1. Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Antitrust Law

2. 32 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Antitrust Laws A series of laws enacted to limit anticompetitive behavior in almost all industries, businesses, and professions operating in the United States.

3. 32 - 3Copyright © 2006 by Pearson 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

4. 32 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 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

5. 32 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Antitrust Penalties Federal antitrust laws provide the following penalties: Criminal sanctions Civil penalties Private civil actions Effect of a government judgment

6. 32 - 6Copyright © 2006 by Pearson 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 Per se rule Requires the concerted action of two or more parties

7. 32 - 7Copyright © 2006 by Pearson 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. 32 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Horizontal Restraint of Trade Competitor No. 1 Competitor No. 2 Agreement to restrain trade level of distribution 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.

9. 32 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Horizontal restraints of trade include: Price-Fixing – per se 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 – per se Division of Markets – occurs when competitors agree that each will serve only a designated portion of the market. A per se violation. Group Boycott – Group Boycott – occurs when two or more competitors at one level of distribution agree not to deal with others at another level of distribution. Price-Fixing – per se 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 – per se Division of Markets – occurs when competitors agree that each will serve only a designated portion of the market. A per se violation. Group Boycott – Group Boycott – occurs when two or more competitors at one level of distribution agree not to deal with others at another level of distribution.

10. 32 - 10Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Group Boycott by Sellers: Agreement Not to Deal With a Customer SellerCompetitor No. 1 Agreement not to deal with a customer BoycottedCustomer SellerCompetitor No. 2

11. 32 - 11Copyright © 2006 by Pearson 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

12. 32 - 12Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Vertical Restraint of Trade different levels of distribution Occurs when two or more parties on different levels of distribution enter into a contract, combination, or conspiracy to restrain trade Supplier Customer Agreement to restrain trade

13. 32 - 13Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Forms of Vertical Restraint (1 of 2) Resale Price Maintenance (vertical price- fixing) 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 per se A per se violation of Section 1 of the Sherman Act

14. 32 - 14Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Forms of Vertical Restraint (2 of 2) Nonprice Vertical Restraints Nonprice Vertical Restraints – are unlawful under Section 1 of the Sherman Act if their anticompetitive effects outweigh their pro-competitive effects Include situations where a manufacturer assigns exclusive territories to retail dealers, or Limits the number of dealers that may be located in a certain territory

15. 32 - 15Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defenses to Section 1 of the Sherman Act (1 of 2) Unilateral Refusal to Deal 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 with others This rule was announced in United States v. Colgate & Co. Colgate doctrine Often referred to as the Colgate doctrine

16. 32 - 16Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defenses to Section 1 of the Sherman Act (2 of 2) Conscious Parallelism 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 Noerr Doctrine Two or more parties may petition the government to enact laws or to take other action

17. 32 - 17Copyright © 2006 by Pearson 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 The following elements are necessary to prove a defendant in violation of Section 2: Relevant market Monopoly power Act of monopolizing

18. 32 - 18Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defining the Relevant Market Relevant product or service 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 Relevant geographical market – the area in which the defendant and its competitors sell the product or service

19. 32 - 19Copyright © 2006 by Pearson 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

20. 32 - 20Copyright © 2006 by Pearson 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 Possession of monopoly power without such an act does not violate Section 2 of the Sherman Act

21. 32 - 21Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defenses to Monopolization Innocent Acquisition Innocent Acquisition Superior business acumen Monopoly that is acquired by superior skill, foresight, or industry Natural Monopoly Natural Monopoly Monopoly that is thrust upon the defendant Small market that can support only one competitor

22. 32 - 22Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Section 7 of the Clayton Act: Mergers Section 7 of the Clayton Act 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.”

23. 32 - 23Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Mergers (continued) Section 7 of the Clayton Act The following elements are necessary to prove a violation of Section 7 of the Clayton Act: 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

24. 32 - 24Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Mergers (1 of 2) Horizontal Mergers A merger between two or more companies that compete in the same business and geographic market presumptive illegality test United States v. Philadelphia National Bank established the presumptive illegality test Horizontal Mergers A merger between two or more companies that compete in the same business and geographic market presumptive illegality test United States v. Philadelphia National Bank established the presumptive illegality test Vertical Mergers A merger that integrates the operations of a supplier and a customer Backward vertical merger The customer acquires the supplier Forward vertical merger The supplier acquires the customer Vertical Mergers A merger that integrates the operations of a supplier and a customer Backward vertical merger The customer acquires the supplier Forward vertical merger The supplier acquires the customer

25. 32 - 25Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Types of Mergers (2 of 2) Market Extension Mergers A merger between two companies in similar fields whose sales do not overlap Geographical market extension merger Product market extension merger Market Extension Mergers A merger between two companies in similar fields whose sales do not overlap Geographical market extension merger Product market extension merger Conglomerate Mergers A merger that does not fit into any other category A merger between firms in totally unrelated businesses Unfair advantage theory Conglomerate Mergers A merger that does not fit into any other category A merger between firms in totally unrelated businesses Unfair advantage theory

26. 32 - 26Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defenses to Section 7 Actions The Failing Company Doctrine The Small Company Doctrine

27. 32 - 27Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Premerger Notification Hart-Scott-Rodino Antitrust Improvement Act of 1976 Hart-Scott-Rodino Antitrust Improvement Act of 1976 An act that requires certain firms to notify the FTC and the Department of Justice in advance of a proposed merger Unless the government challenges the proposed merger within 30 days, the merger may proceed

28. 32 - 28Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Section 3 of the Clayton Act: Tying Arrangements tying arrangement 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

29. 32 - 29Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Tying Arrangements (continued) Section 1 of the Sherman Act 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

30. 32 - 30Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Section 2 of the Clayton Act: Price Discrimination Commonly referred to as the Robinson- Patman Act Sellers often offer favorable terms to their preferred customers Price discrimination occurs if the seller does this without just cause Illegal if it results in substantially lessening competition or creating a monopoly in any line of commerce

31. 32 - 31Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Direct Price Discrimination Section 2(a), 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.

32. 32 - 32Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Indirect Price Discrimination A form of price discrimination that is less readily apparent than direct forms of price discrimination e.g., favorable credit terms, freight charges, and such to favored customers Robinson- Patman Act These are violations of the Robinson- Patman Act

33. 32 - 33Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Defenses to Section 2(a) Actions The Robinson-Patman Act establishes three statutory defenses to Section 2(a) liability: 1. Cost justification defense 2. Changing conditions defense 3. Meeting the competition defense

34. 32 - 34Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Section 5 of the Federal Trade Commission Act: Unfair Methods of Competition Section 5 of the FTC Act Section 5 of the FTC Act – prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce Section 5 is broader than the other antitrust laws The FTC is exclusively empowered to enforce the FTC Act

35. 32 - 35Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Exemptions From Antitrust Laws Statutory Exemptions Statutory Exemptions – Exemptions from antitrust laws that are expressly provided in statutes enacted by Congress Implied Exemptions Implied Exemptions – Exemptions from anti-trust laws that are implied by the federal courts State Action Exemptions State Action Exemptions – Business activities that are mandated by state law are exempt from federal antitrust laws

36. 32 - 36Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. State Antitrust Laws Most states have enacted antitrust statutes State statutes are usually patterned after the federal antitrust statutes intrastate State antitrust laws are used to attack anti-competitive activity that occurs in intrastate commerce