Chapter 10 Antitrust

Chapter 10 Antitrust

Matt Gummig, Andrew Cotton, Melissa Luebbe,Jessi Bays, Patrick Davies Lee Jones, and Bryce Jones, Katherine Guerin

History

Following the civil war, large industries became dominated by trusts. A trust was a business entity that was formed when shareholders of all or the majority of companies in an industry would transfer their stock to a board of trustees in exchange for dividend certificates. The board of trustees would then collectively govern the companies, effectively creating a monopoly of the industry. Most trusts (which in effect monopolized and engaged in price fixing) followed policies to which the public objected but which were not regulated in any way by the government. A prominent example of these practices was the Standard Oil Company, which in the late 1800’s controlled almost the entire market for oil in the United States. Standard Oil started as several organizations that decided to band together and run under what is known as a trust to get around rules of that time which governed the sizes of organizations. This quickly became a popular way for companies to converge and control commodity prices and limit competition.

By the late 1890’s, public concern over business practices caused the federal government to pass legislation. The first piece of legislation was passed in 1890 with the Sherman Act, followed by the Clayton Act in 1914, and the Robinson-Patman Act in 1936. Economic theorists believe these laws help lower prices, improve the quality of goods and services, promote innovation, allow more choice for consumers, and cause a more efficient economy.

Introduction

The authority to enforce these acts lies in the hands of the Antitrust Division of the Department of Justice, as well as the Federal Trade Commission (FTC), which was created with the Federal Trade Commission Act of 1914. The Antitrust Division shares jurisdiction with the FTC in civil cases, but can also file criminal charges on those knowingly violating antitrust laws. The FTC deals with consumer protection in a very broad sense by determining whether or not a business is using deceptive practices or participating in activities harmful to competition. The commission’s goal is the protection of consumers. The FTC Act gives the commission power to prevent “unfair methods of competition,” which allows them to enforce regulation like the Sherman Act, Clayton Act, and Robinson-Patman Act as well. It also gives them the power to prevent anticompetitive behavior not yet regulated by law. The FTC is an independent federal agency, so it is under less political control than most federal agencies within the executive branch of the government.

If the FTC finds that there has been a violation of trade regulation rules, it can take action against the offending party by filing a formal complaint. An FTC administrative law judge will hear the case and make the decision. Appeals of this decision go first to the heads of the commission and then to the federal courts of appeals and the Supreme Court. The judge will usually administer a cease-and-desist order, which is a command to stop the illegal action(s). If the alleged violator wants to settle the dispute by an agreement, they can go through a consent order, which is a promise to stop the activity in question but is not an admission of guilt.

United States antitrust law is primarily concerned with protecting competition for the sake of consumers and competitors. This law is established upon the acceptance of two facts: first, that market competition is the most effective way of allocating resources and protecting the interests of consumers and producers; and second, that rules for fair competition must be in place to maintain this efficiency.

For example, if Standard TV Co. is the only firm present in the television market, the choice of what we watch our favorite programs on is pretty simple: Standard or nothing. With limited substitute products and no competition, Standard can safely raise the price as high as they want and most people will still buy it. In fact, Standard could stop making their TV’s with remotes or other features, cutting their cost of raw materials and processing, while still not affecting their share (100%) of the market. Additionally, Standard has no reason to innovate or improve its products as it is unthreatened. In this market, consumers have no choices, poor quality, and high prices. Fair pricing, incentive to innovate, quality maximization, and available alternatives are the benefits of competition that antitrust legislation is trying to preserve.

I. The Sherman Act

The Commerce Clause of the United States Constitution grants Congress the power to regulate interstate commerce meaning they place restrictions on behavior that could affect it. One of the first embodiments of this concept can be found in the Sherman Act of 1914. The Act consists of two main declarations: (1) Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal and (2) “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person to monopolize any part of trade or commerce among the several states, or with foreign nations shall be deemed guilty of a felony.” For simplicity’s sake, these two sections will be explained separately.

A. Section 1

Section 1 of the Sherman Act deals with “restraints of trade” that come in the form of contracts, combinations, or conspiracies. While acts of Congress have a tendency towards imprecise language to aid in universal application at judicial discretion, this section of the Sherman Act was in desperate need of interpretation. The first step was to establish the definition for “restraints of trade.” A restraint of trade is a threat to the competitive atmosphere of a particular market, resulting in a loss of the benefits otherwise reaped. Consequently, the courts recognized two main categories of behaviors that arose from the restraint of trade. Behaviors that are inherently dangerous to competition fall under the “per se” rule and are always illegal while behaviors which may or may not be dangerous given the specific situation fall under “rule of reason” and may not always be illegal.

1. Per Se Illegal Behavior

If the courts can find proof that these behaviors exist, it does not require proof of any kind of damages because per se illegal behaviors have been deemed to always threaten the competitive environment. No justification can excuse activities that fall under the category of per se illegal. The four behaviors currently classified as per se illegal are: horizontal price fixing, horizontal division of markets, horizontal price quota, and group boycott.

a. Horizontal Price Fixing

Horizontal price fixing is when competitors explicitly or implicitly set a price at which to sell their comparable goods or services. The term horizontal, in the antitrust sense, refers to firms competing in the same level of production or sales. The term vertical refers to a buyer-seller relationship, like the relationship of a manufacturer to a wholesaler to a store. Horizontal price fixing interferes with the way the “invisible hand,” proposed by Adam Smith, sets the market price for a good or service in a free market. This interference results in an artificially high price and harms the consumer. For example, if McDonald’s decides to raise the price of its food, some consumers may choose to pay the higher price and others will go to another fast food restaurant. However, if the dominant fast food restaurants, like McDonald’s, Burger King, and Wendy’s decide together that they should double the prices of all their hamburgers, then the three would likely be found guilty of horizontal price fixing. Consider the following case:

DENNY’S MARINA, INC. V. RENFRO PRODUCTIONS, INC.

8 F.3d 1217 (7th cir. 1993)

Denny’s is a full-service marine dealer located near Peru, Indiana. It sells fishing boats, motors, trailers, and marine accessories in the central Indiana market. The Dealer Defendants are marine dealers in the same market area who compete with Denny’s to sell boats to Indiana consumers. CIMDA is a trade association of marine dealers in that area. The Renfro Defendants are producers of two boat shows held annually at the Indiana State Fairgrounds (the “Fairgrounds Shows”). The February fairgrounds show (the “Spring Show”) originated over 30 years ago. It is one of the top three boat shows in the United States, attracting between 160,000 and 191,000 consumers annually. The [*1220] October show (the “Fall Show”) is smaller and began in 1987. Denny’s alleges that the defendants conspired to exclude it from participating in these shows because its policy [**6] was to “meet or beat” its competitors’ prices at the shows.

Denny’s participated in the Fall Show in 1988, 1989, and 1990; it participated in the Spring Show in 1989 and 1990. At all of these shows Denny’s [**7] was very successful, apparently because it encourages its customers to shop the other dealers and then come to Denny’s for a lower price. During and after the 1989 Spring Show, some of the Dealer Defendants began to complain to the Renfro Defendants about Denny’s sales methods. After the 1990 Spring Show these Dealer Defendants apparently spent a good part of one CIMDA meeting “venting their….frustration” (App. at 15) about Denny’s. The complaints to the Renfro Defendants also escalated.

As a result, the Renfro Defendants informed Denny’s that after the 1990 Fall Show (in which Denny’s was contractually entitled to participate) it could no longer participate in the Fairground Shows. This litigation ensued. Denny’s seeks compensatory damages to be assessed by a jury, as well as injunctive relief. A successful claim under Section 1 of the Sherman Act requires proof of three elements: (1) a contract, combination, or conspiracy; (2) a resultant unreasonable restraint of trade in the relevant market; and (3) an accompanying injury. The district court noted that defendants do not dispute the first and third elements of proof. Hence, the parties’ only argument is whether Denny’s has made a sufficient showing of the second element, unreasonable restraint of trade, to withstand defendants’ motions for summary judgment.

So far, the position of this Court is similar to that of the court below. Nevertheless, having essentially found that plaintiff had adduced sufficient evidence of a horizontal price-fixing conspiracy to withstand a motion for summary judgment, the court below refused to apply the per se rule that would allow it to conclude that there had been an unreasonable restraint of trade in the relevant market. Instead, before it would apply the per se rule, the court required the plaintiff to demonstrate a substantial potential for impact on competition in the central Indiana market as a whole. Such an exception to the per se rule against price-fixing it unwarranted by cited precedent apart from a district court case discussed below. As plaintiff explains, it “simply cannot afford the elaborate market analysis and expert witnesses required to make such a showing.”

As far [**14] back as 1940, it has been clear that horizontal price-fixing is illegal per se without requiring a showing of actual or likely impact on a market. Socony-Vaccuum Oil, 310 U.S. at 223-224, and it progeny; AgreedaHaverkamp, Antitrust [*1222] Law (1986) 1510 at 415, 418-419. This is because joint action by competitors to suppress price-cutting has the requisite “substantial potential for impact on competition, “Superior Court Trial Lawyers Ass’n, 493 U.S. at 433 (quoting Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 16, 80, L. Ed. 2d 2, 104 S. Ct. 1551) to warrant per se treatment. The district court would require plaintiffs in this case to demonstrate a particular potential for impact on the market, when one of the purposes of the per se rule is that in cases like this such a potential is so well-established as not to require individualized showings.

Since Denny’s presented enough evidence for a court and jury [**16] to conclude that the defendants engaged in a horizontal conspiracy to suppress price competition at boat shows, their conduct is a per se violation of Section 1 of the Sherman Act. Maricopa Medical Society, 457 U.S. at 338. The district court’s grant of summary judgment to defendants is reversed and the case is remanded for trial. The dismissal of the Renfro Defendants’ counterclaim is likewise reversed and remanded for further consideration.

b. Horizontal Division of Markets

Horizontal division of markets occurs when competitors apportion amongst themselves the consumer market for which they should be competing. This apportionment is often done geographically, but can also occur on some other basis. An example of this is if two cable companies competing in the same city decide to geographically split the town in two, with each company serving half. With this division, consumers could no longer switch cable providers without moving, and so if one company raised its price there is nothing the other could do about it. When the case is simply a division of market to reduce competition, it is called a naked restraint of trade, meaning it served no other purpose than to reduce competition and ultimately cheat the consumers. Another example that is illegal under the Sherman Act is bid rigging. While there are a few different types, it occurs in construction bidding where the contract is already promised to one company, but other bids are allowed in to make it look legitimate. Sometimes, contractors will have a deal between them where they will take turns not submitting bids so that one contractor will be guaranteed to get the contract, or they will all agree on their submitted prices so that they can take turns being the successful bidder. There are a few examples of market division that are not naked restraints and are legal assuming they are not overly restrictive and do not extend for an unreasonable amount of time. In the case of horizontal market divisions, these are referred to as ancillary restraints. Probably the most common form of such a restraint is a non-compete agreement whereby the seller of a business agrees not to compete with the market.2 In order for these to be exempt from the per se rule, these transactions must be “subordinate and collateral to a separate, legitimate transaction. The ancillary restraint is subordinate and collateral in the sense that it serves to make the main transaction more effective in accomplishing its purpose.”3

c. Horizontal Production Quotas

A horizontal production quota is when competitors limit the amount of product they release into the market. The purpose of this move is to limit supply and thus, increase the price that the market is willing to pay for their product. The textbook example of this strategy in action is the Organization of the Petroleum Exporting Countries (OPEC). The countries comprising this group control approximately 66% of the world’s proven oil reserves and collectively determine how much oil to produce in order to manipulate world oil prices. This obviously harms the consumer as the producers can manipulate the market price at will rather than letting it be determined through traditional economic supply and demand. Because OPEC is located outside the U.S. and beyond the reach of its legal jurisdiction, there is nothing the United States can do about its illegal operating structure.

d. Group Boycotts

Also known as a collective refusal to deal, a group boycott can be vertical, horizontal, or both. If these boycotts are large enough, a competitor may be successfully cut off from suppliers or a market. An example of an illegal boycott would be if all of the major auto part suppliers in the industry collectively decided to stop doing business with Ford Motor Company. This action would have the effect of choking Ford out of the auto industry and would be viewed as anti-competitive. Acting on its own, one supplier may legally refuse to do business with a manufacturer (i.e. one auto supplier and Ford); unilateral decisions made by firms that do not have full market power are not considered a collective refusal because a refusal by one non-dominant firm will merely send the purchaser to a competitor.

2. Rule of Reason (Non-Per Se)

There are a variety of behaviors that the Sherman Act includes under the rule of reason due to their anti-competitive effects. One of the major activities is known as vertical price fixing or resale price maintenance. This activity is when a manufacturer suggests a resale price to its dealers and attempts to enforce it. Vertical price fixing was once per se illegal but now generally operates under the rule of reason assumption. In other words, there are occasions when the Supreme Court has held that dealers have the right to stop selling to wholesalers “for reasons sufficient to himself,” which was the case when Colgate & Co. was accused of obligating its dealers to sell at fixed prices. The court found that without intent to create a monopoly, the Sherman Antitrust act does not prohibit the announcing of retail prices and the refusal to deal with retailers that will not sell at this price. The general rule is that if it is instigated by the retailers, it will be termed illegal.