AntitrustProfessor Morgan, Spring 2003

1 Summary .................................................................................................................... 3 2 1 st period – 1890 to 1914 ............................................................................................ 3

2.1 Common Law Precedents...................................................................................32.2 Jurisdiction and Scope of the Sherman Act........................................................32.3 Horizontal Combinations in Restraint of Trade....................................................3

2.3.1.1 US v. Trans-Missouri Freight Assn (US 1897, p. 38)............................42.3.1.2 US v. Addyston Pipe & Steel Co (6th Cir 1898, p. 55)..........................4

2.4 Monopolization and Merger.................................................................................52.4.1.1 Standard Oil Co. of NJ v. US (US 1911, p. 82).....................................5

2.5 Vertical Restraints of Trade – Resale Price Maintenance...................................52.5.1.1 Dr. Miles Medical Co. v. John D. Park & Sons Co. (US 1911, p. 102). 5

2.6 Adoption of the Clayton Act and FTC Act............................................................62.6.1 Clayton Act...................................................................................................62.6.2 FTC Act........................................................................................................6

3 Rule of Reason Period – 1915 to 1939 ...................................................................... 7 3.1 Cases giving definition to the Rule of Reason.....................................................7

3.1.1.1 Board of Trade of City of Chicago v. US (US 1918, p. 119).................73.2 Trade Association Cases....................................................................................7

3.2.1.1 American Column and Lumber Co. v. US (US 1921, p. 133)...............73.3 Interplay between Patent and Antitrust Law........................................................8

3.3.1.1 US v. General Electric Co. (US 1926, p. 158).......................................84 3 rd Period – 1940 to 1974 ........................................................................................... 8

4.1 Horizontal Combinations in Restraint of Trade....................................................84.1.1 Price Fixing...................................................................................................8

4.1.1.1 US v. Socony-Vacuum Oil Co. (US 1940, p. 192)...............................84.1.2 Group Boycotts............................................................................................9

4.1.2.1 Fashion Originators Guild of America v. FTC (US 1941, p. 221)..........94.1.3 Market Division.............................................................................................9

4.1.3.1 Timkin Roller Bearing v. US (US 1951, p. 231)....................................94.1.4 Cases Testing the Limits of the Per Se Rule...............................................9

4.1.4.1 US v. Topco Associates, Inc. (US 1972, p. 247)...................................94.2 Monopolization..................................................................................................10

4.2.1.1 US v. Alcoa (2d Cir 1945, p. 255).......................................................104.2.1.2 US v. United Shoe Machinery (D.Mass 1951, p. 273)........................104.2.1.3 Utah Pie v. Continental Baking Co. (US 1967, p. 303).......................11

4.2.2 Predatory Pricing........................................................................................114.3 Vertical Arrangements Perceived as Exclusionary............................................11

4.3.1.1 International Salt v. US (US 1947, p. 316)..........................................114.3.1.2 Standard Oil (Calif) v. US (US 1949, p. 322)......................................124.3.1.3 Fortner Enterprises v. US Steel Co. (US 1969, p. 352)......................12

4.4 Dealing with Dealers.........................................................................................134.4.1 Resale Price Maintenance.........................................................................13

4.4.1.1 US v. Parke, Davis & Co. (US 1960, p. 368)......................................134.5 Mergers.............................................................................................................13

4.5.1.1 Brown Shoe Co. v. US (US 1962, p. 419)...........................................134.5.1.2 FTC v. Proctor & Gamble (US 1967, p. 466)......................................14

5 Modern Period – Since 1974 .................................................................................... 14

1

5.1 Transition Cases...............................................................................................145.1.1.1 U.S. v. General Dynamics Corp (US 1974, p. 486)............................145.1.1.2 Continental TV v. GTE Sylvania (US 1977, p. 495)............................15

5.1.2 Who Can Sue.............................................................................................155.1.2.1 Brunswick Corp v. Pueblo Bowl-O-Mat (US 1977, p. 506).................15

5.2 Section 1............................................................................................................165.2.1 Horizontal Price Fixing...............................................................................16

5.2.1.1 National Society of Professional Engineers v. US (US 1978, p. 516)165.2.1.2 BMI v. CBS (US 1979, p. 523)............................................................165.2.1.3 Arizona v. Maricopa County Medical Society (US 1982, p. 538)........165.2.1.4 NCAA v. U. Oklahoma (US 1984, p. 550)...........................................17

5.2.2 Group Boycott............................................................................................175.2.2.1 Northwest Wholesale Stationers v. Pacific Stationery and Printing (US 1985, p. 570).........................................................................................................175.2.2.2 Rothery Storage v. Atlas Van Lines (DC Cir 1986, p. 577).................17

5.2.3 Horizontal Market Division.........................................................................185.2.3.1 Jay Palmer f. BRG of Georgia, Inc (US 1990, p. 592)........................18

5.2.4 Dealing with Dealers..................................................................................185.2.4.1 Monsanto Co. v. Spray-Rite Service Corp. (US 1984, p. 595)...........185.2.4.2 Business Electronics Corp. v. Sharp Electronics (US 1988, p. 606). .195.2.4.3 State Oil Co. v. Kahn (US 1997, p. 619).............................................195.2.4.4 California Dental Association v. FTC (US 1999, p. 631).....................19

5.3 § 2 – Mononpolization.......................................................................................205.3.1.1 Aspen Skiing v. Aspen Highlands (IS 1985, p. 647)..........................205.3.1.2 Matsushita Electric v. Zenith (US 1986, p. 664)..................................205.3.1.3 AA Poultry Farms v. Rose Acre Farms ( 7th Cir 1989, p. 677)............21

5.4 Tying and Exclusive Dealing.............................................................................225.4.1.1 Jefferson Parish Hospital vv. Hyde (US 1984, p. 690)........................225.4.1.2 Eastman Kodak Co. v. Image Technical Services ( US 1992, p. 704)225.4.1.3 US v. Microsoft (DC Cir 1998, p. 729)................................................235.4.1.4 US v. Microsoft (DC District 2000, p. 741)..........................................235.4.1.5 US v. Microsoft (DC Cir 2001, handout).............................................24

5.5 Mergers.............................................................................................................245.5.1.1 Cargill v. Monfort of Co. (US 1986, p. 991)........................................24

5.5.2 Merger Guidelines......................................................................................255.5.2.1 FTC v. Stapes & Office Depot (DC 1997, p. 781)..............................25

5.5.3 Antitrust v. Federal Regulation...................................................................265.5.4 Antitrust v. State Regulation.......................................................................26

5.5.4.1 Southern Motor Carriers v. US............................................................265.5.4.2 Columbia v. Omni Outdoor Advertising...............................................26

5.5.5 Antitrust and International Regulation........................................................275.5.5.1 Hartford File Insurance Co. v. California.............................................27

6 Antitrust Economics .................................................................................................. 27 7 Exam Review ............................................................................................................ 29

2

1 Summary

Horizontal Arrangements Vertical Arrangements Jurisdictional/Procedural Issues

Price Fixing Trans-Missouri (Addyston Pipe)

Resale Price Maintenance Dr. Miles

Interstate Commerce

Market Division Addyston Pipe

Territorial allocation Private Litigant Standing

Group Boycotts Vertical Integration Antitrust Injury

Monopolization Standard Oil

Exclusive Dealing Summary judgment standards

Mergers Tying Interplay v. antitrust and other federal and state regulatory policies

2 1st period – 1890 to 19142.1 Common Law Precedents

Concern about monopolies and restraints of trade extends at least as far back as early periods of developing British law.

The Case of Monopolies – across the board ban on restraints of trade.Mitchel v. Reynolds (1711) – have to ask what effect of a given restrain of trade was. If restricted in scope and duration, benefits may exclude restraints.

2.2 Jurisdiction and Scope of the Sherman Act Passed in 1890. Purpose, according to Bork, is to enhance the welfare of consumers. Trusts were the perceived evil the Act was directed at. Purports to regulate both interstate and foreign commerce.

§1 – forbids contracts, combinations or conspiracies in restraint of trade aimed at multiple firms conspiring

§2 forbids monopolizations of an industry directed at trusts aimed at acts of single firms buying up competition

Remedies and sanctions- Injunctions, breakups, jail time $10 million or 2xgross gain/loss (corporations) $350K + 3 years in prison (individuals)

Enforced by DOJ and private interests acting on their own behalf.

2.3 Horizontal Combinations in Restraint of TradeUS v. E.C. Knight Co.

3

2.3.1.1 US v. Trans-Missouri Freight Assn (US 1897, p. 38)

Facts: Price fixing. Western railroads (common carriers) form an association to establish rates and regulations to maintain continuous lines & not run each other out of business. Trying to solve, legitimate, logistical concerns re allocative efficiency. Δs argue subject to IC Act and not Sherman Act.

Result: 1) The Sherman Act applies to railroads; 2) the agreement is invalid under §1.

Legal Analysis: 1)

RRs have ability to affect price of goods in interstate commerce. Natural changes in industry Ok; manipulated changes not.

2) Applies to all Ks in restraint of trade, not just Ks in unreasonable restraint of

trade. Courts are not in a position to decide rates/results – does not analyze effects of

restraint.

Significance: What we do in AT analysis is assess the conduct of the actors, not the results the

conduct produced. That price is reasonable is not defense. White dissent claiming only “unreasonable restraints of trade” are prohibited.

Wanted “rule of reason”

2.3.1.2 US v. Addyston Pipe & Steel Co (6th Cir 1898, p. 55)

Facts: Market Division. 6 manufacturers of cast-iron pipe with 30% ms formed association to designate “reserved cities” in which one member could make all pipe sales. Bid among themselves for right to win contracts by contributing bonuses shared among all members. Penalty for selling outside own territory. Made it look like bidding for jobs was competitive.

Result: SA applies and agreement invalid under §1.

Legal Analysis: If it was illegal under common law, it is illegal under SA. Sees that almost any K can be seen to restrain trade, so exempts scenarios

under common law, such those ancillary to a lawful K. Disagrees with White – thinks reasonableness will make us “set sail on a sea of

doubt.”

Significance: Ancillary restraint doctine: reasonable restraints that are ancillary to lawful contracts are legal.

4

2.4 Monopolization and Merger

2.4.1.1 Standard Oil Co. of NJ v. US (US 1911, p. 82)

Facts: Monopolization. Oil discovered near Cleveland, needed to be refined. Transcontinental railroad ran from NY Chicago. Rockefeller approached RR to transport oil - in exchange for steady business gets a lower price. Rockefeller combines all local companies in process and ended up with over 90% of the refining market. Charter of NJ Corp changed to hold all stock of acquired companies.

Result: Violation of §1 and §2

Legal Analysis: Focus on effect of agreements. Where co:1) reduces output2) increases prices3) restricts the entry or freedom of others to KHere, real evil was in “destroying potentiality of competition” by erecting barriers to entry. Remedy was divestiture.

Significance: Reads a “Rule of Reason” into the Sherman Act. Clear rejection of the “all contracts” rhetoric in Trans-Missouri. Seems to tie §2 violation to §1 violation.

2.5 Vertical Restraints of Trade – Resale Price Maintenance

2.5.1.1 Dr. Miles Medical Co. v. John D. Park & Sons Co. (US 1911, p. 102)

Facts: Vertical restraint – resale price maintenance. Manufacturer requires retailers to sign Ks fixing retail prices of medicines. Retailer sues. Π argues 1) goods sold on consignment; 2) like a patented good b/c made by a secret process.

Result: Violates §1

Legal Analysis: K not written as consignment agreement, cannot restrain right of alienation of goods sold. Goods not patented. Treats this as a horizontal combination of retailers because they are who profit most.Holmes dissent -

Market will take care of it if overpriced. Purpose of K is not to restrict competition – there are alternatives. All levels of manufacturing/retail are subject to competition at their level.

Significance: Resale price maintenance continues to be per se illegal perhaps because courts worry about a conspiracy at the manufacturer level if it allows vertical restraints. Later qualified by Colgate – if a firm makes a unilateral decision not to deal with someone, usually OK (unless essential facilities)

5

2.6 Adoption of the Clayton Act and FTC ActTwo additional AT laws to go along with Sherman Act.

2.6.1 Clayton Act

§2 – Robinson-Portman – small business protection prohibiting price discrimination. You may not charge different prices in different geographic areas if effect is to

deter competition or to create a monopoly.§3 – no exclusive dealing or tying – can’t sell or lease items, patented or unpatented, on condition customer won’t use someone else’s goods.

§4 – private right of action for treble damages§5 - convictions in criminal cases are collaterally estopped from private action§6 – labor union exemption§7 – mergers that significantly decrease competition where it existed prior to the merger are invalid.§16 – allows for injunction.

2.6.2 FTC Act Creates FTC to enforce Sherman and Clayton§5 – allows FTC to define “unfair method of competition”

6

3 Rule of Reason Period – 1915 to 1939

3.1 Cases giving definition to the Rule of Reason

3.1.1.1 Board of Trade of City of Chicago v. US (US 1918, p. 119)

Facts: §1 Rule of Reason. Board establishes “call” rule whereby members were prohibited from buying grain in transit to Chicago at any price other than the closing price of grain that day. Δ claimed rule passed for convenience of members and to break up monopoly of grain dealers in Chicago. Govt shows no ill effects of the rule.

Result: Reasonable regulation of business under §1 Legal Analysis: Test is whether the restraint merely regulates and thereby promotes competition, or whether it may suppress or destroy competition. To decide, looks at evidence and several factors. Here:1) Nature of the rule – restraint on price-making period only.2) Scope of the rule – limited: only on certain grain, only to Chicago, only to part of the day. 3) Effect of the rule –

a) anti – did not affect price or volume of grain sent to Chicagob) pro – had identifiable beneficial effects on grain market in Chicago.

Significance: Evidence seeking to explain a business practice may be introduced.Brandeis’ analysis is still relevant today.

3.2 Trade Association Cases

3.2.1.1 American Column and Lumber Co. v. US (US 1921, p. 133)

Facts: Trade associations – price fixing. Hardwood producers representing 30% of market create association wherein they exchange information relating to production, pricing, etc. No formal agreement with respect to production or prices. Mr. Gadd synthesized info into newsletter. Govt argued it allows members to control future market conditions.

Result: Invalid under §1 as price fixing

Legal Analysis: Court looks at motive and finds the underlying purpose was to enhance the economic standing of firms by decreasing output and increasing prices.

Significance: Abandons approach used in Board of Trade – to look at effects and see whether pro-competitive effects outweigh anti-competitive effects. (Brandeis dissent). Looks at motive instead. Highlights possibility that in oligopic industries, it is possible that an exchange of information may = implicit collusion. This case in effect overruled by Maple Flooring, allowing this behavior.

7

3.3 Interplay between Patent and Antitrust Law

3.3.1.1 US v. General Electric Co. (US 1926, p. 158)

Facts: Resale Price Maintenance. GE grants a license to Westinghouse to manufacture patented lightbulbs and sell them at the same price as GE does. Govt argues this is like Dr. Miles but worse due to size of company and importance of product. GE argues valid because consignment goods – GE holds title.

Result: Agreement valid because goods on consignment.

Legal Analysis: Attempts to combine co-equal principles of patent law and AT. GE has patent. Granting license and controlling price is OK because without the license GE would be the only producer and could still control price. » license has no effect of competition.

Significance: Courts will respect patent monopolies in licensing unless licenses attempt to exceed patent monopolies. Dr. Miles was weakened by this case because Ge was able to avoid the per se rule through a valid consignment agreement and the court acknowledged there may be benefits to small dealers from resale price maintenance.

4 3rd Period – 1940 to 1974

4.1 Horizontal Combinations in Restraint of Trade

4.1.1 Price Fixing

4.1.1.1 US v. Socony-Vacuum Oil Co. (US 1940, p. 192)

Facts: Price fixing – per se illegal. Gasoline buying program challenged. Oil industry forms plan to allow major oil companies to buy distress gas from refiners and sell it slowly on the market, trying to stabilize industry and keep wells operating. Each major company selects refiner as “dancing partner” and agrees to purchase surplus gas. Keeps gas from alternate channels of distribution.

Result: Invalid under §1.

Legal Analysis: Sees purpose was to raise price, even if it did not curtail production. Price stabilization good enough. No price fixing required. No market power required. No overt act required. Here, Δs had a hope of affecting price.

Significance: Per se rule – invalid under §1 if there is a purpose or effect of raising, depressing, fixing, stabilizing price. Hope of affecting price is enough.

8

4.1.2 Group Boycotts

4.1.2.1 Fashion Originators Guild of America v. FTC (US 1941, p. 221)

Facts: Group boycott – per se illegal. Guild aims to prevent “style piracy” of dresses by boycotting retailers who sold copies of their designs. Claims reasonable to protect from evils.

Result: Unfair method of competition under §5 of the FTC Act.

Legal Analysis: Court sees restraint as creating a private government – restricting retailer’s freedom. Reduces # of sources of goods, makes it difficult for copiers to stay in business. Court looks at market power and intent, but does not allow evidence of reasonableness.

Significance: Exclusionary, commercial boycotts with no public benefit are per se illegal. These differ from ideological boycott in that here only Δ’s economic interests were at stake.

4.2 Market Division

4.2.1.1 Timkin Roller Bearing v. US (US 1951, p. 231)

Facts: Market Division and Price Fixing. British, French and US manufacturers of antifriction bearings form joint venture because local laws required a local presence in order for firms to be able to do business there. Divided world into three markets via trademark licensing and fixed prices.Δ argues reasonable:1) because ancillary to joint venture and TM licensing (valid Ks).2) in light of current trade conditions.

Result: Per se illegal.

Legal Analysis: Drove up price in US because British and French Timkens can’t import into US. Ancillary restraint not a defense because per se illegal. Common ownership does not liberate from AT laws. Jackson dissent – should be treated as a single enterprise.

Significance: Intra Enterprise Conspiracy Doctrine – integration or affiliation is not a defense to conspiracy. Leaves all joint ventures, etc. open to §1 action. (overruled for wholly owned subsidiaries 30 years later by Copperweld.)

4.2.2 Cases Testing the Limits of the Per Se Rule

4.2.2.1 US v. Topco Associates, Inc. (US 1972, p. 247)

Facts: Market Division and Group Boycott. Small grocers form co-op to act as purchasing agent for products to become private label goods. Allowed members to protect their territories via market division and group boycotts. Δ argues

9

1) agreement allows small firms to compete with large firms and increase competition – good for consumers.2) territory division needed to avoid free rider problem.

Result: Per se illegal under §1.

Legal Analysis: Court is willing to use the rule of reason if it hasn’t seen the case before. Here, familiar because horizontal market division, » per se illegal.Burger dissent - simply ancillary restraints on cooperative buying, which benefited consumers. Court should look at difficult economic problems and use economic analysis.

Significance: Market division becomes per se illegal for all firms – big and small even without price fixing. May have been weakened by NCAA and BMI. Burger’s dissent becomes the analysis for the 4th period.

4.3 Monopolization

4.3.1.1 US v. Alcoa (2d Cir 1945, p. 255)

Facts: Monopolization. Decided by 2nd circuit for the Supreme Court. Alco has legal monopoly due to patents on ingot aluminum and smelting process. Previously, dividing territories with foreign firms and exclusive dealings with electric company were struck down. Here, expanding capacity to meet demand.

Result: Monopoly in violation of §2.

Legal Analysis: Size alone is not sufficient to find monopolization. Choice between market definitions giving Alcoa 90%, 64% and 33% respectively.

Chooses to exclude secondary market but include finished products. While Alcoa seems to be a “gentle giant”, just expanding to meet demand for its

product, not to avoid potentiality of competition, it still intended to maintain its monopoly. .

Exception to §2 per se rule if monopoly is “thrust upon a particular firm” – intent becomes relevant. Size alone is not enough.

Significance: Market power is a component of analysis. Shows relevance of definition of market to decision. L. Hand established market analysis used for next 35 years. Market share is ambiguous depending on how markets are defined. Made clear §2 would be applied to conduct beyond that condemned under §1.

4.3.1.2 US v. United Shoe Machinery (D.Mass 1951, p. 273)

Facts: Monopolization. Maker of shoe manufacturing machinery revolutionized shoe making industry. United Shoe controls 75% of market of 1400 – 1500 shoe manufacturers. United figured out how to beat the 2ndary market problem (used machines) by leasing machines only.

Result: Violation of §2.

10

Legal Analysis: Court focuses on barriers to entry raised by United Shoe’s leasing terms, machine replacement policy and free repair. Also finds price discrimination.Court wants to find §2 violation due to getting large by a violation of §1, but previously found no §1 discrimination. Therefore, uses Griffith and Alcoa rules. Here finds 1) market power, 2) power excludes some potential competition (secondary market), and limits actual competition, and 3) power not the result of natural advantages, skill, etc. (excusable causes). Declines to break up company now (though that happens 10 years later), and orders United Shoe to remove restrictions from lease agreements.

Significance: Classic example of antitrust laws doing more harm than good.

4.3.1.3 Utah Pie v. Continental Baking Co. (US 1967, p. 303)

Facts: §2 of Clayton Act – price discrimination. Utah Pie had 2/3 of frozen pie market in Salt Lake City. Evaporated milk companies came into market, and Utah Pie’s market share decreases to 45%. Claims competitors were price discriminating. Clayton Act §2 requires a showing that Δ: 1) charged less, 2) with an intent to monopolize.

Result: Violation of §2 of the Clayton Act.

Legal Analysis: Court found predatory intent. It viewed Utah Pie’s reduction in market share as evidence of erosion of competition.

Significance: Criticized as counterproductive AT decision. Example of court focusing on injury to competitor rather than on “competition” as a whole. Ironically, Utah Pie’s purported injury was likely a result of competition. Antithesis of Warren’s line in Brown: “It is competition, not competitors, which the Act protects.” Would likely not be heard today due to type of injury.

4.3.2 Predatory PricingSelling at a price that would drive everyone else out of market so you can then raise prices above competitive level.Areeda-Turner test – No pricing should be deemed predatory if it is above the short run marginal cost of the firm. Looks at “reasonably anticipated average variable costs.”# units Fixed Variable Total Average Sale Price Cash Position

(total/units) (total – cum sale) 1 10 2 12 12 5 -7 2 2 14 7 5 -4 3 2 16 5.3 5 -1 4 2 18 4.5 5 +2

4.4 Vertical Arrangements Perceived as Exclusionary

4.4.1.1 International Salt v. US (US 1947, p. 316)

11

Facts: §3 of Clayton Act –Tying. Manufacturer of patented salt processing machines conditions lease on purchase of salt from International. Δ args – 1) not burdensome because only had to buy salt from International if couldn’t get it for less elsewhere, 2) necessary for quality control.

Result: Violation of §1 SA and §3 CA.

Legal Analysis: Δ not allowed to put on evidence of reasonableness. Courts says unreasonable per se as price fixing under §1 if 1) not insubstantial (Court only looks at $ amount and finds it “not insignificant” – did not look at market share, which would have been very small.) and 2) potential lessening of competition or tending toward monopoly under §3. Would only accept quality control argument if no other producer could meet published standards – not the case here.

Significance: It is unlikely, if not impossible, that International could monopolize the market in salt just through use in their machines, or that it was really needed for quality control. Therefore, tying here might just be another way to price discriminate because salt is consumed more rapidly by heavy users of the machines, therefore, they pay more.

4.4.1.2 Standard Oil (Calif) v. US (US 1949, p. 322)

Facts: §3 of Clayton Act –Exclusive Dealing. Standard Oil requiring gas stations to buy its products for quality control reasons. Seems like International Salt. Only 16% of western stations were affected and 7% of sales.

Result: Violation of §3 of Clayton Act.

Legal Analysis: Court makes a distinction between requirement Ks and tying arrangements. Says requirement Ks have advantages to both sellers and buyers, and rule of reason governs. Court does not just look at the $ amount of commerce affected as in tying. Even so, here, competition had been foreclosed in a substantial share of the market.

Significance: Departure from International Salt. Court creates an “island of rule of reason in a per se ocean.” Now all cases are brought as tying cases from now on.

4.4.1.3 Fortner Enterprises v. US Steel Co. (US 1969, p. 352)

Facts: Tying. Δ selling prefabricated steel homes that were expensive for homes of the size and look. Offers to finance entire developments as long as developer buys US Steel houses. Developer sues, wants financing without having to buy houses. $190,000 involved.

Result: Possible violation of §3 of Clayton Act – remanded for determination of market power (none found in 1977.)

Legal Analysis: Court brings case within the scope of the per se doctrine by finding: 1) amount of interstate commerce “not insubstantial” by looking just at $ amount involved, not market share of Δ, 2) sufficient economic power inferred from desirability to

12

of financing deal to consumers and the uniqueness of the offering 3) restricts entry into market of cookie cutter homes if competitor can’t offer such good financing.. White dissent – favorable credit terms show vigorous competition in homes.

Significance: Led to real doubts about the continuation of the per se rule as formulated in the 3rd period.

4.5 Dealing with Dealers

4.5.1 Resale Price Maintenance

4.5.1.1 US v. Parke, Davis & Co. (US 1960, p. 368)

Facts: RPM. Parke-Davis offered its wholesalers and retailers a Colgate-like list of prices and said P-D would stop dealing with any wholesaler that didn’t use them. 2 retailers were advertising vitamins at lower prices than those in price list. P-D talks to all wholesalers and gets them to comply by telling them the others agreed to comply. Uses them to then gain adherence by retailers.

Result: Violation of §1 of Sherman Act

Legal Analysis: Colgate only allows unilateral activity – announcement and refusal to deal. Court finds here P-D has gone beyond a mere announcement of prices (a la Colgate) because P-D used wholesalers to help gain adherence by retailers. Focus here is not on effects, but on the manner of distribution.

Significance: Narrowed Colgate’s reach - not an excuse for creating system of price maintenance for a large distribution system. Today, Monsanto would require proof of agreement.

4.6 Mergers

4.6.1.1 Brown Shoe Co. v. US (US 1962, p. 419)

Facts: Merger. Proposed merger of Brown and Kinney. Brown is 3rd largest seller, 4th largest manufacturer. Kinney is 8th largest seller, 12th larges manufacturer. Industry is not very concentrated and neither company has a large market share.

Result: Violation of §7 of Clayton Act.

Legal Analysis: Not per se unlawful. Court looks at horizontal and vertical aspects of merger. Horizontal aspects – to satisfy “any line of commerce requirement” of §7, court looks at the product market and determines it to be men’s, women’s, and children’s shoes (not substitutes for each other). To satisfy “any section of the country”, court looks to the nation as a whole for manufacturing, but considers each city an area for retail sales. The court then looks to the effect of the merger and finds that in Dodge City, merged company would have 57% of women’s shoes. Vertical aspects – manufacturer aligning with retailer looks like an exclusive arrangement like tying. Concerned about other manufacturers doing the same.Court finds no mitigating circumstances such as small or failing companies.

13

Trend toward consolidation, court wants to halt market concentration in the early stages.

Significance: “Structuralist period” – concern about structure of industry, # of competitors, etc. Today, horizontal guidelines are issues and vertical aspects are considered unimportant because competitor’s prices determine the price that can be charged. Famous for Warren’s line: “It is competition, not competitors, which the Act protects.” Introduced “failing company doctrine.”

4.6.1.2 FTC v. Proctor & Gamble (US 1967, p. 466)

Facts: Conglomerate or Product-Extension Merger. P&G wanted to acquire Clorox, which is neither a competitor (horizontal merger), nor a supplier or distributor (vertical merger) to P&G.

Result: Merger in violation of §7 of Clayton Act

Legal Analysis: Analysis is the same as in Brown- what is the line of commerce and what is the geographic area? Court defines line of commerce as “household liquid bleach” and the geographic area to be the nation and regional markets.1) Court finds P&G to be a potential competitor to Clorox before the merger, exerting force on Clorox’s pricing by threatening to enter the market. Finds merger of potential competitor with price leader would remove barriers to increased prices.2) Merger with P&G would make Clorox even more dominant than it already was due to efficiencies gained from P&G’s size.

Significance: Example of the Dominant entrant as described by Justice Marshall in his concurrence on Falstaff Brewing. If a firm outside the market with overpowering resources were to join the market, could have a substantial anticompetitive effect – might drive other marginal companies out of business, or might raise barriers to entry.

5 Modern Period – Since 1974The question became how to approach antitrust issues in a manner consistent with bother traditional concerns and sound economic analysis.

5.1 Transition Cases

5.1.1.1 U.S. v. General Dynamics Corp (US 1974, p. 486)

Horizontal merger between deep coal mining company and strip mining coal company. Court was willing to look at the economics, not just at the numbers. Refused to condemn a merger of 2 coal producers. The acquiring firm had 6.5% of current output in on of the relevant markets and the acquired firm had 4.4%. However, the acquired firm only had 1% of the reserves on that market and all other known reserved were claimed by others. As a result, the current market share severely overstated the firms’ future production potential.Question should be: who will be offering product next year for sale? If not likely to be a future player anyway, not a substantial lessening of compeition.Douglas dissent – “failing company” defense – but it doesn’t work here b/c United might develop strategy to compete. (Potential competition defense).

14

Qualifying the Potential Competition Doctrine –US v. Marine Bancorporation (US 1974, p. 494) – National Bank of Commerce (NBC) of Seattle seeks to acquire local Spokane bank. Govt argued NBC may have entered Spokane market, so merger removed NBC as a perceived potential entrant. Because banking is highly regulated, highly concentrated. But state law forbade NBC’s expansion into Spokane. Potential competition doctrine is not controlling where the market of the acquired firm is regulated because there will be no reason for firms to change their behavior out of fear of potential entry.

5.1.1.2 Continental TV v. GTE Sylvania (US 1977, p. 495)§1 of Sherman Act. Vertical non-price restrictions – territorial restrictions. Sylvania moved to a franchising system of dealers. Adds another retailer in SF to create price competition among retailers. D Ct analyzed it under per se doctrine (Schwinn). S Ct overrules Schwinn – recognizes that intra-brand restrictions can help increase inter-brand competition, which is more important than intra-brand competition. Under the rule of reason, territorial restrictions are often illegal but not per se. Have to show effects on inter-brand competition. (Vertical non-price restrictions)Topco was like this, but is not overruled because it was characterized as horizontal market division.

Vertical price restrictions are different. Congress seems to approve per se analysis. Dr. Miles reinstated by repealing of fair price statutes.

5.1.2 Who Can Sue5.1.2.1 Brunswick Corp v. Pueblo Bowl-O-Mat (US 1977, p. 506)

Brunswick sole bowling equipment on credit, and when boom ended, it was left holding the bag. Buys bankrupt lanes and runs them.§7 of Clayton Act – may have found this illegal.

Vertical merger like Brown Shoe Large firm like in Falstaff

“Failing company” doctrine may have been successful.Here, Πs have standing, Likely some injury, some standing. But, here the injury is actually caused by activities the AT laws are trying to promote.To bring a private action under AT laws, you have to show injury of the type the AT laws were intended to prevent. Injury must be an antitrust injury – “by reason of” that which made the acquisition illegal. Helped reduce number of private AT suits brought.

Test for brining private antitrust action:1) causal connection between Δ’s act and the Π’s harm2) relation between Π’s injury and the type of conduct the AT laws were intended to prohibit.3) issue of duplicative recovery

Other limitations on who can sue –Hanover Shoe v. US Machinery - “passing on” defense – Δ claims Hanover would have passed increased costs onto consumers, therefore no injury to Hanover. No – only of

15

first purchaser of goods resells them under a “cost-plus K” can Δ use passing on defense.Illinois Brick v. Illinois – The first purchaser is the only purchaser who can sue.Kansas v. Utilicorp – Sale to a public utility is not the same kind of “cost-plus” K discussed in Hanover Shoe. Cannot justify the passing-on defense.

Under §4 of Clayton Act: States can sue on behalf of their citizens. Individuals as well as corporations can sue Look for risk of duplicative recoveries or remoteness of harm to the real targets of

the anticompetitive conduct.

5.2 Section 1

5.2.1 Horizontal Price FixingGoldfarb v. VA State Bar – a bar association’s rule prescribing minimum fees for legal services violated §1 of the Sherman Act. Professions covered by AT laws, real estate transactions are interstate commerce.

5.2.1.1 National Society of Professional Engineers v. US (US 1978, p. 516)Ban on competitive bidding. Can only negotiate after K procured. This is not price fixing (per se illegal) b/c no formal agreement » rule of reason. Look at facts particular to the business, history of the restraint, and reasons why restraint is imposed. Only defense is procompetitive effect.Rule of reason – whether restraint promotes competition or inhibits competition in the industry.

5.2.1.2 BMI v. CBS (US 1979, p. 523)2nd only to GTE Sylvania in revolutionizing law in 4th period. Horizontal price restriction analyzed under rule of reason and found to be legal.I: Whether blanket licenses are per se illegal.H; No. A plan that makes the operation of an industry more efficient is OK.Test –If effect or purpose is: to restrict output of decrease output (per se illegal)OR to increase economic efficiency and make market more competitive (R of R)Here:

Creates efficiencies b/c lowers transaction costs (like Board of Trade) Non-exclusive – can still negotiate with individual © owners. Creates a new market b/c different product than individual music. If arrangement

can be shown to add to opportunities consumers have, more likely to be found reasonable.

Did not abolish the per se rule –Catalano v. Target Sales – private suit brought by beer retailers against wholesalers who agreed to terminate practice of extending retailers credit for 30 days with no interest.

5.2.1.3 Arizona v. Maricopa County Medical Society (US 1982, p. 538)All MDs in Phoeniz not part of HMOs (70%) organize into society and agree on complexity/compensation for medical procedures, form Ks with insurance cos.Would be legal if it were a medical organization offering flat fee services (like BMI), or if insurance cos decided the prices.

16

H: Here, horizontal price fixing – per se illegal. Not a new product like BMI Procompetitive effects not convincing.

5.2.1.4 NCAA v. U. Oklahoma (US 1984, p. 550)NCAA negotiates overall package of rights for 850 colleges and universities and negotiates with networks. CFA, made up of big football schools, negotiates with NBC. NCAA threatens sanctions to all athletics/activities.Court does not apply per se rule even though this looks like Maricopa County (horizontal price fixing.) Some anticompetitive practices are necessary if there is going to be a product.H: Found invalid under R of R. Rejects per se b/c/ purpose of rule is to regulate and enhance competition. Market is college tv sports.

Public Interest factors –US v. Brown University (3rd Cir)– elite colleges form group to determine need and establish aid for students. No person could receive more than their need in aid. D Ct took a quick look – did not take creation of diversity into account, nor non-profit status. Reasonable. Departure from Professional Engineers.

5.2.2 Group Boycott5.2.2.1 Northwest Wholesale Stationers v. Pacific Stationery and Printing

(US 1985, p. 570)Co-op of stationers to achieve economies of scale by buying in bulk (like Topco). Pacific expelled from co-op for failure to disclose management change. Pacific says it is because they maintained a wholesale operation after co-op asked them to terminate it or be expelled. I: Whether per se rule appliesH: Not necessarily. Requires “predominantly anti-competitive effects” meaning: Market power or Exclusive access to an element essential to effective competition. No pro-competitive justification.Now per se rule looks like R of R.Here, possible to be an effective player without being a member.

5.2.2.2 Rothery Storage v. Atlas Van Lines (DC Cir 1986, p. 577)Bork. Moving agents allege groyp boycott.I: Whether this is a group boycott in violation of §1 of SA.H: Ancillary restraint. No.Groups of people can in many kinds of circumstance refuse to deal. Not per se illegal. Applies test from Northwest Wholesale Stationers. Here, market share was so small that likelihood of anticompetitive effects was small + efficiency – if free riding is allowed, Atlas will lose incentive to invest in system if no ROI. System will fall apart if no ability to exclude.Bork declares Addyston Pipe the law of the land and Topco & Sealy overruled.Wald concurrubg – but market power test should balance, should not just look at output restriction/price raising.

17

Boycotts as a Means of Protest Missouri v. NOW (8th Cir p. 587) – NOW asks members not to hold conventions in states that had not adopted the ERA. Boycotts for political purposes were no the type of boycotts the AT laws were designed to prevent. Ask whether motive is economic. If so » per se illegal.

FTC v. Superior Court Trial Lawyers Association (US 1990, p. 588)DC Cir said test should be whether they have market power. S Ct says per se illegal because motivation was economic.

Joint Ventures in Network Industries as Essential Facilities –Network industry - the advantages of becoming a member increases as the # of participants increases.

In this kind of industry, do firms have the right to participate?

SCFC ILC v. Visa – Visa, a joint venture, would not allow issuers to issue their own competing cards. Sears wants to issue Visa cards in addition to the Discover card. No right – not really a network industry. Better for Sears to compete than particpate.

5.2.3 Horizontal Market Division

5.2.3.1 Jay Palmer f. BRG of Georgia, Inc (US 1990, p. 592)BarBri and BRG agree that BRG will teach Barbri courses in Atlanta. Price of bar review courses goes way up. Per se illegal – increase in price shows purpose of agreement was $. Like Socony Vacuum and Topco.

5.2.4 Dealing with Dealers5.2.4.1 Monsanto Co. v. Spray-Rite Service Corp. (US 1984, p. 595)

Herbicide manufacturer wants distributors to handle product correctly, train farmers because it is a dangerous chemical. Spray-Rite was a one-man show not following protocol. Terminated. Assumption was that it was a price restraint.I: Standard of proof to find vertical price-fixing violation under §1 of SA.Concerted price-fixing requires proof of agreement - evidence that tends to exclude the possibility of independent action by the manufacturer and distributor. Posner says in Isaksen v. Vermont Castings (p. 601) that 1) manufacturer efforts to get dealers to adhere to minimum price + 2) evidence of adherence is good enough.

Proof of Agreement –E.I. du Pont de Nemours & Co. v. FTC (2d Cir 1984, p. 601) – noncollusive adoption of business practices by all firms in oligopolistic industry OK because no basis to say they had been reached by agreement. .

Petroleum Products Antitrust Litigation (9th Cir 1990, p. 602) – 3 kinds of evidence for alleged coordination –1) sawtooth pattern in pricing.2) press releases announced changes3) some evidence of direct communicationSufficient evidence to infer coordinated behavior.

18

In re Baby Food Litigation (3d Cir 1999, p. 603)– Gerber has 70% of market in 4-firm industry. Parallel pricing changes. Obtaining market information about competitot is not conspiratorial, and any firm with an industry leader like Gerver is likely to follow its leadership.

5.2.4.2 Business Electronics Corp. v. Sharp Electronics (US 1988, p. 606)Sharp terminated Business Electronics at behest of other Houston dealer. (Like Klor’s – you either go with us or with them) DCt said like Monsanto – per se illegal termination of discount dealer after complaint of another dealer. 2 steps to analysis:1) Did you terminate a price-cutter?2) Was there an agreement between Sharp and 2nd dealer regarding price.Court says termination of a price-cutter is a non-price restraint.

Maximum Price FixingAtlantic Richfield v. USA Petroleum (US 1990, p. 618)ARCO authorizes dealers to match discounters’ prices. Better gas at a better price.Discount dealer sues – no AT injury. Effect on other gas stations doesn’t matter.Albrecht – had been a suit by customers, not by competing newspaper. Maximum price fixing per se illegal. Overruled by:

5.2.4.3 State Oil Co. v. Kahn (US 1997, p. 619)Gas station purchases gas at 3.25 cents under suggested retail. If they sold above suggested retail, had to give excess to Standard Oil. Maximum resale price maintenance.I: Whether per se illegal (Albrecht said yes)H: No.

Lessens dealer independence? But State Oil could get rid of dealers altogether. If we want a dealership system, have to permit this.

Services? But, it is not in Standard Oil’s best interst to fail to provide services. Could be min price fixing – if so, will be a per se case. No need to keep the per

se rule all the time.Only minimum price restraints are per se illegal. AT law is not here for private causes of action.Now, McDonald’s can impose $1 menu. Don’t have to shame franchisees into doing it.In 30 years not a single case brought by govt. All max price cases brought by private parties. AT law not here for private causes of action – if Govt not concerned, why should court be? Unanimous decision.

5.2.4.4 California Dental Association v. FTC (US 1999, p. 631)Dentists not allowed to advertise re pricing, discounts on quality service. FTC found per se illegal, find market power and said would even be illegal under R of R.

Supreme Court said FTC needed to show empirical evidence (surveys, data) showing anticompetitive effects.

9th Circuit takes “quick look,” Rejected by Supreme Court, says can only do “quick look” when a rudimentary

economic analysis concludes would clearly have anticompetitive effects.Says no categories, inquiry should be reasonable for the case.Here, FTC/9th Cir did not consider possible procompetitive effects.Breyer dissent – Ask 4 questions:1) What is the specific restraint at issue? Most important – here there were 3.

19

2) What are its anticompetitive effects?3) Are there offsetting pro-competitive justifications?4) Do the parties have sufficient market power to make a difference?

5.3 § 2 – Mononpolization

5.3.1.1 Aspen Skiing v. Aspen Highlands (IS 1985, p. 647)Private treble damages action.I: whether erroneous as a matter of law b/c it rests on an assumption that a firm with monopoly power has a duty to cooperate with its smaller rivals in a market arrangement in order to avoid violating the SA.H: No. Predatory behavior – attempting to exclude rivals on some basis other than efficiency. Requirements for §2 violation –1) Monopoly power in a relevant market –2) Attains or maintains market share by anticompetitive means. Where a practice has pro-consumer effects, termination of that practice is suspect. Must show legitimate business reason. Otherwise, predatory conduct – behavior designed to exclude with no pro-efficiency justification.Berkey Photo v. Eastman Kodak (2d Cir 1979, p. 660) – I: whether Kodak was liable fo failing to warn photo processors of coming developments.H: No duty – no liability for making a better product.

Raising rivals’ costs – 1) control of bottleneck or essential facilities2) foreclosure of an essential input (buying up all of a resource)3) inducing collusion among suppliers to overcharge or not deal with rival.4) eliminating all but one source of supply to rival.

Denial of use of IP – presumptively valid business justification. EU, by contrast, sees denial of rights to use IP can constitute abuse of a firms dominant position in some exceptional circumstances.

5.3.1.2 Matsushita Electric v. Zenith (US 1986, p. 664)Π – Zenith and NUE, Δ – 21 Japanese-controlled TV manufacturers. Claims §1 violation – activities in Japan to coordinate activities to raise prices in Japan, which would subsidize losses in US due to cut prices.I: The standard district courts must apply when deciding whether to grant summary judgment in an antitrust conspiracy case.H: Test for granting summary judgment:1) Is there an AT injury to this Π ? (always ask if Π is 3rd party!!)2) Does the Π’s theory make economic sense? If not, by definition, no genuine issue of material fact. 3) If so, must show evidence that tends to exclude legitimate behavior.Here, not economically plausible b/c:

1) Utah Pie – very expensive to acquire market share by pure predatory pricing.2) a) They have been doing this for 20 years! b) No evidence that the system is working. Zenith/RCA still had 40% of the market. Market was made more competitive by presence of Japanese firms.

20

3) Nonsense to believe that people are engaging in predatory pricing b/c they are making a lot of money. Would want a positive return on retained earnings.

Firm would not lose money to get into a position where it can’t make money!

5.3.1.3 AA Poultry Farms v. Rose Acre Farms ( 7th Cir 1989, p. 677)Integrated egg producing operations. Surplus eggs – most cos selling to “breakers”. Rose Acre was selling them cheaply to grocery stores for sale alongside regular eggs. Looked like predatory pricing to competitors.Opinion suggests 3 ways to approach predatory pricing cases (or monopolies).Decides to “look at the back end – at the high price later scenario” – Does this firm have the ability to recoup the losses they are incurring?Are prices rising or falling?Is the market share growing?What is the cost of entry into the market?Here, recoupment was impossible – prices falling, entry into market steady.

21

5.4 Tying and Exclusive Dealing

5.4.1.1 Jefferson Parish Hospital vv. Hyde (US 1984, p. 690)I: Whether an exclusive K between a hospital and a firm of anesthesiologists is per se illegal under §1 of the SA.Might have been characterized as Exclusive Dealing (R of R applies). Here, wanted to bring it as tying b/c per se illegal.1) Does this Π have an AT injury?The tying law is designed to protect the competitor, not the consumer. Concern is about exclusion of people who want to be able to sell the tied product. » AT injury to this Π.2) Are there 2 separate products linked?OK as long as seller doesn’t have control of tying product.Ask, “Do people ever want to buy these products separately?”H: Not per se illegal. Per se illegal if 1) has market power in tying product and 2) threat of acquiring market power in tied product.. (Continues to be the statement of law. Kodak doesn’t change this.)O’Connor’s analysis – says this has all the costs of R of R w/o the benefits. Her analysis – 3 requirements:1) market power in tying product2) threat of acquiring market power in tied product.3) coherent economic basis for treating products as separate.Must wish to purchase tied w/o buying tying product. If tying product is used in the same proportion as tied product (1-1), can’t make more $$.Willing to look at this as exclusive dealing. Rule of Reason determines:1) whether corners the market (no other hospital) or 2) denies opportunity to practice profession in the area. Here, neither, » not unreasonable.

5.4.1.2 Eastman Kodak Co. v. Image Technical Services ( US 1992, p. 704)Kodak had micrographic equipment – specialized and sophisticated photographic equipment. Refuses to sell or have parts sold in independent service organizations. 18 ISOs sue under §1 and §2 of the SA.I: Whether Δs lack of market power in the primary equipment market precludes, as a matter of law, the possibility of market power in derivative aftermarkets.Is it tying?Court sees tying product as part, tied product as services (D Ct saw typing was equipment, tied was service/parts). Big diffrence b/c Kodak had market power in parts, but not in equipment. Π’s lawyer did not reserve rule of reason, and insisted on per se rule. Costs of information and switching give rise to market power.Separate products? Yes, b/c sometimes you need service w/o parts and vice versa. H: No SJ granted – remanded.Scalia dissent – anomalous that Kodak could bundle parts and service with equipment under Jefferson Paris, but not service with parts here. Makes no economic sense. In the absence of interbrand power, inherent control over unique parts for its own brand should not amount to market power sufficient to invoke the per se rule. Wants R of R.

Franchising Today – Krehl v. Baskin & Robbins – difference between “business format” (rent a name-tying) and “distribution” (sell the product – no tying) franchising.

22

Licencing IP – IP treated for AT purposes like any other kind of property. Licensing agreements treated under R of R.

5.4.1.3 US v. Microsoft (DC Cir 1998, p. 729)MS OS installed on IBM computers. Tremendous advantage/risk of monopoly b/c:1) marginal production costs are negligible2) positive network effects – the more people who are on it, the more valuable it becomes to be on it.People writing apps are going to write them of the OS with the most users.**Should it be a §2 violation to have 90-95% market share in an industry like this? There are going to be times there is only a single firm.I: Whether MS violated its consent decree.Govt args – 2 separate products. MS args – single product, can’t break software apart.Here court is deferential to manufacturer, as long as there is a factually plausible advantage – OK. Plus, bundling is OK b/c no way to make more money – 1-1 correspondence betw. OS and browser.Case decided as a matter of contract interpretation, not tying law.Wald – software should be scrutinized more closely. Maj. Test too easily met. Wants to balance evidence of synergy against evidence of distinct markets.

5.4.1.4 US v. Microsoft (DC District 2000, p. 741)4 claims - §2 monopolization, §2 attemt to monopolize, §1 (vertical) exclusive dealing, §1 tying. §2 Monopolization –1) Market definition – licensing of al Intel-compatible PC OS’s world-wide. (excludes Apple, hand-helds)

MS args –1) should be broader2) market = our own product! (Like Grinnell where market = centrally-based security systems.)(Approach here is very much from the guidelines – we’ll see similarities)3) Nature of the industry – can change in an instant, » should not be seen as powerful.

2) Market power – Here may be a natural monopoly due to positive network effects.But we want competition for the monopoly position (innivation – example, apps that can run on any OS)Harms – inhibiting another firm from replacing it as the monopoly or OS that would break down the monopoly and offer meaningful choice in OS’s.Middleware – threatened to make Windows capable of running anything –

Positive feedback loop with developers would end Barriers caused by ISV dependence would break down

§2 test –1) monopoly power (by any means, even natural monopoly)2) maintaining it by anticompetitive methodsIs it exclusionary – If so can rebut with pro-competitive business reasons.Is it predatory – high costs with not possible return except to perpetuate monopoly.H = §2 monopoly.

23

5.4.1.5 US v. Microsoft (DC Cir 2001, handout)Definition of market – agrees with DCt.Direct proof of market power not required.§2 Monopolization analysis. (Rule of reason from BMI, NCAA)BOP on Π to show:1) anticompetitive effect (harm to consumers)2) injury of the type AT laws are meant to prevent3) Δ can then rebut with procompetitive justifications4) Π must then show anticompetitive harms outweighs procomptetitive justifications.5) Must focus on effect, not on intent.OK to price IE low or even give it away.But, agreements w/ IAPS, conduct re Java lead to a finding of monopolization.

§2 Attempt to monopolize –Must define market.Swift case – dangerous probability of success. 3rd period – bad conduct is enough.Seems like a high standard.

§1 Exclusive Dealing –Were competitors excluded from >= 40% of the market?Were all reasonable distribution channels foreclosed?

§1 Tying – 1) Are there 2 separate products?S Ct says per se illegal. (But MS Act decision shows what S Ct might do in a case like MS (but probably not with a firm with so much market power!)Here, A Ct looks at:1) nature of the industry2) efficiencies of bundling3) “first mover” problem – if the first person to do something innovative, like put a spell checker in a word processing program, will be found per se illegal, discourtages technological advances.Court here is not true to S Ct precedent in Jefferson Parish – adopts O’Connor’s dissent.

5.5 Mergers§7 of Clayton Act (Hart-Scott-Rodino Act of 1976) – Merger must be subitted to DOJ 30 days in advance. DOJ/FTC will negotiate with potential partners. Has to be quick b/c many mergers are financed by extensions of credit that may dry up.What are the agencies looking for?

5.5.1.1 Cargill v. Monfort of Co. (US 1986, p. 991)2nd largest meat packer wants to acquire 3rd largest. Market share would = 25%). 5th larges (<10%) complaining. Seeks injunction.DOJ had not opposed the merger.I: whether Π had AT injury?H: Yes. We rely on private parties to supplement govt forces, » a firm should be entitled to block an illegal merger w/o having to suffer an economic injury.Only question is whether the private enforcer can present the case competently and vigourously.

24

5.5.2 Merger GuidelinesLike Model Rules – can’t be used in court. Not law.Good faith effort to flag the issues.Describes the fundamental evil – Market Power.

5 things to ask in analysis of a merger –1) Does the merger significantly increase market concentration?a) market definition – hypothesize a single sell. Could they raise their prices 5% and sustain that for a year? Expand market until customer’s won’t switch.b) measure increase in compeition. Philadelpiah bank looked at top firms. Here, use HHI: sum the squares of the individual market shares.3 categories of results:

< 1000 – unconcentrated1000 –1800 – moderately concentrated> 1800 – highly concentrated

2) What is the adverse impact, if any, on competition? Will coordinated Interaction be possible? Info available, homogeneity of

products/firms, industry-wide practices? Is detection or punishment likely to be fast? Is firm acquiring a maverick? Are firms offering #1 and #2 products in the market and will they have ms

>=35%? Is capacity of competitors fixed so that merged firm can decrease output and

raise prices?3) How easy is it to enter the market? (Is the market ripe for self-correction?)

Is it timely? (2 years from panning to impact) Is it likely? (If would be profitable at pr-merger prices and it can get those prices

[can’t if output too large, which would depress prices]) Is it sufficient? (must have access to needed inputs, product must be

substitutable)4) Are there efficiency gains? (CM)

Cognizable? (verifiable and not from anti-competitive behavior) merger-specific? Almost never justify a merger to monopoly or near-monopoly. More important when harms are not great. Shifting production - yes. R&D - maybe, procurement, capital, management,

licensing – not likely.5) Will one or more of the merging firms fail? (FROE)

Cannot meet financial obligations in near future. Would not be able to reorg successfully under Chapter 11. Has made unsuccessful good faith efforts to find alternative offers of acquisition? Absent the merger, assets would exit the market.

5.5.2.1 FTC v. Stapes & Office Depot (DC 1997, p. 781)§7 of the Calyton Act and §5 of the FTC Act. Proposed merger between #1 and #2 office superstores. Only have 5.5% of market of office supplies, but court defines market as consumable office supplies sold through office superstores. Found that if Staples raised its price 5%, people would not switch to CVS or to the grocery store, Only place a person would switch to would be Office Depot or Office Max.

25

Can somebody be accused of having excessive market share in a market they created? Give companies a clear disincentive to offer low prices in the first place.Here, HHI = 7000.If compeition were eliminated, experience with these companies shows that prices are going to go up. Costly to enter market, no efficiencies from merger, neither was a failing firm.

5.5.3 Antitrust v. Federal Regulation 1) Is there an express exemption from AT laws? (agricultural co-ops, labor unions, for example)2) Whether activity is one agency has to regulate in order to make its regulatory scheme work.AT&T in the 1970s - D Ct. held regulatory schemem did not exempt it – FCC couldn’t keep up with AT&T’s activities. Example of interplay between federal agency and AT laws.

5.5.4 Antitrust v. State Regulation 1943 Parker v. Brown – Raisin growers regulated by state. State scheme was consistent with federal scheme, but not limited to these state regulations. When does state regulation immunize from AT?Compulsion was the focus, expanded in Noerr – members of an industry can get together and lobby for state regulation. This allows a cartel not to run afoul of the AT laws.Several cases held state compulsion was necessary – see p. 802.California Retail Liquor Dealers Association v. Midcal – test1) Policy on the subject must be clearly articulated as state policy (intent to displace competition with regulation is enough per Southern Motor Carriers.2) Policy must be actively supervised by the state.

5.5.4.1 Southern Motor Carriers v. USIntrastate ratemaking for truck lines. (Like Trans-Missouri) Provides clear contrast between federal context and state context. I: whether collective ratemaking activities, thoughnot compelled by states, are entitled to Parker immunity.Court applies Midcal:Who has to articulate the state policy? Legislature or courts. (In Miss., not clear who did – but the fact that the legislature delegated ratemaking to the agency was enough – clear intent to displace competition is enough.) +NO COMPULSION required.

5.5.4.2 Columbia v. Omni Outdoor AdvertisingColumbia firm establishes billboards, gives favors to politicians. Atlanta firm comes in to compete. State created a zoning ordinance. Omni claims conspiracy in violation of §1.I: Did the city have the authority to do this?H: Yes, in the zoning power. (Have to find power.) Basically upholds any regulation.All legislation is a negotiation. State exemption is key, but some cases ….?White dissent – cities are easier to buy than states.

26

Sham Litigation – Professional Real Estate Investors v. Columbia Pictures (p. 828)Almost anything goes. Only litigation that is baseless (unethical to file) not allowed.

5.5.5 Antitrust and International RegulationAmerican Banana – Activity that occurred in foreigh country that is meant to produce and does produce substantial effect in US is subject to US AT laws.Alcoa “effects test” – reduces imports.

5.5.5.1 Hartford File Insurance Co. v. CaliforniaSee Matsushita Electric v. Zenith – prices in Japan set as a result of regulatory system in Japan. Cannot be a conspiracy under US law.I: whether claims against London re-insurers should be dismissed as improper applications of SA to foreign conduct.H: No. There is no true conflict between foreign and domestic law. Foreign law did not say, “You must do this.” Only said, “If you do this, OK.” - COMPULSION REQUIRED.Only exception would be for policy reasons – international comity.Scalia syas US courts have authority to hear case. Regulation of British insurers is very lenient, government adopted a permissive scheme. More aggressive against foreign than against state/municipal.Reflection of the fact that the EU’s AT laws are concerned with limiting competition.

6 Antitrust EconomicsBasic assumptions underlying economic analysis:

The principle of scarcityWe can’t have all of everything we want. There are finite resources in the world.

People act so as to maximize their own self-InterestEven if people act selflessly, they may be doing it out of self-interest.Even if not true, it is the most true of anything that can be said.

People are different.What makes me better off may not make someone else better off.If I had their pen and they had my sandwich, we would both be better off. Welfare would be increased even though nothing new was produced.We want to make it possible for people to make these kinds of exchanges.

Life is lived at the margin.How much more or less.“Do you want a safe car or an efficient car?”How much better will I be if I do X?

We deal with each other in markets.Circumstances under which people can, or are restricted from, dealing with each other.Analogy is a farmer’s market, but people may never see each other.

The quest for allocative efficiency.Efficiency –

27

1) Allocative efficiency – getting goods/services/money to those who value them/it most. Competition is important in achieving this.2) Productive efficiency – we want to increase the amount of output from a given set if inputs. Large entities often do this best. Therefore, tension between competition and monopoly exists.3) Dynamic efficiency – the ability of people to enter and do something better. Achieving productive efficiency may make this difficult.

How prices are set in competition.The competitive model – If you charge a higher price, you will sell less than if you set a lower price.

You won’t produce more than you can sell. Assuming new firms can enter the market, price will stay at the equilibrium.

Competition tends to benefit consumers by sorting out producers and givneg the lowest cost. Produces “consumer surplus” – gap between what people have to pay for an item and what they would have been willing to pay (benefit).

Producers try to recapture surplus by producing less and raising prices. To do this, they engage in monopoly or agreements in restraint of trade.

Costs of production – First unit costs a lot. Marginal cost of 2nd unit is lower.

The distortions imposed by monopoly.Difference between price and marginal revenue – if you are a monopolist, marginal revenue you receive will decline as you lower price.Welfare loss triangle – reduced quantity and increased price from competitive levels. The social loss from having the industry in the hands of a monopolist – consumers who could have had the good in competition, but not in monopoly.

U.S. economic theory – it is better to drive the market to eliminate welfare loss by looking toward competition. Ask: Is it possible for firms to drop their output and increase their prices about what would be possible in a competitive environment?

Positive Efficiency – Economies of scale and transaction costs

Dynamic Efficiency – Regulation can do more harm than good.

The Competence Problem – How much economic activity can be analyzed?

28

7 Exam ReviewAT is not like tax in the sense of being based on detailed statute. Rather a simple set of statutes, relatively few sections, few that we emphasize, that are interpreting the problem of the effort of individual businesses to try to overcome the problem that competition creates for them – they can’t ever get lazy, there’s always someone willing to sell at or above marginal cost and take their customers away from them. Can make marginal ROI, but can’t make any real money.Goal is to find a way out of that box by creating something so unique that people will be willing to pay extra for it, or by getting together with their competitors to collectively overcome the problems of competition.Labels and cases to illustrate the wide variety of ways these issues come up – not only in US but in every country that has an AT system. Now, limited the subject matter to about 3 subjects:1) Collective action – firms getting together and seeking to overcome the problems of competition - §1 of SA:horizontal - verticalprice fixing - resale price maintenancemarket division group boycott – excluding distributors

Still useful to keep the distinctions in mind that we’ve used – not because we have the same commitment to those labels that we had in the 3rd period, but b/c its useful if you can characterize the problem. Useful to use that label as a way of reminding yourself of what the potential a/c effect can be: Have the parties created a situation where they can each act as a mini-monopolist in their own market? Also gives a basis for assessing pro-competitive effects may be.Line between rule of reason and per se analysis is breaking down, and may have disappeared. Per se – straight blatant price fixing (as in bid rigging where parties agree in bidding who is going to win), vertical resale price maint where parties have set min prices (as opposed to max), and in tying (however, somewhat more questionable – assume distinction has largely gone away.)What are a/cWhat are p/c

2) Exclusionary practices - §2 SA – and tying arrangements:Do you have a firm with significant market power who has used practices to obtain that power, or to maintain that power, that are designed to exclude or have the effect of excluding the potentiality of competition. In general, these practices break down – somebody will come along with something better – the question is, “Have you engaged in a process that reduces the likelihood that that competition will take place?” Microsoft, for example. Analysis is whether you are interfering with the market to correct the problems that otherwise would exist.Tying – sometimes described as exclusionary. Has its own set of problems. Concern as expressed has been that the firm engaging in tying will either compel customers to buy things they don’t want or will prevent others in the market from being able to sell that product. (Microsoft). But, we don’t want to condemn creative ways of marketing or packaging products. Pricing practices alone are unlikely to be found exclusionary today – days of Utah Pie are largely behind us (old theory that has died out).

29

3) Mergers – a big part of any AT practice b/c unlike where someone has to identify you as a/c and then sue you for it, there is a lot of work that is simply req’d b/c of notic reqs of Act. That said, it is different in the sense that you don’t really have to show that a harm has occurred, b/c by definition, it has not yet occurred. Prohibition can be based on the possibility that you will tend to reduce competition, tend to create a monopoly, etc. Merger law - §7 CA – reaches a lot of things that would not be a violation of §1 or §2 of SA.Merger Guidelines – how much does this merger increase concentration in the industry? To what extent is that increase in concentration something to worry about? If it may reach parallelism, may not want to permit it even if not explicitly illegal.Problems of market definition, etc are fascinating. Should we always think about a world market rather than a national market?International implications in light of different laws abroad that might be viewed as a defense. And availability of other AT laws that may have a very different view of what constitutes a violation (EU, for example.) Problems of wither trying to harmonize the laws around the world or back off a bit from the application of state laws.

Exam –20 cases – 2nd prob, 3rd prob – fact patterns – figure out what is going on here? 1) Business problem – are they engaged in an appropriate response to market conditions, or are they likely to disadvantage consumers? 2) Label it if you can.

Sample outline – 4-5 big issues, broken out into 2-3 subissues.1) Do AT laws apply?

HHI for very small firms – not important question. 12 firms who total 10% of market. 1% squared = 1%, added together = 12. Inconsequential.

30

Modern Period

HorizontalPrice fixing If explicit, look at purpose and effect:

If 1) to increase price or decrease output 2) naked restraint with no other purpose other than the stifling of competition 3) threaten the central nervous system of the economy, thenper se illegal

Beer Distributors, Maricopa County If to increase economic efficiency and make market more

competitive or if creates a new product – R of RBMI v. CBS

If not explicit, use R of R to see if pro- or anti- competitive only. Public interest doesn’t matter.Nat’l Soc of Prof. Eng, contrast with Brown University.How much proof of conspiracy is required? See page 239 – Theatre Enterprises.

Group Boycott Per se rule requires “predominantly anti-competitive effects” meaning: Market power or Exclusive access to an element essential to effective competition No pro-competitive justification. Otherwise R of R. Northwest Wholesale Stationers, Rothery Storage v. Atlas Van Lines

Boycotts for political purposes were not the type of boycotts the AT laws were designed to prevent. Ask whether motive is economic. If so » per se illegal. FTC v. Superior Court Trial Lawyers Assoc.

Market Division R of R, in spite of Jay Palmer v. BRG [Per se illegal.]???????????????????No S Ct case, but no basis for distinguishing it. Ct App cases saying this. Small market shares 1-2 % - no serious problem/reason to say per se.Breyer dissent in California Dentists– Ask 4 questions:1) What is the specific restraint at issue? Most important.2) What are its anticompetitive effects?3) Are there offsetting pro-competitive justifications?4) Do the parties have sufficient market power to make a difference?Calvani approach to analyzing §1 horizontal cases –1) Is restraint inherently suspect? If no, Rule of Reason.If yes, (Horizontal minimum price fixing or market division), 2) Are there efficiencies (not just procompetitive justifications)?3) If yes, do they outweigh the anticompetitve effects (balancing)?

31

Easterbrook – filters. Is there a story to be told?1) Ask whether Δ has market power. If no, no actionable wrong.2) Does Δ have an incentive to act in an anticompetitive way?3) Ask whether there is a uniform practice in the industry. If not, market will sort it out.4) Is there evidence that output was really reduced by the practice?Klein – “enforcement-oriented” analysis – Is there a pro-competitive story to be told?1) whether type of restraint is currently recognized by courts as per se illegal2) If not, is there a procompetitive justification for the agreement3) If yes, do likely anticompetitive effect outweigh competitive benefits?

VerticalPrice restrictions Concerted

Per se illegal Dr. MilesMust show evidence of agreement. Complaint not good enough.Monsanto

Minimum resale price – Per se illegal. Maximum resale price – R of R. (State Oil v. Kahn)

Independent OK under Colgate – the manufacturer can announce prices in advance and refuse to deal with those who fail to comply.

Non price restrictions(Territorial Allocation)

ConcertedR of R – must show effect on inter-brand competition. Market impact.GTE Sylvania

IndependentOK under Colgate (above)

Termination of Price Cutter (a non-price restraint)1) Did you terminate a price-cutter?2) Was there an agreement between Sharp and 2nd dealer regarding price.Business Electronics v. Sharp Electronics

32

TyingContainer case (late 60s) – J. Douglas went through all analysis of industry and called it a per se illegal. California Dentists has largely removed distinction between per se and R of R.

Jefferson Parish Hospital -Per se illegal if:1) has market power in tying product and 2) threat of acquiring market power in tied product.. (Continues to be the statement of law. Kodak doesn’t change this.)O’Connor’s analysis:3 requirements:1) market power in tying product2) threat of acquiring market power in tied product.3) coherent economic basis for treating products as separate.Must wish to purchase tied w/o buying tying product. If tying product is used in the same proportion as tied product (1-1), can’t make more $$.Willing to look at this as exclusive dealing. Rule of Reason determines:1) whether corners the market (no other hospital) or 2) denies opportunity to practice profession in the area.

MonopolizationRequirements for §2 violation –1) Monopoly power in a relevant market. 2) Attains or maintains market share by anticompetitive means. Rule from Alcoa brought into 4th period – a company that has achieved a large market share by luck, superior product, etc., is not in violation of §2, not even a little bit.§2 Monopolization analysis. (Rule of reason from BMI, NCAA)BOP on Π to show:1) anticompetitive effect (harm to consumers)2) injury of the type AT laws are meant to prevent3) Δ can then rebut with procompetitive justifications4) Π must then show anticompetitive harms outweighs procomptetitive justifications.5) Must focus on effect, not on intent

Attempt to MonopolizeSpecific intent required.

Test for granting SJ (Matsushita v. Zenith) –1) Is there an AT injury to this Π ? (always ask if Π is 3rd party!!)2) Does the Π’s theory make economic sense? If not, by definition, no genuine issue of material fact. 3) If so, must show evidence tha tends to exclude legitimate behavior.

33

What’s Going on Here?Business problem.Standing to sue?1) Injury to Π

First purchaser only (avoids duplicative recovery)State on behalf of citizensIndividual or corporationAssociation standing – CA Dental – “organized to carry on business for its own profit” or for the profit of its members.

2) AT injury – of the type AT laws were intended to prohibit.Pueblo, Utah Pie3) CausationIs Interstate Commerce affected?Not if wholly in a state. EC Knight, Addyston Pipe at S.Ct.International?Hartford Effects Test

How do we categorize this conduct?Collective action - §1 SA Horizontal Price Fixing

Is this a naked restraint of trade which has the sole purpose or effect to increase price or decrease output w/o any pro-competitive or efficiency justifications? If so, per se illegal.If not, use R of R.1) what is the specific restraint at issue?2) a/c effects?

Increase price Decrease output Restrict competition

3) offsetting p/c justifications? Reducing costs of production Lowers transaction costs New product (BMI) Improving operation of market Increases consumer choice Public interest (contrast Nat’l Society of Prof. Eng. w/ Brown

University)4) do the parties have sufficient market power to make a difference?

Industry dominated by small number of producers with large market share?

Fungible product with inelastic demand?(Breyer dissenting – CA Dental.)Cases:

Professional Engineers BMI Maricopa County NCAA

Horizontal Market Division

ROR in spite of Jay Palmer v. BRG.

34

Horizontal Group boycott

Does R of R or per se apply?Per se if:1) Δ possesses market power or2) exclusive access to an element essential to effective competition. 3) no pro-competitive justifications.[Per se looks like rule of reason (Northwest Stationers/Atlas Van Lines]1) what is the restraint at issue?2) a/c effectsIs this a network industry?Sears v. Visa3) p/c Counteracts free riderIncentive to investSystem will fall apart if no ability to ability to exclude4) Market power or Essential facilitiesIs this a boycott as a means of protest?Missouri v. NowFTC v. Superior Trial Lawyers Association (economic)

Vertical Resale Price Maint.

If not concerted, OK under Colgate.Per se or R of R?Is there evidence of agreement that tends to exclude possibility of independent action? Monsanto.

Vertical territorial allocation (non-price restriction)

Business Electronics v. Sharp is non-price, but there is an agreement.

35

Exclusionary Conduct - §2 Monopolization, §1 Tying

36