October 200024

hile competition policy is not the kind of thing that most people (even lawyers)

ponder in their free time, some who do have questioned the relevance of the

antitrust laws, and whether a statute enacted 110 years ago—before the invention of

the automobile—possibly could have any significance to the complicated, global mar-

kets of today’s New Economy. After all, Senator Sherman could not possibly have envi-

sioned many of today’s markets and industries, including e-commerce, when he drafted

his famous law to “bust the trusts” so prevalent in the 1800s. With the recent trial court

decision in the Microsoft1 case, the debate has become more tangible and real. But

although markets may change and become more complex, it is apparent that the

Sherman Antitrust Act remains relevant today, which is testimony to its enduring under-

lying principle of free and unfettered competition and its evolution and flexible applica-

tion over the years by the courts.

Sales over the Internet have exploded in recent years: the “Internet Economy” gener-

ated over one-half trillion dollars in revenue in 1999.2 That was an increase of 62% over

1998’s figure of $322.5 billion.3 These totals include every facet of the Internet econ-

omy, from the top layer of the Internet’s infrastructure to business-to-consumer com-

merce, or classic retail sales.

According to figures generated by the Census Bureau of the U.S. Department of

Commerce, U.S. retail e-commerce sales alone for the first quarter 2000 were an esti-

mated $5.3 billion.4 Common fungible products to high-tech goods and services are

being hawked and sold on the Internet. Music, computer equipment, legal services, cars

and even funeral services are being sold, and have put Web page designers in high

demand. As a result, business is scrambling for a piece of the pie. This has challenged

antitrust practitioners to predict how the courts might view certain business practices in

this new medium. While the technology is outpacing the courts’ decisions, familiar

antitrust principles will help inform the advice you give your clients.

F E A T U R E S | A N T I T R U S T , F R A N C H I S E A N D T R A D E R E G U L A T I O N

Sorry, But E-Commerce is Not Exempt from the Antitrust Lawsby Francis H. Casola

Old Antitrust Doctrine MEETS NEW ECONOMY:

Old Antitrust Doctrine MEETS NEW ECONOMY:

Senator Sherman

could not possiblyhave envisionedmany of today’s mar-

kets and industries,

including e-commerce,

when he drafted his

famous law to “bust

the trusts” so preva-

lent in the 1800s.

W

Virginia Lawyer 25

An Antitrust Law Primer

The principal federal antitrust statutes are the Sherman AntitrustAct,5 the Clayton Act,6 the Robinson-Patman Act7 and the FederalTrade Commission Act.8 The Sherman Act, on which this articlefocuses, has particular widespread application. Sherman ActSection 1 condemns all contracts, combinations and conspiraciesin restraint of trade.9 The conduct condemned by this provisiontypically is “horizontal” in nature, i.e., between competitors, andrequires concerted activity between two or more actors.10 Certainhorizontal arrangements have been deemed so devoid of com-petitive virtue that they are considered per se illegal.11 Theyinclude price fixing, horizontal group boycotts, market allocationand certain tying arrangements.12 It is this conduct, most typi-cally price fixing, which gains the attention of criminal prosecu-tors under the antitrust laws.

Not every “restraint of trade” is illegal, however. The courts haveread into the Sherman Act a reasonableness standard, and applya “rule of reason” analysis to determine if a specific restraint isunreasonable.13 If it is, the restraint will be condemned as illegal.In making that determination, the courts typically go through adetailed analysis of the relevant market to determine whether theprocompetitive justifications for the conduct outweigh its anti-competitive effects.14 This analysis is applied where the competi-tive impact of a practice is unclear, or where experience hasindicated that it is not always anticompetitive.15 “Vertical” non-price restraints, i.e., those imposed from a manufacturer downthe chain of distribution, are typically subject to analysis underthe rule of reason because they have been found to have “realpotential to stimulate interbrand competition.”16 Such restraintsinclude exclusive distributorships, territorial and customer restric-tions, and profit pass-over arrangements, to name a few. While itremains illegal per se for a supplier to agree with itsdistributors/retailers on a minimum price to be charged for itsproducts, maximum resale price maintenance (setting a ceilingon resale prices) is now subject to rule of reason analysis.17

Indeed, most agreements are reviewed under the rule of reason.

Sherman Act Section 2 prohibits monopolization, attempts tomonopolize and conspiracies to monopolize.18 With the excep-tion of conspiracies to monopolize, the focus here is unilateralconduct by a firm, not joint or concerted action. Monopolizationarises when a firm willfully acquires or maintains monopoly

power, typically through predatory conduct.19 Attempted monop-olization arises when a firm engages in predatory20 or anticom-petitive conduct with a specific intent to monopolize and there isa dangerous probability of that firm achieving monopolypower.21

Defining a relevant product and geographic market is the firststep in evaluating a Section 2 claim of monopolization orattempted monopolization;22 indeed, it is critical to any analysisunder the rule of reason and failure to do so will be fatal to anyclaim.23 Relevant markets consist of both product and geo-graphic markets,24 both of which must be described with reason-able specificity.25 The relevant product market generally isdefined as the category of goods or services with which theproduct subject to the alleged restraint effectively competes,26

and with which it enjoys “reasonable interchangeability of use.”27

The relevant geographic market is the area in which buyers orsellers of the relevant products effectively compete.28 The area ofeffective competition is the market area in which the seller oper-ates and to which the purchaser can practically turn forsupplies.29

The widely accepted general rule of thumb is that, while 90%market share is enough to support a claim for monopolization,“it is doubtful whether 60 or 64% would be enough; and cer-tainly 33% is not.”30 Nevertheless, those who enjoy a marketshare of at least 60% can be guilty of monopolization.31

Attempted monopolization may be found where one’s marketshare is even lower.32

In addition to adequately defining a relevant market, to prove anantitrust violation under the rule of reason one must also showthat the challenged conduct produced an adverse effect on com-petition in the relevant market.33 That effect must be substan-tially adverse, and not insignificant, de minimus, trivial or insub-stantial.34 The antitrust laws exist to protect competition frompractices which damage it; damage is measured by increasedprices, reduced quality or increased market concentration, not bythe removal of a single market participant.35 Antitrust practition-ers are fond of the aphorism that the antitrust laws were enactedfor the protection of competition, not competitors,36 to sum upthis principle.

Application to the Internet

In addition to traditional methods, the Internet has brought sup-pliers, distributors and retailers new ways to market, advertise,price and sell their products and services. Likewise, this presentssuppliers and distributors who want to control the sale and dis-

tribution of their products with new antitrust challenges. Whilearising in a new medium, these problems will be addressed andresolved by the courts and practitioners alike under settledantitrust principles. Some of these potential problems are dis-cussed on the following pages.

A N T I T R U S T , F R A N C H I S E A N D T R A D E R E G U L A T I O N | F E A T U R E S

. . . those who enjoy a market share of at least 60% can be guilty ofmonopolization. Attempted monopolization may be found where one’s

market share is even lower.

October 200026

Prohibiting Retailers From Selling On-Line

Some suppliers may wish to ban all sales by distributors/retailersover the Internet out of concern for maintaining the integrity oftheir distribution system. For example, a manufacturer may beconcerned that sales over the Internet will infringe on its distrib-utors’ exclusive territories or areas of primary responsibility, andwill encourage discounters and “free riding,” all to the detrimentof point-of-sale customer service, such as warranty repair. If adistant competitor is permitted to sell into a territory withoutmaking any investment in local promotions or service, therebyundercutting local retailers, those local retailers may be discour-aged from investing in those same areas. As a result the sup-plier’s sales as a whole may suffer.

Can a supplier prohibit all on-line sales of its products to pre-vent this “free rider” problem? A supplier may do so as long as itis careful that the restraint is lawful under the antitrust laws.Such a vertical, nonprice restraint would be analyzed under therule of reason.37 The U.S. Supreme Court has even identified theeradication of the free rider problem as justification for verticalrestraints such as the establishment of exclusive territories.38 Theconcern is the health of interbrand competition—not a problem

if intrabrand competition suffers as long as the restraint pro-motes interbrand competition.39 Thus, since the courts haveapproved distributorship arrangements including exclusive terri-tories, they likely would approve of exclusive territories beingextended to cyberspace under the rule of reason.40

Reserving Some or All Internet Sales to the Supplier

Some suppliers may wish to market and sell over the Internetdirectly to retailers and end users, in addition to maintainingtheir traditional sales channels through distributors. They mightwant to achieve this by reserving some or all Internet sales tothemselves under their distributorship agreements. In such acase, the same considerations raised above with regard to a sup-plier’s ban on all Internet sales by its distributors would apply.

In addition, such a scheme would put the supplier in “dual dis-tribution” with its distributors. The courts have found thatalthough dual distribution has horizontal, as well as vertical, ele-ments, it will be analyzed under the rule of reason if the restric-tion primarily benefits the supplier through increased interbrandcompetition.41 A supplier that adopts a dual distribution scheme,though, should be particularly vigilant that, outside the restric-tions it adopts, it not engage in conduct with “competing” dis-tributors that could be characterized as horizontal or per se ille-gal.

Favoring Certain Retailers Through Internet Policy

May a supplier favor certain retailers by providing them withhyperlinks from the supplier’s home page? The answer clearly isyes. A supplier may favor certain retailers as primary or favoreddealers and grant them preferential treatment.42 For similar rea-sons, a supplier likely may allow only certain retailers to sellover the Internet, as long as it makes this decision unilaterallyand can articulate compelling pro-competitive justifications forthe policy.

Controlling Retailers’ Web Pages

Suppliers who are concerned about the content, design andappearance of the Web sites that their retailers are using to selltheir products may want to exercise control over those aspectsof distribution.

Is this legal?

It is clear that suppliers may exert significant control over thesales practices of their retailers and distributors.43 Therefore, theylikely can exert control over the Web sites of their retailers as

F E A T U R E S | A N T I T R U S T , F R A N C H I S E A N D T R A D E R E G U L A T I O N

. . . a manufacturer may be

concerned that sales over theInternet will infringe on its dis-

tributors’ exclusive territoriesor areas of primary responsibility,

and will encourage discounters and

“free riding,” all to the detriment of

point-of-sale customer service,

such as warranty repair.

. . . a supplier likely may allow only certain retailers to sell over theInternet, as long as it makes this decision unilaterally and can articulate

compelling pro-competitive justifications for the policy.

Virginia Lawyer 27

long as they do so in an effort to make their brand morecompetitive in the interbrand market.

Setting Minimum Resale Prices of Products Sold Over the Internet

While a supplier may suggest a minimum price below whicha retailer may not price and sell its products, and then unilat-erally refuse to deal with a retailer who refuses to adhere tothe policy,44 it may not secure a retailer’s adherence to thispolicy through agreement, pressure, coercion or threats. To doso would be resale price fixing, a per se violation of ShermanAct Section 1.45 Similarly, in the Internet context, a suppliermay announce a minimum resale policy under which it willterminate any retailer who sells its products over the Internetor otherwise below a given price, but it may not take anyother action to enforce the policy and may take no action togain its retailer’s adherence to such policy through pressure,coercion or threats.

Setting Maximum Resale Prices of Products Sold Over the Internet

Unlike the setting of minimum prices, the U.S. Supreme Courthas determined that under certain circumstances a suppliermay have procompetitive justifications for setting a maximumprice over which a retailer may not price its products.46

Therefore, a supplier’s maximum resale price maintenancepolicy will be subject to rule of reason analysis to determineits legality.

Denying Cooperative Advertising Reimbursementsto Noncompliant Dealers

In an effort to promote the advertisement of their productslocally, suppliers may establish a cooperative advertising pro-gram by which they reimburse their dealers some portion oftheir advertising expense. Suppliers may wish to use this pro-gram to enforce certain practices, such as denying reimburse-ment to those dealers whose Web sites do not meet standardsestablished by the supplier, or who have failed to advertisethe supplier’s products at the supplier’s suggested resaleprices.

Can a supplier do so legally?

Suppliers should be careful in establishing such arrangementsbecause they may be challenged as vertical price fixing.However, there is authority holding that such plans are lawfulas long as the dealer remains free to sell the product at what-ever price it chooses, and to advertise at whatever price itdesires, so long as it is done at the dealer’s expense.47 Indeed,government regulators have stated that similar programs willbe analyzed under the rule of reason.

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Awards of Meritand

LOCAL BAR LEADER

OF THE YEAR

Deadline for submissions:May 7, 2001

continued on page 28

October 200028

Conclusion

The Internet is a new, explosive medium that has and will con-tinue to raise new challenges in many fields of law, includingantitrust. The starting point for meeting the challenges in theantitrust field, however, will remain traditional, well-worn princi-ples familiar to all antitrust practitioners. If you stick with thoseprinciples, even though the case law discussing Internet issues isnot yet developed, you will serve your clients well. �

ENDNOTES

1 United States v. Microsoft Corp., 97 F. Supp.2d 59 (D.D.C. 2000) (addressingremedy portion of case).

2 See Executive Summary, The Internet Economy Indicators (visited August 13,2000) http://www.internetindicators.com/executive_summary_june_00.htmlThe report cites a study by the University of Texas at Austin’s Center forResearch in Electronic Commerce, an excellent source of information and sta-tistics regarding the explosion of Internet-based commerce. The Center forResearch in Electronic Commerce’s Web site can be found athttp://cism.bus.utexas.edu/

3 See id.

4 See Retail E-Commerce Sales are $5.3 Billion in First Quarter 2000, CensusBureau Reports, United States Department of Commerce News (visited August13, 2000) http://www.census.gov/mrts/www/current.html

5 15 U.S.C § 1 et. seq.

6 15 U.S.C. § 12 et. seq.

7 15 U.S.C. § 13 (otherwise known as Section 2 of the Clayton Act).

8 15 U.S.C. § 45.

9 15 U.S.C. § 1.

10 Oksanen v. Page Memorial Hosp., 945 F.2d 696 (4th Cir. 1991), cert. denied,502 U.S. 1074 (1992).

11 Northern Pacific Ry. v. United States, 356 U.S. 1, 5 (1958).

12 Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1979). Tying occurswhere a firm with market power in one product coerces or ties the sale ofthat product to the sale of another separate and distinct product. Id.

13 Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918).

14 Id. Some courts, including the Fourth Circuit Court of Appeals, shortcut theanalysis by employing a market screen. That is, “a finding of no marketpower precludes any need to further balance competitive effects of a chal-lenged restraint.” Murrow Furn. Galleries, Inc. v. Thomasville Furn. Indus.,Inc., 889 F.2d 524, 529 (4th Cir. 1989). If an entity does not enjoy marketpower in the relevant market (geographic and product), then there is no“need to further balance the competitive effects of a challenged restraint.” Id.(commenting on what has come to be known as the “market screen”).

15 FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986); NorthwesternWholesale Stationers, Inc. v. Pacific Stationers, Inc., 472 U.S. 284 (1985).

16 Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 52 n.19 (1977).

17 Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911) (hold-ing it is per se illegal for a manufacturer to agree with distributors of its prod-ucts to fix and maintain resale prices for those products); United States v.Colgate & Co., 250 U.S. 300 (1919) (holding that manufacturers may unilater-ally state in advance the prices at which its goods may be resold and refuseto deal with wholesalers and retailers who do not conform to such prices,but may not coerce their compliance); State Oil Co. v. Khan, 522 U.S. 3(1997) (maximum resale prices and not illegal per se, and shall be subject tothe rule of reason).

18 15 U.S.C. § 2.

19 United States v. Grinnell Corp., 384 U.S. 563 (1966). By contrast, monopoliza-tion does not involve the possession of monopoly power through growth ordevelopment as a consequence of a superior product, business acumen orhistoric accident. Id. at 570- 71.

20 Examples of predatory acts include predatory pricing, unlawful refusals todeal, price fixing, tying arrangements and monopoly leveraging.

21 Spectrum Sports, Inc. v. McQuillam, 506 U.S. 447, 456 (1993).

22 Satellite Television v. Continental Cablevision, Inc., 714 F.2d 351, 355 (4th Cir.1983), cert. denied, 465 U.S. 1027 (1984).

23 See America Online, Inc. v. Greatdeals.net, 49 F. Supp.2d 851, 858 (E.D. Va.1999).

24 RCM Supply Co. v. Hunter Douglas, Inc., 686 F.2d 1074, 1076 (4th Cir. 1982).

25 Brown Shoe Co. v. United States, 370 U.S. 294, 324 (1962); Consul, Ltd. v.Transco Energy Co., 805 F.2d 490, 491, 495-95 (4th Cir. 1986), cert. denied,481 U.S. 1050 (1987).

26 Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327-28 (1961).

27 Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 482 (1992).See AOL, Inc. v. Greatdeals.net, 49 F. Supp.2d 851, 858 (E.D. Va. 1999) (reject-ing plaintiff’s product market of “email advertising to AOL subscribers”because numerous substitutes are available).

28 Satellite Television v. Continental Cablevision, 714 F.2d 351, 357 (4th Cir.1983), cert. denied, 465 U.S. 1027 (1984).

29 Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327-28 (1961).

30 United States v. Aluminum Co. of America, 148 F.2d 416, 424 (2nd Cir.1945).

31 Reazin v. Blue Cross and Blue Shield of Kansas, Inc., 663 F. Supp. 1360 (D.Kan. 1987), aff’d and remanded, 899 F.2d 951 (10th Cir.), cert. denied, 497U.S. 1005 (1990) (60% sufficient where defendant’s share was 15 times largerthan next largest competitor and there were significant barriers to entry).

32 M & M Medical Supplies and Serv., Inc. v. Pleasant Valley Hospital, Inc., 981F.2d 160 (4th Cir. 1992) (rehearing en banc) (holding that claims involvinggreater than 50% market share should be treated as attempts to monopolizewhen other elements of offense are satisfied), cert. denied, 508 U.S. 972(1993).

33 Great Escape, Inc. v. Union City Body Co., 791 F.2d 532, 539 (7th Cir. 1986);Terry’s Floor Fashions, Inc. v. Burlington Indus. Inc., 763 F.2d 604, 610 n.10(4th Cir. 1985).

34 United States v. Topco Assocs., Inc., 405 U.S. 596, 606 (1972).

35 Advanced Health-Care Servs. v. Giles Memorial Hospital, 846 F. Supp. 488,493 (W.D. Va. 1994); Sewell Plastics, Inc. v. Coca-Cola Co., 720 F. Supp. 1196,1217 (W.D.N.C. 1989), aff’d, 912 F.2d 463 (4th Cir. 1990), cert. denied, 498U.S. 1110 (1991).

36 Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962).

37 Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

38 Id. at 54-55.

39 Murrow Furn. Galleries, Inc. v. Thomasville Furn. Indus., Inc., 889 F.2d 524(4th Cir. 1989). See also Murphy v. Business Cards Tomorrow, Inc. 854 F.2d1202 (9th Cir. 1988) (the state of intrabrand competition is irrelevant wherethere is robust interbrand competition), overruled on other grounds,Townsend v. Holman Consulting Corp., 914 F.2d 1136 (9th Cir. 1990).

40 Short of outright banning Internet sales by distributors/retailers, another waya supplier may address the problem where a discounter selling over theInternet is undermining a supplier’s distribution scheme is to implement asystem of pass-over fees, as discussed by Greg St. Ours in another article inthis issue of the Virginia Lawyer.

41 Hampton Audio Electronics, Inc. v. Contel Cellular, Inc., 966 F.2d 1442 (4thCir. 1992).

42 Terry’s Floor Fashions, Inc. v. Burlington Industries, Inc., 763 F.2d 604 (4thCir. 1985) (allowing manufacturer to give lower prices to certain very effec-

F E A T U R E S | A N T I T R U S T , F R A N C H I S E A N D T R A D E R E G U L A T I O N

Francis Casola is a principal of the Roanokefirm of Woods, Rogers & Hazlegrove, PLC, andis the immediate past chair of the VirginiaState Bar’s Antitrust, Franchise and TradeRegulation Section. This article borrows froman outline and presentation made by HowardFeller entitled, “Sales Practices on theInternet: Antitrust and Trade RegulationIssues” presented on June 18, 1999 inVirginia Beach. The author thanks Mr. Feller

for his kind permission to use this outline, and he also gratefullyacknowledges the research assistance provided by Richard D. Scott, anassociate with Woods, Rogers & Hazelgrove.

Virginia Lawyer 29

tive carpet dealers in order to encourage thosedealers to bid and otherwise promote the man-ufacturer’s carpets rather than the carpets ofcompetitors).

43 Garment Dist., Inc. v. Belk Stores Servs., 799F.2d 905, 910-11 (4th Cir. 1986) (discounter ter-minated because of poor image), cert. denied,496 U.S. 1005 (1988); Winn v. Edna Hibel Corp.,858 F.2d 1517, 1520 (11th Cir. 1988) (reason forterminating dealer was to maintain image andintegrity of products); and Wilson v. I.B.E.Industries, Inc., 510 F.2d 986 (5th Cir.1975)(upholding requirement that service sta-tions not be “cluttered”). For the implicationswielding such control may have in the franchisecontext, see R. Scott Caulkins’ article in thisissue of the Virginia Lawyer.

44 United States v. Colgate & Co., 250 U.S. 300(1919).

45 United States v. Parke, Davis & Co., 362 U.S. 29,43 (1960).

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

47 In re Nissan Antitrust Litigation, 1577 F.2d 910(5th Cir. 1978), cert. denied, 439 U.S. 1072(1979).

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