1. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Chapter 46 Antitrust Law
Business Law Legal, E-Commerce, Ethical, and International Environments
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

2. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Antitrust Laws
A series of laws enacted to limit anticompetitive behavior in almost all industries, businesses, and professions in the United States.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

3. Federal Antitrust Laws
Sherman Act of 1890
Clayton Act of 1914
Federal Trade Commission Act of 1914
Robinson-Patman act
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

4. Antitrust Enforcement
The federal antitrust statutes are broadly drafted to:
reflect the government’s enforcement policy
allow the government to respond to economic, business, and technological changes
Each administration adopts an enforcement policy for antitrust laws.
Antitrust laws are enforced more stringently at some times than at other times.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

5. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Antitrust Penalties
Federal antitrust laws provide the following penalties:
Criminal sanctions
Individuals may be fined up to $350,000 and three years in prison
Corporations may be fined up to $10 million
Civil penalties
Treble damages
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

6. Antitrust Penalties (continued)
Private civil actions
Clayton Act
Consumers must have dealt directly with violators
Treble damages, plus costs and attorneys’ fees
Plaintiff has four years to bring action
Tolled during suit by federal government
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

7. Antitrust Penalties (continued)
Effects of Government Judgment
Prima facie evidence of liability in private civil treble damage action
Defendants often enter a nolo contendere plea or enter into a consent decree
Defendant does not admit guilt but is subject to penalty
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8. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Restraints of Trade
Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies in restraint of trade.
To violate Section 1, the restraint must be found to be unreasonable under either of two tests:
Rule of reason
Per se rule
Requires the concerted action of two or more parties
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

9. Rules to Determine Lawfulness of a Restraint
Rule of Reason
A rule that holds that only unreasonable restraints of trade violate Section 1 of the Sherman Act.
Per se Rule
A rule that is applicable to those restraints of trade considered inherently anticompetitive.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

10. Horizontal Restraints of Trade
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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

11. Horizontal Restraint of Trade
Agreement
to restrain trade
Competitor
No. 1
Competitor
No. 2
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

12. Horizontal restraints of trade include:
Price-Fixing – occurs where competitors in the same line of business agree to to set the price of the goods they sell. A per se violation.
Division of Markets – occurs when competitors agree that each will serve only a designated portion of the market. A per se violation.
Group Boycott – occurs when two or more competitors at one level of distribution agree not to deal with others at another level of distribution.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

13. Group Boycott by Sellers
Agreement
not to deal with
a customer
Seller
Competitor
No. 1
Seller
Competitor
No. 2
Boycotted
Customer
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14. Group Boycott by Purchasers
Boycotted
Supplier
Purchaser
Competitor
No. 1
Purchaser
Competitor
No. 2
Agreement
not to deal with
a supplier
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

15. Other Horizontal Agreements
Reasonable restraints are lawful
Examined under rule of reason
Unreasonable restraints are violation of Section 1 of Sherman Antitrust Act
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16. Vertical Restraints of Trade
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

17. Vertical Restraint of Trade
Supplier
Agreement to
restrain trade
Customer
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

18. Vertical restraints of trade include:
Resale Price Maintenance (vertical price- fixing) – 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.
A per se violation of Section 1 of the Sherman Act.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

19. Vertical restraints of trade include: (continued)
Nonprice Vertical Restraints – are unlawful under Section 1 of the Sherman Act if their anticompetitive effects outweigh their pro-competitive effects.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

20. Defenses to Section 1 of the Sherman Act
Unilateral Refusal to Deal
A unilateral choice by one party not to deal with another party.
This does not violate Section 1 of the Sherman Act because there is no concerted action.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

21. Defenses to Section 1 of the Sherman Act (continued)
Conscious Parallelism
Occurs when two or more firms act the same but without concerted action.
This does not violate Section 1 because there has been no concerted action.
Noerr Doctrine
Two or more parties may petition the government to enact laws or to take other action.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

22. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Monopolization
Section 2 of the Sherman Act
Prohibits the act of monopolization as well as attempts and conspiracies to monopolize.
Can be violated by the conduct of one firm
The following elements are necessary to prove a defendant in violation of Section 2:
Relevant market
Monopoly power
Act of monopolizing
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

23. Defining the Relevant Market
Includes substitute products or services that are reasonably interchangeable with the defendant’s products or services.
Relevant geographical market is the area in which the defendant and its competitors sell the product or service.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

24. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Monopoly Power
The power to control prices or exclude competition.
Measured by the market share the defendant possesses in the relevant market.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

25. Willful Act of Monopolizing
A required act for there to be a violation of Section 2 of the Sherman Act.
Predatory pricing
Possession of monopoly power without such an act does not violate Section 2.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

26. Defenses to Monopolization
Superior Business Acumen
Monopoly that is acquired by superior skill, foresight, or industry.
Natural Monopoly
Monopoly that is thrust upon the defendant.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

27. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Mergers
Section 7 of the Clayton Act 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.”
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

28. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Mergers (continued)
The following elements are necessary to prove a violation of Section 7:
Line of commerce – the market that will be affected by the merger.
Section of the country – geographical market that will be affected by the merger.
Probability of a substantial lessening of competition.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

29. Market Extension Mergers
Types of Mergers
Horizontal Mergers
Vertical Mergers
Conglomerate Mergers
Market Extension Mergers
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30. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Horizontal Mergers
A merger between two or more companies that compete in the same business and geographical market.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

31. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Vertical Mergers
A merger that integrates the operations of a supplier and a customer.
Backward vertical merger
Forward vertical merger
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

32. Market Extension Mergers
A merger between two companies in similar fields whose sales do not overlap.
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33. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Conglomerate Mergers
A merger that does not fit into any other category.
A merger between firms in totally unrelated businesses.
Section 7 examines the lawfulness of such mergers under the:
Failing company doctrine
Small company doctrine
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

34. Defenses to Section 7 Actions
The Failing Company Doctrine
The Small Company Doctrine
Prentice Hall, 2001
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

35. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Tying Arrangements
A tying arrangement is a restraint of trade where a seller refuses to sell one product to a customer unless the customer agrees to purchase a second product from the seller
Section 3 of the Clayton Act prohibits tying arrangements involving sales and leases of goods.
Tangible personal property
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

36. Tying Arrangements (continued)
Section 1 of the Sherman Act prohibits tying arrangements involving goods, services, intangible property, and real property.
A tying arrangement is lawful if there is some justifiable reason for it.
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37. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Price Discrimination
Sellers often offer favorable terms to their preferred customers.
Price discrimination occurs if the seller does this without just cause.
Unlawful trade practices under Section2 of the Clayton Act, otherwise known as the Robinson-Patman Act.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

38. Direct Price Discrimination
Section 2(a) of the Robinson-Patman Act prohibits direct and indirect price discrimination by sellers of a commodity of a like grade and quality where the effect of such discrimination may be to substantially lessen competition or to tend to create a monopoly in any line of commerce.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

39. Direct Price Discrimination (continued)
To prove violation, you must prove these elements:
The defendant sold commodities of like grade and quality,
to two or more purchasers at different prices at approximately the same time, and
the plaintiff suffered injury because of the price discrimination.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

40. Indirect Price Discrimination
Sophisticated ways to provide discriminatory prices to favored customers.
Illegal under Robinson-Patman.
Favorable credit terms
Freight charge reductions
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41. Defenses to Section 2(a) Actions
Cost Justification
Changing Conditions
Meeting the Competition
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42. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Cost Justification
Seller’s price discrimination is not unlawful if price differential is due to differences in cost of manufacture, sale, or delivery.
Bulk shipping rates that vary depending upon amount transported
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43. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Changing Conditions
Price differentials that are a result of changing market conditions are not illegal.
Reducing prices that reflect the deterioration of perishable goods
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

44. Meeting the Competition
A seller may lawfully engage in price discrimination to meet a competitor’s price.
Seller must meet but not beat competitor’s price.
Rockport shoes meeting price of Great Lakes Shoe Co. in Michigan and Wisconsin only.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

45. Unfair Methods of Competition
Section 5 of the FTC Act prohibits unfair methods of competition.
Broader than other antitrust laws.
Covers conduct that violates any provision of the Sherman Act or the Clayton Act, violates the spirit of those acts, fills the gap in those acts, and offends public policy.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

46. Exemptions From Antitrust Laws
Statutory Exemptions – Exemptions from antitrust laws that are expressly provided in statutes enacted by Congress.
Implied Exemptions – Exemptions from anti-trust 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.
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47. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
State Antitrust Laws
Most states have enacted antitrust statutes.
State statutes are usually patterned after the federal antitrust statutes.
State antitrust laws are used to attack anti-competitive activity that occurs in intrastate commerce.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman