act of monopolizing: An act that is required to find a violation of Section 2 of the Sherman Act Possession of monopoly power without such act does not violate Section 2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Monopolization: Section 2 of the Sherman Act 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.

Mergers: Section 7 of the Clayton Act Section 7 of the Clayton Act: A section which provides that it is unlawful for a person or business to acquire the stock or assets of another “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly” Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Mergers: Section 7 of the Clayton Act Elements to prove a violation: Line of commerce: The products or services that will be affected by a merger, including those that consumers use as substitutes Section of the country: Geographical area that will feel the direct and immediate effects of a merger Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Mergers: Section 7 of the Clayton Act Probability of a substantial lessening of competition: The probability that a merger will substantially lessen competition or create a monopoly Classification of mergers: Horizontal merger: A merger between two or more companies that compete in the same business and geographical market Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Mergers: Section 7 of the Clayton Act Vertical merger: A merger that integrates the operations of a supplier and a customer Market extension merger: A merger between two companies in similar fields whose sales do not overlap Conglomerate merger: A merger between firms in totally unrelated businesses Does not fit into any other category Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Mergers: Section 7 of the Clayton Act Defenses to Section 7 Actions: The failing company doctrine The small company doctrine Hart-Scott-Rodino Antitrust Improvement Act: An act that requires certain firms to notify the Federal Trade Commission and the Justice Department in advance of a proposed merger Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Tying Arrangements: Section 3 of the Clayton Act Section 3 of the Clayton Act: Prohibits tying arrangements that involve 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.

Price Discrimination: Section 2 of the Clayton Act Section 2 of the Clayton Act (Robinson-Patman 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: A section that prohibits direct and indirect price discrimination by sellers of a commodity of a like grade and quality Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Direct Price Discrimination To prove a violation of Section 2(a) of the Robinson-Patman Act, the following elements of direct price discrimination must be shown: Commodities of like grade and quality Sales to two or more purchasers Injury A plaintiff who has not suffered injury because of a price discrimination cannot recover Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Indirect Price Discrimination A form of price discrimination (e.g., favorable credit terms) that is less readily apparent than direct forms of price discrimination Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Defenses to Price Discrimination Cost justification defense: 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 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Defenses to Price Discrimination 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 A federal government administrative agency that is empowered to enforce the Federal Trade Commission Act Section 5 of the Federal Trade Commission Act: A section that 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 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 exemptions: Business activities that are mandated by state law are exempt from federal antitrust laws Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. State Antitrust Laws Most states have enacted antitrust statutes Usually patterned after federal antitrust statutes Used to attack anticompetitive activity that occurs in intrastate commerce When applied laxly, plaintiffs often bring lawsuits under state antitrust laws Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

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