ANTITRUST II
Professor Meyers
Spring 2001
Chapter 8: Price Discrimination
Robinson-Patman Act: It is an antitrust law, implemented in 1930’s to help non-chain stores compete with large chain stores who could get price breaks for quantity discounts on purchases. Problem: R-P may be more anti-competitive than pro-comp. Because it protects competitors rather than competition.
Clayton Act § 2 (15 U.S.C. §13 Robinson Patman Act)
Focuses on the impact of price in the market. The R-P prohibits discrimination on price. R-P prohibits a seller from selling a product at a lower price to one buyer than another.
ELEMENTS:
1. There must be a sale across state line (commerce
requirement)
2. There must be a discrimination (difference) in price.
This difference can be direct or indirect: charge buyer
for delivery or better credit terms.
3. There has to be 2 actual purchasers. (not leases & offers don’t count)
4. It must be a commodity/goods of like grade and quality (measured by quality of goods not consumer preference.)
5. Purchasers must be competitors.
EFFECTS TEST:
1. Does discrimination “substantially lessen competition” OR
2. “Tend to create a monopoly” OR
3. Does it injure, destroy or prevent competition with the:
Seller (seller who missed sale) (Primary line injury)
Buyer: (Secondary line injury)
Customers of either buyer or seller (Tertiary line injury)
DEFENSES:
1. Cost Justification: Quantity discounts are not a defense.
Cost justifications must be proven before sale takes place. Very hard to prove.
2. Changing conditions defense: Change in market or going out of business sales
3. Meeting competition defense
Other provisions c, d and e are totally different than 2(a)
2(f) Buyer Liability If buyer wrongfully induces seller he could be liable too.
The sellers defense is meeting competition defense
Brooke Group(Liggett) v. Williamson Tobacco – Predatory Pricing Claim (Primary Line Injury)
Plaintiff must show dangerous probability of Recouping Costs by Defendant. Success of the Defendant = Key Antitrust Injury: 1) Prices below Defendant’s Cost 2) Reasonable prospect or dangerous probability that predator will recoup losses
FTC v. Morton Salt – Secondary Line Injury; Quantity discounts
Court may infer injury to competition where quantity discounts are not Functionally available to all purchasers. Note: Primary line injury: tough to prove competitive injury
Secondary line injury: it may be inferred
Texaco v. Hasbrouck – Functional Discounts Legitimate?
Affirmative Defense: 1) Discount justified by savings in manufacture, delivery, or sale; (buyer performs a legitimate duty for the seller and in return is given a discount) and 2) good faith response to equally low price of competator. Legitimate Functional Discount will not give rise to inference of injury to competition.
J. Truett Payne v. Chrysler – Sales incentive program.
Buyer must show Actual Injury to himself, not just injury to competition as a whole. Actual injury: lost profits, lost business, etc. as the result of the price discrimination.
FTC v. Henry Broch and Co. – “broker” for food producers(sellers)
Held: broker who charges less commission to buyer violates R-P §2(c) because different commission schedules applied to different buyers. §2(c) designed to prevent dummy brokers, bribes, etc… Cost justification does not apply here, nor do you need two transactions.
Commodities of Like Grade and Quality
FTC v. Borden – like grade and quality based on chemical composition, not packaging, or customer preference.
United States v. Borden – Cost justification defense asserted in price discrimination claim b/c Borden charged diff. Prices b/n diff. Grocery stores. Held: No cost justification based on artificial classification of consumers. In order to use cost justification, Defendant must show marginal cost upon which the price discrim. is based. VERY HARD!!
Meeting Competition Defense (Buyers Lie!!!)
United States v. US Gypsum – Horizontal Competators exchanged price info. Held: Good Faith belief, rather than absolute certainty, is necessary for “meeting competition defense” to justify price concession. Seller entitled to meet price to keep customers. Factors for Good Faith: 1) Seller allowed to meet competition, not beat competition. 2) made in good faith. 3) buyer threatened termination. 4) Seller seeks documentary evidence. 4) Reasonableness in terms of market data. 5) Consistent with buyer’s past practices
Falls City v. Vanco Beverage – Beer sales; Meeting competition defense available in wide geographic market, not just on a customer by customer basis. Standard: Reasonably Prudent Businessman
Changing Conditions Defense
Comcoa v. NEC – changing market for distribution of telephone goods meets requirements for this defense.
Great Atlantic & Pacific Tea Co. v. FTC – Buyer liability. Held if buyer “knowingly” induces seller to discriminate in price, where buyer uses a second seller, buyer may be liable under §2(f) but only if Seller one (who lowered cost of sale) is liable under §2(a). Buyer’s liability derives from Sellers liability. (Seller one may have meeting competition defense.)
Okla. Antitrust Laws: OK only has laws corresponding to §2(a), (b) not (c), (d), (e), or (f). Defencses: Cost Justification, Meeting Competition, and Changing Conditions.
Chapter 7: Mergers and Acquisitions
Vertical Integration Through Merger
United State v. Yellow Cab Company – merger restrained trade b/c it prevented the purchase of cabs from companies other than the parent company. Cab companies would have to pay more for cabs and pass the cost on to the consumer. Held: Vertical integration can be a violation of AT laws if unreasonable restraint of interstate commerce. Case is problematic, both from an economic standpoint, and the unity of interest of common ownership (no K, combo, conspiracy)
United States v. Columbia Steel Co. - §1, §2 Sherman violations for vertical mergers? Held: While vertical integrations are not per se violations, the issue is whether the merger forecloses competition and is more anticompetitive than procompetative.
Note: effects test of §7 Clayton claim: “substantially lessen competition or tends to create a monopoly”
Vertical Integrations will be judged using effects test vis a vis a defined market (geographic and product)
United States v. EI Dupont – Held: ownership of GM stock by Dupont insulated them from the market. Relevant market was automotive market, not fabric sales. Since GM had 40% market share of auto industry and acquisition of stock was not motivated by competitive factors, one may use §7 claim to force Dupont to divest shares. Test: 1) market affected must be substantial 2) Plaintiff must prove likelihood that substantial portion of market may be affected.
Note: SOL: 4 yrs for private AT actions; 5 years for Criminal; none for injunctive relief.
Brown Shoe v. United States - §7 claim; proposed merger (horizontal and vertical) b/n Brown and Kenny shoe mfg or retail outlet. Held: “trend” toward shoe manufactures to acquire retail outlets “definitely foreclosed” other mfg from competing for other retailers. The area of effective competition must be determined by reference to product market and geographic market. Product market: interchangeability (“cross-elasticity”). What is the size of the share of the market foreclosed? The goal of §7 is to prevent oligopolistic markets.
Herfindahl-Hirschman Index (HHI) – used to measure concentration of the market and change in concentration after a merger. Step one: Square the individual market shares of each competator and then sum the squares. HHI of 10,000 is a perfect monopoly. Above 1800 is highly concentrated market. 1000-1800 moderate. And so on. Step two: measure the HHI after the merger. Step 3 what is the difference in the two HHI scores. An increase of 100 or more indicates a greater concentration and a better chance DOJ will investigate.
DOJ Merger Guidelines –
DOJ is looking for “barriers to entry” into a potential market post merger, and if they do not pass the “timely, likely, and sufficient” test, then the DOJ will attempt to stop the merger at “incipiency.”
3.0“Entry analysis” Entry must be timely, likely, and sufficient in its magnitude, character, and scope to deter or counteract the competitive affects of concern.
3.2 “Timeliness of Entry” – consider entry alternatives within 2 years
3.3“Likelihood of Entry” – likely if new entry would be profitable at premerger prices, and if such prices could be secured by entrant
3.4“Sufficiency of Entry” - would the new entry affect the merged entity, be “felt” by the merged entity.
In other words, if the bad effects of the merger occur, are there competitors who could enter the market (T,L,S) to offset the harm
Today: Look at Trend (consolidation), Barriers to Entry (T,L,S), and Market Foreclosure (not as important today)
Vertical Mergers hardly ever looked at today (See Reason v. BlueCross)
States AG “4 firm test”
Mergers of Competitors
Northern Securities v. United States – Held: merger of two railroads by a holding company “restrains competition” within the meaning of the Sherman Act.
United States v. Columbia Steel Company – Held, in horizontal aspect, the possibility of future interference with competition through the acquisition of a competing company does not constituted an unreasonable restraint of trade. Arguably, based on the market definitions, these two companies were not compotators. Sherman Act Case
Brown Shoe v. United States - §7 Clayton Claim; Most Hostile Case against horizontal mergers. Held the effects of the merger may substantially lessen competition in the market (nationwide mfg and sale of shoes) proscribe the merger.
Probably a bad ruling. Today, one needs to look at barriers to entry.
In horizontal case Plaintiff will want to define the market as geographically small as possible. In monopolization and vertical case, define as large as possible.
United States v. Philadelphia National Bank – (probably not good law today)- bank merger; issue: proper line of commerce and section of country. Court held that geographic market was small and commercial banking was the product market, and ignoring the argument that the bank would be more competitive nationwide, the court held that the increase in concentration ALONE was anticompetitive. “Countervailing power argument” raised here: where anticompetitive effects of merger are outweighed by meeting communities convenience and needs, then merger shouldn’t be illegal.
United States v. Vons Grocery Co. – (Takes Philadelphia to next level) Held: due to trend of consolidation and market share in LA area of Vons would increase to 7.5% this merger would be a “per se” violation of §7 Clayton. No analysis of competitive affect or barriers to entry.
United States v. General Dynamics – acquisition of stock of coal companies. Market = not coal, but energy; and geographic = within the competitive position of various coal mfgs. Merging companies, one was deep mining, one was strip miner. SHIFT toward more conservative analysis, rational look at barriers to entry, rather than pure market share. Held: The court should analyze fundamental structural changes in the market when determining whether a merger would substantially lessen competition. Factors: concentration of the industry, trend, and after merger affect on the competition.
Consider 1992 Horozontal Merger Guidelines
Entry analysis: T,L,S
Efficiencies
Failure and Existing Assets
FTC v. Staples – FTC seeking prelim injunction to merger b/n two office product superstores. Two part injunction test: 1) FTC likelihood of success on §7 claim on the merits 2) equities involved (efficiencies) Note, there were high barriers to entry into the superstore market.
Hospital Corp. of America v. FTC – whether acquisition of hospitals in TN is likely to facilitate collusion? Barriers to entry where high, need a state certificate to open hospital. FTC wins. Note, efficiencies are not a good argument to merger b/c plaintiff must prove efficiencies cannot be achieved through other means.
United States v. Waste Management, Inc – barriers to entry in waste management are low so merger was OK. If merged company presented any inefficiencies post merger, someone else could easily enter the market
Mergers of Potential Competitors
United States v. Sidney Winslow – merger of shoe componant mfgs found OK b/c they were not actual competators
United States v. Continental Can – held: proposed merger b/n can mfg and glass mfg stopped b/c they were potential competitors and market for end uses of their products the same (“cross-elasticity” of demand), and high probability of foreclosing the market for end uses.
FTC v. Proctor and Gamble – Clorox Case; Perceived actual potential competitor creates barriers to entry (high) where it would remove Proctor from the market as a potential competitor and it may tend to suppress competition where Proctor would retaliate by selling Clorox at a loss while making up for the loss by selling other products.
Held: merger would allow P&G to exercise market power and substantially lessen competition and prevent others from entering the market.
Actual vs. Percieved competators facilitating or hurting competition
Failing Company Defense
Citizen Publishing v. United States – two papers operate in “joint operating agreement”; Defendant failed to show: 1) there was a going out of business sale 2) grave danger of failure 3) showing that the company with which the failing business was to merge was the only available purchaser (must offer to third party) 4) bankruptcy would not have helped. Now papers must get approval to merge, but may avoid many of the problems above.
Note, this doesn’t apply to failing “division”
Further, private party has difficult burden seeking divestiture, let DOJ or AG do it.
Chapter 3: Antitrust Enforcement
Quadriparte approach:
1)DOJ, Criminal and Civil
2)FTC, Civil
3)Private parties, Civil
4)States Attorneys General
DOJ
DOJ has right to discovery b/4 trial, but these are secret. This is the investigative power. SOL is tolled by the start of an investigation (CID civil investigative demand). Private party has a year to file after the conclusion of the DOJ investigation. Gov. through DOJ, can recover damages, and if Gov. is wronged party, can have damages trebled. If only private parties damaged, Gov cannot get damages, must pursue injunctive relief. SOL for civil is 4 years.
§9 of OK Antitrust laws gives the AG similar investigative powers as parens patriae. DIFF = if state is injured party, it can seek damages, but not trebled. But if bringing action as parens patriae then damages can be trebled. State SOL for civil is 4 years from beginning of offence, or discovery thereof (this is diff from federal).
DOJ criminal prosecutions – Horizontal Price fixing is only case DOJ really pursues. Grand Jury investigation and indictment. Note: only Gov. can waive “speedy trial act.” So Gov can drag out the investigation. Federal Fines for Sherman violations 350K individual – 10mill. for corp. & 3 years in prison. SOL is 5 years. Must show “specific intent.” Clayton or R-P violations violation fine = misdemeanor with 5K fine.
OK criminal = fine 10k and 2 years in prison. SOL = 5 years
FTC
Only civil juris. §5 or FTC Act. Hearing in front of FTC examiner. Same investigative powers. Antitrust division and Consumer Protection division. Appeals to Circuit Court.
Private Parties
Treble damages. Reversible error to let jury know. Exclusive federal juris. For federal claim. Ratio is 20 private to 1 Gov. action. Mandatory one way reasonable attny fees for Plaintiff.
Venue
Where Defendant is located or does business, or is found. If conspiracy, must have venue over all Defendants. Nation wide extraterritorial service of process over defendant corporations
Juris “Interstate Commerce” Requirement
Summit Health v. Pinhas – Held: there is a nexus b/n alleged act (doctor’s boycotting service of one doctor) and interstate commerce (patients from other states, Medicare payments, etc…) Test is NOT the competitive effect upon the defendant, but a general evaluation or the restraint on all participants and potential participants. Look at the effects within the entire market.
Note: OK there is no commerce requirement, but effects which fall into OK apply
Doctrines Needed for Antitrust Claim
1)Direct Purchaser Doctrine – only the direct purchaser of goods which where “price fixed” may recover, not “indirect purchaser”
2)Antitrust Injury – injury must be the result of action Antitrust laws designed to prevent.
3)Standing – remoteness of the plaintiff to the alleged illegality or injury
Direct Purchaser and Problem of Passing On
Illinois Brick Co. v. Illinois – Illinois Brick sold brick to contractors who in turn sold to State of Illinois. Can Plaintiff get around “direct purchaser doctrine” by claiming contractors merely passed on price fixed bricks? Held: no, an indirect purchaser may not use the passing on defense that contractor may have (see Hanover) offensively because of the multiplicity of lawsuits and evidentiary problems the indirect purchaser problem causes.
Exceptions to indirect purchaser doctrine:
1)Injunction sought
2)Cost Plus – where there is a pre-existing K b/n seller and purchaser giving evidence of pre-price fixing, there are no evidence problems)
3)Unity of Entity – if the manufacturer/seller and retailer/purchaser are same or subsidiary, then there is a unity of interest (see Copperweld)
4)Co-Conspirator – if the seller and direct purchaser are co-conspirators then an indirect purchaser can sue.
Business or Property Requirement
Reiter v. Sonotone Corp. – Consumer who’s only injury under §4 Clayton claim is loss of money falls within the statutory language of “Business, or Property.” It does not have to be “business property.
Antitrust Injury
Brinswick v. Pueblo Bowl-O-Mat. – Plaintiff must show 1) damage to self and 2) “specifically” Antitrust injuries, the type of injuries AT laws were designed to prevent and that flows from that which makes Defendant’s acts unlawful. The damage to self should be the type of loss that the claimed violations would be likely to cause.
Cargill v. Monfort – For injunction, Plaintiff still needs to show AT injury is the reason he is seeking relief
Atlantic Richfield v. USA Petroleum – Price fixing case; conspiracy for vertical max price; Even where there is a presumption of injury to competition in a “per se” violation, the plaintiff must still show his damages flow from the AT violation. Here the plaintiff should show 1) conspiracy(agreement) 2) in unreasonable restraint of trade 3) damage to plaintiff 4) injury was the type AT laws designed to prevent (Clayton §4). For example show predatory pricing hurts competition.
Standing