Antitrust Outline
Introduction
The Demand Curve
Terms:
Main Statutory Provisions
Sherman Act (passed July 2, 1890)
Clayton Act (passed 1914, amends Sherman Act)
Federal Trade Commission Act (passed 1914)
Robinson-Patman Act (passed 1936)
Hart-Scott-Rodino Act (1976)
Theories of Harm
Restraints of Trade
Cases
US v. Trans-Missouri Freight (1897)
US v. Addyston Pipe (1898)
Rule of Reason
Cases
US v. Standard Oil (1911)
Northern Securities v US (1904)
US v. American Tobacco (1911)
Price Fixing and Other Per Se Violations
Cases
Chicago Board of Trade v. US (1918)
Appalachian Coal v. US (1933)
US v. Socony-Vacuum (1940)
Horizontal Agreement Characterizations
Cases
Broadcast Music (BMI) v. Columbia Broadcasting (CBS) (1979)
NCAA v. Univ. of Okla. Bd. Of Regents (1984)
Updating the Rule of Reason
California Dental Association v. FTC (1999)
Finding the Agreement
Cases
Interstate Circuit v. US (1939)
Theater Enterprises v. Paramount Film Distributing (1954)
Toys “R” Us v. FTC (2000)
American Column and Lumber v. US (1921)
Refusals to Deal and Joint Ventures
Cases
Montague & Co. v. Lowry (1904)
Fashion Originators Guild v. FTC (1941)
Klor’s v. Broadway Hale (1959)
NYNEX v. Discon (1998)
Radiant Burners v. Peoples Gas, Light & Coke (1961)
Northwest Wholesale Stationers v. Pacific Stationary and Printing (1985)
Associated Press v. US (1945)
Influencing the Government
Cases
Eastern Railroad Presidents Conference v. Noerr Motor Freight Co. (1961)
California Motor Transport v. Trucking Unlimited (1972)
Allied Tube & Conduit v. Indian Head (1988)
Mass. School of Law at Andover v. ABA (1997)
Professional Real Estate Investors v. Columbia Pictures (1993)
State Action
Cases
Parker v. Brown (The California Raisin Case) (1943)
Schwegmann Bros. v. Calvert Distillers (1951)
Goldfarb v. VA State Bar (1975)
California Retail Liquor Dealers Assoc. v. Midcal Aluminum (1980)
Columbia v. Omni Outdoor Advertising (1991)
Vertical Arrangements
Cases
Dr. Miles Medical Co. v. John D. Park & Sons
Continental TV v. GTE Sylvania (1977)
US v. Arnold, Schwinn & Co. (1967)
Monsanto v. Spray-Rite (1984)
Business Electronics Corporation v. Sharp Electronics Corp (1988)
State Oil v. Khan (1997)
Single Firms: Monopolization and Market Definition
Cases
US v. Aluminum Co. of America (Alcoa) (1945)
US v. E.I. DuPont de Nemours (1956)
Predatory Pricing
Case
Brooke Group (Liggett) v. Brown & Williamson Tobacco
Tying Arrangements
Cases
Northern Pacific Railway v US (1958)
Eastman Kodak v. Image Technical Services (1992)
Jefferson Parish Hospital v. Hyde (1984)
Telex v. IBM (1973)
US v. Microsoft (2001)
Exclusive Dealing
Cases
Standard Fashion v. Magrane Houston (1922)
FTC v. Brown Shoe (1966)
U.S. Healthcare v. Healthsource (1993)
US v. Microsoft (2001)
Mergers and Acquisitions
Analysis of a Merger
Cases
FTC v. Staples (1997)
In re AOL (2000)
FTC v. H.J. Heinz (2001)
In re Silicon Graphics (1995)
Attempts to Monopolize
Cases
Lorain Journal v. US (1951)
Aspen Skiing Co. v. Aspen Highlands Skiing Co. (1985)
Spectrum Sports v. McQuillen (1993)
US v. Microsoft (2001)
Price Discrimination
Cases
Utah Pie v. Continental Baking (1967)
FTC v. Morton Salt (1948)
US v. Borden (1962)
Falls City v. Vanco Beverage (1983)
Standing, Enforcement, and Injury
Jurisdiction
Standard of Review
Cases
Hanover Shoe v. United Shoe Machinery (1968)
Illinois Brick v. Illinois (1977)
Kansas v. UtiliCorp United (1990)
Blue Shield af Virginia v. McCready (1982)
Brunswick v. Pueblo Bowl-o-Mat (1977)
Remedies, Settlements, and Consent Decrees
IntelConsent Decree
Microsoft Consent Decree
Introduction
The theory of antitrust is somewhat antithetical. While the free market in the United States is designed to promote the impulse of businesses and individuals to grow as large and profitable as possible, antitrust law is there to curb the naked greed that can ultimately harm competition. So, the goal of antitrust law is to promote competition and not individual competitors. There is an alternate theory, however, that antitrust law is also designed to protect consumers. Lastly, there is the Chicago school of thought that antitrust law is based on the goal of efficient utilization of resources (espoused by such luminaries as failed Supreme Court Justice nominee Robert Bork). Much of this comes in the context of mergers, which ostensibly eliminates competition from the market. Agencies (see Jurisdiction, infra) can operate from a position of presumptive unlawfulness, and have free reign to investigate mergers.
The Demand Curve
Under economic theory, as the price for a good or service increases, market demand will correspondingly fall. Similarly, through decreasing the availability of a good or service in the market, the price will correspondingly increase.
The problem, under antitrust law, is when the price of a good or service is artificially increased or, in the alternative, if the quantity of a good or service is artificially decreased.
In the graph above:
P1 = Fair market (competitive) price
P2 = Monopolistic price
Q1 = Market demand at competitive price
Q2 = Market demand at monopolistic price.
The triangular area formed below the quantity slope represents the harm in the market, as consumers are denied access to goods and services, and resources that would otherwise be efficiently used are left unutilized. Although Sharfman did not term it as such, under economic theory this triangular area is termed the “contraction in demand.”
Terms:
Consumer surplus: The excess money that people would pay over the competitive price for a good is called the consumer surplus.
Inelastic: A good for which the demand doesn’t change much even if the price changes.
Competitive cost: A consumer price that includes a reasonable profit for the business.
Monopoly price: The price a vendor can demand if that vendor has monopolized the market (read: some price higher than the competitive price). The monopoly price is where profits are maximized (anything higher would reduce consumer purchases to the point where none would buy).
Reserve price: The maximum price a consumer would be willing to pay for a good or service before either substituting another good or service or forgoing purchase altogether.
Consumer surplus: The price some consumers would be willing to pay over the competitive price to obtain a good or service. In a certain light, this could be considered a foregone profit.
Predatory pricing: Collusion between companies to drive out competition by lowering prices below cost and then, once vanquished, raising prices back toward monopoly prices. The problem, of course, is that other competitors could come back into the vacuum.
Supracompetitive price: Any price above the competitive price but below the monopoly price.
Market power: The ability of a firm to set prices or otherwise control a market.
Market definition: Set both by market share and geographic location. Narrowing the scope of geographic location and/or the relevant product market makes it more likely to find market power.
Quick look analysis: A largely abandoned method to determine if a particular behavior violates antitrust law. Designed for violations that are not illegal per se, but are sufficiently anticompetitive on their face that a rule of reason analysis is not required. Places burden on the defendant to prove the action is not anti-competitive nor reduces quantity or increases price. No need for plaintiff to prove defendant has market power under the quick look analysis.
Rule of reason analysis: Burden is on the plaintiff to prove that the actions of the defendant are anticompetitive, reduce quantity, or increase price; plaintiff also has to show the defendant has power in the defined market.
Horizontal merger: A merger of competing companies.
Vertical merger: A merger of companies with complementary products
Portfolio effects: In mergers, the anticipated effect of mergers between companies offering complementary products. Also referred to as “range effects.” The theory is that consumers often prefer to purchase a complete line of products from a single supplier. The proposed merger between Honeywell (a major aerospace equipment and instrument provider) and GE (the largest manufacturer of jet engines) was blocked on this basis.
Entrenchment: The result of a firm benefiting from a merger’s portfolio effects, as it solidifies its dominance in markets.
RPM: Retail price maintenance.
Main Statutory Provisions
Sherman Act (passed July 2, 1890)
Sherman Act, Sec. 1, sentence 1: Costs are (artificially, through contract or conspiracy) driven up and thereby a segment of consumers are being deprived of the benefit of goods as fewer are being transacted for in the market.
- You can’t violate section one unilaterally; at least two actors are required.
- You can be liable both civilly as well as criminally. Fines and prison time could be the result.
- Generally to prove a Section 1 violation you must show the defendant has market power.
Sherman Act, Sec. 2: Every person who monopolizes, or attempts to monopolize (dangerous probability of success, and yet fail to), is liable for violating the statute. Affirmative defenses are listed in 2(c) through 2(e), the biggest is due allowance for cost (such as delivery to smaller retailers who require greater service during distribution).
Sherman Act, Sec. 4 (jurisdiction, who has standing): Federal courts have jurisdiction, under common law the government could not bring a case, but now the government can. Any person can also bring suit.
Sherman Act, Sec. 7: “Person” includes corporations.
Clayton Act (passed 1914, amends Sherman Act)
Clayton Act, Sec. 2: (a) No price discrimination except for valid business costs, sellers can still
choose customers
(b) FTC can prohibit price discrimination but the presumption is rebuttable
Clayton Act, Sec. 3: Forbids sellers from offering discounts on goods (not services) to obtain exclusivity; seems to trigger an automatic Sherman Act Section 1 violation. This is the foundation for tying claims.
Clayton Act, Sec. 4: 4A: Anyone who is injured in cash or property by an antitrust action has standing to bring suit in district court and can recover treble damages. Prevailing plaintiff rule: You can recover attorney’s fees as well.
4B: Four year SOL.
4C(a)(1): State attorneys general have standing.
4C(a)(2): Treble damage awards are possible.
4D: Profits made through illegal overcharges can also be awarded.
4E: Court has discretion in apportioning damage awards.
4F: Feds and states can join cases.
4G: Sole proprietorships and partnerships are not classified as persons under the law and therefore have no standing.
Clayton Act, Sec. 5:Successful state or federal case against a defendant can serve as prima facia evidence for private plaintiffs.
Clayton Act Sec. 7: Clause prohibiting mergers that promote monopolies; gives FTC jurisdiction.
Clayton Act Sec. 7A: Prior to the passage of Section 7A through the Hart-Scott-Rodino Act, mergers could only be challenged after that had been transacted – the “unscrambling the egg” problem. Section 7(a) requires filing notifications by the transacting parties to the government and a waiting period for merger. Section 1 of the Sherman Act and Section 7 of the Clayton Act are ex post, whereas Section 7(a) of the Clayton Act is ex ante.
Note: There is private standing within section 7, but no private standing under section 7(a) of the Clayton Act (only the government can object under section 7(a).
If the acquirer’s value is greater than $200M, or worth more than $50M but less than $200M and have net sales or assets of greater than $10M, then mergers are subject to federal notification. The parties have the obligation to notify and wait 30 days (this can be extended).
Clayton Act, Sec. 16: Besides money damages, you can also get injunctive relief.
Federal Trade Commission Act (passed 1914)
Federal Trade Commission Act, Sec. 5: Permits the FTC to take pre-emptive steps to prevent antitrust violations (subject to judicial review, see Brown Shoe, infra). Covers “unfair methods of competition in or affecting commerce.” This reads broader than the Sherman Act, but Souter in CDA says that a violation of Section 5 of the FTC Act is the equal to a violation of Section 1 of the Sherman Act. In fact, Section 5 of the FTC Act is a superset of Section 1 of the Sherman Act. The penalties for violation of section 5 is outlined in sections (f) ($10K for each violation of a commission order, of which there are always many) and (m)(1)(A), (B), and (C) which says the commission can commence a civil action with the same $10K per violating fine.
Robinson-Patman Act (passed 1936)
Prohibits price discrimination by sellers amongst consumers. Amended Section 2 of the Clayton Act. Seems to protect competitors rather than competition, there is a growing chorus to repeal it.
Hart-Scott-Rodino Act (1976)
Contains a parens patriae provision that permits states to sue on behalf of neutral persons as opposed toonly on behalf of corporations under antitrust law.
Theories of Harm
- Monopolization/Attempts to monopolize
- Price fixing (per se)
- Horizontal agreements (was per se)
- Vertical agreements (those that set price or reduce competition are per se)
- Product tying arrangements (per se)
- Refusals to deal
- Predatory pricing
- Retail price maintenance (per se)
- Geographic market division among competitors (per se)
- Group boycotts – also known as concerted refusals to deal (per se)
Restraints of Trade
Section 1 of the Sherman Actrenders unlawful “every contract, combination, and conspiracy in restraint of trade.” Since every contract in some sense restrains trade, the scope of this Section has been narrowed by interpolating into it a “reasonability” requirement.
Type of Restraint / Horizontal / Verticalnon-price / depends (AP) / rule of reason (Continental)
min-price / per se / per se (Dr. Miles)
max price / per se / Rule of Reason (State Oil v. Khan)
suggested / per se / Rule of reason (BEC v. Sharp)
Cases
US v. Trans-Missouri Freight (1897)
P51: Suit in equity, government looking for injunctive relief. 18 carriers west of the Mississippi who fix rates, rules and regulations for traffic, and so on. District Court dismisses complaint, affirmed by Circuit Court, makes it to SCOTUS. Defendants argue that the agreement would not have been void at common law. SCOTUS disagrees, the statute is broader than common law and forbids any restraint of trade. The act previously was not construed to make new items unlawful that were lawful under common law, but instead to statutorily make unlawful those things prohibited under common law. In this decision, the reach of the Sherman Act was extended beyond that recognized by common law.
US v. Addyston Pipe (1898)
P56: Six pipe manufacturersentered into a horizontal agreement of two years’ duration under which they divided sales territories. SCOTUS backs off from the extreme position of Trans-Missouri Freight; in Addyston, only unreasonable restraints are unlawful (the birth of the rule of reason). Naked restraints are illegal per se (only purpose is to exclude competitors) but ancillary restraints may be legal (provisions that ensure that the contract can be enjoyed).
Rule of Reason
“When you are performing a rule of reason evaluation, look at the purpose as well as the effect.” – Brandeis, Chicago Board of Trade
The “rule of reason” is the approach that courts take generally when the effects of a particular restraint are not immediately obvious and require and full-blown market analysis. There is no hard and fast set of rules; literally everything is on the table.
Unreasonable is defined by reducing quantity and raising price; if this standard is not met, then the restraint is per se reasonable. There are per se violations (e.g., price fixing), that even though they don’t increase price/reduce quantity they are still regarded as a violation. At this point, the reasonableness standard does not need to be met and the government through proving the action, has proven its prima facia case.
Reasonability depends upon whether the restraint promotes or undermines competition. If the former, then the restraint is reasonable; if the latter, then it is unreasonable. What ultimately matters is the restraint's effect. A restraint's ostensible or actually intended purpose is relevant only insofar as it sheds light on the restraint's effect. What sort of effects would be anti-competitive? Justice Brandeis, in Chicago Board of Trade (infra) identified higher prices and lower quality as examples of anti-competitive effects.
Cases
US v. Standard Oil (1911)
Handout: Standard Oil goes through three phases:
- 1870 – 1882: Standard gobbles up as many Ohio refineries as it can lay its hands on
- 1882 – 1899: All stock gathered together and stuffed into a trust to escape the clutches of Ohio (NJ thought to be more pro-business). Placing the companies in a trust unites their interest and means that there is someone who must maintain a fiduciary duty to all firms; they will also not compete with each other.
- 1899 – 1906: The trust reconsolidates and recapitalizes and begins to spread west.
The decision: 38 companies and seven individuals go down; the company was give the “death penalty” and broken up. The trusts and covenants employed by Standard Oil to build its monopoly were unreasonable. Cp. Alcoa, infra.
Northern Securities v US (1904)
P63:Arose because of a merger between two railroads to prevent access by a third railroad (Union Pacific) to a lucrative route (The Burlington Line) in violation of the Sherman Act. This type of activity is addressed later in Section VII of the Clayton Act.
US v. American Tobacco (1911)
P66: Five firms responsible for 95% of US tobacco sales merged into a single company. They then purchased other tobacco related businesses to vertically integrate the operation, then formed other agreements to stifle competition. Through its analysis the SCOTUS essentially overruled Trans-Missouri and set a standard of reason for evaluating antitrust cases (rather than saying all contracts could be in violation).
Price Fixing and Other Per Se Violations
There are certain kinds of behavior (price fixing, product tying, and a few others, see the list in the section Theories of Harm supra) that are considered illegal per se; meaning if the plaintiff proves the defendant as taken such actions, the case is essentially over. There are very few “pre se” violations remaining, most cases require a rule of reason analysis (pro/anticompetitive, increase/decrease in quantity, increase/decrease in price). Courts adopted the per se rules in an effort to achieve judicial economy.
Cases
Chicago Board of Trade v. US (1918)
P207: In order to participate in the exchange one must become a member by buying a seat. There were three types of transactions: Spot (in Chicago), Futures (not yet harvested), and in transit (on its way to Chicago). The Board set a rule that in after hours trading, all grain had to be sold at the closing price of the previous session. The SCOTUS, providing a laundry list of reasons on page 210, found several pro-competitive reasons for allowing the behavior to continue. The main thing to take away from the case is not just to condemn an artificial restraint on trade, but instead look at its intent and effect.