American Bar Association Section of Antitrust LawAmerican Bar Association Young Lawyers Division Antitrust Committee

New York State Bar Association and State Enforcersjointly present

THE ANTITRUST BASICS TELECONFERENCE SERIES

Lesson I: Sherman Act Section 1Lesson I: Sherman Act Section 1

September 20, 2006 September 20, 2006

Eric A. SacksEric A. SacksJenner & Block LLPJenner & Block LLP

“Every contract, combination . . . , or conspiracy, in restraint of trade

. . . is declared to be illegal.”

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15 U.S.C. § 1.

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Compare Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911), with United States v. Trans-Missouri Freight Ass’n, 166 U.S. 290 (1897); see also Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918), see also Phillip Areeda & Louis Kaplow, Antitrust Analysis ¶¶ 204-207 (4th ed. 1988).

Only unreasonable restraints are illegal.

Elements of Section 1 Claim• Civil antitrust claims:Civil antitrust claims:

− Standing Standing − Antitrust Injury Antitrust Injury − Causation Causation − DamagesDamages

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• Section 1:Section 1:−Agreement that isAgreement that is−UnreasonableUnreasonable

The Agreement Element

• ExpressExpress – Direct Evidence– Direct Evidence

– – Circumstantial Circumstantial EvidenceEvidence

• TacitTacit – – Parallel conductParallel conduct

– – Independent action?Independent action?

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See Phillip Areeda & Louis Kaplow, Antitrust Analysis ¶ 236 (4th ed. 1988).

Direct Evidence

• ContractsContracts• Corporate and Transactional DocumentsCorporate and Transactional Documents• RulesRules• TestimonyTestimony

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Circumstantial Evidence

• ““Conscious commitment to a common Conscious commitment to a common scheme designed to achieve an unlawful scheme designed to achieve an unlawful objective.”objective.”

• Evidence that “tends to exclude the Evidence that “tends to exclude the

possibility” of independent conduct.possibility” of independent conduct.

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Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768 (1984).

Id.; see also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986).

Circumstantial Evidence

Parallel ConductParallel Conduct

(“conscious parallelism”)(“conscious parallelism”)

andand

““plus factors”plus factors”

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See VI Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶¶ 1433, 1434 (2d ed. 2003); In re Baby Food Antitrust Litig., 166 F.3d 112, 122 (3d Cir. 1999); Petruzzi’s IGA Supermarkets, Inc. v. Darling-Delaware Co., Inc. 998 F.2d 1224, 1243 (3d Cir. 1993).

“Plus” Factors

• Suggestion of traditional conspiracy Suggestion of traditional conspiracy (“facilitating practices”)(“facilitating practices”)

• Action against economic-interests?Action against economic-interests?• Motivation to conspire?Motivation to conspire?

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See VI Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1434 (2d ed. 2003); In re Baby Food Antitrust Litig., 166 F.3d 112, 127 (3rd Cir. 1999); Petruzzi’s IGA Supermarkets, Inc. v. Darling-Delaware Co., Inc. 998 F.2d 1224, 1242-44 (3rd Cir. 1993).

Parties to the Agreement

• CompetitorsCompetitors – Horizontal Agreement– Horizontal Agreement

(Interbrand Competition) (Interbrand Competition) • ““Partners”Partners” – Vertical Agreement– Vertical Agreement

(Intrabrand Competition) (Intrabrand Competition)

• CorporateCorporate – No Agreement?– No Agreement?AffiliatesAffiliates

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Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984).

Compare Palmer v. BRG of Georgia, Inc, 498 U.S. 46 (1990), with Continental T.V., Inc. v . GTE Sylvania, Inc., 433 U.S. 36 (1977); see also United States v. Topco Associates, Inc., 405 U.S. 596 (1972).

Unreasonable Restraint Element

• Rule of ReasonRule of Reason

• Per Se RulePer Se Rule

• Alternatives: “Quick Look” DoctrinesAlternatives: “Quick Look” Doctrines

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Rule of Reason

• Do one or more parties to the restraint have the ability to Do one or more parties to the restraint have the ability to harm competition?harm competition?

− Market Power GateMarket Power Gate

• Does the restraint help more than it hurts?Does the restraint help more than it hurts?

− Balancing of benefits (pro-competitive virtues) with costs (anticompetitive Balancing of benefits (pro-competitive virtues) with costs (anticompetitive vices)vices)

• Can the benefits of the restraint be obtained without all of its Can the benefits of the restraint be obtained without all of its costs?costs?

− ““Least restrictive alternative”Least restrictive alternative”

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See VII Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1502 at 345-46 (2d ed. 2003); see also Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918).

Market Power Gate• Indirect ProofIndirect Proof

− Market share in properly defined “relevant market”Market share in properly defined “relevant market”

• Direct ProofDirect Proof

− Increase price or decrease output without significant Increase price or decrease output without significant profit lossprofit loss

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Example of Business Justifications

• Restraint Increases OutputRestraint Increases Output

• Restraint Lowers PriceRestraint Lowers Price

• Restraint Promotes Brand InvestmentRestraint Promotes Brand Investment− Prevents “free-riding”Prevents “free-riding”

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Per Se Rule• Because of “pernicious effect on competition Because of “pernicious effect on competition

and lack of and lack of ANYANY redeeming virtue,” a restraint is redeeming virtue,” a restraint is “conclusively presumed to be unreasonable”“conclusively presumed to be unreasonable”

• Categories Categories • Court experienceCourt experience

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Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958) (emphasis added).

Per Se Illegal Restraints• Horizontal Price FixingHorizontal Price Fixing

• Vertical Price Fixing Vertical Price Fixing (Resale Price Maintenance)(Resale Price Maintenance)

• Horizontal Market DivisionHorizontal Market Division

• Some Horizontal BoycottsSome Horizontal Boycotts

• Some Tying ArrangementsSome Tying Arrangements

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United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).

Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990).

Compare Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 295-98 (1985), with Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 212 (1959).Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 15-16 (1984).

Rigid ApproachOld School

• No consideration of possible No consideration of possible procompetitive virtuesprocompetitive virtues

• Even when they are plausibleEven when they are plausible

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United States v. Topco Associates, Inc., 405 U.S. 596, 609-10 (1972).

Alternative ApproachesNew School

• Ancillary restraints doctrineAncillary restraints doctrine− Naked restraint?Naked restraint?− ““Quick look”Quick look”

• Truncated rule of reasonTruncated rule of reason− Condemnation without “elaborate industry analysis” Condemnation without “elaborate industry analysis” − ““Quick look”Quick look”

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See California Dental Ass’n v. FTC, 526 U.S. 756; 769-70 (1999); Law v. NCAA, 134 F.3d 1010, 1020 (10th Cir. 1998); see also NCAA v. Board of Regents of Univ. of Okla., 468 U.S. 85, 109-10, & n.39 (1984); FTC v. Indiana Federation of Dentists, 476 U.S. 447, 459 (1986).

See VII Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1511c at 420-421 (2d ed. 2003); Polk Brothers, Inc. v. Forest City Enters., Inc., 776 F.2d 185, 188-89 (7th Cir. 1985); see also Rothery Storage & Van Co. v. Altas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986); Joel I. Klein, Acting Assistant Attorney General, Antitrust Division, A Stepwise Approach to Antitrust Review of Horizontal Agreements, Remarks Before the American Bar Association’s Antitrust Section Semi-Annual Fall Policy Program (November 7, 1996) (available at 1996 WL 655653).

Challenging Section 1 Organizations

• Cooperative VenturesCooperative Ventures• AssociationsAssociations• Standard Setting OrganizationsStandard Setting Organizations

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Cooperative Ventures• Legitimate vs. ShamLegitimate vs. Sham

− Pro-competitive CooperationPro-competitive Cooperation− Creation or Promotion Creation or Promotion

of a Product or Serviceof a Product or Service− Risk SharingRisk Sharing− IntegrationIntegration

• Ancillary Restraint?Ancillary Restraint?

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Compare Polk Brothers, Inc. v. Forest City Enters., Inc., 776 F.2d 185, 188-89 (7th Cir. 1985), with Polygram Holding, Inc. v. FTC, 416 F.3d 29, 36-38 (D.C. Cir. 2005).

Timken Roller Bearing Co. v. United States, 341 U.S. 593 (1951), overruled on other issue by Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984); see also Engine Specialties, Inc. v. Bombardier Ltd., 605 F.2d 1, 8-11 (1st Cir. 1979).

Associations• Information Gathering and SharingInformation Gathering and Sharing

• Help for Cartel or Boycott?Help for Cartel or Boycott?

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California Dental Ass’n v. FTC, 526 U.S. 756 (1999); Fashion Originators’ Guild of America v. FTC, 312 U.S. 457 (1941).

Standard Setting Organizations• Opportunity for Pro-Competitive VirtuesOpportunity for Pro-Competitive Virtues

• Opportunity for ExclusionOpportunity for Exclusion− SafeguardsSafeguards− ““Subversion”Subversion”

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Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500-01, 506-09 (1988); American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982); Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656 (1961).

Vertical Restraints• Non-priceNon-price – Rule of Reason– Rule of Reason

– – Free RidingFree Riding

• Maximum Maximum PricePrice – Rule of Reason– Rule of Reason

• Minimum Price Minimum Price – Per Se– Per Se

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Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977); see also Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988).

Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

State Oil Co. v. Khan, 522 U.S. 3 (1997).

Resources

• Phillip Areeda & Louis Kaplow,Phillip Areeda & Louis Kaplow, Antitrust Antitrust Analysis Analysis (4th ed. 1988).(4th ed. 1988).

• VI & VII Phillip E. Areeda & Herbert VI & VII Phillip E. Areeda & Herbert Hovenkamp, Hovenkamp, Antitrust LawAntitrust Law (2d ed. 2003). (2d ed. 2003).

• See alsoSee also ABA Section of Antitrust Law, ABA Section of Antitrust Law, Model Jury Instructions in Civil Antitrust Model Jury Instructions in Civil Antitrust Cases, 2005 EditionCases, 2005 Edition (2005). (2005).

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