1. Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 47 Antitrust Law Chapter 47 Antitrust Law

2. 47 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. Antitrust Laws A series of laws enacted to limit anticompetitive behavior in almost all industries, businesses, and professions in the United States.

3. 47 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. Federal Antitrust Laws  Sherman Act of 1890  Clayton Act of 1914  Federal Trade Commission (FTC) Act of 1914  Robinson-Patman Act of 1930  Sherman Act of 1890  Clayton Act of 1914  Federal Trade Commission (FTC) Act of 1914  Robinson-Patman Act of 1930

4. 47 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. Antitrust Enforcement  The federal antitrust statutes are broadly drafted to: reflect the government’s enforcement policy reflect the government’s enforcement policy allow the government to respond to economic, business, and technological changes 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.

5. 47 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. Antitrust Penalties  Federal antitrust laws provide the following penalties: Criminal sanctions Criminal sanctions Civil penalties Civil penalties Private civil actions Private civil actions Effect of a government judgment Effect of a government judgment

6. 47 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. Section 1 of the Sherman Act: Restraints of Trade  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 Rule of reason Per se rule Per se rule  Requires the concerted action of two or more parties

7. 47 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. 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. 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. Per se Rule  A rule that is applicable to those restraints of trade considered inherently anticompetitive.

8. 47 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

9. 47 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Horizontal Restraint of Trade Competitor No. 1 Competitor No. 2 Agreement to restrain trade

10. 47 - 10Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

11. 47 - 11Copyright © 2004 by Prentice-Hall. All rights reserved. Group Boycott by Sellers: Agreement Not to Deal With a Customer SellerCompetitor No. 1 SellerCompetitor No. 2 Agreement not to deal with a customer BoycottedCustomer

12. 47 - 12Copyright © 2004 by Prentice-Hall. All rights reserved. Group Boycott by Purchasers: Agreement Not to Deal With a Supplier PurchaserCompetitor No. 1 PurchaserCompetitor No. 2 Agreement not to deal with a supplier Boycotted Supplier Supplier

13. 47 - 13Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

14. 47 - 14Copyright © 2004 by Prentice-Hall. All rights reserved. Vertical Restraint of Trade Supplier Customer Agreement to restrain trade

15. 47 - 15Copyright © 2004 by Prentice-Hall. All rights reserved. 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. A per se violation of Section 1 of the Sherman Act.

16. 47 - 16Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

17. 47 - 17Copyright © 2004 by Prentice-Hall. All rights reserved. Defenses to Section 1 of the Sherman Act  Unilateral Refusal to Deal A unilateral choice by one party not to deal with another party. 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. This does not violate Section 1 of the Sherman Act because there is no concerted action.

18. 47 - 18Copyright © 2004 by Prentice-Hall. All rights reserved. Defenses to Section 1 of the Sherman Act (continued)  Conscious Parallelism Occurs when two or more firms act the same but without concerted action. 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. 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. Two or more parties may petition the government to enact laws or to take other action.

19. 47 - 19Copyright © 2004 by Prentice-Hall. All rights reserved. Section 2 of the Sherman Act: Monopolization  Prohibits the act of monopolization as well as attempts and conspiracies to monopolize. Can be violated by the conduct of one firm 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 Relevant market Monopoly power Monopoly power Act of monopolizing Act of monopolizing

20. 47 - 20Copyright © 2004 by Prentice-Hall. All rights reserved. Defining the Relevant Market  Relevant product or service market – includes substitute products or services that are reasonably interchangeable with the defendant’s products or services.  Relevant geographical market – the area in which the defendant and its competitors sell the product or service.

21. 47 - 21Copyright © 2004 by Prentice-Hall. All rights reserved. Monopoly Power  The power to control prices or exclude competition.  Measured by the market share the defendant possesses in the relevant market.

22. 47 - 22Copyright © 2004 by Prentice-Hall. All rights reserved. Willful Act of Monopolizing  A required act for there to be a violation of Section 2 of the Sherman Act. e.g., predatory pricing e.g., predatory pricing  Possession of monopoly power without such an act does not violate Section 2.

23. 47 - 23Copyright © 2004 by Prentice-Hall. All rights reserved. Defenses to Monopolization  Superior Business Acumen Monopoly that is acquired by superior skill, foresight, or industry. Monopoly that is acquired by superior skill, foresight, or industry.  Natural Monopoly Monopoly that is thrust upon the defendant. Monopoly that is thrust upon the defendant.

24. 47 - 24Copyright © 2004 by Prentice-Hall. All rights reserved. Section 7 of the Clayton Act: 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.”

25. 47 - 25Copyright © 2004 by Prentice-Hall. All rights reserved. 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. 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. Section of the country – geographical market that will be affected by the merger. Probability of a substantial lessening of competition. Probability of a substantial lessening of competition.

26. 47 - 26Copyright © 2004 by Prentice-Hall. All rights reserved. Types of Mergers Horizontal Mergers Vertical Mergers Market Extension Mergers Conglomerate Mergers

27. 47 - 27Copyright © 2004 by Prentice-Hall. All rights reserved. Conglomerate Mergers  Section 7 examines the lawfulness of such mergers under the: Unfair Advantage Theory Unfair Advantage Theory Potential Competition Theory Potential Competition Theory Potential Reciprocity Theory Potential Reciprocity Theory

28. 47 - 28Copyright © 2004 by Prentice-Hall. All rights reserved. Potential Reciprocity Theory Newspaperpublisher Papermanufacturer Loggingcompany Merged firm (Newspaper Publisher and Logging Co.) Sells Lumber Sells Paper

29. 47 - 29Copyright © 2004 by Prentice-Hall. All rights reserved. Defenses to Section 7 Actions The Failing Company Doctrine The Small Company Doctrine

30. 47 - 30Copyright © 2004 by Prentice-Hall. All rights reserved. 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. i.e., tangible personal property i.e., tangible personal property

31. 47 - 31Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

32. 47 - 32Copyright © 2004 by Prentice-Hall. All rights reserved. Price Discrimination  Sellers often offer favorable terms to their preferred customers.  Price discrimination occurs if the seller does this without just cause.

33. 47 - 33Copyright © 2004 by Prentice-Hall. All rights reserved. Section 2(a) of the Robinson-Patman Act: Price Discrimination  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.

34. 47 - 34Copyright © 2004 by Prentice-Hall. All rights reserved. To prove a violation of Section 2(a), the following elements must be shown: 1)The defendant sold commodities of like grade and quality, 2)to two or more purchasers at different prices at approximately the same time, and 3)the plaintiff suffered injury because of the price discrimination.

35. 47 - 35Copyright © 2004 by Prentice-Hall. All rights reserved. Defenses to Section 2(a) Actions Cost Justification Changing Conditions Meeting the Competition

36. 47 - 36Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

37. 47 - 37Copyright © 2004 by Prentice-Hall. All rights reserved. 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.