Antitrust OutlineProfessor PierceSpring 2013

I. BASIC ECONOMIC PRINCIPLES

Antitrust Law: Reducing the incidents of harm that are attributable to monopolies, by fostering the benefits of a competitive market.

Industry Demand Curve: The industry demand curve (the number of widgets people will buy at a certain price) will always be represented by a curve that slopes down to the right.

That is, the higher the price, the fewer pencils people will buy. Consumers either find alternatives (pens) or simply do without. Thus, quantity demanded declines as the price increases. To a person manufacturing in a competitive market (a “price taker”), you have no choice how much you choose

to set the price at (the demand curve looks flat) because the price is set by the market.

Marginal cost is the only thing that determines the price of the product: People live on the margin, choices are not profit or dramatic, they are made at the margin Marginal Cost: The additional cost you incur in your decision to make one more unit of your product (one more

pencil), OR the amount of money you save in declining to purchase/make that extra unit. Marginal Cost Curve: Goes down initially, as you take advantage of the available economies of scale. But

eventually, you will reach a point in your output level, where your marginal cost in production begins to go up because you overstretch your resources (go into overtime, have to give resources away for other higher valued uses, machines break down).

Scenario Under a Monopoly: What Changes?

o As a monopolist, you create the demand curve that governs all pencils – which always slopes to the right.

Your decisions always set the market price. If you increase your output, the price plummets. If you decrease output, the price goes up.

o No longer comparing marginal cost with price; you are now comparing marginal costs with marginal revenue.

Marginal Revenue Line: In determining how many units to produce to reach the point where the marginal cost equals the marginal revenue. Revenues are increased to the extent that you sell more units; but you decrease revenues to the

extent that so many units are sold that prices decrease.o If you are a monopolist where price elasticity of demand is less than one, you come out ahead by

withholding available supply Can sell at better price and come out ahead, gain more selling fewer products than you lose by

reducing demand o When a monopolist sells in any market with relatively price inelastic demand, the curve that firm

looks at in making pricing/output decisions isn't demand curve, but the Market/Revenue Curve Always to the L of demand curve, and steeper than demand curve Bc every increase in output produces corresponding decrease in price Profit maximizing point is intersection of marginal cost and marginal revenue curves BUT: they'll take price from the intersection of MC and demand curves So: monopoly quantity always lower, price always higher than in traditional curve

o Thus, when you go from competition to monopoly, you get: An increase in price. A reduction in quantity. A transfer of wealth from the consumers to the producers.

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A reduction in social welfare.

Errors In the Law Type 1 Errors: occurs when the law convicts the innocent Type 2 Errors: when the law fails to prohibit genuinely harmful conduct

o Can be corrected partly by new entry and other market reaction Type 3 Errors: caused when the complexity of legal rules increases the burden of antitrust compliance and

enforcement

Price Elasticity: The extent to which a change in price changes the quantity of something that is demanded. Elasticity of demand: Producer is limited in how much it can increase prices because consumers can always buy

an alternate product or do without (ice cream, cars, luxury goods).o This even limits monopolies, because they cannot charge more than people will pay and have no incentive

to withhold supply Inelasticity of demand: Wide variations in the price will not change the demand for the product because there is

a constant need for them (water, electricity, gasoline…) Price elasticity of demand-if price goes up 10%, will quantity demanded go down 5% or 20%

o If its 5%-price elasticity is .5-->if the firms can get together and up the price, it will be profitable for them (gain 10%, lose 5%)

The lower the  better for firmso If its 20%-price elasticity is 2.0-->if firms get together and up the price, they would all lose money

Anything above 1.0 is suicidal Allocative Efficiency: Getting goods and services to the people who value them most. All goods and services would be appropriately allocated and preferences for leisure met, because by definition no further acts or exchanges could make the situation better=optimal state.

Productive Efficiency: Lettings firms achieve the size at which the cost of production is the lowest possible per unit, even if that means somewhat smaller number of competing firms. (“Economies of Scale”)

Natural Monopoly: A condition under which a single firm can serve the entire market at the lowest per-unit cost. When this is the case, policymakers usually forego antitrust and directly regulate the firm’s prices.

Dynamic Efficiency: The desire to break-up large firms to protect the competitive process itself, and especially to preserve the opportunity for new firms to enter the market and create new firms.

Most economists consider monopsony to be as bad as monopoly1. Monopoly -single firm, or group of firms acting as a single firm, replaces competition with monopoly to withhold

supply and increase prices2. Monopsony -single firm, or group of firms acting together acting as purchasers come together to regulate price

II. EARLY CASES: THE COMMON LAW OF ANTITRUST

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A covenant not to compete was valid (Mitchell v. Reynolds). Queen (government) granting a monopoly was illegal and thus enjoined (The Case of Monopolies).

The Case of Monopolies (1602): Queen gave a monopoly for production of playing cards to one man for 12 years. Another guy came in after 12 years and wanted to produce cards.H: Effects of Giving Monopoly: (1) Reduction in quality of cards; (2) Increase in the price of cards;(3) Decrease in the availability of cards; (4) Reduces the number of people employed in this business; (5) Enrich the holder of the monopoly.

Mitchell v. Reynolds (1711): Defendant owns a bakery and offers to lease it for 5 years to the P on the condition he will not operate a bakery during the 5 year tenancy (limited geo and time duration)H: Court holds the covenant valid as a reasonable restraint ancillary to a legitimate transaction. A covenant not to compete adds value to the lease. It is not a monopoly when it is restrained in a particular place or to a particular person. Voluntary restraints are lawful, but can be abused. I: A contract in restraint of trade is valid if it is ancillary to a legitimate transaction. This court recognizes the socially-beneficial effects of a covenant restraining trade (thus, it is a reasonable restraint).

Other Cases: 1. Craft v. McConoughy

1. Five grain dealers in small IL town has Ked to operate as separate businesses, but kept prices the same and divided profits 

2. Court refused to lend aid in the division of the profits on an illegal transaction when the son of one of the dealers took over

2. Richardson v. Buhl 1. Diamond Match Co bought up all the match companies in US2. Court said matches were a necessity and co had created a monopoly against public policy

3. Chicago Gas Light 1. Two firms has been granted corporate charters to sell natural gas in Chicago, then one tried to go into the

territory of the other2. Court said that monopoly that had been granted no longer held 

4. However some stuff was still being upheld in England that wouldn't be upheld in America; i.e. said a shipowners association monopoly was ok because only intent was to increase profits; upheld other things that were not injurious to the public

Diversion from the Common Law:

Industrial Revolution: By the end of the 19th century (Industrial Revolution), the common law was being eroded. Change from agrarian society, to one with employees in big corporate enterprises

Considered a horrible new world-how can we bust these trusts?? The remedies weren’t significant enough (there was no threat of damages or jail)

Now we are the only country with treble damages [most effective remedy available?!] Emergence of inter-state transactions required federal laws regulating antitrust.

III. THE SHERMAN ANTITRUST ACT (1890) AND OTHER ANTITRUST LEGISLATION

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A. The Sherman Act (1890)

The Sherman Act: An Act to Protect Trade and Commerce Against Unlawful Restraints and Monopolies Section 1: Trusts, combinations or conspiracies in restraint of trade are illegal. Section 2: People who monopolize, attempt to monopolize or combine or conspire to monopolize are guilty of a

misdemeanor and will be punished by a fine no greater than $5000 or imprisoned for less than a year. Section 4: U.S. Circuit Courts have jurisdiction. Section 7: Victims of violations may sue in the Circuit Court where the defendant resides, may collect threefold

the amount of damages incurred and can collect attorney’s fees. Section 8: The term “person” as used in the Act includes corporations.

Legislative History of Sherman Act: Unclear. Legislators had a number of different motives… Protect Small Business: Some people supported the act to protect small businesses from large businesses for

sociological and political reasons. Economic efficiency: There were some legislators, and, for a time, some judges who thought these above two

reasons were consistent.o Reasons why these two reasons are not consistent:

Cartels, by charging higher prices, will raise the market price and thus give the small firms a cushion to raise their prices.

Thus, by getting rid of cartels you increase competition and the five larger, more efficient firms will put the smaller businesses out of business.

Ironically, then, it is more efficient to get rid of the cartels and leave only the big firms to control the market.

But, it is more socially beneficial to keep the cartels in order to preserve small business. Codify the Common Law: Codify common law, add remedies, and add jurisdiction over interstate and foreign

commerce.o Problem : Difficult to determine the common law, because it changed over time and across different states.

CANNOT READ THE SHERMAN LAW TEXTUALLYo Need to apply other tools

All 9 Justices Today Would Agree on the Following in Interpreting Sherman: Act only meant to apply to SOME restraints and monopolies. Economic efficiency best justifies the Act. It is also meant to codify the common law, so it is OK to rely on old cases.

B. The Clayton Act and the FTC Act (1914)

Context: By 1914, Congress was upset with the Court’s actions under the Sherman Act, so they pass two statutes, designed to let the Courts know they’re disappointed

Clayton Act Outlaws:

o Section 2: price discriminationo Section 3: tying one product to another and exclusive dealing, aka the Henry v. AB Dick Problem:

Unlawful for someone to make  a K to fix a price upon the agreement that the purchaser shall not use or deal in foods of competitors where the effect of such K shall be to lessen competition or create a monopoly

o Sections 4 and 5: expanded the practical availability of private treble damage actionso Section 6: exempted labor unions from antitrust attack

Otherwise would be illegal as a cartel; Congress wanted to encourage not prohibit them o Section 7: regulated stock acquisition mergerso Section 16: gave a comparable private right to injunctive relief

These are illegal ONLY when these actions “substantially lessen competition or tend to create a monopoly.”

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Federal Trade Commission Act Creates the Federal Trade Commission, with a new mandate to stop unfair or deceptive acts or practices.

o Deals more with fraud, than with antitrust.o However, the “FTC Improvement Act,” passed in the 1970s, largely undermined this mission.

Confers upon FTC the concurrent jurisdiction (concurrent with DoJ) to enforce antitrust laws.o Sit down and divvy up different industrieso Still very different agencies, one is independent (FTC) but only DOJ has enforcement powers (throw you in jail)

Both DoJ and FTC have worked out how this works by coordinating who covers what subject-matter.

IV. METHODS OF ANTITRUST ANALYSIS

A. PER SE RULE

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Per Se Rule: Practice is illegal without further inquiry, regardless of beneficial effects or reasonableness.

Types of Per Se Illegal Activities:1. Horizontal Maximum Price-Fixing2. Horizontal Market Allocation: Firms engaged in same commercial activity agree to compete in different

territorial regions, so not to directly compete against one-another.3. Horizontal Group Boycotts: Where a collection of firms agrees not to deal with one firm or another collection

of firms, on the basis of a selfish interest in preserving or improving market power. (Modified Per Se Rule applies).

4. Conscious Parallelism: Process (not itself illegal) by which firms in a concentrated market share monopoly power, setting supra-competitive prices by recognizing their shared economic interests and interdependence with respect to price and output decisions (e.g. airlines).

Prior to 1954, the Court held conscious parallelism to be per se illegal, but afterward held that it alone does not violate Sherman 1; rather, conscious parallelism is evidence of price-fixing (together with meeting to fix prices, for example) partly because it is difficult to maintain (Brooke Group).

5. Tying Arrangements (but not after Microsoft for technologically integrated products6. Requirements Contracts, but only when they cover a substantial part of the market.

Effect of Adopting Per Se Rule: Court can exclude all evidence of purported social justification. Makes the trial much shorter, easier.

o DOJ/public prosecutors are happy.o Companies are fearful.

Problem: Too simplistic.

B. RULE OF REASON

Rule of Reason: Court makes a broad inquiry into the nature, purpose and effect of any challenged arrangement before a decision is made about its legality. Restraints do not violate Sherman if they achieve other social goals that counterbalance the injury to competition.

Factors described in Chicago Board of Trade (horizontal price-fixing case):o Facts peculiar to the business to which restraint is applied;o Its condition before and after the restraint is imposed;o The nature of the restraint and its effect, actual or probable;o The history of the restraint;o The evil believed to exist;o The reason for adopting the particular remedy;o The purpose or end sought to be attained; Knowledge of intent may help the court to interpret fact and predict consequences, but good intent will not necessarily save an objectionable regulation

Types of Activities Covered by the Rule of Reason:1. Horizontal Minimum Price Fixing2. Vertical Minimum Price Fixing3. Vertical Maximum Price Fixing4. Vertical Allocation of Markets5. Vertical Group Boycotts6. Mergers (under FTC Merger Analysis)7. Trade Association Cases8. Predatory Pricing/Bidding

Practical Effects of Reasonableness Standard: Companies are much happier with the reasonable standard because it gives them an opportunity to argue they

had no intent, and their practices were reasonable. Trials take MUCH longer and there are intervening changes in the market during trial Harder for the government to win.

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Efficiency Test: To determine the outcome under the Rule of Reason… (BMI)1. Whether the challenged conduct (the market integration) is reasonably necessary to achieve the cost-

reducing efficiencies.2. Whether the restraint that follows is actually necessary to the integration.3. Whether the efficiency achieved by integration outweighs the adverse affects of the restraint.

Modern Quick-Look Rule of Reason Approach: (Brennan’s Dissent in CA Dental) [used by lower courts, cert denied by SC so never officially adopted—argued to be better because per se too strict, ROR too opened ended]

What is the restraint at issue? What are its likely anticompetitive effects? Are there off-setting pro-competitive justifications? Do the parties have sufficient market power to make a difference?

**Pierce would switch order of 3d and 4th factors, don’t need to address pro-competitive since can’t have adverse effects if you don’t command enough market power. Thus pro-competitive effects not relevant ot the inquiry.

RECONCILING MODERN CASES: Court expressly states that there is often no bright line that separates per se from ROR Essential inquiry under both is the same, whether or not the challenged restraint enhances competition A structure for evaluating horizontal restraints emerges

o First we ask whether the restraint is inherently suspect Horizontal price fixing and market division are inherently suspect because they are likely to

raise prices by reducing outputo If not, then the traditional ROR, with attendant issues of market definition and power, must be

employedo Is yes, is there a plausible efficiency justification for the practice

Does the practice seem capable of creating or enhancing competition? It is plausible it cannot be rejected without extensive factual inquiry

o If plausible, need to determine whether the justification is really valid Full balancing test of ROR

o If the justification is not valid, then the practice is unreasonable and unlawful under ROR Easterbrook suggested that the court applies filters to screen out cases in which the risk of harm to consumers was

smallo P should have to provide a logical demonstration that the D had market powero P should have to show that the D has an incentive to behave in an anticompetitive way and that AT sanctions

are necessary to correct the D’s incentiveso Court should determine whether firms in the industry use different methods of product and distributiono If so, competition between those methods should protect consumerso Is there evidence output actually was reduced by the challenged practiceo Look at identity of P, if it’s a business rival then arrangement is likely beneficial to consumers

V. STANDING/JURISDICTION/REMEDIES

A. STANDING

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Rule: Plaintiff must be able to show antitrust injury (injury to competition) in order to have standing to bring an action for antitrust violation. If you cannot show injury, the case must be dismissed. (Bowl-O-Mat).

COMPETITORS RARELY HAVE STANDING (but consider tying cases). Indirect customers lack standing (too expensive to argue) Direct customers have standing, but they often lack the incentives, resources, and organizational skills to sue

effectively (but see Boeing case) DOJ and FTC always have standing, but since the mid 1970s both agencies have been staffed by sophisticated

pros who rarely pursue off the wall theories. Congress has given state parens patria standing. The role of states in antitrust enforcement in controversial

represented by AG)****Pierce said that usually he is for broad access to the courts but in this case it makes sense to limit access because the precedents set are so poor

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. (1977): Brunswick, one of the two largest manufacturers of bowling equipment, has been acquiring bowling centers, including six in the markets where plaintiff bowling centers operate. Plaintiff effectively had a monopoly in these locations, and Brunswick’s actions introduced competition. The plaintiff brought this action alleging violations Clayton under sec. 7, and treble damages under sections 4 and 16 (cites Albrecht and Utah Pie). H: Because plaintiffs’ injury would have occurred regardless of whether defendant, or some other firm, took over the bowling alleys, it has not shown that the illegal behavior caused its injury and therefore is not due damages under section 4 of Clayton. I: Plaintiffs must prove antitrust injury – injury of the type antitrust laws were meant to prevent and that flows from defendant’s unlawful behavior NOT just Clayton 7 violation – in order to have standing to bring antitrust action under Clayton sec. 4.

** Court assumes for sake of argument that this acquisition would have been found illegal if the gov’t had brought the case.

Hanover Shoe v. United Shoe Machinery Co: United Shoe asserted that even if Hanover had been overcharged for the machines because United leased but did not sell them, Hanover would have passed the increased cost on to the purchasers of its shoes so it shouldn’t get damages. H: Court rejected defense. Even if they passed on the overcharges, the higher prices would have cost it sales and it would have suffered damages. Can only use defense when the first purchaser from the D had resold the goods under a cost-plus K.

Illinois Brick (1977): State of IL, suing on its own behalf and that of some of its citizens, asserted that the D had overcharged building contractors for brick used in building projects within the state. The state sued as an indirect purchaser-someone whose costs had been raised because the contractor from whom it had bought could be presumed.H: Reason why Hanover could sue is the reason why IL could not. I: Only direct customers have standing to sue for treble damages in antitrust violations. Were standing not limited to the direct consumer, the entire line of distribution would be able to sue, resulting in double recovery. Also difficult to prove what effect the cartel had further down the line of distribution.

Kansas v. UtiliCorp: Treble damage action brought against a natural case pipeline by both a natural gas utility (first purchaser) and the states acting on behalf of consumers (subsequent purchaser).H: A sale to a public utility is NOT the kind of cost-plus K that Hanover Shoe had said could justify use of the passing-on defense. Also held that states couldn’t sue.

***These cases eliminated many suits by consumers, including those filed as class actions. BUT ultimate consumers can recover under most state antitrust statutes.

Pleading Requirements:

Bell Atlantic v. Twombly: I: An antitrust conspiracy P with evidence showing nothing beyond parallel conduct is not entitled to a directed verdict.

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Proof of a Sherman 1 conspiracy must include evidence tending to the exclude the possibility of independent action, and at the summary judgment stage a P’s offer of conspiracy evidence must tend to rule out the possibility that the Ds mere acting independently.

Why does it matter to a D that it can prevail on a motion to dismiss rather than being required to wait for a motion for summary judgment? Doesn’t have to go through discovery! Expensive and might reveal secrets.

B. JURISDICTION

A. INTERSTATE COMMERCE REQUIREMENT/OTHER FEDERAL LAWS

Interstate Commerce Act (1887): Created the Interstate Commerce Commission to regulate railroads. Part of the mission was to set prices.

Four years later the Sherman Act made it illegal to monopolize a competitive market, or restrain trade. The two statutes are not reconcilable. Trans-Missouri Railroad: Though irreconcilable, the two states apply to the same activity. (Muddled the law.) This issue revisited in Keogh.

Filed Rate Doctrine: Any rate filed with a federal regulatory agency is the law. It cannot be overturned or adjusted by Sherman or courts applying Sherman. This has been the principle means through which federal courts have reconciled the apparently irreconcilable mechanisms of federal regulatory statutes and antitrust statutes.

United States v. E.C. Knight Company (“The Sugar Trust”) (1893): The American Sugar Refining Co. had acquired all but five sugar refining companies in the United States, which all happened to be in PA. Through an exchange of stock, it was able to acquire four of these five holdouts, giving it 98% of the sugar refining market.H: The Act does not apply to sugar refining because it is not interstate trade, it is all manufactured by one state, and thus does not fall within the commerce power of Congress regulated by Sherman.I: This is no longer good law, but it has never been overruled. Today, interstate commerce is not defined this way. However, the Court today, with Lopez and Morrison, is limiting the meaning of interstate commerce back in this direction.

Keogh v. Chicago Midwestern Railroad (1922): A group of competing railroads meet to fix prices. They finally agreed upon rates with the ICC. ICC approves rates as reasonable. H: This is a violation of the Sherman Act, but there is no remedy available. The usual remedy under Sherman is the difference between the competitive rate and cartelized rate, but under the ICC, any rate that is filed with the agency is the law. Because the ICC rate (cartelized rate) is the only lawful rate, the Court does not have the power to award a different rate.I: “Filed Rate Doctrine.” Any rate filed with a federal regulatory agency is the law. It cannot be overturned or adjusted by Sherman or courts applying Sherman. This has been the principle means through which federal courts have reconciled the apparently irreconcilable mechanisms of federal regulatory statutes and antitrust statutes. CAN’T GET DAMAGES THROUGH AT LAW.

Verizon v. Trinko (2004): H: Don’t need FCC and AT laws doing the same job. They are better at it, and 2 institutions will likely create unintended consequences.

Summit v. Pinhas (1991): Midway is a Louisiana hospital. Summit owns Midway and many other hospitals in other states. Pinhas, a renowned eye surgeon, objects to the two-doctor rule (must have two doctors in the room). Summit peer review committee revokes Pinhas’s privileges because of alleged incompetence, and he sues stating that the real reason is because he objects to this price-gouging practice (whistle-blowing). H: 5 Justice majority finds that the Sherman Act applies because Summit’s business is infected with interstate commerce: Summit owns hospitals in other states and deals with insurance companies in other states.

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4 J- Dissent: Scalia says Sherman Act doesn’t apply because this conspiracy itself does not affect interstate commerce. I: Reasoning centers around what constitutes interstate commerce – if this case were tried today, the outcome would be different (Lopez, 5-Justice Majority adopted smaller definition of commerce clause in ACA case). Pierce: Not going to return to EC Knight (since little room for AT law then) but he believes there will be a narrowing a la Lopez and ACA case-depends on who the next justice is.

Only modern case for IC and Antitrust.

Credit Suisse Securities (USA) LLC v. Billing (2007): A group of buyers of newly issued securities have filed an AT lawsuit against underwriting firms that market and distribute those issues. Buyers claim that the underwriters unlawfully agreed with one another that they would not sell shares of a popular new issue to a buyer unless that buyer committed, artificially inflating prices of securities. H: Crucial factors to decide if the AT laws and other Fed Reg have clear repugnancy (clearly incompatible): existence of regulatory authority under the securities  law to supervise, responsible regulatory entities exercise that authority, resulting risk that the securities and AT laws, if both applicable, would produce conflict guidance, requirements, duties, privileges, or standards of conduct, and possible conflict affected practices that lie squarely within an area of financial market activity that the securities law seek to regulate. Securities Law is sufficient to regulate this industry, AT laws don’t apply.  

I: NINE JUSTICES AGREE, where there’s already a fed agency regulating, the AT courts should be very reluctant to intervene at all.

B. INTERNATIONAL JURISDICTION

Comity: There are certain suits that courts should not address – though jurisdiction is proper – because of recognition of the foreign state’s sovereignty and their superior interests in trying the case.

International jurisdiction is largely governed by the principle of comity.

Sherman Act applies to conduct outside the US if that conduct affects the US market and people if it would have the same effect if it occurred in the US.

American Banana v. United Fruit (1909): Defendant had a monopoly of the banana trade in Latin America, forming a cartel with its competitors to jointly set unreasonably high prices. Plaintiff bought a plantation in Panama but refused to join the cartel, so defendant got the government to use Panamanian soldiers to shut down construction of a railway needed to get his bananas to market.H: The Supreme Court would not extend the Act to events that were legal in the countries where they took placeI: Though this is no longer the law today, this case demonstrates a still very problematic area in antitrust law: Supreme Court doesn’t have the ability to enforce its law internationally; the Court is also uncomfortable with its institutional capacity to deal with foreign relations issues. Later cases extend jurisdiction to international Sherman cases more extensively.

See Matsushita.

Hartford Fire Insurance v. California (1993): This suit arose out of superfund liability. States and private plaintiffs alleged a group boycotted as the result of a conspiracy engaged in by U.S. insurance companies and international reinsurance companies, in violation of Sherman 1. The insurance and reinsurance companies said that they would refuse to insure unless the ISO (a company that provides the standard insurance forms on which all insurance is sold) rewrote the insurance forms to limit liability. The McCarren-Ferguson Act exempts insurance from the antitrust laws, because insurance is meant to be state-regulated. But, the Act provides an exemption for any activity that is a boycott. The reinsurance market is regulated by a British agency in London, and all of the conduct – meeting with the ISO to force a re-draft of insurance forms – took place in London. H: Comity should not apply because the British government did not compel the conduct that violates Sherman. Comity should only apply when a foreign state compels the conduct. Also, firm can abide by both laws since no conflict.Dissent: Comity should apply when conduct is authorized by the other country.International Criticism: Foreign governments were upset at this decision, because under the State Action Doctrine,

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states are given more protection than foreign governments since they only need to AUTHORIZE and countries need to COMPEL.

Hoffman-La Roche LTD v. Empagran S A (2004): Case involves vitamin sellers around the world that agreed to fix prices, leading to higher vitamin prices in the US and independently leading to higher vitamin prices in other countries.

H: The Foreign Trade AT Improvements Acts of 1982 excludes from Sherman’s reach most anticompetitive conduct that causes only foreign injury, exceptions for overseas violations that adversely affect imports, US exports, or US domestic markets. We conclude that a purchaser in the US could bring a Sherman Act claim under the FTAIA based on domestic injury from a Swiss corp, but a purchaser in Ecuador could not bring a Sherman Act claim based on foreign harm

Pierce: if this case came out the other way, it would be way better for American consumersmore treble damages case leads to more competitive behavior and consumers better off

Today: Nations have been attempting to reconcile their approaches to antitrust law. So far, they have achieved a lot of success re treatment of international price-fixing cartels, but there are large differences in many other areas, e.g., mergers, vertical restraints, predatory pricing, tying, and discovery rules.

“Wonderful for lawyers, hell for clients”-need to look at over 100 different AT laws, all the countries and states; generally good but a lot of conflict [substantive law, procedural issues, discovery, remedies]

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VI. STATE ACTION DOCTRINE EXCEPTION TO ANTITRUST LIABILITY

** The Sherman Act is silent on the ability of States to restrain trade.

State Action Doctrine: Any state action – action of a State or authorized by a State -- is not within the scope of the Sherman Act, it is instead within the scope of this new defense, the State Action Doctrine. (See Parker)

Midcal Aluminum Two-Pronged Test : To determine whether state regulation of private parties is shielded from the federal antitrust laws…

1. The challenged restraint must be “one clearly articulated and affirmatively expressed as state policy.” Must be satisfied by a statute. Under Goldfarb, the clear statement must rise to the level of compelling the anticompetitive conduct. Later, Southern Motor Carriers modified Goldfarb, requiring only that the anticompetitive conduct be

authorized by the state legislature. As long as the State clearly articulates its intent to adopt a permissive policy, the first prong of the Midcal test is satisfied.

2. The State must supervise actively any private anticompetitive conduct. Can be satisfied by the actions of any state actor, including a state agency.

Benefits of State-Enforced Cartels: Don’t need agreement of 100% of the people – there is usually a statutory-specified minimum that can force

the others, with the power of the state, to comply. Tax-payers pay for inspectors to monitor raisin-growers and prevent cheating. The State has the remedy of incarceration available to enforce compliance (e.g., don’t fix prices or limit

production? We can send you to jail.) These are the most successful cartels, because they are enforced by States.

Evolution of State Action Doctrine: Created in Parker v. Brown: (California raisin case) The antitrust laws do not apply to anticompetitive activity

sanctioned by state government.o Between 1943-75, courts did not rule on state action doctrine.o Courts interpreted it to have very broad reach.

By 1975, there were new justices on the court, and efficiency, microeconomic theory, and public welfare now controlled the Court’s opinions.o The Court wanted to get rid of the State Action Doctrine, because state-sanctioned cartels were now the

biggest and most powerful cartels in the nation. After the Court tried to restrict the Doctrine’s application between 1975-1980, the Court again began to interpret

it broadly in 1985. (Southern Carriers) Possible Exceptions to State Action Doctrine:

Sham Exception to Noerr-Pennington Doctrine. o The Court in Omni says that you cannot use the legal decision-making process to have an anticompetitive

effect, but it is fine to use litigation to have an anticompetitive outcome. Failed Exceptions as argued by plaintiff in Omni.o Conspiracy Exception

Problem : This would make illegal very common behavior – private actors are needed in order to persuade others and get bills passed, and motivated by numerous other factors.

o Corruption Exception An exception for corruption poses HUGE definitional problems – what is corrupt?

o Bribery Exception This again poses definitional problems, because there are many shades of bribery that people can get

around. Plus, there are other statutes – criminal statutes – that apply to corrupt public officials and people who try

to corrupt public officials.

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Parker v. Brown (1943): The Prorate Program, established by the California Agricultural Prorate Act, controlled the production, distribution and sale of raisins in Raisin Proration Zone #1, which accounts for virtually all raisin production in the U.S., and half that of the entire world. H: The Sherman Act does not prohibit restraints of trade authorized by State legislatures. Because the raisin industry is of local concern, the State is in the best position to regulate it. Absent Congressional disapproval, the program is valid both under Sherman and the Commerce Clause. SEE The Case of Monopolies (1603). I: Created the State Action Doctrine.

Goldfarb v. Virginia State Bar (1975): Virginia State Bar sets advisory fee estimates that attorneys must set prices at a certain level to protect professional ethics. The Virginia State Bar is a state agency, approved by the legislature and the state supreme court. H: If there is anticompetitive conduct, the state must require the action – not just authorize it – and the only institution that counts as the state is the legislature. A state agency doesn’t have the power to insulate anticompetitive conduct from the antitrust laws, only the legislature. I: Chips away at the state action doctrine.

Cantor v. Detroit Edison (1976): Detroit Edison gave free light bulbs along with provision of electrical service. Approved by Michigan Public Service CommissionH: The Commission is a state agency, not the legislature, AND the activity is approved by the legislature, but not commanded by it; therefore, there is no antitrust immunity. I: Adopts Goldfarb analysis.

Midcal (1980): Involved a challenge to CA’s program under which each wine producer or wholesaler was required to file a price schedule with the state and require that its retailers adhere to it. Midcal had allegedly sold 27 cases of wine for less than the posted price. H: Program violates Sherman. I: Announces the two-part test (ABOVE) used to determine whether any conduct falls within the state action doctrine.

Southern Motor Carriers Rate Conference v. United States (1985): Defendants are “rate bureaus” composed of motor common carriers in the Southeast. These rate bureaus submit joint rate proposals to the Public Service Commission in each state. This collective rate-making is authorized, but not compelled, by the States in which the rate bureaus operate. H: Defendant’s collective rate-making activities, although not compelled by the states, are immune from antitrust liability under the State Action Doctrine articulated in Parker v. Brown. I: (1) “Compel” is gone, and replaced by “authorized.” (2) Where the behavior is inherently anticompetitive, the Court will be likely to say that the action is implicitly authorized. If the state’s intent to establish an anticompetitive regulatory program is clear, the state’s failure to describe the implementation of its policy in detail will not subject the program to the restraints of the antitrust laws.

Court said in a later hospital case that where a state allowed its counties to provide hospital care and set rates for surgery, the result of a concentrated hospital market was NOT WHAT THE SC MEANT BY FORESEEABLE RESULT. Needs to be a lot more clear/pointed: i.e. We the State of GA want to displace competition by….. Court is moving back again toward Goldfarb/Cantor.

Patrick v. Burgett (1988): A town in Oregon has only one hospital. Dr. Patrick is a new doctor who obtains hospital privileges. It turns out that almost every doctor in town is a member of the same practice group – a partnership that provides all of the health care needs of the town. Dr. Patrick does not want to join the practice group; in fact, he starts his own practice group. Shortly thereafter, the hospital peer review committee decides it will take away his hospital privileges. Patrick sues the hospital for group boycott, claiming the only reason the privileges were revoked was because Patrick would not join the practice group. H: Though prong one of Midcal was satisfied because the legislature required peer review committees, prong two was not satisfied because the private peer review committee is not a state actor. I: Example where prong two of Midcal not satisfied. Congress later codifies this case to exempt peer review committees from AT law if they comply with due process.

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FTC v. Ticor Title (1992): State insurance commissioners (agency) supervise the title search firms. But, when the FTC brought action, the Court found that the title filings had never actually been opened. H: State agencies did not actively supervise the conduct at issue – the rates set by the title search firms – so there is no antitrust immunity. I: Example where prong two not satisfied because active supervision requirement not met.Ticor today: States are still not opening things (remember Pierce’s friend with 48-star flag)…but Scalia is a seasoned justice and as a conservative wants to cut federal power and add to the states.

A. NOERR-PENNINGTON EXCEPTION TO SHERMAN (LOBBYING)

Noerr-Pennington Doctrine : Behavior designed to influence the government (lobbying), even when engaged in by a group, even when it has an anti-competitive purpose, is exempted from Sherman, falling under the defense of the Noerr-Pennington Doctrine.

Core Political Activities: This conduct, getting to pursue a common interest to a legislature, court or agency, is soundly protected by the Constitution.

Sham Exception: Groups may not abuse the judicial or legislative process solely to reach an anticompetitive end. This is a difficult standard to meet, because the actions must be entirely “baseless” and taken “solely for anticompetitive purposes. (See California Motor Transport)

Requirements for Litigation to be a “Sham” under Noerr:1. The lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically

expect success on the merits.2. It must be determined whether the baseless lawsuit conceals “an attempt to interfere directly with the

business relationship of a competitor,” through the “use of the governmental process – as opposed to the outcome of that process – as an anticompetitive weapon.”

Ways of Getting Around the Sham Exception:o Don’t file an objection in every case.o Don’t file a boilerplate/same document.o Be more selective on the basis of the claim.

Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc. (1961): 24 eastern railroads banded together for an anti-competitive purpose -- sharing the cost of hiring a PR firm to influence legislation, fostering the adoption of laws against long, heavy trucks, and encouraging the Governor of Pennsylvania to veto a “Fair Truck Bill.” H: No Sherman violation. There is nothing in the Act that prohibits influencing legislation; indeed, that would mean the regulation of political activity, as well as business activity. I: Created Noerr-Pennington Doctrine, permitting groups to influence legislation.

California Motor Transport v. Trucking Unlimited (1972): At this time, States were regulating trucking rates, and you had to go to the State agency to get permission to haul cargo. A group of truckers filed an opposition demand for hearings in every case which another firm proposes a new route. The truckers would list its reasons for opposition, and demand a full evidentiary hearing on its claims, which would of course take years. H: Defendants actions violated Sherman Section 1, because is constituted unethical conduct in an adjudicative proceeding. I: Court establishes the “sham” exception to the Noerr-Pennington Doctrine.

B. MUNICIPALITIES

City of Lafayette Test : In order to win Parker Doctrine immunity from the antitrust laws, a municipality must have specific state authorization of the anticompetitive activity. There is no Municipality Doctrine; the city is not a state actor under Parker.

City of Boulder Home Rule Statute : Home Rule Statute confers on municipalities the right to engage in their own regulatory actions – to act as if they are the state with respect to things that happen within the city’s borders. However,

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Home Rule Statutes – which give broad plenary power to the city -- are not sufficient to satisfy Midcal prong one (specific authorization).

City of Eau Claire Prong : Municipal supervision of the conduct at issue will satisfy Midcal prong 2 (supervision). A municipality is an actor of the state with respect to active supervision.

Local Government Antitrust Act of 1984: Cities were going bankrupt because they were losing trebled antitrust actions. This statute still requires cities to be incompliance with City of Lafayette; however, there are no longer treble damages available for antitrust suits against cities after 1984 statute [so these kind of cases have been dropped since no repercussions].

City of Columbia v. Omni Outdoor Advertising, Inc. (1991): Defendant Columbia Outdoor Advertising (COA) ran a billboard business in Columbia, South Carolina, where it eventually controlled more than 95% of the relevant market, having a close relationship with the community and its leaders. Plaintiff claims that there was a longstanding, secret anticompetitive agreement between defendant and the City, whereby COA maintained its monopoly power and the City Council members received advantages from COA. In response to increasing competition between Omni and COA, the City passed an ordinance restricting the size and location of billboards – an ordinance which favored COA because it had most of the pre-existing billboards. H: Conduct at issue easily qualifies under both state action and Noerr-Pennington, easier to dismiss state action than N-P.The state statute authorized municipal ability to regulate land use, and it was foreseeable that the extension of regulation authority might have anticompetitive effects; therefore, the municipal action in limiting billboard use is sanctioned by state action and is subject to Parker immunity. Sham exception to N-P applies only when Ds are trying to use process, rather than outcome, for anticompetitive purposes and only when “no reasonable litigant could realistically expect success on the merits.” 

I: (1) It is sufficient that anticompetitive effects be a foreseeable result of the state authority to regulate, in satisfying the Parker requirement for “clear articulation.”(2) There is no conspiracy, corruption or bribery exception to Parker immunity. (3) Agreements between municipalities, or their officials, and private parties to use the zoning power to confer de facto exclusive privileges in a particular line of commerce are beyond the reach of Sherman 1.

Pierce: Court does not want to expand the scope of Omni to give it broader effect. See GA hospital case above.

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VII. SHERMAN § 1: HORIZONTAL COMBINATIONS IN RESTRAINT OF TRADE

Modern Law of Horizontal Restraints: Horizontal Minimum Price-Fixing is determined under Modified Rule of Reason

o Initially made per se illegal in Addyston Pipe, where a contract in restraint in trade is illegal unless it is ancillary to a legitimate transaction.

o Chicago Board of Trade adopts Rule of Reason.o Then Trenton Potteries adopts per se rule.o Appalachian Coals = Rule of Reason.o Socony-Vacuum formally adopts Addyston’s per se rule: “Under the Sherman Act a combination formed

for the purpose and with the effect of raising, depressing, fixing, pegging or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.”

o Container Corp. implements modified Rule of Reason: Informal, ad hoc exchange of prices is illegal under Sherman 1.

Horizontal Maximum Price-Fixing is Per Se Illegalo Declared in Kiefer v. Stewarto Confirmed in Maricopa County.

Horizontal Group Boycotts Are Per Se Illegal where the Firms Have Market Powero Declared per se illegal in Fashion Originator’s Guild.o Silver v. NYSE found group boycotts legal only where they provide for due process.o NW Wholesale declared the group boycotts are only per se illegal where the firms have market power.o Political Boycotts : Exempt except where there is some economic motive present (D.C. Superior Court

Prosecutors). Horizontal Market Division is Per Se Illegal.

o Declared illegal in Timkin.o Still per se illegal, though somewhat limited under BRG, to those situations were the violation is blatant

(like Trenton Potteries).

Essential Facilities Doctrine: Gives firms the right to access the property without which they would not be able to compete. (See Terminal Railroad Association and Aspen) Best for regulatory cases, Courts are reluctant to use it

A. EARLY § 1 CASES

Standard Oil Company of NJ v. United States (1911): (Sherman 1 & 2) Standard Oil is charged with conspiring and combining in restraint of trade in the business of refined and crude oil. Rockefeller put all the shares of individual firms into a trust controlled by him (90% of the oil business in Ohio and other states in the Northeast). [took 20 years to resolve this case]H: The agreement did violate Sherman 1 and 2. The common law interpretation of sections 1 and 2 of the Sherman Act indicate that though the Act is not meant to apply to all Ks, it is meant to be judged on common law and public policy determination of restraints in trade and monopolies. I: A contract is restraint of trade is unlawful only if it is unreasonable. The Court considers evidence of intent, whether the businesses have the effects characteristic to a monopoly, and the arguments of the parties in justifying their practices. Limited Freight Association and Joint Traffic to their facts, because the Court felt that the cases misinterpreted the meaning of the Act by holding every restraint of trade a violation.

**sent a message to DOJ that you can win one of these cases if you want to invest 2 decades and massive amounts of resources.

United States v. American Tobacco Co: H: Court said that the size American Tobacco had obtained (over 86% of cigarettes) was not itself to be condemned, but rather the history of combination was so replete with illegal activities that it violated Sherman.

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United States v. Terminal Railroad Association: “Essential Facilities Doctrine.” (1912) Defendant owned 14 of the 24 railroads that converged in St. Louis, the switching yards on both sides of the Mississippi River, and the only means of crossing the river. While the court found that ordinarily it is OK to create all of the facilities required to perform a particular business, geography in this case made it impossible for the other railroads to construct their own facilities.H: By virtue of defendant’s advantage in this region, it not allowing competitors to use its facilities was a restraint in trade. Therefore, it had to allow others to buy into the combination, with the Terminal acting as an impartial agent, or buy use of the lines at a fair rate. I: Created the “Essential Facilities Doctrine,” giving firms the right to access the property without which they would not be able to compete. In this case, the ICC can oversee this…but whatever if you don’t already have an agency?

B. HORIZONTAL MINIMUM PRICE-FIXING

Summary: Horizontal Minimum Price-Fixing is determined under Modified Rule of Reason: Initially made per se illegal in Addyston Pipe, where a contract in restraint in trade is illegal unless it is ancillary

to a legitimate transaction. Chicago Board of Trade adopts Rule of Reason. Then Trenton Potteries adopts per se rule. Appalachian Coals = Rule of Reason. Socony-Vacuum formally adopts Addyston’s per se rule: “Under the Sherman Act a combination formed

for the purpose and with the effect of raising, depressing, fixing, pegging or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.”

Container Corp. implements modified Rule of Reason: Informal, ad hoc exchange of prices is illegal under Sherman 1.

Conscious Parallelism: Every time one firm raises its prices, the others follow, and when one firm lowers its price, the others follow.

(1948) It is per se illegal to engage in conscious parallelism.o Federal Trade Commission v. Cement Institute (1948) [upheld a finding of conspiracy based on a system of

base point pricing so no one could negotiate a better price from a nearby seller]o United States v. Paramount Pictures (1948) [not necessary to find an express agreement in order to find a

conspiracy] (1954) It is not per se illegal to engage in conscious parallelism.

o This behavior is also indicative of competitive markets.o It will not alone be enough to support a violation of the antitrust laws, but can be considered as circumstantial

evidence, when combined with other evidence, would be enough to prove a violation.o Theater Enterprises, Inc. v. Paramount Film Distributing Corp. (1954): Set limits on permissible

inferences. Business behavior is admissible as circumstantial evidence from which one may infer agreement.

However, proof of parallel business behavior does not conclusively establish agreement or itself constitute a Sherman Act offense.

Remedy: Could similar ends be achieved without price-fixing?

A. EARLY HORIZONTAL MINIMUM PRICE FIXING CASES

OVERRULED:United States v. Trans-Missouri Freight Association (1897): The government filed suit against an association of railroads, the Trans-Missouri Freight Association, for collaborating to “unjustly and oppressively” increase rates while operating in interstate commerce. The government sought an injunction against coordinated rate-making by the association. H: The Sherman Antitrust Act prohibits EVERY contract in restraint of trade (no accounting for reasonableness). I: Literal interpretation of the language of the act. Said too sweeping in Joint-Traffic Association, quickly overruled by Addyston Pipe.

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United States v. Addyston Pipe & Steele Co. (Circ Opinion 1898, but it’s from sophisticated Taft so OK): Horizontal Minimum Price-Fixing. Six manufacturers of cast-iron pipe allocate among themselves the right to preserve particular customers through allocation of territories [outbid each other on purpose]H: Addyston Pipe is a cartel, because the restraint in trade was not ancillary to the agreement’s purpose. Contract is illegal even if the organization covers only 30% of the cast-iron market in the U.S. because the restrictive activity was not ancillary to a lawful contract and could spiral into a much more dangerous cartel (more firms want to join). Reasonable prices are not a defense. I: Creates per se rule made law 30 years later…

B. ARTICULATING THE RULE OF REASON CASES

Chicago Board of Trade v. U.S. (1918): Most U.S. grain is traded by the Chicago Board of Trade, which is comprised of people who sell grain. The Board sets the rules for trading of grain. It determined that any grain sold between 2:00 p.m. and opening the next day, would be sold at a price set by the Board at close of business (2:00 p.m.) the next day. This means that for half the hours of the week, the prices are fixed. H: The practice is legal under § 1, because this rule serves the socially-beneficial purposes of reducing the power of the few merchants who were willing to trade grain after hours and allowing all merchants to work reasonable hours. I: Post-Clayton Act application of the Rule of Reason. Pierce says this decision is crazy because it says that it is OK not to compete where there may be some socially-beneficial reasons behind the practice. (Broad definition of social benefit.) This case is widely-regarded for clear articulation of the Rule of Reason.

C. TEETERING TOWARD THE PER SE RULE

United States v. Trenton Potteries Company (1927): Defendants are manufactures and distributors of 82% of pottery fixtures used in bathrooms in the United States. On appeal, defendants charged that the lower court should have instructed the jury to consider the reasonableness of the prices charged, rather than stating that the defendant’s activity violated the Sherman Act by engaging in horizontal minimum price fixing. H: The power to fix prices, whether reasonably exercised or not, involves power to control the market and to fix arbitrary or unreasonable prices. Agreements which create such potential power are themselves unreasonable and unlawful restraints. Therefore, horizontal minimum price-fixing is itself per se illegal. I: This case rejects the Rule of Reason and adopts the Per Se Rule.

** Trenton Potteries established the per se rule, but it was revisited in Appalachian Coals (below).Appalachian Coals, Inc. v. United States (1933): 137 Producers of coal in the Appalachian Region account for 12% of the coal production east of the Mississippi, but 74% of coal production in the Appalachian Region. The Producers formed an exclusive selling agency, where each producer owned its capital in the Company and the Company, in turn, established standard classifications, sought the best prices obtainable, and received a commission of 10%. H: Defendant didn’t fix prices; they merely stabilized them and then raised them back up. Given the poor state of the market in coal, ease of entry, and competition outside the immediate region, the Appalachian Coals, Inc. is not acting in restraint of trade, because competition is preserved and it is unlikely the Company would have the power to fix prices. I: This case returns to the Rule of Reason, requiring analysis of particular conditions, purpose, and likely effect of the agreement. Shift in the law explained by the Great Depression.

Sugar Institute v. US: 15 institute members refined 70-80% of the sugar used in the US. Institute forbade members from changing prices until after a publicly announced price change, which firms would either follow or the announced price would be withdrawn. H: Companies many announce price changes in advance, but Institute steps to enforce adherence to those prices violated Sherman 1.

Interstate Circuit v. US: D’s ran 130 movie theaters in TX and NM, paid over 74% of license fees in their territories. Common manger of the D’s wrote a letter to each of 8 distributors asking them to agree to not make their films available to any other theater that charged less, they all agreed.H: agreements are in restraint of trade, distributors were guilty of conspiring even though then never communicated with each other (all were named on the letters).

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D. PER SE RULE ADOPTED

Socony-Vacuum formally adopts Addyston ’s per se rule : “Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.”

United States v. Socony-Vacuum Oil Co. (1940): With strong encouragement from the Roosevelt Administration, oil companies address excess capacity by forming a group that buys “distress oil” from independent producers at “fair market.” The plan was a means to stabilize the tank car market, by having major oil companies purchase the distress oil at fair market prices. Some evidence that the NIRA agency had okayed this behavior and encouraged it other markets. H: Because it was found that the buying programs caused or contributed to the rise and stability of prices, the defendant was a combination with the power to fix prices and is thus per se illegal under Sherman. Doesn’t matter that the prices were fixed at fair market price-they were still fixed. I: Market power (as was in Trenton Potteries) to implement price fixing is irrelevant; all that is required to find illegality is the purpose to make an agreement (fn 59).

**very controversial decision at the time, but did lead to faster cheaper trials-PER SE test made predicting the winner very easy.

United States v. Container Corporation of America (1969): Defendant accounts for 90% of the shipment of corrugated containers for plants in the Southeastern U.S. Through an informal agreement, competing firms exchange information of the most recent price charged on the expectation of reciprocation. H: The Court found that although this behavior was voluntary, irregular, and it was easy to enter into the industry, the practice resulted in price stabilization downward, and was thus a combination or conspiracy to fix prices, in violation of Section 1 of Sherman. (See Socony-Vacuum) I: Informal, ad hoc exchange of prices is illegal under Sherman 1. The Court adopts a modified per se rule; no longer a simple, single-factor analysis. Could also be seen as a truncated Rule of Reason analysis.Factors include: Suspicious behavior, oligopolistic market structure, highly price inelastic demand, excess capacity, declining prices over time (ambiguous-doesn't really tell you anything), low barriers to entry, lots of entry at time of excess capacity (looks like this is excess capacity is being withheld to artificially raise prices).

Goldfarb v. Virginia State Bar (1975): The Bar Association had a rule that it would be unethical to charge less than a certain minimum price for designated services. H: The rule is per se illegal price fixing.I: The Court ruled for the first time on professionals using the antitrust laws.

E. THE BLURRED LINE BETWEEN THE PER SE RULE AND RULE OF REASON

Truncated Rule of Reason: In all horizontal restraint cases the court is to make a threshold inquiry as to whether a challenged practice “facially appears to be one that would always or most always tend to restrict competition and decrease output, … or instead one designed to ‘increase efficiency and render markets more, rather than less, competitive.’” (BMI)

National Society of Professional Engineers v. United States (1978): Section 11(c) of the Code of Ethics for the National Society of Professional Engineers prohibits its members from discussing their fee until the prospective client has selected the engineer for a particular project. This is challenged as a restraint of trade in violation of Sherman 1.H: The Rule of Reason analysis is proper in this case; however, the practice is illegal under section 1 because it is an absolute ban on competitive bidding. No inquiry into the policy reasons or social benefit behind the practice is proper under the Rule of Reason. I: This case revives the Rule of Reason, but limits its inquiry ONLY into the impact of the practice on competitive conditions. (“Quick Look Rule of Reason”)RARE ROR GOV’T WIN because this ROR is easier to satisfy.

Broadcast Music, Inc. (ASCAP) v. Columbia Broadcasting System, Inc. (1979): Vertical minimum price fixing. ASCAP and BMI are organizations comprising millions of copyrighted musical compositions. The organizations act as

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agents for the song-writers’ copyrights, by issuing non-exclusive blanket licenses, entitling the licensee the right to perform any and all of the compositions owned by the members, for a stated term. The fee is usually a percentage of total revenues or a flat dollar amount. CBS claims that ASCAP and BMI are unlawful monopolies, that the blanket licenses are illegal price fixing, an unlawful tying arrangement a concerted refusal to deal, and a misuse of copyrights. H: The blanket licenses should be examined under the Rule of Reason, its value toward economic efficiency weighed against any anticompetitive effect. Remanded for further proceedings. I: Demonstrates a shift in the Court’s analysis toward economic efficiency as a means of determining competition. The Court adopts a Rule of Reason because of the fact that (1) this dealt with copyrights which allow these people to collect royalties, (2) this issue had already been settled by consent decree (DOJ has more expertise), and (3) the arrangement was efficient and reduced transaction costs. Stevens’s Dissent: There is a better arrangement that ASCAP could do without violating the antitrust laws. ASCAP and BMI could act as agents of the copyright holder, taking care of the initial contracting and monitoring. Should be held illegal under ROR. If this case arose today: Stevens would win because of developments since 1979 -- the advent of the internet and computers, keeping transaction costs down.

National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma (1984): The NCAA promulgates rules and standards for college sports. It also regulated the ability of TV networks to televise football games, by fixing the price for the broadcasts and how/when the games were able to be broadcast. H: Per se rule does not apply to the sports broadcasting market, because the product is competition itself. Under the Rule of Reason, the NCAA’s practice is a violation of section 1, because it curtails output, blunts the ability of member institutions to respond to consumer preference, and restricts the role of college athletics in national life. I: (1) First case in the modern period explicitly to apply the Rule of Reason analysis to a section 1 case and still find a violation. (2) One of the first cases in which an antitrust action is brought against a nonprofit organization.

United States v. Brown University (1993): The Ivy League Overlap Group (Ivy League Schools plus MIT) agreed that (1) no one can get financial aid without demonstrated need; (2) agreed to meet regularly to set aid standards; (3) meet regularly to agree to a common amount that the individual has to pay. This has the traits of the classic price fixing cartel, because a person could not get more aid at one school than they could at another school – it would be the exact same. During the 1990s, all universities increased both tuition and financial aid substantially (more aid because it cost more to go to school). The Bush Administration brought suit under Sherman 1. H: The agreement is a price-fixing mechanism impeding the ordinary functioning of the market and thus requires justification of a pro-competitive virtue; but defendant MIT accomplished this by pointing out the rules’ enhancement of needy students’ consumer choice in a market not driven by profit motive. Thus, full Rule of Reason analysis required. Court of Appeals said DC should have recognized that the Ds had not for profit status and thus were not motivated by commercial considerations. Case never reached SC.

**Now there is an aware of need-based educational aid exception to Sherman 1.

C. HORIZONTAL MAXIMUM PRICE-FIXING

Summary: Horizontal Maximum Price-Fixing is Per Se Illegal: Declared in Kiefer v. Stewart Confirmed in Maricopa County.

Horizontal Maximum Price Fixing : The maximum price will also be the minimum price. Therefore, once the Court determined that horizontal minimum price fixing is per se illegal, it followed the horizontal maximum price fixing is per se illegal.

Kiefer -Stewart v. Joseph E Seagram and Sons (1951): Wholesale liquor dealer charged that 2 liquor distillers had conspired to sell their products only to retailers who would agree not to exceed the retail prices at which the distillers wished their products to be sold. They set max prices to improve their image as firms that did not take advantage of shortages after WWII. H: Horizontal maximum price fixing is per se illegal.

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Arizona v. Maricopa County Medical Society (1982): Defendant medical foundations operate as insurance administrators on behalf of doctors in Arizona (1,750: 70% of doctors in Miracopa County, AZ). As part of the policy, member practitioners must adhere to a fee schedule setting the maximum fees the doctors may charge. The State of Arizona challenges this practice (parens patrii) as an illegal price-fixing conspiracy under section 1 of Sherman. H: Arizona is entitled to summary judgment; the fee schedule is a per se violation of Sherman sec.1 as horizontal maximum price fixing. I: Upholds per se rule against horizontal maximum price fixing. Controversial because the challenged practice had the potential to lower consumer costs, and per se rule prevented analysis of probable outcome of activity. Court concerned that max price fixingmin price fixing.

D. HORIZONTAL GROUP BOYCOTTS

Summary: Horizontal Group Boycotts are per se illegal only when firms have market power. Declared per se illegal in Fashion Originator’s Guild. Silver v. NYSE found group boycotts legal only where they provide for due process. NW Wholesale declared the group boycotts are only per se illegal where the firms have market power. Political Boycotts : Exempt except where there is some economic motive present (D.C. Superior Court

Prosecutors).

A. TRADITIONAL CASES

Fashion Originators’ Guild of America v. Federal Trade Commission (1941): The Fashion Originators’ Guild of America (FOGA) was formed to combat “style copying,” whereby the designs of its member designers and textile wholesalers were copied and sold at cheaper prices. FOGA performed a group boycott, where retailers throughout the country must sign an agreement not to carry to copied clothing or they could not carry FOGA garments. Notably, FOGA members comprised 38-60% of the market in women’s clothing, so those retailers that did not agree suffered loss of business. Further, FOGA instituted other policies unrelated to style copying, including prohibiting its members from retail advertising, regulating discounts, sales, participation in retail fashion shows, and sales to retailers who do business in residences. H: The FTC correctly concluded that FOGA’s practice constituted an unfair method of competition in violation of Section 3 of the Clayton Act and the Sherman Act, even without a complete monopoly. I: Group boycotts are per se illegal.

Associated Press v. United States (1945): Associated Press has 1200 member newspapers. The by-laws allow any member of AP to share its story with any other member of AP. It also prohibits its members from selling news to non-members, and allows any AP member to block admission to a direct competitor. By forcing the competitor to join another press group, which is comprised by all 2nd-ranked dailies and does not cover some markets, the competitor is relegated to offering lower quality news. H: This is a per se illegal boycott because the inability to buy news from the largest news agency or its members could have a serious affect on competing newspapers. I: Adverse Effects of the Court’s Decision: If every paper can become a member of AP, there is a free-rider problem. If a paper can rely on getting its news from AP, it will stop producing news and create uniformity in news stories – fewer different perspectives. Therefore, the direct competitor benefits as much from the Washington Post’s stories as its does.

Silver v. NYSE (1963): Silver has a seat on the NYSE. The NYSE, a self-policing member organization, kicks him off, because he was stealing from his clients. Silver claims this is a group boycott in violation of Fashion Originator’s Guild. H: This is a per se unlawful group boycott unless NYSE provides the member due process and then expels him for a good reason.I: A group boycott is legal if, but only if, it is implemented in a way that complies with due process (i.e., there is a well-supported finding that the group is acting for a social reason, and not a non-competitive reason).

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B. MODERN CASES

Limited Per Se Rule Application: Applies only where the firms have market power. (NW Wholesale)

Northwest Wholesale Stationers, Inc. v. Pacific Stationary & Printing Co. (1985): Pacific, a stationary supplier, was a member of Northwest Wholesale Stationers, a cooperative that acts as primary wholesaler for its retail members and gives discounts in the form of a percentage of the profits the coop makes each year. Pacific was kicked out of the coop for failure to notify of a change in stock ownership. Pacific brought suit claiming that the expulsion is a group boycott in violation of section 1 of Sherman. H: The Court retains the per se rule for group boycotts, but only where the group has market power (remanded). I: Limits NYSE to its facts. (1) NYSE had market power. Without market power – which the Coop did not have – there is no Sherman violation. (2) NYSE self-regulated and therefore there were certain rules is MUST adhere to. The Coop was not self-regulatory.

**Pierce says not really a per se rule anymore when there are so many justifications: If you have market power in  a relevant market and you participate in a group boycott....and you have no justification for it....then group boycott is per se illegal.

Rothery Storage & Van Co. v. Atlas Van Lines, Inc. (1986): Atlas, the 6th largest mover in the country, has agency agreements with 590 moving companies which perform its interstate moving business, forming an association. Due to deregulation of the moving business (turning a legal cartel into a competitive market), many of Atlas’s agents began free-riding on their contracts, earning their own interstate authority to move and undercutting Atlas’s prices while utilizing Atlas’s name and services. Atlas then severed its pooling arrangement and agency contracts with any carrier that persisted in handling its interstate carriage on its own account, as well as for Atlas. The agents who were cut off are suing here for a group boycott and vertical minimum price fixing in violation of Sherman 2. H: (1) Because Atlas doesn’t have market power (6% of the market), the boycott is not per se illegal under NW Wholesale. (2) The court rules that the vertical minimum price-fixing is a valid restraint because it was a restraint ancillary to a socially-beneficial business purpose.I: (1) This arrangement was efficient and good for consumers. This is efficient, allows companies to take advantage of economies of scale, and enables smaller movers to still operate as independent agents. (2) This Court gleans a shift in the Supreme Court’s antitrust analysis for vertical restraints, stating that the new law on vertical restraints is better dictated by BMI, NCAA and Pacific Stationary, which revised Addyston Pipe & Steel, finding that practices that have an ancillary effect of restraining trade are to be judged according to their purpose and effect.

C. GROUP BOYCOTTING AS FORM OF POLITICAL PROTEST

Socially-Motivated Group Boycotts: Group boycotts that are clearly done for political purposes, and not for economic gain, are valid under Sherman.

EX: NAACP boycott of Denny’s for racial discrimination. However, so long as the competing firm has lower prices and the Guild will improve its profits as a result of

the boycott, the judge is likely to draw the inference that the actions are actually motivated by greed and that the boycott is illegal. O EX: Manufacturer protest of firms that use child labor.O Loophole: Manufacturers can use labor unions to organize and institute group boycotts because labor

unions are exempt from Sherman.

D.C. Superior Court Prosecutors Case: Prosecutors representing indigent clients boycotted in order to garner higher pay for their time – get a raise from $20 per hour to $35 per hour. H: The Court finds that because the economic motive was at least present in this case, it was per se illegal. I: Mixes public interest with economic self-interest concerns.

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D. GROUP BOYCOTTING AND STANDARDS SETTING

Should an agreement with a genuine public interest component also be subject to group boycott challenge?Pierce: Boycotts based on impartial standard are lawful but abuse of the standard setting process to further anticompetive purposes is unlawful.

Radiant Burners Inc v. People Gas Light: American Gas Association is a membership organization comprised of natural gas pipeline companies. One of the Association’s activities was the operating of a testing lab that evaluated the safety, utility, and durability of gas burners and gave them a seal of approval. Radiant Burners produced a burner that failed their test and the AGA members would not sell gas for use in their burners (so no one would buy them).H: Court said that a conspiratorial refusal to sell gas for burners lacking the AGA seal of approval falls within one of the classes of restraints that are per se illegal.

E. HORIZONTAL MARKET DIVISION (TERRITORIAL ALLOCATION OF MARKETS)

Horizontal Market Division is Per Se Illegal: Declared illegal in Timkin. Still per se illegal, though somewhat limited under BRG, to those situations were the violation is blatant (like

Trenton Potteries).

A. TRADITIONAL CASES

Timken Roller Bearing Co. v. United States (1951): Defendant is charged with combining with British Timken and French Timken to restrain commerce by eliminating competition in the manufacture and sale of antifriction bearings on the world market. At the time, there were a lot of barriers to foreign direct investment and very high tariffs to international trade. In order to get around these barriers, you have to have a high number of native share-holders. On this model, Timken jointly-owned British and French Timken with citizens of those countries. To avoid trade barriers, these firms could only sell within its own borders and to their colonies.H: The agreement assigning trade territory, fixing prices, protecting markets to eliminate outside competition, and restricting imports to and exports form the U.S., is illegal as a restraint of foreign trade under the Sherman Act.I: Horizontal allocation of markets is per se illegal.Court is finally agreeing with Taft in Addyston (1898) that horizontal allocation of markets is per se illegal.

B. UNDER THE PER SE RULE

United States v. Topco Associates, Inc. (1972): 25 independent grocery stores form a coop – purchasing, labeling, branding and advertising. Rules allow any member to veto a proposed new member or new store near existing member. Grocery stores comprise 1.5-16% of local market. H: This association’s practice is a horizontal allocation of markets and group boycott, and both are per se illegal (don’t need collective price fixing as well). Pierce’s Analysis: It is impossible for Topco to do any harm to consumers. If anything, Topco stood to prevent to domination of a few large chains.

C. MODERN CASES

See Rothery v. Atlas Moving: Circuit Court decision considers the old position that group boycotts and horizontal allocations of markets are per se illegal (see Topco and Sealy), as generally overruled. The new law on vertical restraints is better dictated by BMI, NCAA and Pacific Stationary, which revised Addyston Pipe & Steel, finding that practices that have an ancillary effect of restraining trade are to be judged according to their purpose and effect. (But see Palmer below)

Polk Bros v. Forest City Enterprise, Inc (7 th Circ 1985): Polk Bros, which owned land in IL, discussed with Forest City the possibility of building a store large enough for both firms. Polk sells appliances and home furnishings, Forest City sells building materials, lumber, tools and related products. Organized a covenant restricting the products each could

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sell, Forest City broke covenant. H: Covenant does not violate Sherman 1. When cooperation contributes to productivity through integration of efforts, ROR applies. Covenants of this type are assessed under ROR and unless they bring a large market share under a single firm’s control they are lawful. A restraint is ancillary when it may contribute to the success of a cooperative venture that promises greater productivity and output.

Jay Palmer v. BRG of Georgia, Inc. (1990): BRG of Georgia and HBJ were competitors in the provision of bar review courses in Georgia. In the early 1980s, both companies agreed not to compete with one another: BRG would get Georgia and HBJ would get the rest of the U.S. In return, HBJ would get $100 per student enrolled and 40% of all earnings above $350. After the plan went through, BRG’s prices increased from $150 to $400. Plaintiffs brought suit that this agreement was a violation of Section 1 of Sherman. H: This agreement is a horizontal allocation of territories and per se illegal under Topco. Because the defendants were former competitors and the agreement had the effect of raising prices, it has clear anticompetitive effects. I: Horizontal allocations of territory still per se illegal where the violation is blatant (like Trenton Potteries).*** SC cites to Topco, means that DC Circ in Rothery was wrong, Topco’s basic reasoning is not good law, but some of the language still good descriptions.

Copperweld Corp. v. Independence Tube Corp (1984).: Overruled the Intra-Enterprise Conspiracy Doctrine in Timken and Yellow Cab. “The coordinated activity between a parent and its wholly-owned subsidiary must be viewed as that of a single enterprise for purposes of Section 1 of the Sherman Act.”**Court said nothing about partly owned subsidiaries.

American Needle (2010): Filed by a company that had for 20 years been licensed to make stocking hats for fans to wear their team’s logo. In 2000, NFL had such producers bid for the right to an exclusive K and Reebok won. Court disagreed that the NFL was using a multi firm conspiracy made up of the teams, they said that the teams have value only because they compete in the NFL.

H: Ct held that NFL is organization of multiple firms.

F. HORIZONTAL RESTRAINTS IN SPECIAL CONTEXTS

A. PROFESSIONAL CONDUCT (PRICE-FIXING)

Rehnquist is the hero of these cases: He believes that professional conduct can never be anticompetitive because of the high standards of professionals. He is the dissent in these cases.

Professional Defenses Offered: Safety/Public Welfare EX: (National Society of Professional Engineers) If a “lowest bidder” system were implemented, there would

be unsafe structures all over the place. Problem : There are other bodies of law that offer resolution of this problem. (tort, building codes, contract

law…) If we held that public health/safety were a justification for exception from the antitrust laws, attorneys could

argue potentially every activity served a public benefit and should be exempt.

Goldfarb v. Virginia State Bar (1975): The Bar Association had a rule that it would be unethical to charge less than a certain minimum price for designated services. H: The rule is per se illegal price fixing. I: The Court ruled for the first time on professionals using the antitrust laws.

National Society of Professional Engineers v. United States (1978): Section 11(c) of the Code of Ethics for the National Society of Professional Engineers prohibits its members from discussing their fee until the prospective client has selected the engineer for a particular project. This is challenged as a restraint of trade in violation of Sherman Sec. 1. H: The Rule of Reason analysis is proper in this case; however, the practice is illegal under section 1 because it is an absolute ban on competitive bidding. No inquiry into the policy reasons or social benefit behind the practice is proper

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under the Rule of Reason. I: This case revives the Rule of Reason, but limits its inquiry ONLY into the impact of the practice on competitive conditions. (“Quick Look Rule of Reason”)

Broadcast Music, Inc. (ASCAP) v. Columbia Broadcasting System, Inc. (1979): Vertical minimum price fixing. ASCAP and BMI are organizations comprising millions of copyrighted musical compositions. The organizations act as agents for the song-writers’ copyrights, by issuing non-exclusive blanket licenses, entitling the licensee the right to perform any and all of the compositions owned by the members, for a stated term. The fee is usually a percentage of total revenues or a flat dollar amount. CBS claims that ASCAP and BMI are unlawful monopolies, that the blanket licenses are illegal price fixing, an unlawful tying arrangement a concerted refusal to deal, and a misuse of copyrights. H: The blanket licenses should be examined under the Rule of Reason, its value toward economic efficiency weighed against any anticompetitive effect. I: Demonstrates a shift in the Court’s analysis toward economic efficiency as a means of determining competition. The Court adopts a Rule of Reason because of the fact that (1) this dealt with copyrights, (2) this issue had already been settled by consent decree, and (3) the arrangement was efficient and reduced transaction costs. Stevens’s Dissent: There is a better arrangement that ASCAP could do without violating the antitrust laws. ASCAP and BMI could act as agents of the copyright holder, taking care of the initial contracting and monitoring. If this case arose today: Stevens would win because of developments since 1979 -- the advent of the internet and computers, keeping transaction costs down.

B. HEALTH CASES

Patients don’t sue individually in court: Very expensive to sue. Difficult to put together a class action. Also, don’t care about doctor pricing, because the insurance companies pick up the tab.

McCarren-Ferguson Act: Federal government may not regulate insurance companies, only the states (state insurance commissioners).

Additionally, the antitrust laws do not apply to insurance companies. Loose state regulation, unreachable by antitrust laws, leads to massive anticompetitive activity.

Studies find that most important determinants of high quality/low cost care are large scale provider networks and competition

DOJ and FTC differ re approach to accountable care orgs under the ACA o ACA has driven hospitals to consolidation because of ACOo They are ok with it to some pt, but many markets have already surpassed that point

HYPOS:1. 100 doctors form a partnership in which each agrees to charge the same fee.

Partnership comprises a cross-section of practice areas. This looks like horizontal price fixing. BUT, this is not illegal because:

o A partnership is recognized as achieving efficiencies by sharing costs and combining talents of the partners.

o Also, partnerships still have to compete against each other. Partnership is not in violation of Sherman by horizontal price fixing.

2. 1750 doctors form partnership in which each charges the same fee. Horizontal min price fixing. But can’t be a Sherman 1 problem because it’s a single firm. This creates a problem of market concentration, in violation of Sherman 2 (monopolizing or attempting to

monopolize 70% of the market) and Clayton 7 (if it happened through haa merger). This is violates antitrust laws for tending toward market concentration.

3. A corporation forms to provide medical services. It hires 100 doctors and charges the same fee for each. The 100 doctors comprise 5% of the medical services in the area. This poses no problem at all, because a corporation is able to have internal rules that doctors have the

same fee, so long as they still compete with other firms. A corporation can provide medical services and set an internal price schedule for its services.

4. 100 doctors engage in collective bargaining with the corporation.

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This is OK, because there is a labor exemption to Sherman: Employees can bargain for their demands from their employers.

Unions are exempt from antitrust laws.5. Corporation hires 1750 doctors and charges the same schedule of fees for each of the doctors.

1750 doctors is 70% of the medical services market in the area. If the corporation got 70% of the market through natural growth, it’s OK. BUT, if the corporation got 70% through mergers, this should have been stopped by Clayton 7, and is

currently illegal under Sherman 2. This is illegal as a monopoly under Sherman 2.

Arizona v. Maricopa County Medical Society (1982): Defendant medical foundations operate as insurance administrators on behalf of doctors in Arizona (1,750: 70% of doctors in Miracopa County, AZ). As part of the policy, member practitioners must adhere to a fee schedule setting the maximum fees the doctors may charge. The State of Arizona challenges this practice (parens patrii) as an illegal price-fixing conspiracy under section 1 of Sherman. H: Arizona is entitled to summary judgment; the fee schedule is a per se violation of Sherman sec. 1 as horizontal maximum price fixing. I: Upholds per se rule against horizontal maximum price fixing.

C. SPORTS CASES

Cases Analyzed Under Rule of Reason: Per se rule does not apply to the sports broadcasting market, because the product is competition itself (e.g., you need an elaborate set of rules to provide suspense, uncertainty, and some degree of parity.) (NCAA)

Failing Defense: Regulation necessary to protect attendance of live games. Consumer Choice: Consumers have a right to sit home or go to a game, and the NCAA cannot interfere with

that.

Is the NFL 32 Competing Firms or a 32 Team Partnership?: In 2010, SC held that NFL consists of 32 independent firms rather than a single partnership.

Each team has its own revenue from its games. Plus there is revenue sharing for TV profits. And there is revenue sharing in general support of the League (think Steinbrenner signing huge checks to other

baseball teams). It matters whether NFL is a partnership because if the NFL is treated as one entity, it would be a single firm

controlling the professional football market (Copperweld rule).o This has been often litigated with different results and no Supreme Court case.

Special Statutes: Professional athletics have special statutes that amend how antitrust laws apply to them. EX: The AFL and NFL merger. If you convince the people that a merger is good for the sport by getting consumer support behind it, then you

can get a special statute exception to Sherman and Clayton.

Labor Exemption: Sports leagues may try to avoid antitrust regulation by loading terms into their labor provisions and triggering labor exemptions. (EX: Collective Bargaining Agreements) (Brown v. Pro Football)

National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma (1984): The NCAA promulgates rules and standards for college sports. It also regulated the ability of TV networks to televise football games, by fixing the price for the broadcasts and how/when the games were able to be broadcast. H: Per se rule does not apply to the sports broadcasting market, because the product is competition itself. Under the Rule of Reason, the NCAA’s practice is a violation of section 1, because it curtails output, blunts the ability of member institutions to respond to consumer preference, and restricts the role of college athletics in national life. I: (1) First case in the modern period explicitly to apply the Rule of Reason analysis to a section 1 case and still find a violation. (2) One of the first cases in which an antitrust action is brought against a nonprofit organization.

Chicago Professional Sports Limited Partnership v. National Basketball Association: NBA had adopted a rule that

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no Superstation may carry more than 20 NBA games per season. WGN wanted to broadcast the Chicago Bulls nationwide. H: Court applied ROR.

Fraser v. Major League Soccer: Players challenged a plan under which they were all hired by the central league and assigned to the teams that made it up. H: Court rejected the League’s plea for automatic application of Copperweld, but also rejected the player’s characterization of the League as obviously a device to eliminate competition for players. At worst the court found that the teams were joint ventures whose efforts to consolidate some functions could bee procompettive, thus ROR applies

American Needle v. NFL: Filed by a company that had for 20 years been licensed to make stocking hats for fans to wear their team’s logo. In 2000, NFL had such producers bid for the right to an exclusive K  and Reebok won. H: Court disagreed that the NFL was using a multi firm conspiracy made up of the teams, they said that the teams have value only because they compete in the NFL. Each team could license its own logo, but nothing prevents them from acting collectively.

Clarett v. NFL: Clarrett, a college football player, challenged the NFL’s “years after graduation” restriction on playing in the League as a violation of antitrust laws. NFL’s Justifications: Protect the health of young, developing players; BUT, more likely they had this restriction to keep players in college to improve ability. H: Applying Brown, found no antitrust violation, because this rule is part of the collective bargaining agreement (within the scope of the labor exemption) and therefore untouchable by antitrust laws. I: Illustrates use of collective bargaining agreement to get around antitrust laws.

D. PUBLIC INTEREST/UNIVERSITY CASES

University’s Defense in Brown : Meetings/aid agreements were essential to furthering the public interest by ensuring their financial need resources are adequate to give aid to all deserved people.

United States v. Brown University (1993): The Ivy League Overlap Group (Ivy League Schools plus MIT) agreed that (1) no one can get financial aid without demonstrated need; (2) agreed to meet regularly to set aid standards; (3) meet regularly to agree to a common amount that the individual has to pay. This has the traits of the classic price fixing cartel, because a person could not get more aid at one school than they could at another school – it would be the exact same. During the 1990s, all universities increased both tuition and financial aid substantially (more aid because it cost more to go to school). The Bush Administration brought suit under Sherman 1. H: The agreement is a price-fixing mechanism impeding the ordinary functioning of the market and thus requires justification of a pro-competitive virtue; but defendant MIT accomplished this by pointing out the rules’ enhancement of needy students’ consumer choice in a market not driven by profit motive. Thus, full rule of reason analysis required.

G. TRADE ASSOCIATION CASES

Type of Communication is the Distinguishing Factor in these Two Cases: The info that went from the members to the trade association was the same in both cases – extremely detailed,

firm-specific info about current and future prices. However, the information going from the association to the members was completely different.

o American Column included was very detailed and disaggregate firm-specific information, identifying prices, sales lists and customers.

o Maple Flooring’s information had been aggregated by the trade association and did not identify the statistics of individual firms.

Information about past transactions AND the court got 4 new justices!

o Both Courts agree that information can have socially-beneficial effects, such as showing where there will be surpluses, but draw the line at where it enables price-fixing or cartelization.

Every time 2 leaders in the same industry get together for dinner, the first topic is always collusion

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A. TRADITIONAL CASES

American Column & Lumber Co. v. U.S. (1921): 365 firms that account for 1/3 of hardwood production, form an association. The association collects from each member and disseminates to each member detailed, disaggregated, present & future information about prices and sales. Before it sent out, an economist analyzes the data and tells the members what it means. Association meets regularly, urges a “spirit of cooperation” (rather than the cut-throat environment of competition) and claims great success. Prices increased during this period. H: The association is illegal.I: This is still the law today.

Maple Flooring Manufacturers’ Assn. v. United States (1925): A trade association has 22 corporate members, half of which produce rough lumber, the other half of which use the lumber to manufacture wood flooring. There is evidence that there are many non-member manufacturers of wood flooring, and that defendants only own a small percentage of maple, beech and birch timber. The Association shares statistical information, average prices, shipping rates and also meets regularly. H: The sharing of trade information is a good business practice and in the public interest. It is not illegal, notably, because the information shared was not confidential and not too specific as to give the members any substantial advantage over non-members. Importantly, the prices were not uniform and they were not higher than non-members’ prices.

Cement Manufacturer Protective Assn v. US (decided on same day): Involved a group of 19 manufacturers who produced cement along the east coast. Compiled and distributed a book showing freight rates and monthly info on past production and stock on hand.H: Court found for the Cement companies, an exchange of specific K terms is permissible because there was no agreement to maintain uniform prices.

B. MODERN CASES

National Society of Professional Engineers v. United States (1978): Section 11(c) of the Code of Ethics for the National Society of Professional Engineers prohibits its members from discussing their fee until the prospective client has selected the engineer for a particular project. This is challenged as a restraint of trade in violation of Sherman Sec. 1.H: The Rule of Reason analysis is proper in this case; however, the practice is illegal under section 1 because it is an absolute ban on competitive bidding. No inquiry into the policy reasons or social benefit behind the practice is proper under the Rule of Reason. I: This case revives the Rule of Reason, but limits its inquiry ONLY into the impact of the practice on competitive conditions. (“Quick Look Rule of Reason”)

California Dental Ass’n v. FTC (1999): Trade association adopts an ethical rule in which they prohibit misleading advertising, and lists types of advertising that it would consider misleading – advertising as to price and quality must include full context and comparison of this claim. All ads have to be submitted for approval. FTC says that all the association is doing is restraining advertising through the back door, applies a quick look test. H: Majority upholds the practice, reversing and remanding the FTC decision. If the lower court had written a decision as long as the dissents though, we might have upheld it. Professional Context: The professional context at issue contributes to reversing the decision – had this been the vitrious pottery or cardboard box industry, Pierce has no doubt that the court would have struck down the practice.Dissent: Finds that the practice is a violation of Sherman. Creates Quick Look Rule of Reason Test.

1. What is the restraint at issue? A qualified prohibition on references to quality/price in ads2. What are its likely anticompetitive effects? De facto prohibition on some types of ads is def anticompetitive

[the not so quick part of the test]3. Are there off-setting pro-competitive justifications? There is potential in any case to be offsetting

efficiencies [difficult to determine]4. Do defendants have enough market power to make a difference? YES

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SHERMAN § 1: VERTICAL RESTRAINTS

Vertical Allocation of Markets/Vertical Price-Fixing Precedent: o Dr. Miles Medical : (1911) Contracts with dealers to implement vertical minimum price-fixing are per se

illegal, but OK if through agents on consignment.o Colgate : (1919) Overrules Dr. Miles by saying that vertical minimum price fixing is illegal only when there

is a contract. Unilateral vertical minimum price-fixing is OK because this is unilateral imposition of the price-fixing

regime (e.g. you can’t sell for less than $1 or we won’t sell to you anymore) – not a contract.o Parke Davis : (1960) Overruled Colgate -- Unilateral vertical minimum price fixing plus communication is

an illegal contract.o Union Oil : (1964) Escape clause of Dr. Miles eliminated -- Agencies and consignments are illegal. Vertical

Minimum Price Fixing is made functionally illegal.o White Motors : (1963) 3 Justice Dissent: Vertical allocation of markets and vertical minimum price fixing

have the same effects – ways of eliminating competition among the distributors. The majority holds that vertical allocation of territories are OK.

o Schwinn : (1967) Vertical allocation of territories, like vertical minimum price fixing, is per se illegal. o Sylvania : (1977) Overrules Schwinn. Vertical allocation of territories is OK.

Under this reasoning, vertical minimum price fixing would also be per se illegal, overruling Dr. Miles (see White’s dissenting opinion).

o Monsanto (1984): Vertical allocation of markets is legal when this case is considered because Sylavania overruled Schwinn.

Modified the burden of proof from Parke Davis, because more than mere communication is required. Now need evidence that defendants “had a conscious commitment to a common scheme designed to achieve an unlawful objective.” AKA PLUS FACTORS in additional to the parallel activity. (Bell Atlantic v. Twombly)

o Business Electronics (1988): A vertical price restraint is not per se illegal under section 1 of Sherman unless it includes some agreement to set prices or price levels.

o Leegin : Overrules Dr. Miles, vertical min price restraints should be judged by ROR

H. VERTICAL MINIMUM PRICE-FIXING

** See also Vertical Allocation of Markets for similar reasoning.

Vertical Minimum Price-Fixing: Where a manufacturer tells a wholesaler or retailer the minimum prices which may be charged for the manufacturer’s products.

ROR applies (Leegin overrule Dr. Miles). See above table for evolution of per se illegality of vertical minimum price fixing and its relationship to Vertical

Allocation of Markets.

Why would a manufacturer engage in vertical minimum price fixing: To protect retailers from free-riders.

o To encourage retailers to invest resources into selling your product – such as elegant showrooms and educated salespeople.

o Free-riders (such as discount houses) may give neither of these and sell at below recommended price. Therefore, consumer shop at the elegant stores, but purchase at the discount houses. Manufacturers want to dissuade this behavior.

Two Problems with Vertical Price-Fixing: Scenario #1: In certain circumstances, it is possible that a cartel will use vertical minimum price-fixing as a

means to achieving horizontal minimum price-fixing. Scenario #2: Horizontal minimum price-fixing that the retailers have forced the manufacturer to implement. In both these circumstances, it’s easy to prove effort to fix prices horizontally, because the retail sale of goods is transparent.

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***No matter what gov’ts/courts feel on price fixing, everyone agrees that horizontal price fixing is BAD so if vertical price fixinghorizontal price fixings that’s a RED FLAG

The Challenging Issue of Price Matching or Lowest-Price Guarantees: Issues surrounding the most favored nation clauses, or guaranteed lowest price policy, continue to intrigue

economistso Immediate reaction is that they are examples of competition at its best and most intenseo But in reality, you’re just not offering the low price at all thinking worst case scenario you have to lower

for some customerso And competitors prob won’t both lowering prices since you’ll just match them

A. EARLY CASES

OVERRULED:Dr. Miles Medical Company v. John D. Park & Sons Company (1911): Dr. Miles, producer of pharmaceuticals, enters into contracts with a number of wholesalers and retailers, where they must agree to sell Dr. Miles products for no less than a certain amount. A retailer, not in a contract with Dr. Miles, gets a number of Dr. Miles drugs from a contracted wholesaler, and then began selling the drugs for less than the contracted minimum price. H: Vertical minimum price-fixing contracts are illegal under the Sherman Act. However, a producer, like Dr. Miles, can do the same thing if it is the one making the sale (or agents who never take title: consignment). It just can’t set the price that others sell at. Also, maker of a proprietary medicine, unpatented, stands on no different footing from that of other manufacturers and will not justify a restriction of trade. Court applies contracts dispute law. I: Illustrates situation that existed for 100 years, where the Supreme Court had a set of lawyers that did not understand how markets work. They drew a legal distinction between two practices that had the same effect (vertical allocation of markets and vertical minimum price-fixing).

United States v. Colgate & Co. (1919): Defendant circulated lists to its dealers stating the uniform prices to be charged and consequences of not adhering to the prices. Government brought suit alleging charge of uniform process throughout the U.S. H: The Court found that as there was no contract between Colgate and its dealers, Colgate had only done what any firm may do: use independent discretion as to parties with whom it will deal, and announce in advance under what conditions it will refuse to sell. I: The Colgate Rule: Unilateral vertical minimum price-fixing is not a violation of the Sherman Act, because there is no contract. Vertical Minimum Price-Fixing Law as of 1919: If you have vertical minimum price-fixing through contracts with your dealers, then that is a per se violation of the Sherman Act. However, if you have an at-will contract with dealers, and you unilaterally send out lists of demands, a failure to comply with which will terminate the contract, then there is no violation.There are now three ways to get around the Sherman Act with vertical price-fixing:

1. Create own retail outlet2. Deal through an agent3. Make unilateral demands

B. 1960’S CASES

United States v. Parke, Davis & Co. (1960): Parke Davis, a pharmaceutical manufacturer, set suggested minimum prices for its wholesalers and retailers in the Washington and Richmond area. Though it announced a policy of refusing to deal with firms that sell below the suggested minimum price through its catalogue, when retailers began advertising this below-minimum price, it enlisted the wholesalers to agree not to supply the retailers that sold at the lower price. This created an oral contract. Dart Drugs, a retailer, brought this to the attention of the DoJ, which charges a violation of Sections 1 and 3 of Sherman. H: Because Parke Davis communicated with its wholesalers and retailers when it found that they were violating the minimum price-fixing standards – basically trying to get them into compliance – this created a contract and is thus governed by Dr. Miles, and not Colgate.

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I: Overruled Colgate -- Unilateral vertical minimum price fixing PLUS communication is an illegal contract.** Indistinguishable from the facts of Colgate, except the plaintiff establishes that there were some communications that took place between the retailer and the manufacturer in the process of implementing its price-fixing regime; only way to act pursuant to Colgate for large companies is by talking to people and making one’s position clear.

Simpson v. Union Oil Co. of California (1964): Union Oil entered into “consignment agreements” with retailers, such as Plaintiff Simpson, whereby it fixed the price it wished the retailer to sell at and the retailer would receive a small commission. When Simpson charged less than the price required by Union Oil, Union Oil cut-off supply and withdrew from the consignment agreement.H: These are “so-called agents” in “so-called consignment agreements.” Union Oil is just exploiting the Dr. Miles exception. The “consignment agreement” is an agreement coercively employed, to achieve retail price maintenance and is therefore illegal under Sherman. GE doesn’t apply because this isn’t a patented device. [not a defense that the retailer could have not agreed to it and gone elsewhere]I: By Simpson, all of the distinctions that the Court made had the effect of rendering prior case law obsolete – practically making vertical minimum price-fixing per se illegal.

C. MODERN CASES

Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. (1979): Vertical minimum price fixing. ASCAP and BMI are organizations comprising millions of copyrighted musical compositions. The organizations act as agents for the song-writers’ copyrights, by issuing non-exclusive blanket licenses, entitling the licensee the right to perform any and all of the compositions owned by the members, for a stated term. The fee is usually a percentage of total revenues or a flat dollar amount. CBS claims that ASCAP and BMI are unlawful monopolies, that the blanket licenses are illegal price fixing, an unlawful tying arrangement a concerted refusal to deal, and a misuse of copyrights.H: The blanket licenses should be examined under the Rule of Reason, its value toward economic efficiency weighed against any anticompetitive effect. I: Demonstrates a shift in the Court’s analysis toward economic efficiency as a means of determining competition. The Court adopts a Rule of Reason because of the fact that (1) this dealt with copyrights, (2) this issue had already been settled by consent decree, and (3) the arrangement was efficient and reduced transaction costs. Stevens’s Dissent: There is a better arrangement that ASCAP could do without violating the antitrust laws. ASCAP and BMI could act as agents of the copyright holder, taking care of the initial contracting and monitoring. If this case arose today: Stevens would win because of developments since 1979 -- the advent of the internet and computers, keeping transaction costs down.

Monsanto Co. v. Spray-Rite Service Corp. (1984): Monsanto is a large chemical manufacturer that controls 15% of the corn herbicide market and 3% of the soybean herbicide market. Plaintiff Spray-Rite is a family-run business that operates as a discount retailer of agricultural chemicals. It is the 10th largest of 100 distributors of Monsanto’s corn herbicide and 16% of its sales were Monsanto products. In 1967, Monsanto instituted a new program whereby it would renew its dealerships yearly, considering a series of factors – including capability of salesmen and exploitation of the geographic market – prior to granting the dealership. Additionally, it implemented unilateral vertical minimum price fixing, in order to protect its business from free-riders and encourage quality salesmanship. Plaintiff’s discount dealership with Monsanto was revoked in 1968. Plaintiff claims that Monsanto and some of its dealerships conspired to fix the prices of Monsanto herbicide, in violation of Sherman 1. H: Monsanto is in violation of Sherman 1.There is substantial evidence that Monsanto and some of its dealers conspired to raise prices, and specifically, that Spray-Rite was the victim of this arrangement by failing to comply. I: Modifies Parke Davis by requiring more than mere communication and holding that the antitrust plaintiff should present direct or circumstantial evidence that reasonably tends to prove that the manufacturer and others “had a conscious commitment to a common scheme designed to achieve an unlawful objective.”

Court sees this case as pulling together the Dr Miles/Colgate/Parke David line of cases and merging it with the White/Schwinn/Sylvania line. Lower court shorthand rule has become that the P must identify plus factors, ie facts in addition to the fact of parallel activity, that tend to prove an agreement.

Rothery Storage & Van Co. v. Atlas Van Lines, Inc. (1986): Atlas, the 6th largest mover in the country, has agency agreements with 590 moving companies which perform its interstate moving business, forming an association. Due to

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deregulation of the moving business (turning a legal cartel into a competitive market), many of Atlas’s agents began free-riding on their contracts, earning their own interstate authority to move and undercutting Atlas’s prices while utilizing Atlas’s name and services. Atlas then severed its pooling arrangement and agency contracts with any carrier that persisted in handling its interstate carriage on its own account, as well as for Atlas. The agents who were cut off are suing here for a group boycott and vertical minimum price fixing in violation of Sherman 2. H: (1) Because Atlas doesn’t have market power (6% of the market), the boycott is not per se illegal under NW Wholesale. (2) The court rules that the vertical minimum price-fixing is a valid restraint because it was a restraint ancillary to a socially-beneficial business purpose.I: (1) This arrangement was efficient and good for consumers. This is efficient, allows companies to take advantage of economies of scale, and enables smaller movers to still operate as independent agents. (2) This Court gleans a shift in the Supreme Court’s antitrust analysis for vertical restraints, stating that the new law on vertical restraints is better dictated by BMI, NCAA and Pacific Stationary, which revised Addyston Pipe & Steel, finding that practices that have an ancillary effect of restraining trade are to be judged according to their purpose and effect.

Business Electronics Corp. v. Sharp Electronics Corp. (1988): In 1968, petitioner Business Electronics was the exclusive retailer of Sharp business calculators in Houston. In 1972, respondent Hartwell was also permitted to sell for Sharp. Sharp published non-binding suggested minimum retail prices, and both retailers often sold below these prices, and Business Electronics more often sold below Hartwell’s prices (intra-brand competition). In June 1973, Hartwell threatened to terminate its dealership unless Sharp cut off its relationship with Business Electronics. The next month, Sharp terminated its relationship with Business Electronics. Business Electronics brought suit against Sharp and Hartwell claiming that they had conspired to terminate it, and that this conspiracy was illegal under Sherman 1. H: This agreement contained no agreement on resale price or price level; therefore, it cannot be a per se illegal vertical arrangement in restraint of trade, ROR applies. I: A vertical restraint is not per se illegal under section 1 of Sherman unless it includes some agreement to set prices or price levels. Departure from ROR standard must be justified by demonstrable economic effect such as facilitation of cartelizing, rather than formalistic distinctions; that inter-brand competition is the primary concern of the AT laws; and that the rules in this area should be formulated with a view towards protecting the Sylvania doctrine.Pierce: Ct holds that legal unilateral vertical min price fixing becomes illegal k-based vert min price fixing only when there are written K in which dealers agree not to sell below specified prices. Pierce says doesn't make sense, but at least it clarified Monsanto. Yet, inconsistent with 1960s opinions takes us back to 1926 legal regime. Can still form the basis of an AT case, not per se violation, but ROR violation dependent on facts.

Leegin Creative Leather Products Inc v. PSKS Inc (2007): Leegin, a leather goods manufacturer, institutes a retail pricing a promotion policy. Leegin refused to sell to retailers that discounted Brighton goods below suggested prices, exception for products not selling well that the retailer did not plan on reordering, because wanted to give sufficient margins to provide customer service. Kay’s was discounting Brighton goods by 20%, supposedly to compete with nearby retailers who were also undercutting. H: Retail price maintenance can have pro-competitive effects (stimulate inter-brand competition by reducing intra-brand competition) and anti-competitive effects, but not always anti-competitive. Thus, ROR should apply to vertical min price restraints. Dr. Miles is overruled. Vertical min price fixing is still illegal under ROR if it is distinguished horizontal price fixing by retailers or manufacturers. Dissent: 4-justice dissent thinks that it will throw the economy into uncertainty, likely raising prices and making it difficult for lower courts to develop workable principles after 100 yrs of per se rule.**EU and NY, NJ and CA are all anti-Leegin.

I. VERTICAL MAXIMUM PRICE FIXING

Vertical Maximum Price Fixing is Considered Under the Rule of Reason, as of 1997: State Oil v. Kahn. Per Se Illegal From 1951-1997. (Albrecht) Syllogism: Because horizontal minimum price fixing and horizontal

maximum price fixing are per se illegal, and vertical maximum price fixing looks like its horizontal counterpart and can have the same effects, it is per se illegal also.

Beneficial Effects: To prevent delivery people/dealers who have territorial monopolies through vertical allocation of markets from exercising monopoly power.

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OVERRULED:Albrecht v. Herald Co. (1968): Herald Co. publishes a morning newspaper in St. Louis whereby carriers buy the papers wholesale and deliver them in 172 routes. Carriers have exclusive territories, but they also are subject to termination if prices exceed the suggested maximum. Petitioner Albrecht sold above the maximum, Herald Co. auctioned the rights to the route to Kroner, on the understanding that if Albrecht sold at the lower price, he would lose his rights. H: The combination formed by Herald Co., Milne (PR agency) and Kroner (purchaser of rights to area 99) is a maximum resale price-fixing arrangement per se illegal under section 1 of Sherman. I: Pierece’s Commentary: Astonishingly stupid decision because it protects monopolies and finds per se illegal the activities the firm created to prevent monopoly power. [FIRST AND ONLY OPINION OF SC TO HOLD IT]

State Oil Co. v. Kahn (1997): P leased and operated a gas station from State Oil. As part of the supply agreement, plaintiff contracted that it would sell the oil at State’s suggested retail price, less a margin of 3.25 cents per gallon. P also promised not to sell the gas for more than the suggested price, or the additional profits would be refunded to State. When plaintiff fell behind on lease payments, a receiver took over the gas station but was not bound to State’s price restrictions, so he was able to turn a profit above the 3.25 cent margin. Plaintiff claims that the maximum price restriction was a violation of Sherman 1. H: The case should be remanded to the Court of Appeals for further analysis under the Rule of Reason since max price fixing could have pro-competitive effects. ROR sufficient to figure out if mix price mixing disguised as max. I: OVERRULES Albrecht v. Herald. Vertical maximum price fixing is no longer per se illegal because there is no economic justification for it. The rule of reason now applies to vertical maximum price fixing.

J. VERTICAL TERRITORIAL ALLOCATION CASES

Two arguably illegal purposes of vertical minimum price-fixing: Disguised horizontal price fixing (use the manufacturer as a means to fix prices horizontally). Element of an illegal horizontal arrangement.

Benefits of Vertical Territorial Allocation/Vertical Minimum Price Fixing: Prevents free-riding: Not allow discounters to sacrifice knowledgeable sales people, advertising, equipped

showrooms for lower price.o Vertical minimum price fixing is the same as vertical allocation of markets: (Dissent in White Motor

Co.) Since the Court says vertical minimum price fixing is per se illegal, vertical allocation of markets should also be per se illegal.

o To protect your dealers who are engaging in expensive promotion of your product by deterring free riders who do not wish to involve the product development you want, you can do this through vertical minimum price-fixing as well as vertical allocation of markets.

Court Less Concerned with Inter-Brand Competition than Intra-Brand Competition: Vertical restraints are designed to promote intra-brand competition, and the Courts have found this permissible under the Rule of Reason. (Sylvania)o Inter-Brand : Competition between different manufacturers of similar products. (BAD) (EX: competition

among dealers of all TVs) Vertical allocation of territories increases inter-brand competition because it improves the quality

of salesmanship that the TVs are given (think fancy showroom).o Intra-Brand : Competition between dealers of the same product. (GOOD) (EX: TVs in Business

Electronics, Sylvania) Vertical allocation of territories in these circumstances decreases competition such that the Sylvania

TVs do not compete within the same territory.o Courts not so concerned about reduced intra-brand competition because of the benefits yielded from inter-

brand competition. To prevent distributors from selling only in the most-densely populated areas. (Albrecht)

o Most efficient means of delivery (think of a grid – each person has a small square, rather than having to cover the whole area).

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A. TRADITIONAL CASES

White Motor Co. v. United States (1963): Defendant manufacturer sells trucks to distributors, dealers and large users. It has 1% of the market. It limits/allocates the territory in which dealers and distributors may sell the manufacturer’s trucks. It also does not allow dealers to attempt to make government or fleet sales, without getting the express permission of White. Plaintiff claims the clause restricting territory is per se violations of section 1 and 3 of Sherman. H: No per se violation of Sherman because this is a new issue and vertical territorial allocation may have beneficial economic effects. I: Vertical minimum price fixing is per se illegal, but vertical allocation of markets is not per se illegal. What’s Really Going On: If you want to protect your dealers from free riding and encourage the dealers to do expensive product promotion and development, then you have to protect them from free-riders. Since the court has ruled vertical minimum price fixing is per se illegal, White is able to accomplish the same thing through vertical allocation of markets.

US v. General Motors Corp (1966): Case combining territorial allocation with discount selling. Several GM dealers were found to be cooperating with discount houses and referral services that would sell cars very cheap, having bought them almost at the wholesale price from the cooperating dealers. Customers were encouraged to go to the GM dealers to look at cars, but then buy them from the discount houses. GM dealers went to GM, who threatened the offending wholesaling dealers.H: Practice was per se illegal because of the prime purposes of the practice was to keep the prices up.

OVERRULED:United States v. Arnold Schwinn & Co. (1967): Schwinn sold bikes. Between 1951 and 1961 its market share dropped from 22.5% to 12.8%. To combat this reduction in sales, it changed its business practices: Reduced dealers from 15,000 to 5,000 dealers, required high-quality support, and imposed territorial restrictions on each of the dealersH: This has the similar effect as vertical minimum price fixing. Vertical minimum price fixing is per se illegal, and therefore vertical allocation of markets is per se illegal. I: (1) One of two cases in antitrust law that has been overruled; (2) Court Returns to the Old Rule that where Schwinn does this practice through agents, it is OK, but it is an illegal practice where the practice is implemented through dealers.

OVERRULED:Albrecht v. Herald Co. (1968): Herald Co. publishes a morning newspaper in St. Louis whereby carriers buy the papers wholesale and deliver them in 172 routes. Carriers have exclusive territories, but they also are subject to termination if prices exceed the suggested maximum. Petitioner Albrecht sold above the maximum, Herald Co. auctioned the rights to the route to Kroner, on the understanding that if Albrecht sold at the lower price, he would lose his rights. H: The combination formed by Herald Co., Milne (PR agency) and Kroner (purchaser of rights to area 99) is a maximum resale price-fixing arrangement per se illegal under section 1 of Sherman. I: Pierce’s Commentary: Astonishingly stupid decision because it protects monopolies and finds per se illegal the activities the firm created to prevent monopoly power.

B. MODERN CASES

** Vertical Allocation of Markets governed by the Rule of Reason. (Sylvania)

Continental T.V., Inc. v. GTE Sylvania Inc. (1977): Sylvania’s market share had decreased from being substantial, to about 1%. To counter this, it came up with a plan whereby it decreased its number of retailers to increase the quality of its salesmanship. It thus distributed its TVs to franchised dealers that can only sell the TVs from their stores and only in regions prescribed by Sylvania (intra-brand) – though the franchisees do not have exclusive territories. Continental was such a franchisee, and when Sylvania licensed another franchisee within a mile of its store, Continental objected then sought to open a new store in Sacramento. Sylvania denied the right of Continental to sell its TVs in Sacramento, but it decided to make the move anyway. Sylvania then cancelled its franchising agreement and sought collection of unpaid payments. Continental claims the franchise restriction on where a dealer can sell violates Sherman 1. H: Applying the rule of reason, the Court found that the vertical allocation of markets is not illegal because it does not have demonstrated potential for competitive harm. Court uses economic efficiency as its sole criterion.

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I: (1) OVERRULES SCHWINNrevert back to Northern Pac RR and White Motor. Applies rule of reason analysis, making territorial allocation OK. (2) Makes distinction between inter-brand and intra-brand competition. Non-price vertical restrictions:(1) Reduce intrabrand competition by limiting the number of sellers of a particular product competing for the business of a given group of buyers.(2) Promote interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of products.

K. VERTICAL GROUP BOYCOTTS

** Just as per se illegal as horizontal group boycotts IF there is concerted action. SINGLE FIRM BOYCOTTS DO NOT VIOLATE SHERMAN 1-they can’t [but can violate Sherman 2 under ROR].

Klor’s, Inc. v. Broadway-Hale Stores (1959): Klor’s and Broadway-Hale are two department stores that do business next to each other on Mission St. in San Francisco. Klor’s is a discount store and Broadway-Hale is an upscale department store. Broadway-Hale has told 10 appliance manufacturers that it will not buy their products if they sell to Klor’s. The 10 manufacturers agree among themselves not to sell to Klor’s. Klor’s alleges a violation of sections 1 and 2 of the Sherman Act.H: This is a group boycott and per se illegal under Sherman [doesn’t matter that the victim is just one merchant whose business is so small that his destruction makes little difference to the economy]I: This is the end of the major department stores trying to put the discount stores out of business.

Discon v. Nynex (1998): When competition as introduced into the long-distance telephone market, some local companies had to remove their old call switching equipment and install new. Discon had done removal work for a subsidiary of NYNEX. In Discon’s view, the switch would increase the cost of the removal services, thus benefitting NYNEX and fraudulently passing the burden of the higher cost to telephone user.H: Ct held that unilateral boycotts are not per se illegal. No boycott related per se rule applies and the P here must allege and prove harm, not just to a single competitor but to competition itself: alleging regulatory fraud was not enough to show injury to competition.

L. PRICE DISCRIMINATION/PREDATORY PRICING

Predatory pricing requires a firm to undergo definite losses by cutting prices to push another firm out of the market, and then the firm must sustain this market power for long enough to recoup its losses. Because it is highly uncertain this will ever be accomplished, courts rarely try predatory pricing and instead wait to punish them if they succeed since some form of minimum price fixing will be required in order to ensure monopoly rents.

“Predatory pricing schemes are rarely tried, and even more rarely successful.”

Predatory Pricing=Predatory bidding, same analysis applies (Weyerhaeuser)

Two Prerequisites for Recovery Under Predatory Pricing: (Brown & Williamson)1. A plaintiff seeking to establish competitive injury resulting from a rival’s low prices must prove that the

prices complained of are below “some measure of incremental cost (marginal cost).” AKD must charge a price below cost.

o Average variable costs, average incremental costs, and others are used as surrogates for marginal cost, because marginal cost is so difficult to compute.

2. The plaintiff must also demonstrate that the competitor had a “reasonable prospect” (Robinson-Patman) or a “dangerous probability” (Sherman 2) of recouping its investment in below-cost prices and making a profit. Have to show the very difficult probability that prices could be raised and sustained at that level for long

enough to recoup losses.***Extremely difficult to find a pattern of facts that can satisfy this test.

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Robinson-Patman Act (Clayton Act § 2): Designed to help small businesses compete with large businesses. Price discrimination/predatory pricing is unlawful if it “substantially lessens competition or tends to

monopoly.”o Made it unlawful to discriminate in price between different purchasers of commodities of like grade and

qualityo Quantity discounts unrelated to cost difference were left out purposefully

Same with efficiencies, change in market conditions, meeting competition, and choosing customerso Buyers are also held liable if they knowingly induce or receive a discrimination in price; large volume

customers this can’t demand a discount in price for their business. Brown & Williamson: Robinson-Patman and Sherman 2 Claims are the Same.

o The standards for Robinson-Patman Act are the same as Sherman 2.o Thus, predatory pricing claims can no longer distinguish between predatory pricing claims under Robsinon-

Patman and Sherman 2, because the same analysis applies.

Predatory Pricing: Lowering prices below-cost in certain markets in order to underbid competitors and put them out of business.

Generally used by larger firms in order to gain a monopoly. However, it is very difficult to successfully practice predatory pricing because a firm must sell at a loss for long

enough to drive its competitors out of business and then maintain an artificially high cost for long enough to recoup its costs before a new firm emerges and underbids them.o All of the equipment sold by the firms going out of business will be bought up by new firms.o Fewer people will purchase goods at the higher prices, especially in an elastic market.

McGee on Predatory Pricing: Where there are high barriers to entry, predatory pricing is still not effective because it is difficult to drive people out of the market (though capital costs are high, operating costs are low).o Would have to engage in predatory pricing for a very long time – 20 years or so.

The symptoms of predatory pricing are similar to the symptoms for price competition. A primary line injury is charging different prices in different cities to injure competition between the seller

and its own competitors by making it difficult for the competitors to stay in business (Utah Pie case). Morton Salt is between resellers, known as secondary line injury.

Responses to Predatory Pricing Claims: Predatory pricing can never happen.

o (McGee) It is impossible for a firm to recoup its losses and earn monopoly rents before another competitor comes in and forces prices to go down.

o Because it can never be successful, it should not be illegal. Most commentators say that McGee is right except for where he says it can NEVER be done.

o There are at least some circumstances where it can happen and work. Because it is difficult for a predatory pricing scheme to work, it is best to wait until a firm has actually

put other firms out of business, and then sustained artificially high prices, and THEN sue. If a court always condemns price differences they will likely commit a lot of Type I errors.

Evolution of Predatory Pricing in the Law: Utah Pie: Predatory pricing became a popular antitrust claim after Utah Pie, because people would use it

whenever they faced competitors who were lowering their pricing. FTC v. Anheuser-Busch: only need to show a price difference to prove price discrimination Matsushita: Began a trend toward weakening of predatory pricing theory. Brown & Williamson: Claims under predatory pricing are completely dissuaded and rarely raised.

Utah Pie v. Continental Baking Co. (1967): Petitioner, Utah Pie, is a small baking company competing with four large defendant bakers in a very competitive market for pies in Utah. In 1958, Utah Pie had a monopoly, controlling 66.5% of the market. However, the big companies begin selling in Utah Pie’s market and by 1962 Utah Pie only controls 43.5% and its prices and profits are way down because competition was primarily wielded through the increase and reduction of prices to gain advantage. H: Defendants violated § 2(a) of the Clayton Act by participating in predatory pricing – that is, lowering prices below-

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cost in Salt Lake City than were the prices in other markets, in order to underbid competitors. I: Hallmark predatory Pricing Case (Pierce says it’s the worst decision EVER!)

Court’s Rationale and Pierce’s Criticisms: Defendants are selling below their average costs.

o This happens all the time (sales), especially where firms are trying to enter a market.o The general rule is that firms will keep producing as long as they are operating at marginal costs.

Defendants sold below prices they charged in other markets.o This usually demonstrates different supply and demand in the two markets.

This opinion makes no sense because Utah Pie had a monopoly and competition from the big competitors caused them to lose hold of their monopoly and competition was increased. Therefore, the Court used the Robinson-Patman Act to accomplish what it intended to prevent – preservation of a monopoly.

Matsushita Electric Industrial Corp. v. Zenith Radio Corp. (1986): Defendant, 21 Japanese corporations that manufacture or sell electronics – especially TVs – are charged with conspiring to drive plaintiff American TV manufacturer out of the TV market in violation of the antitrust laws (including Sherman 1 and 2). Plaintiffs claim that defendants schemed to fix and maintain artificially high prices for plaintiff’s products in Japan, while selling their own products in the U.S. at such a low price that they sustained a loss. Thus, trying to run competitors out of the market. H: An inference of a predatory pricing conspiracy is not sufficient to find a violation of Sherman 2, because of the unlikelihood that the predatory pricing scheme will succeed in pushing plaintiff out of the market. In the meantime plaintiff is benefiting from the practices and loss of profits that the defendant is sustaining. I: This case suggests that the Court is not as enthusiastic about predatory pricing as it was in Utah Pie; however, the decision is not definitive because this is a Sherman 2 case, and Utah Pie was a Robinson-Patman Act case.

Brooke Group Ltd. v. Brown & Williamson Tobacco (1993): The cigarette market is a tight oligopoly – six firms that engage in conscious parallelism (not an illegal cartel because no formal communication). By the 1980s, the market is characterized by excess capacity. Liggett (Brooke Group), the 6th largest, introduced a discount generic brand. Liggett’s share increases from 2% to 5%. Brown & Williamson, third largest with 12% of the market, responds by introducing its own discount brand. The two firms engage in a price war in which the other 4 firms also participate – this indicates the collapse of the cartel. Liggett sues under Robinson-Patman Act, claiming that Brown & Williamson engaged in predatory pricing by entering the generic cigarette market, which Liggett controlled, by offering discriminatory discounts to wholesalers which Liggett claims were below cost. H: Because Brown & Williamson’s scheme was unlikely to result in oligopolistic price coordination and sustained supracompetitive pricing in the generic segment of the national cigarette market, there has been no predatory pricing violation. I: Robinson-Patman and Sherman 2 Claims are the SameCourt’s Explanation for Why Predatory Pricing is Not Illegal Here:

“Unsuccessful predation is a boon to consumers.” Antitrust law should not be “an obstacle to the chain of events most conducive to the breakdown of oligopoly

pricing.” The remedies for predatory pricing create “intolerable rights of chilling legitimate price cutting.”

American Airlines Case: No predatory pricing because plaintiff failed to show below incremental cost – incremental cost of an empty plane seat is only a few dollars.

HYPO:

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FTC v. Morton Salt Co: FTC found Morton had discriminated in price between purchasers of like grades and qualities and issued a ceased and desist order. Morton sells its finest brand of table salt, Blue Label, on a standard quantity discount system available to all customers. They pay a price according to the quantities bought but only five companies have ever bought sufficient quantities to obtain the lowest per case price, they operate large chains of retail stores and able to sell the salt cheaper than independents. H: Theoretically these discounts are equally available to all, but functionally they are not. Statute doesn’t require that the price discrimination actually harm competition, but that there is a reasonable possibility that they may have such an effect, which is satisfied in this case.

A operates in many markets in which it confronts serious competition, but it operates in 30 markets in which it either confronts no competition or in which its few competitors engage in parallel pricing. It charges high prices in those markets.

If a discount airline enters one of those 30 markets, A reduces its price to far below the price it previously charged and even below the price charged by the discount airline.

o Can't argue that it's charging below marginal cost, which is, say $5 to fill an extra seat (jet fuel, minor staff time, etc)

A also doubles the number of planes it runs in that market. The discount airline usually drops out of the market or goes out of business, after which A returns to its prior price and number of flights.  

o Can argue, though, that adding the extra seats by adding flights is selling below incremental cost and airline has no way of actually making money on this route

But maybe this is the wrong way to think of it: could interpret as A setting monopoly prices and daring anyone to come in on a specific market, where A may undercut and bankrupt the competitor

Pierce: so Brooke Group can still pop up, even though cases such as these airline hypos have never been successful.

Weyerhaeuser Co v. Ross Simons Hardwood (2007): Ross-Simons, a saw-mill, sued Weyerhaeuser alleging that it drove it out of business by bidding up the price of sawlogs to a level that prevented Ross from being profitable. Weyer was getting about 65% of the logs available for sale in the NW region.H: Brooke Group analysis applies to predatory bidding as well. But just as unlikely to happen and unlikely to be successful. Ross has not satisfied this test, thus cannot support the jury’s verdict.

Linkline Communications Case:H: Trinko bars a claim that wholesale prices of access to phone lines are too high and Brooke Group standards for predatory retail pricing were not alleged. Allegation of a price squeeze could not overcome those defects.

Price squeeze: involves charging so much for a competitor input and so little to retail customers that the competitor cannot gain customers.

M. TYING ARRANGEMENTS

Tying Arrangements: The sale of one product (the tied product) is dependent on the sale of another product (the tying product).

Per Se Illegal under International Salt: When you tie one product to another product, you increase the barriers to entry in both markets. o Where a company must compete with tying arrangements, it may have to enter both markets

simultaneously. Problem: It is quite a challenge to figure out when there is any anticompetitive effect of tying, or what factual

basis you would need. Tying is Illegal Under Both Sherman Act § 1 and Clayton 3: Northern Pacific Railway holds that tying is

illegal under Sherman 1 as well as Clayton 3 (International Salt).

Four Elements of a Per Se Tying Violation ( Kodak ) : 1. The tying and tied goods are separate products;

o One multi-component good can become two separate goods with improvement in technology (Jerrold Electronics).

o Every fast food franchise is a single product (McDonald’s).2. The defendant has market power in the tying product market;

o Patent does not automatically confer monopoly power (IL Tool)3. The defendant affords consumers no choice but to purchase the tied product from it; and,4. The tying arrangement forecloses a substantial volume of commerce.

o Don’t need to prove market dominance, so long as the tying arrangement is a “not insubstantial amount of commerce.” (Northern Pacific Railway)

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Another Instance of Ramsey Pricing: (See also United Shoe) International Salt’s low-priced leases for the machines and high-cost for the salt is a means of decreasing barriers to use of the machines, with a usage price that is higher for those who use the machines the most.

The activity is socially beneficial because it charges different prices based on what people are willing to pay.

A. TYING CASES

Once you agree to a tying agreement, you can change your mind later and sue for injunction/damages (Perma Life Mufflers)

Why do firms argue that tying is good? Don’t want their high quality products being tarnished by low quality inputs or repairs (I. Salt) Clear accountability and recordsmake better machines (Kodak)

International Salt Co. v. United States (1947): International Salt, the nation’s largest producer of salt used for industrial purposes, leases its machines on the condition that the lessee agrees to use only salt provided by International Salt in the machine (“tying” clause). H: The lease provision restricting use of salt to that provided by International Salt is illegal under Clayton § 3, as a restraint of trade that forecloses competitors from entering the market and tends toward monopoly.I: (1) Any tying of one product to another product is per se illegal under Clayton Section 3; (2) Illustrates Ramsey Pricing; (3) This could also be seen as a means of quality control, ensuring that only high-grade salt is used in International Salt’s machinery. The manufacturer risks high maintenance costs and a declining reputation if the machines break down regularly. The standard counter-argument to this is that all International Salt had to do was specify the minimum quality of the salt that must be used by the machine.

Times-Picayune Publishing Co. v. United States (1953): The New Orleans Times-Picayune owns both the morning and afternoon. There is a separate competitor that operates only in the afternoon paper. Times-Picayune requires any company that takes out an ad in the morning paper to take out an ad in the afternoon paper. The purpose of this is basically to put the competitor out of business. H: There is only one product here – an advertisement, be it in the morning or afternoon paper – and there can only be tying where there are two products. Thus, there is no tyingI: Distinguishes itself from International Salt, because it found that there was only one product: the advertisements. Adds the requirement of market dominance to the per se test for tying arrangements (only in dicta, and its short lived).

United States v. Jerrold Electronics (1960): Jerrold Electronics makes two products: a master TV antenna and the signal booster. The antenna was of very high quality, but the signal booster was not. Jerrold only sold the two as a package. The government brought suit stating that this was illegal as a tying arrangement. H: Initially, it was fine to tie the sales together because they were basically part of the same product. But as technology improved, the two products should be sold separately so that consumers can choose which antenna and signal booster they want. Thus, this was an illegal tying arrangement.I: Illustrates how a multi-component product can evolve into two separate products as technology improves. (SEE Microsoft.) Problem: Judges are not well-positioned to determine the evolution of the market or how a product should be designed to make it compatible with competitive products.

Northern Pacific Railway Co. v United States (1958): Northern Pacific was granted 40 million acres for land for construction of a railroad between Lake Superior and Puget Sound. When it sold or leased much of this land 80 years later, it did so with the inclusion of “preferential routing” clauses which required the lessee to ship all its products produced or manufactured on the land with Northern Pacific, provided the rates were equal to those of competing carriers. Evidence of the competitor’s rate would have to be presented to Northern Pacific, however, in order to get that rate. The government brought suit under Sherman § 1, that the preferential treatment clauses were unlawful restraints of trade.H: The preferential treatment clauses are per se illegal as a tying arrangement under International Salt. I: Court says tying is just as illegal under Sherman as it is under Clayton. (Clayton Act doesn’t apply to this situation, since Clayton Act only applies to products – land and shipping rates aren’t products.) Shouldn’t have to prove market

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dominance, so long as the tying arrangement is a “not insubstantial amount of commerce” for “market dominance.” *Still cited as authoritative today.

United States v. Loew’s, Inc. (1962): Defendant motion picture distributors sell block packages of films to TV companies, which include both desirable and undesirable movies. The government claims that the requirement that the TV stations buy the undesirable films is a tying arrangement in violation of Section 1 of Sherman.H: The block booking of batches of movies to TV stations is an illegal tying agreement and violates Section 1 of Sherman. Because the film distributors have a trademark of their films – a legal monopoly to the tying product – this in itself demonstrates its “sufficient economic power.” I: Any firm that holds a copyright or patent has market power. OVERRULED IN IL TOOL.What is really going on: When people value parts of a package differently (say different movies in different cities), they will tend to be willing to pay a higher package price than the sum of the competitive prices of the pieces of the package individually.

Fortner Enterprises, Inc. v. United States Steel Corp. (1969): U.S. Steel was trying to enter the housing market, so it offered below-market loans in exchange for the developer/borrower using their pre-fabricated homes as part of the development. Fortner took them up on this offer, and found that the quality was not very good. Brought suit for damages that this was an illegal tying arrangement. H: Illegal tying arrangementI: This case marks the outer limits of tying law. (1) If there is a tying arrangement, then that shows economic power because the firm had power to enforce the tying condition [had a unique economic advantage over its competitors with its terms of credit]. (2) The interstate commerce is not insubstantial because it was valued at $200,000 – don’t look at the relative market, but just whether the value is “not insubstantial.”

Fortner II (1977): H: Supreme Court finds that U.S. Steel did not have sufficient economic power in the money market [unique credit terms are not enough] and the case should be dismissed.

Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. (1979): Vertical minimum price fixing. ASCAP and BMI are organizations comprising millions of copyrighted musical compositions. The organizations act as agents for the song-writers’ copyrights, by issuing non-exclusive blanket licenses, entitling the licensee the right to perform any and all of the compositions owned by the members, for a stated term. The fee is usually a percentage of total revenues or a flat dollar amount. CBS claims that ASCAP and BMI are unlawful monopolies, that the blanket licenses are illegal price fixing, an unlawful tying arrangement a concerted refusal to deal, and a misuse of copyrights. H: The blanket licenses should be examined under the Rule of Reason, its value toward economic efficiency weighed against any anticompetitive effect. I: Demonstrates a shift in the Court’s analysis toward economic efficiency as a means of determining competition. The Court adopts a Rule of Reason because of the fact that (1) this dealt with copyrights, (2) this issue had already been settled by consent decree, and (3) the arrangement was efficient and reduced transaction costs. Stevens’s Dissent: There is a better arrangement that ASCAP could do without violating the antitrust laws. ASCAP and BMI could act as agents of the copyright holder, taking care of the initial contracting and monitoring. If this case arose today: Stevens would win because of developments since 1979 -- the advent of the internet and computers, keeping transaction costs down.

Jefferson Parish Hospital District No 2 v. Hyde (1984): Hyde is an anesthesiologist who applies for admission to the med staff at East Jefferson Hospital. Hospital denied the app because the hospital was a party to a K providing that all anest. services required by patients would be performed by a prof medical corp. 20 hospitals in the area, 70% of patients in the area go to other hospitals. Hyde sues alleging a per se Sherman 1 violation for tying. H: Split 4-3-2 , court does not apply per se test found for JP. 2 Justices would retain simple per se prohibition on tying (a la Int’l Salt), concur in judgment.3-Justice plurality would apply 3-part per se test: (not ready to go with rule of reason) [LAW TODAY]

Products are separate if they are subject to “separate demand,” i.e. each could be sold separately from the other. D must have market dominance re tying product (substantial volume of commerce foreclosed, 30% is not enough) There must be a realistic risk that D will be able to obtain market dominance re tied product. (force patients to buy

services they would not otherwise purchase)

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4 Concurring Justices would apply 4-part  test: (actually, they would go with ROR, but, since we can't, we would say:) Products are separate unless there is an economic justification to bundle them. D must have market power re tying product. There must be realistic risk that D will obtain market power re tied product. There must not be efficiency advantages that offset the potential anticompetitive effects.

 Eastman Kodak Company v. Image Technical Services: Kodak sellers copies and service and replacement parts. Respondents are 18 ISOs that began servicing Kodak equipment, until Kodak limited the availability of parts to ISOs making it more difficult for them to compete with Kodak in servicing Kodak equipment. Filed suit for Sherman 1 violation for tying and Sherman 2 violation for attempting to monopolize the sale of service for Kodak machines.

H: To defeat a motion for summary judgment, a reasonable trier of fact must be able to find that service and parts are 2 distinct products and that Kodak has tied the sale of the 2 products. If tying agreement found, then consider if firm has appreciable economic power in the tying market. On remand, jury found that Kodak had found a stupid enough buyer (fed gov’t) so the tying violated Sherman 1. NO P HAS EVER SURVIVED ON A MOTION FOR SUMMARY JUDGMENT ON THIS THEORY SINCE-Breyer would laugh at these cases.

Pierce: START OFF HAVING 100% of SERVICE IN HOUSE to avoid this suit.

B. REQUIREMENTS CONTRACTS

Clayton Act § 3: Exclusive Dealing Contracts. Prohibits tying and exclusive contracts if they “substantially lessen competition or may tend toward monopoly.”

Exclusive dealing contracts (similar to requirements contracts) are common and perfectly legal except in the situation of monopolies, where a firm that has exclusive dealing contracts with many other firms substantially lessens competition of decreasing the ability of competing firms to work with the same dealers.

Motion Picture Patents Co Case: court held that when 2 patent were unrelated (film feeder and film), then the effect of tying them was the same as requiring use of unpatented supplies in a patent product and the restriction was thus void

International Business Machines Corp v. US: manufacturer of a patented tabulating machine tries to require lessees of its tabulating machines to purchase all the cards to be used in the machines from it. Court says this is illegal, even if there are quality control issues-could make the cards to IBM specs and IBM could warn users of the dangers of cheap imitations.

Standard Fashion Co Case: Clayton 3 prohibits exclusive dealing Ks whose effects may be to substantially limit competition or create a monopoly, MAY includes probably lessen competition or create an actual tendency to monopoly (40% of the market sufficient).

Requirements Contracts: Per se illegal ONLY where the contracts cover a substantial part of the market (Standard Oil).

Requirements contracts are often socially-beneficial: Allows both buyers and sellers to be able to predict, in advance, what they can buy.

In absence of requirements contracts, it is possible for either party to hold up the other party and prevent getting the product on time in order to get concessions from that other party.

Ensures that the buyer will be able to get the same standard of product every time and an guaranteed supply at a certain price, obviate the expense and risk of storage, and that sellers know they are dealing with buyers who will not undermine its reputation for quality, also reduces selling expenses, gives protection against price fluctuations, and offers the possibility of a predictable market.

Standard Oil of California v. United States (1949): Standard Oil controls 23% of the west coast gasoline market. It sells half its gas through company-owned stations, and half through independently-owned stations with whom it has requirements contracts. All its competitors in this region also used these requirements contracts (industry custom). H: This requirements contract is illegal, but not all requirements contracts are per se illegal. The Court inferred that the probable effect of the contracts was to substantially lessen competition and tend to create a monopoly in violation of Section 3 of the Clayton Act. I: Rejects per se rule against requirements contracts, but holds the activity illegal because it involves a “substantial

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share of market.” Thus, the Court adopts the more specific per se rule that anytime requirements contracts cover a substantial part of the market, they are per se illegal. Douglas’s Dissent: The majority’s holding is going to result in Standard Oil purchasing all of the independently-owned companies and selling all of its gas through its own stations, because it won’t let independents sell its gas along any other type of gas. This is exactly what did happen.

C. FRANCHISING AND TYING IN THE CIRCUIT COURTS

Susser v. Carvel Corporation (1964): In order to have a Carvel ice cream franchise, you have to use its ice cream and logo. H: This is not an illegal tying arrangement because Carvel only has 1% of the ice cream market and the items required to be purchased were a single product with the trademark.

Siegel v. Chicken Delight, Inc. (1971): Chicken Delight has 25% of the chicken fast food market. In order to have a franchise, you have to buy all the food, oil and fryers from the company. H: This is an illegal tying arrangement because Chicken Delight controls a substantial part of the market. The CD franchise does not exist to distribute the franchisors chicken in the way Carvel has to distribute special ice cream.

** Above two cases illustrate importance of market power.

Principe v. McDonald’s Corp. (1980): McDonald’s has a huge percentage of the market and everything is tied together and standardized. H: This is not an illegal tying arrangement because every franchise is a single product. I: Creates the clear rule that every franchise is a single product. There was an essential need to create a clear rule for franchises, since they are socially beneficial in creating consistency and convenience in the availability and quality of food.

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VIII. OLIGOPOLIES

Conditions Which Exist to Create Oligopoly:1. Information sharing2. Small number of firms3. Advanced publication of prices: While this can be socially-beneficial, what largely determines whether this is a

means of price fixing is the size of the industry (number of firms)4. Industry-wide resale price maintenance (vertical minimum price-fixing): If only three firms make a certain

product and each limits what others can sell their products for, the suggests the possibility of a horizontal price-fixing regime.

5. Product of high homogeneity: Products of high homogeneity (fungible goods) are easier to cartelize. (EX: natural gas, fungible products, cardboard boxes… v. products of high heterogeneity, such as car manufacturers).

6. Relative price elasticity of demand: The extent to which a change in price produces an increase or decrease in quantity demand.a. A highly-priced elastic market is where a 10% price increase would result in a 100% decrease in demand.

(producer loses money)b. Highly priced inelastic demand enables a producer to increase the price and still maintain the same amount

of demand (this is a market ripe for cartelization).7. Ease of entry: High barriers to entry signify cartelization.8. International trade: Reduction in barriers to international trade makes cartelization more difficult, because it

expands the market.

** Also Relevant to MERGERS.

Amendment to Section 7 of the Clayton Act (1950): Prohibits any merger if it may substantially impair competition. Need to stop the concentration of economic power in its incipiency. Heavily concerned with the problem of oligopoly, where a few large firms control a market.

Note on Cartels: Cartels occur where firms agree to cutback on production to set prices higher. These are very difficult to maintain.

o There is a big temptation to cheat and, because they are illegal, there is no legal recourse for violating the cartel agreement.

o Requires regular meetings to address constant changes in the demand curve.o The only effective cartels use state power (American Banana, Parker Raisin Case)o Small producers love cartels because they raise prices, enabling them to get more $$ for their products.

The smaller the number of firms that account for the largest share of the market, the easier it is to cartelize. (ie 3 each with 33%).o First you must get all the firms to agree.o Then you have to enforce the agreement, which can be very difficult in cartels where there is such a strong

incentive to cheat.

Concerns with Oligopolies: Oligopoly markets do not perform as well as larger, more diverse markets. May be illegal price-fixing going on. Leads to parallel patterns of behavior, not giving the benefits of robust competition (high quality, innovation,

competitive pricing…). Don’t need to agree, the other competitor just decides not to rock the boat when you increase prices

Particularly true when both competitors have factories of finite size that would be costly to expand or some comparable basis for confidence that the other would not suddenly expand output and begin a price war

Two-step Analysis by Judge Posner: Ask whether conditions in a particular market are even conducive to interdependent conduct

Concentrated market of sellers and a lark of fringe market of small firms Standard product sold primarily on the basis of price Need or at least the incentive or collude

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o Ie high ratio of fixed to variable costs, static or declining demand Inelastic demand at the competitive price

o A reduction in output would in fact yield more net revenue An industry in which entry takes a long time

Whether higher than competitive pricing can be observed **A court should not sustain a case unless 1+ of these signs are observed Fixed relative market share Price discrimination Exchanges of price info Industry wide resale price maintenance Evidence of new entry and declining market share of leading firms

United States v. Penn-Olin Chemical Co. (1964): Pennsalt and Olin entered into a joint venture -- Penn-Olin -- to produce and sell sodium chlorate in the southeastern United States. Pennsalt, which solely produces and manufactures chemicals across the U.S., would operate the Penn-Olin plant. Meanwhile, Olin, a large diversified corporation that produces, among other things, bleached paper employing sodium chlorate, would be responsible for selling Penn-Olin’s products. Where there was an oligopoly in this market, Penn-Olin was able to gain 27.6% of the market share. (This is good for the market – increasing competition.) The Government claims this joint venture us a violation of section 7 of Clayton and section 1 of Sherman. H: Joint ventures are subject to the regulation of Section 7, under analysis similar to that of mergers. Because the district court did not perform an analysis under Section 7, the case is remanded. I: Illustrates “potential entrant.”

See FTC v. Heinz

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IX. SHERMAN § 2: MONOPOLIZATION

A. MONOPOLIES

Two Things Must Be Proven to Show Section 2 Monopoly Violation:1. Need to prove that the firm has monopoly market power in the relevant market. (Alcoa)

Relevant product market; ANDo Though percentage required is debatable, economists believe it depends on the price elasticity demand for

the product. o Shown by Degree of Substitutability: Are the products similar in price and interchangeable in their use

(does not have to be interchangeable in all uses, EX: 50% in Alcoa)? Interchangeability in the purposes for which they were produced. Determined through consideration of price, use and qualities. (Du Pont) Quality Interchangeability (Debate in Brown Shoe)

o Cross-Elasticity of Demand: What happens if the price of the product goes up? EX: Price of Prius goes up 10%. 5% of the people who would have bought the Prius decide not to

buy and buy other cars. If no one switches, then we know that the Prius and other cars are not in the same market. High cross-elasticity of demand : Reasonably interchangeable. Low cross-elasticity of demand : Not reasonably interchangeable.

Relevant geographic market.o Determined by the ease and cost of transportation.o Usually it’s the Standard Metropolitan Statistical Area (SMSA).o How far will you travel to buy the product?o Grinell case: gov’t successfully convinced the court that the relevant product market for at home alarm

system is only central protection service market, and doesn’t include other types of protective services, i.e. guards.

2. The firm willfully acquired or maintained that market power through anticompetitive conduct (as opposed to growth development as a consequence of a superior product, business acumen, or historic accident). Practices that do not alone violate antitrust laws may violate Sherman 2 where there is substantial market

power. (Alcoa and United Shoe). Traditional Rule: Abuse of market power is evidenced by trade practices that would violate § 2 if adopted by

two parties acting jointly. Types of Exclusionary Behavior: (Microsoft).

o Exclusive Dealing Contracts (Microsoft).o Threats (Microsoft).o Predatory Pricing o Denial of Access to Essential Facilities (Aspen)o Product Innovation (Microsoft).o Vertical Agreements

See also Microsoft 4-Part Guidelines (BELOW)3. Note on Natural Monopolies:

A natural monopoly is a market in which the firm’s marginal cost of production does not increase with an increase in output, at least not over relevant ranges of production (think RRs)

There are always economies of scale, marginal cost is consistently below its average cost If forced to price competitively, a firm in a natural monopoly situation will tend to be willing to sell its

goods or services at any price at or above MC rather than lose the business and get no revenue at all….ultimately goes out of business

Pierce: It’s never illegal to be a monopoly; it’s what drives economics in our country-the desire to be a monopolist! Everyone is reaching for it, striving to reduce costs and increase quality

Having a monopoly is only a violation of antitrust laws if you have monopolized, obtaining that monopoly through illegitimate means ; natural monopolies exist, ie natural gas

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Microsoft’s Four Principles for Distinguishing Between Exclusionary and Competitive Conduct:1. Exclusionary acts “harm the competitive process and thereby harm consumers. In contrast, harm to one or more

competitors will not suffice.”2. The plaintiff “must demonstrate that the monopolist’s conduct indeed has the requisite anticompetitive effect.”3. “A plaintiff successful establishes a prima facie case under § 2 by demonstrating anticompetitive effect, then the

monopolist may proffer a ‘pro-competitive justification’ for its conduct. If the monopolist asserts a pro-competitive justification – a non-pretextual claim that its conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal – then the burden shifts back to the plaintiff to rebut the claim.”

4. “If the monopolist’s pro-competitive justification stands unrebutted, then the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the pro-competitive effect.”

Ramsey Pricing: (Inverse Elasticity Principle) A firm with monopoly power, can sell at a single price, but it will make more money if it sells for each consumer at a different price, depending on how much that consumer’s willing to pay.

Means of getting maximum revenue to the government, with the least distorting effect to the public. This is the theory embodied in United’s leasing practices. This is beneficial to society, because all people who attach a value to the machine, are able to obtain it. EX: Leases in United Shoe. Modern Ramsey Pricing Problem: Prescription drugs cost different prices in different countries.

Sherman 2 Cases: There have been only a few cases with mixed and controversial results

ATT Case o In 1947, DOJ sued ATT on an essential facilities theoryo In 1982 DOJ was shocked with ATT offered to settle by de-integrating into a single long distance

provider that would compete against other long distance providers and several regional operating companies that would provide local service on a regulated monopoly basis and would make their lines and switches available to all of the competing providers of long distance service 

o Antitrust induced breakup of ATT is widely regarded as a success, particularly in its effects on long distance service and rates

o In 1996 Congress mandated major additional changed in the telecom market that have been far more controversial in their effects

IBM Case o In 1969, DOJ sued IBM for allegedly monopolizing the computer marketo After devoting enormous resources to the case (100s of associates) an embarrassed DOJ dismissed its

compliant before trail in 1982o By then, the computer market had changed dramatically and IBM was a relatively small and unsuccessful

participant in the market 

A. TRADITIONAL MONOPOLY CASES

Swift Case: Intent is essential to a combination; intent to bring a monopoly to pass is necessary in order to produce a dangerous probability that it will happen.

U.S. v. U.S. Steel (1920): U.S. Steel is a holding company that buys 12 firms, that before they were bought were independent, competing companies. U.S. Steel then buys them and now owns 50% of the market. It coordinates the prices and output of these companies. At “Gary Dinners,” U.S. Steel met regularly with owners of other competing steel companies.H: This was an incomplete monopoly, and incomplete monopolies/incomplete cartels are OK under § 2 since statute is against the realization, not the expectation of a monopoly. I: Illustrates that a firm can prevail under Rule of Reason in Section 2 challenges. Though it was clear that they intended to create a monopoly, they were unsuccessful in forming a monopoly or cartel because they were never able to get a formal agreement on prices and output by 100% of the steel companies.

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United States v. Aluminum Company of America (2d Circ for SC 1945): Alcoa produces all of the “virgin” ingot aluminum in the United States and controlled over 90% of the “virgin” ingot market in the U.S. H: Where Alcoa was the sole producer of “virgin” ingot, it held a monopoly which was illegal by virtue of the fact that it acted to maintain the monopoly by restricting the development of competitors (expanding in anticipation of increased demand—this part of decision highly criticized).I: Outlines the analysis for monopolies under § 2. Pure Section 2 case (rare and controversial), where the government argues that the single firm is monopolizing, or attempting to monopolize the market through its unilateral actions.1. Alcoa had 33% of alum ingot market if you include recycled and exclude ingots used by Alcoa

1. This wouldn’t be enough2. Alcoa had 64% if you include both recycled alum and ingots used by Alcoa

1. This would have been a lively debate!3. Alcoa had 90% if you excluded recycled and include company use

1. Ct choose this definition-why?1. All recycled alum had its origins as virgin alum-they control 90% of this!2. They could exercise market power!3. Even though recycled alum is a less than perf substitute for virgin alum

1. How did Alcoa get its monopoly? 1. Was monopoly thrust upon Alcoa or did it monopolize?

1. Cartel member 1909-1912 1. But this was a long time ago for only 3 years

2. Operated efficiently with low costs 1. Don't want to punish them for it

3. Took advantage of large economies of scale 1. Not necessarily bad-could have been thrust upon them

4. Expanded capacity in expectation of increased future demand 1. If they hadn't done this other firms would have been able to come in so they did something

bad so they are a monopoly**Also charged with using a price squeeze to run Alcoa’s sheet rolling competitors out business. Sold aluminum at such a high price that sheet rollers could not pay the expenses and making a living profit, while they sold their own sheets at low prices.

American Tobacco Co v. US: RJ Reynolds, Liggett and Myers, and American  Tobacco were the Big 3 cigarette markets, and their combined market shared was usually 75%+. Smaller companies started selling 10 cent pack cigarettes, and the Big 3 cut their wholesale prices. They weren’t driven out of business, but their market share was cut back from 22% to 6%.H: No actual exclusion of competitors is necessary to the crime of monopolization under Sherman 2. The material consideration in determining whether a monopoly exists is whether they had the power to raise prices or exclude competition when it desired to do so. SC endorses Hand’s decision in ALCOA.

US v. Griffith: Ds operate movie theaters in 85 small Midwestern towns. In 53 towns, they owned all theaters, in 32 they had competitors. Ds had a practice of booking films into their entire circuit of theaters and often demanded exclusive rights to be the right to show new films.H: Anyone who owns and operates the single theater in a town, or who acquires the exclusive right to exhibit a film, has a monopoly in the popular sense. Monopoly power, whether lawfully or unlawfully acquired, may itself constituted an evil and stand condemned under 2 even though it remains unexercised. But he usually does not violate Sherman 2 unless he has acquired or maintained his strategic position, or sought to expand his monopoly, or expanded it by means of those restraints of trade which are cognizable under Sherman 1. Booking firms for the whole circuit meant that the Ds were using their market power in towns where they had monopoly power to lock up films for other towns in which they otherwise would have had to compete for rights.

United States v. United Shoe Machinery Corp. (1953): United Shoe Machinery is alleged of monopolizing the shoe machinery market in violation of § 2, and entering into contracts (leases) in restraint of trade in violation of § 1. United accounts for 75% of the shoe machinery market. While there are competitors (1460 shoe manufacturers in the U.S.), it is the only firm with the ability to manufacture all of the machines required to make shoes. Of fundamental importance in this case is the fact that it only LEASES its complicated machines. As an incentive, United performs maintenance on these

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machines for no extra charge and offers bonuses when firms already using United machines, buy or lease other United machines.H: United had a monopoly in violation of Section 2, because it had monopoly power (75%) and had acted intentionally to gain monopoly control (leasing system). Monopoly was not thrust upon it. United’s leasing practices were also in violation of Section 1, because their features made the leases anticompetitive. Remedy: Force United to offer a sales option, get rid of bundled service, and make leases shorter term.I: District Court decision wholly adopted by Supreme Court because it was written by Economic Chair at Harvard and great judge, but everyone thinks the court got it wrong. This decision actually resulted in the concentration of the shoe market and higher prices.

Lease Analysis (Explains Benefits and Drawbacks of long-term leases using Ramsey Pricing): Arbitrage: United would only lease – it would not sell – its complicated machinery.

o To maximize revenues, United charges different prices for its products.o United had to prohibit re-sale of its products to make the arbitrage successful.

If United were to make its products re-sellable, consumers would purchase it for the lower price and then re-sell at a higher price.

This would thus undercut United’s market – it would be competing against itself.o This is very common in services, because it is difficult to transfer services.o This can only be done in a monopoly.

The leases were all long-term.o Ensures revenue and prevents turn-over.

The leases included all maintenance, service and repairs.o Consumer doesn’t have the opportunity to shop around for cheaper maintenance.o Takes away the market for independent service-providers.o Also makes it more difficult for competitors to take the machinery apart and learn how it works.

Low annual rental fee, plus high per-shoe charge.o This fosters ease of entry into the shoe manufacturing market – can lease the equipment at a low initial cost.o This enables them to charge large firms a high price, and small firms a low price for the use of the same

machine. Penalty for using shoes made by others.

o United doesn’t want firms to start with its machine and then go to someone else’s machine, losing the per-shoe charge.

United States v. E.I. du Pont de Nemours & Co. (1956): Du Pont is alleged to be monopolizing the cellophane market. Du Pont Controls 75% of the cellophane market, but only 15% of the flexible packaging market. H: Cellophane is reasonably interchangeable with a number of other products in the flexible packaging market. I: Cross-Elasticity of Demand (reasonable interchangeability of the products). Pierce thinks that the plurality got it right in this case.

B. REFUSALS TO DEAL

Principles Governing Refusals to Deal: (Aspen) There is no general duty for a monopolist to cooperate with a rival. A firm has not violated Sherman 2 if its refusal to deal is based on sound business reasons or increased

efficiency. Refusals to deal will be considered illegal especially where they are essentially predatory – that the firms hopes

to recoup losses by refusing to deal with a competitor, that it hopes to recoup after putting the competitor out of business.

Aspen may also stand for the position that a monopolist must cooperate with competitors as a means of preventing their exclusion.

Essential Facilities Doctrine: Was this mountain or the ticket the essential facility? When a larger competitor begins to help the smaller competitors, it can’t pull out.

o This is the argument that has won the most support from legal commentators.

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Lorain Journal: Newspaper found to violate Sherman 2 when it refuses to print ads from any firm that had advertised or was believed to be about to advertise on the radio station.Otter Tail Power Co: Power company’s use of strategic dominance to foreclose potential entrants into an industry constitutes a violation of Sherman 2.

Aspen Skiing v. Aspen Highlands (1985): Through a 1964 acquisition, defendant obtains 3 of 4 slopes in Aspen, where four firms had originally owned a slope each (this would have been a Clayton 7 violation). Plaintiff has 15% of the market, and defendant has 85% of the market. Plaintiff and defendant begin a joint marketing program with a 6-day, 4 slope ticket (forms a cartel). Plaintiff and defendant get into a fight regarding the division of revenue (sounds like someone in the cartel was cheating). Defendant abandons the 6-day, 4-slope ticket and substitutes a 6-day, 3 slope pass. Plaintiff sues defendant for monopolizing the market by refusing to cooperate with plaintiff in marketing the joint ticket. H: Under Terminal Railroad, the defendant must cooperate in offering the joint ski pass, and there was sufficient evidence to support a finding the defendant intended to create or maintain a monopoly in violation of Sherman 2. I: As a firm gains market power, its refusals to deal with another firm must be qualified by valid business reasons. What Pierce says about this case: No duty to help out a competitor, but once you do you can’t stop or they’ll sue you!

US v. Microsoft (DC Circ 1998): In 1994, DOJ sues Microsoft on a tying theory/ DOJ and M settle, M agrees not to condition use of one product on use of another, but DOJ agrees that M can sell any integrated product. M incorporates its browser into its OS, DOJ claims that violates settlement.H: Ct says any plausible claim that integration brings an advantage puts product in the integrated product category. Ct says judges should not play any role in product design so there is no violation. To have a winning violation of the Clayton act under a tying theory you need the existing of separate products and then the tying produce has to have market dominance.

Second Case: After losing in 98, DOJ files a new complaint alleging: Illegal maintenance of monopoly re OS, Illegal attempt to monopolize browser market, Illegal tying of OS and browser.

DC H: After an expedited trial (18 mos, only written testimony), dist judge makes hundreds of findings favorable to US, adopts US theory re most issues and orders vertical divestiture .DDC H: In 2001, en banc DC Circ upholds dist judge re first gov't theory rejects his reasoning re the other 2, rejects his remedy as not supported by adequate evidence or reasons and a violation of due process, and removes him from case for bias and violating judicial canon. SC never intervened [SC not likely to address a technology case where the tying argument is difficult to understand, and tying is ubiquitous in the industry} 

1. First gov't theory is that Microsoft used a wide variety of tactics to maintain conceded monopoly in the market 1. M engaged in lots of exclusionary conduct to protect its OS monopoly2. Ms method of integrating OS and browser increased cost of using other browsers3. M entered into exclusionary licensing agreements with hardware markers and ISPs4. M used various bullying and sabotage tactics to stop Sun and Netscape from using java to eliminate a

need for an OS2. Rejects all of the tying theories saying it doesn't work at all

1. Looked like a winner for the gov't: when DOJ filed M had over 95% of OS market and over 95%of browser market (although many people install multiple browsers) and there was clearly separate demand for browsers

2. Court refuses to apply JP, rejects per se rule and adopts ROR:1. Per se rule makes no sense for technologically integrated products2. Technological integration is ubiquitous

1. It always saves distribution and transactions costs and often has the potential to capitalize on economies of scope

3. JP test would chill innovation 3. Rejects the remedy because they reject all the tying theories

1. The remedy suggested is divestiture, they thought the economy and US technology could crash ifthey took this remedy

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2. DC cir rejects because of inadequate evidence, inadequate reasons, and violation of DP for refusing to conduct a hearing re remedies

3. DOJ considered urging other remedies 1. Horizontal divestiture: prob wouldn’t be better off with 4 OS, transaction costs go up with

hardware/middleware designing with 4 OS2. Set up a gov't regulatory agency for computer OS? NO, too slow in this industry3. Mandatory code sharing 4. Mandatory redesign on a plug and play basis 5. Conduct-based remedies: DOJ dislikes because always hard to implement and often ineffective

ends up being the remedy selectedMicrosoft and other technology companies being sued all over the world constantly! Pierce urges to drop these cases because would take far too long to litigate fully the merits on the case, given the dynamic nature of the market. 19 states joined the US in bringing the case against M , every state has completely different interests in this case! Verizon Communications v. Law Offices of Curtis v. Trinko: Verizon was an exclusive provider of local telephone service in NY state. The Telecommunications Act of 1996, however, sought to uproot these monopolies and introduce competition into the market by requiring firms like Verizon to share the exclusive network with competitors. Plaintiffs claim that Verizon did not adequately comply with the requirements of the 1996 Act, by discriminatorily filling the orders of its competitors in order to maintain its market share. H: Verizon’s alleged insufficient assistance in the provision of service to rivals is not a recognized antitrust claim under the Court’s existing refusal-to-deal precedents (Aspen Skiing), because the plaintiff has failed to show that Verizon’s refusal to deal prohibited access to “essential facilities.” [Never recognized or repudiated EF doctrine].The existence of the 1996 Act to provide for access makes it unnecessary for the Court to impose a judicial doctrine of forced access, so any such claim of violation under the essential facilities doctrine fails. Ct would find implied AT immunity in 96 Act but for explicit savings clause.

If there is an essential facilities doctrine, it applies only to essential facilities owned by groups and it authorizes a court only to compel access and not to set the terms of access. ***So goes to Section 1 of the Act, NOT Section 2

Concurrence thought the P, a law office that was a local telephone service customer of ATT, lacked standing. I: Emphasizes that where a regulatory framework already exists to address the antitrust issue, the likelihood of finding antitrust harm is small.1996 Act was intended to eliminate monopolies. Sherman only to prevent unlawful monopolies.

B. PATENTS AND ANTITRUST LAW

Patents Confer on the Patentee a Legal Monopoly: The reward for inventing a new product is the monopoly rights to that patent, which they may exploit fully –

with certain exceptions, in the antitrust realm.o A patentee may license its patent to whomever it chooses.o A patentee may also demand a royalty for use of its patent.

See GE. However, where several entities own patents to 10 very similar products, this is not a monopoly at all – it is

merely a ticket of admission into a highly competitive market. Once one has a patent pool, however, GE doesn’t allow the sub-licensees to specify the prices at which the

finished products embodying the patent ideas will b sold. ILLINOIS TOOL: a patent DOES NOT AUTOMATICALLY CONFER MONOPOLY POWER, P still needs

to prove this element.

Antitrust Guidelines for the Licensing of IP (1995)

Agency regards IP as being essentially comparable to any other form of property Agencies do not presume that IP creates market power in the AT context Agencies recognize that IP licensing allows firms to combine complementary factors of production and is

generally procompetive50

o Licenses will be evaluated by ROR: only going to raise concerns if they adversely affect prices, quantities, or quality

o May define technology markets consisting of the licensed tech and its close substitutes, or innovation markets meaning the likely development of goods that do not yet exist

o Particular concern will be raised by exclusive licenses that forbid licensee from also using competing technologies

o Patent or copyright pooling may be challenged if accompanied by collective price fixing or coordinated output restrictions but pooling arrangement generally need not be open to all who would like to join

Splitting Monopoly Profits: (See GE) By licensing a competitor to use the patent, and setting prices at the same level, there is no incentive for the competitor to develop its own technology and the patent-holder does not have to worry about a competitor.

This practice happens a lot today, in the context of pharmaceutical firms and generic manufacturers. But patent law grants a monopoly over use of the patented invention, but it does not guarantee any given level

of economic return. Federal Circuit Bar :

Created Federal Circuit with exclusive jur'd over patent caseso Make sure those judges have some sort of sci/engineering backgroundo Other courts can leave this task to the specialistso Created during Carter admin and for decades, Fed Cir. decided all those cases

Rightly or wrongly, many scholars, economists, lawyers say: Fed Cir has mucked this up pretty badlyo Have a patent system where it's way too easy to get a patent, very difficult to challenge, and they carry

too much powero Hence they're being used as a source of abuseo So: let's get someone else into the act, trim the sails of the Fed Ciro A dozen yrs ago, Sup Ct gets back in the Patent act

Drug Patents: Drug patents last 20 yrs, keep making minor changes and patenting them every couple of years Generic comes out, pioneer sues, settle Firm B to quit man'f generic for a few yrs and Firm A agrees to give Firm B a couple billion BUT: no case has made it to the Sup Ct and Circuits are split To succeed in such a case, FTC has to prove that the infringement action is basically not meritorious (which

is impossible) or other circuits say in order to defend such a settlement, the firms that have entered into settlement have to prove that infringement action is a righteous action

Indian SC just said can only get new patent if the change adds therapeutic value. It’s a solution but makes drug approval much more complicated!

 Patents and Standard Setting :  

Should firm be permitted to persuade standard setting body to require use of its patented technology with or without disclosure?

Can FTC prohibit this as an “unfair method of competition? They are experimenting with using Section 5 of FTC act. FTC's been afraid to use it, and Courts afraid to apply it

Take home:Many scholars believe that US patent law has become an increasingly important source of anticompetitive behavior because patents are too easy to get and too hard to challenge in the US. If that criticism is accurate, what should we do?The Court has issued several recent opinions that have made it harder to get a patent and easier to challenge a patent. 

United States v. General Electric Company (1926): GE owns the patent to the tungsten filament required to make light

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bulbs (a very important patent that really confers a monopoly). GE engages in vertical minimum price fixing through its agents, whereby it owns the light bulbs until they are passed on to the consumer (consignment). GE also licensed its principal competitor in this market – Westinghouse – to use the patented tungsten filament in their light bulbs. This is conditioned on Westinghouse’s promising to sell the light bulbs at the same price as GE. (Horizontal minimum price fixing.) H: The agreement with retailers is an agency and legal under Dr. Miles. Also, GE licensed its patent to Westinghouse; therefore, Westinghouse has no title or right to the patent and GE may set the prices it wishes Westinghouse to sell the light bulbs at. I: A patentee may limit the sales practices of its licensee. THIS CASE HAS BEEN LIMITED BY IL TOOL (2006). The government does not challenge GE’s right to license its competitors to use the patent:

This is actually socially beneficial.o Allows GE to exploit more fully its legal monopoly.o It allows Westinghouse to sell light bulbs at all.o It helps consumer because it creates competition of the sort that Westinghouse still has an incentive to

manufacture its light bulbs at the highest quality and lowest cost possible.

Standard Oil Co. (Indiana) v. United States (1931): Gasoline can be processed through “cracking,” which is superior to the traditional process of “distillation.” Standard Oil comes up with a method of cracking crude oil, to extract gasoline. Other firms come up with similar processes. Standard Oil sues three of those firms, alleging they are infringing on Standard’s patent. Each firm counter-sues Standard, alleging the same thing. To solve the dispute, the firms created a patent pool, where each firm agreed to cross-license the other to use their patents – to the exclusion of everyone else. H: No monopoly in violation of Sherman § 2 because the firms lacked market power (Cracking is only 26% of the gas market, so even together they do not have a monopoly on market power and the firms produced only 54% of the cracked gasoline). Each firm had a monopoly with respect to the use of each firm’s own cracking process, but if you hold a patent on a process that is roughly equivalent to that of three of your competitors, you do not have market power because you must still compete. (Classic competitive market). Sherman also doesn’t require reasonable rates of licensure.I: Pooling patents is not in violation of the Sherman Act. This holding is still good law. Problems with this holding:

Considering that cracking was a superior process, and market share is bound to grow as the process evolves and is preferred to distillation.

The four firms, if they were able to make gas cheaper, would have a monopoly.**but the law favors settling.

Illinois Tool Works Inc v. Independent Ink, Inc: Tool Works and its subsidiary manufacturer and market printing systems that include a patented ink jet printhead, a patented ink container, and specially designed, but unpatented, ink. OEMs agree that they will purchase their ink exclusively from petitioners, and that neither theynor their customers will refill the patented containers with ink of any kind. Independent Ink created Ink with same chemical composition, filed suit alleging illegal tying and monopolization under Sherman 1 and Sherman 2.H: Tying agreements involving patented products should be evaluated under Fortner II and JP, rather than the per se rule applied in Morton and Loew’s. P must prove that the D has market power in the tying product, even if they have a patent.

eBay Inc v. MercExchange LLC (2006): Ebay operates pop website along with Half.com. MercExchange holds a number of patents, including a business method patent for an electronic market designed to facilitate the sale of goods between private individuals. MercExchange sought to license its patent to Ebay and Half but parties failed to reach an agreement, and then filed a patent infringement suit.H: Equity rules state that a P seeking a perm injunction must satisfy four factor test: P suffered an irreparable injury, remedies available at law, ie damages, are inadequate to compensate, considering the balance of hardships between the P and the D, a remedy in equity is warranted, public interest would not be disserved by a per injunction. Judgment remanded for application of test.

Why does this case matter? Injunctions will cost millions, damages only thousands. People are patent trolling, sitting on valuable patents waiting for people to infringe so they can sue. Part of the effort of the SupCt to roll back

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the power of patents by making it harder to issue them, easier to challenge, and lessen their power.

X. CLAYTON § 7: MERGERS

** There has been a significant shift in merger law between the traditional and modern eras, as most decision-making is left to agencies (DOJ and FTC). **

Covered by 1950 Amendment to Clayton § 7: Prohibits any merger if it may substantially impair competition. Need to stop the concentration of economic power in its incipiency. Heavily concerned with the problem of oligopoly, where a few large firms control a market.

Three-Part Inquiry into Merger: Functionally the same as a monopoly inquiry.1. The “line of commerce” or product market in which to assess the transaction.

The “outer boundaries of a product market are determined by the reasonable interchangeability of use [by consumers] or the cross-elasticity of demand between the product itself and substitutes for it.”

Cross-elasticity of demand between products includes the further consideration of the responsiveness of sales of one product to price changes for the other.

2. The “section of the country” or geographic market in which to assess the transaction. The geographic market is defined as the geographic area “to which consumers can practically turn for

alternative sources of the product and in which the antitrust defendant faces competition.3. The transaction’s probable effect on competition in the product and geographic market.

Includes examination of concentration statistics and calculation of the HHI. (modern test) Also consider other evidence, such as ability to raise and fix prices and defendant’s current pricing practices.

Benefits of Mergers: Increased economies of scale, with firms acting more efficiently.

Remedy: If the new merged firm would have a large proportion of the market (over 50%), courts/FTC will try to have the merger go through to create efficiencies. So, the proper remedy is divestiture of certain assets.

Agency Authority to Approve Mergers: (an issue in Philadelphia National Bank) In the context of financial institutions, either the regulator or DoJ can veto a merger (both have to approve the

merger).This is also the case for telecommunications firms, natural gas, and the electricity market. In the case of transportation firms (airlines), the Department of Transportation has express authority to approve

mergers. DOD has absolute power to reject mergers of defense contractors, and 99% authority to approve merger of

defense contractors (DoJ has the 1%).

A. MERGER LAW BETWEEN POTENTIAL COMPETITORS

Test Where Merging Firms/Joint Venture Firms are Potential Competitors: If the answer is “yes” to both questions, the venture is unlawful.

Is it probable that, if the venture were forbidden, one of the firms would enter alone? It is probable that, if one firm entered, the other would either enter or remain in the wings as a viable

potential competitor?

Scenarios Considered by Court Where Potential Competitors/Potential Entrant Issue: (Penn-Olin) Neither firm would have entered. Both firms would have entered independently, and 4 firms, rather than 3 firms would have entered. One of the two firms entered.

o This would have created a better situation than the joint venture, because the firm not entering would have remained a “potential entrant.”

o Potential entrants : Firms with the capacity to enter influence the market because the participating firms operate under the threat of competition.

Problem: It may still not be evident that one of the firms would have entered independently.

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Product Extension Merger: A firm merging to acquire a complimentary product. (Proctor & Gamble)

** It is less problematic to a merger when the two firms DO NOT compete in the same market (think Mercedes-Chrysler merger).

Notes on the Failing Company Doctrine:             The argument is that when a firm fails it necessarily ceases being a competitive force, thus its acquisition can’t

make things worst Also hopes to revitalize the company and make its resources productive again Citizens Publishing Co v. US: Publishers of 2 newspapers tried to establish a joint operating agreement to

prevent one of them from failingo Court affirmed a finding that this would violate Clayton7, established a high standard for showing that the

proposed acquisition was the failing firm’s last straw Has to be the only available purchaser of the failing firm Reorganization of the firm would have had to be dim or nonexistent

B. TRADITIONAL MERGER CASES

Summary of Merger Law as of 1965: DOJ is likely to challenge any merger that includes two competitors or potential competitors. (Vons and

Continental Can). Even a tiny increase in market competition is enough to kill a merger (Brown Shoe). Vertical mergers, mergers in the distribution chain, will also most likely be successfully challenged (United

Shoe). If it’s a firm with a large advertising budget, it can’t acquire any firm with a product similar to it (P&G). If it’s a firm that’s a potential entrant – it knows something about the market and has capacity to enter – then

that merger will also be illegal (Penn-Olin). The law of mergers in the U.S. is that the government always wins (Consolidated Foods).

As a Result of These Cases, Firms Cannot Merge With: Firm that creates a functional substitute. Firm in same chain of distribution [although this leads to economics of scope] Firm with any product that you might conceivably start making yourself (potential entrant). Firm that makes a complimentary product.

Post-1965 Market: Firms start acquiring businesses that have no relation to their product or expertise. Created firms that have no knowledge of expertise running large unrelated businesses – totally dysfunctional. The large number of conglomerates created as a result of a tax regime and above Court decisions, contributed

to the poor economy in the 1970s.

** None of the above cases have ever been overruled; however, most merger law today is determined by regulatory agencies (DoJ and FTC).

US v. Columbia Steel: US Steel was the largest rolled steel producer in the country. Columbia Steel, its wholly owned subsidiary, was the largest rolled steel producer in the Western US. Columbia and US Steel had contracted to buy assets of Consolidate Steel, the largest independent fabricator of steel products in the western region. Gov’t opposed merger because US Steel would be able to fabricate more of its own steel and not need to use other fabricators and competition for those fabricated products would be eliminated.H: SC saw this transaction as simply as allowing a steel producer to find a way to fabricate products in a new territory. Vertical integration without more a cannot violate Sherman. I: Because this was an asset acquisition rather than a stock purchase, Clayton didn’t apply. Congress then adopted the Celler-Kefauver Amendments to Clayton 7 [asset and stock, vertical and horizontal mergers]

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Brown Shoe Co. v. United States (1962): Brown, the third largest shoe manufacturer in the nation (4%), wants to merge with Kinney, the 8th largest shoe manufacturer (0.5% of nation’s shoes). The government charges that the merger will “substantially lessen competition or tend to create a monopoly under Section 7 of Clayton by eliminating competition in the production and sale of shoes. Geo market=nation, product market=men’s, women’s and children’s shoes. H: The merger is illegal under Section 7 of Clayton because the likelihood of foreclosing competition/access is high considering the size of Brown as a manufacturer and Kinney as a retailer, and its effect in intensifying the increased concentration of lines of commerce. I: (1) First case after the Amendment to Clayton 7, found a very small firm in an un-concentrated market to be illegal; (2) Good example of 2-part monopoly analysis. (3) Because of the little market power the new firm would have, this case would have not even been an issue under an HHI analysis. (4) The merger gave the firm 5% market share (but up to 60% in some markets), which raises concerns of how to treat other mergers; disproportionate influence of national chains; and overall threat posed to small business.

United States v. Philadelphia National Bank (1963): The government brought this case against Philadelphia National Bank (PNB) and Girard Trust Corn Exchange Bank (Girard), claiming their merger was in violation of Clayton sec. 7 and Sherman Sec. 1. The two banks were the 2nd and 3rd largest in the Philadelphia area. Their merger would give them 30% of the market, along with 1st largest would be 59% of market. The banking industry (heavily regulated) had been concentrating in the last decade, and the merger would not only make the new bank the largest in the region, but put nearly 80% of bank control in the region within the ambit of 4 banks. H: In cases, such as this, where a merger produces a firm controlling an undue share of the relevant market, which results in a significant increase in the concentration of firms in that market, the merger is so inherently likely to lessen competition substantially that it must be enjoined absent evidence clearly showing that the anticompetitive effects are unlikely. I: Both the regulatory agencies and the Department of Justice have veto-power over the approval of a merger. What was really going on?: A local restriction on the ability of banks to operate outside state lines prevented banks from growing in size such that they could compete internationally, so banks were growing as large as could be done within the state.1. How can US get banks that can participate effectively in large and very large loan markets without ending up with

checking and small business loan markets that are too concentrated? 1. Congress passed law allowing for interstate bankingbanks explode, ATM revolution, market expands

2. Should antitrust courts consider the too big to fail problem?        1. Basically gov't says these big banks are too involved in economy that if we let them fail, the economy will

suffer greatlycreates more hazard3. DOD has no formal power over proposed mergers of defense contractors, but it has complete power over such

mergers as a practical matter1. If you merge, I won't but from you anymore! 

United States v. Von’s Grocery (1966): Two independent markets in L.A. want to merge. The merger would give the new firm 7.5% of the market. H: The court found that this was a time of market concentration, and because we don’t want the stores to be eaten up by large firms, the independent stores can’t merge. Thus, because these two independent stores couldn’t merge to compete against the national chains, they both went out of business. I: This case marks the high water mark of finding very small mergers illegal. Pierce says this is one of the most destructive decisions of the decade. Killed off mom and pop grocery storesincreased market concentration.

United States v. Continental Can (1964): Proposed merger of Continental Can (33% of can market) and Hazel-Atlas (9.6% of glass jar market). H: Illegal under Clayton section 7, because these are two competitors; there is high substitutability for cans and jars, such that they compete in the same market (high cross-elasticity of demand between the product and its substitute)Counter-Argument of Continental Can: The Court has broadened the scope of the product market to include both cans and jars, so now we must re-calculate the market share of the individual firms in this much larger market. Also, add in

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other substitutable containers, such as plastic and paper containers, to make the market larger (larger denominator).Today change in HHI would be 102 in a highly concentrated market, so DOJ would be concerned!

United States v. Alcoa (1964): Alcoa has 38.6% of aluminum market, and wishes to merge with Rome, which manufactures copper and has 1.3% of the aluminum market. H: Aluminum and copper wire are generally not substitutable; however, because Rome also produces aluminum, the merger of the two aluminum manufacturers is too great to be held legal (gave new firm 39.9% of aluminum market). I: Consider all products made, not just primary products.

Federal Trade Commission v. Procter & Gamble Co. (1967): Procter & Gamble acquired Clorox in an effort to expand its production beyond household cleaners and detergents to liquid bleach. P&G had 54.4% of the detergent market, and Clorox had 48.8% of the bleach market. The FTC found that the merger was a violation of section 7 of Clayton, as likely to substantially lessen competition or tend to create a monopoly in the production and sale of household bleaches. H: The FTC correctly found the merger in violation of section 7 because Procter would have otherwise been a competitor against Clorox (although no evidence they wanted to enter the market themselves), and the large size and market share of both firms shows the financial power and influence Procter would have in the bleach market. The Court alluded to the advertising power P&G would have to promote Clorox and push other firms out of the bleach product.I: (1) Demonstrates “Product Extension Merger.” A firm merging to acquire a complimentary product. (2) Role of Advertising: P&G’s ability to advertise the complimentary product (bleach) gave it a disproportionate amount of market power.

FTC v. Consolidated (1965): Consolidated controls unknown percentage of wholesale food market and it wants to merge with Gentry, which accounts for 33% of the dehydrated garlic market. These are completely different markets. FTC found merger violated 7-10 years after the fact. H: This merger violates Clayton sec. 7. The Court reasoned that Consolidated’s position as a wholesaler allows it to condition purchasing of food on the food-producer using Gentry’s garlic in their food. I: Demonstrates reciprocity. Problem: For the Court’s reasoning to work, Consolidated would have to control 100% of the market, otherwise the food producer could just go to a competitor wholesaler. Court also said if the post-acquisition evidence were allowed to override all probabilities, then the parties would bide their time until reciprocity was allowed fully to bloom

US v. Falstaff Brewing Corp: Falstaff, one of the ten largest brewers in the country, did not sell in NE and sought to acquire Narragansett, NE’s largest brewer.H: SC said that the DC erred because they assumed that Falstaff would never have entered the market de novo so it shouldn’t be considered a competitor. DC did not consider whether Falstaff was a potential competitor in the sense that it was so positioned on the edge of the market that it exerted beneficial influence on competitive conditions in that market.

C. MODERN MERGER CASES

Literature identified both errors of commission, ie doctrines that often prohibited socially-beneficial practices, and errors of omission, eg neglect of anticompetitive practices engaged in by professional and non profit orgs and state sponsored cartels.

What Traditional Merger Case Law Survives to the Modern Era: The surviving portion of traditional merger law is the analysis of the relevant product/geo. markets. The part of the cases that are not good law today are the results – how the court reasoned that each merger

illegal. The real law today is not governed by case law, but by agency analysis under the HHI and Merger Guidelines.

Modern Law of Mergers: 99% agency-made, because of the Hart-Scott-Rodino Act.

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SupCt has never overruled any of the 20+ cases that the FTC won in the 60's, prior to those 2 losses SO those cases are still the lawo Eg: DuPont test, most of the reasoning in Alcoa (besides thrust-upon..), PNB case

Since then, the S.Ct has declined to consider the merits of any merger case, though it issued an opinion that makes it virtually impossible for a competitor to challenge a proposed merger in court in 1986.o Cargill v. Monfort (1986):

Blended reasoning in Pueblo Bowl-o-Mat (where it tried to walk back some unintended consequences by making it difficult for competitors to bring a case-- as PP must show injury in a way that antitrust laws were written to avoid--a very difficult burden of proof) to extend to the context of mergers, blended with anti-competitive pricing reasoning

Creates a new version of antitrust standing that makes it virtually impossible for a competitor to challenge a merger

If a merger is likely to harm consumers, it's likely to help competitors, as they'll be able to raise prices as well

So when competitor challenges a merger, there's reason to be immediately suspicious holds that a competitor lacks standing where it fears that merged firm will drive it out of

business. Customers have standing to challenge, but rarely do. States have standing to challenge, but rarely do. DOJ/FTC can challenge without notifying firms of its intent to do so within H-S-R review period, but they rarely do.  

DOJ/FTC have safe harbors that are based on a combination of post-merger level of market concentration and increase in market concentration

o Application of the harbors and many other parts of the Guidelines depends critically on the definition of the product and geographic  markets that are relevant to the merger

The firms and DOJ/FTC often disagree so defining the relevant market often determines the outcome of the analysis 

i.e. Sirius and XM merger...if the market is internet radio its 50% + 50%=monopoly, if its radio entertainment not so much

Constantly changing criteria for merger law because of the unpublished nature of most of their decisions o Guidelines inventory every 5-10 years merger law

Hart-Scott-Rodino (HSR) Act: Firms with at least $100 million in assets considering a merger with a firm that has at least $10 million in

assets, must submit a pre-merger report with DOJ and FTC. The agency that has jurisdiction (expertise as decided between DOJ and FTC), then has 30 days to decide

whether to object to the merger. If the agency challenges the merger filing, it may ask you to submit new analysis of the relevant markets or

evidence to support the filing (3% of cases) If you hear nothing, than the agency has acquiesced and the merger is approved (97% of cases) If you hear something, the agency will challenge the merger, extend the deadline for determination, or ask for

modifications to the merger terms to allow the merger to go through.

1992 FTC Merger Guidelines:1. The first step in any merger case is to define both a product market and a geographic market.2. After the market has been determined, the next inquiry is into what firms are within the market.3. Then, calculate the market share of each firm.4. Then, do an HHI Analysis.5. Finally, the agencies look at how susceptible the industry might be toward oligopolistic pricing

behavior. Factors considered include :

o How concentrated is the market?o Extent of increase in competition.o Product Homogeneity. o Price elasticity of demand.o Entry conditions.o Offsetting efficiencies (Court used to not consider this, now DOJ/FTC does)

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o Failing firm.

1992 FTC Merger Analysis:1. The first step in any merger case is to define both a product market and a geographic market.

o The relevant market is the smallest in which a sole seller could make a “small but significant and nontransitory increase in price,” assuming prices of all other products are held constant.

o In practice, this has come to mean that the sole seller could raise price at least 5% and sustain the increase for at least a year.

o Question on exam the merger was only going to increase the price a dollar, but the pre merger price was 1.50....students said $1 who cares? FTC does! They are about the percentage of the price increase (<5%) If they think its going to be 20%, but then drops down to 3% later after a year thats ok (since its 5%

sustained)2. After the market has been determined, the next inquiry is into what firms are within the market.

o Includes those already selling the defined product in the defined area, and those who could profitably do so in response to the theoretical price increase.

3. Then, calculate the market share of each firm.o Where you do not have a specific allocation of how many firms make up the market and what their market

shares are, the most common practice is to estimate the other firms – conservative approximations – such as 1% assigned to each remaining unknown firm.

4. Herfendahl-Hirshman Index (HHI) : Determine the enforcement agencies will and will not challenge a merger by squaring the market shares of each of the firms in the industry and adding the results together.o EX: 10% + 25% + 50% + 15% becomes 100 + 625 + 2500 + 225, and the HHI = 3450.o Delta HHI: market share of the merged firms - sum of the market share of the two firms proposing to

merger.o A merger will most likely not be challenged if the HHI is less than 1000.o It will likely not be challenged if the HHI is less than 1800 and the increase is less than 50.o However, if the post-merger HHI is over 1800 and the increase is over 100, there is a presumption of

illegality that the firms will have to overcome.o 2010 Guidelines have new safe harbors/ presumptively illegal thresholds:

No challenge if ΔHHI<100 No challenge if post-merger HHI<1500 HHI>2500 & ΔHHI>200 presumptively illegal

o If a proposed merger falls in a safe harbor, DOJ/FTC will acquiesce without further analysis (ACCORDING TO PIERCE): Post-merger HHI<1000; Post-merger HHI=1000-1800 and ∆HHI<100; Post-merger HHI>1800 and  ∆HHI<50.

o HHI reflects all firms in market and places the heaviest weight on the firms with the largest market share. o Calculation tip: If you know the market shares of the firms that account for 60% of the market, and you

know only that none of the other market participants has a market share >1%, you can use a conservative estimate of 40 to reflect the HHI of the firms that account for the other 40% of the market

Next, the agencies look at how susceptible the industry might be toward oligopolistic pricing behavior. Factors considered include:o How concentrated is the market?: Look at the HHI as an indicator of concentration.o Extent of increase in competition: Again, look at HHI.o Product Homogeneity: If the product market is marked by a high degree of homogeneity, it’s much easier

to engage in conscious parallelism or other coordination of activities. How readily firms might reach agreement and detect and punish cheating?

The more homogeneity, the less concern {NOT SURE ABOUT THIS}

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o Price elasticity of demand: Much more concerned about highly-priced inelastic demand, because the manufacturer will be able to artificially raise prices for items where the demand curve stays constant out of necessity.

.2 means for every 10% increase in price, 2% decrease in demand 2.0 means for every 10% increase in price, 20% decrease in demand

o No firm would ever increase their price then! They would lose more revenue than they would gain

o Entry conditions: How readily new entrants might compete away any potential price increase? If it’s easy to enter the market, even high concentrations won’t concern the agencies much, because if you try to increase prices, it will only induce entry and greater competition.

o Offsetting efficiencies: Whether either efficiencies created by the merger or the poor financial condition of one of the merger partners should modify the result suggested by earlier considerations? Look at the likelihood those benefits will accrue to the consumers, rather than just increase the profitability of the firm – do the efficiencies improve social welfare. In the 1960s, the Court repeatedly rejected the argument that mergers should be analyzed in the context

of added efficiency. FTC originally said this, now they conceded that they look at it. Mergers are efficient where:

They increase economies of scale. Where mergers are within the line of distribution, this also leads to more efficient manufacturing

and distribution of products.o Failing firm (RARE): If it’s likely that were the merger blocked, 2 of the 4 firms would go out of business,

then the agency may be likely to go forward. There is tension between economists that do not like the failing firm defense, and lawyers and politicians who embrace it.

Why do so few mergers make it to court? Most of the time, when mergers are turned down by the agency, the firms will give up.

o If the firm presses the merger, the agency will file for a preliminary injunction, and then there is an extensive discovery and trial process that makes the merger complicated, long-winded, and expensive.

o The challenge could take years, and most mergers are so fragile that they will fall apart in that time.o Big exceptions to this situation

Hospital mergers: Hospitals are more likely to challenge an agency finding that the merger is not legal and win. Most likely reason that these mergers succeed is because the hospitals are politically connected

and can get powerful politicians to testify on their behalf. Oracle-PeopleSoft Proposed Merger

Hostile takeover of PeopleSoft by Oracle : It is usually difficult to pass a hostile takeover under HSR test, because the firm being taken over is less likely to cooperate.

DOJ challenged the merger because they classified the relevant market as firms that sell a complete line of business software, and thus this would be making a three-firm market into a duopoloy.

The judge found that the relevant market is business software, and the geographic market is the world; therefore, the market share is not too great as to be illegal under the HSR test.

Where the agency announces its intention to oppose the merger unless parties comply with certain conditions.o In this instance, the firms usually acquiesce.o Judge likely to lean in favor of the agency, and even if conditions are met, there is no guarantee the

merger will go through. Where the agency acquiesces in the merger.

o Other/third firms are unlikely to challenge the merger where the DOJ/FTC has decided not to challenge the merger.

o The biggest hurdle of third parties is standing.

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FTC v. Staples, Inc. & Office Depot, Inc. (DDC 1997): Staples, the second largest office supply superstore in the country, agreed to acquire Office Depot, the largest office supply superstore in the country. The merger would leave only one remaining competitor in the office supply superstore market: OfficeMax. The FTC brought suit to enjoin the proposed merger out of concern that the acquisition may substantially lessen competition in violation of Clayton 7 and the section 5 of the FTC Act. -If relevant product market is retail sales of office supplies, the merged firm would have only 5.5 % of national market; post-merger HHI<130; ∆HHI<22.-If retail sales by office supply superstores is the relevant product market, the merged firm would have 50-100% of each market; the average HHI>5000; and the average ∆HHI=2715. 

H: The product market is office supply superstores, and the geographic market (not in dispute) is 42 metropolitan areas where the stores operate or may operate. After conducting an analysis under the 1992 Merger Guidelines, the Court found that the FTC had shown a “reasonable probability” that the proposed merger may substantially impair competition, and therefore the preliminary injunction is proper. I: Illustrates the importance of market determination of finding a merger invalid (office supply retailer or superstore selling office supplies?). The Court was able to distinguish the product market by examining: (1) Direct Evidence the Merger will Create Higher Prices (5-13% higher); (1) Price Differences between types of stores that sell office supplies; (3) Type of Customers (parents at CVS, Walmart v. small business at office supply stores).

Follow Up: In 2012, Office Depot and Office Max wanted to merge...people figured  hey we know the answer here its the same as above. But it went through, why? ONLINE SHOPPING; we are no longer very interested in structures.

Hospital Mergers: Many go through because at least one partners is in financial trouble and dropping the merger plans without a fight is an unattractive option. Recurring question is market definition: product and geo.

FTC enforces hospital mergers (as opposed to DOJ) Doesn't oppose 98% of hospital mergers

o Willing to let markets concentrate until there are about 3 competitors of equal sizeo HHI 1089*3=3300....pretty concentrated

Hospital typically politically connected FTC recently completed a study finding that prices increased significantly in markets in which courts approved

mergers FTC opposed.

Elzinga-Hogarty test created for market definition to use zip code data

Asks where patients reside who account for 75-90% of admissions in an area’s hospitals It then tries to confirm that finding by asking what proportion of persons from within that area go to local hospitals FTC has created an antitrust safety zone where they won’t challenge a merger where one of the hospitals has both an

average of fewer than 100 licensed beds and an average daily impatient census of less than 40 patients

FTC v. Heinz (DDC 2001): Involved the baby food industry where Gerber had 65%, Heinz 17.4% Beech-Nut 15.4. Most grocery stores sell Gerber and only 1 of the other 2. Wanted to merge, FTC sought injunction. Firms said customers wouldn’t notice the difference-have 2 choices now would still have 2 choices + they could compete with Gerber and lower pricesH: Court of Appeals negged: HHI 5300, dHHI 500+.Grocery stores would lose the benefit of competition between Heinz and Beech-Nut for the second spot on store shelves. Classic example of a pure structural approach that FTC and the Court took based on structural factors alone.

US v. Oracle (N.D. Cal 2004): DOJ seeks to enjoin Oracle from acquiring the stock of PeopleSoft. This case involves one type of computer software, application software that automates the overall business data processing of business and similar entities/ There are tons of competitors in that market! DOJ argues that there’s a separate market for sales of “high function software” to “large complex enterprises” in US so Oracle, Peoplesoft, and SAP are the only sellers in the market.H: Customers, DOJ, experts all differ on definition of product market. Also difficulty with geo market since Elzinga zip code test can’t apply where SAP is a German company with most of its customers in Germany. DOJ fails.

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I: What market share is enough to exercise unilateral market power – 14.3% (No), 28.8% (grey area), 35% (more concern), 60%? Are there other important variables, e.g., short term price elasticity of demand in the retail electricity market is about 0.1? Also, no price transparency here, can’t figure out what firms are charging different companies for their different needs so difficult to cartelize.

FTC v. Whole Foods (DDC 2008): FTC sought a prelim injunction to block the merger of Whole Foods and Wild Oats, contending that WF and Oats are the 2 largest operators on premium, natural and organic supermarkets (PNOS) that have high levels of customer services, target affluent and well educated customers, and are mission drive by social and environ responsibility. FTC says that in 18 cities, merger would create monopolies because WF and Oats are the only PNOS. Whole Foods and Oats have already consummated the merger and closed some Oats stores and sold others, so WF argues the transaction is irreversible and the FTC request for an injunction is moot.H: Only in a rare case would we agree that a transaction is truly irreversible. Court says needed to look at core v. marginal customers: because core customers require the whole package, they respond differently to a price increase from marginal customers who may obtain portions of the package elsewhere. Are core customers going to be drive to WF if Oats closes in a city? (WF internal docs thought they would). Core customers may constitute a recognizable submarket. Court holds for FTC.

Marginal customer will switch if a seller lowers a price a little more, thus is among the customers who theoretically drive prices to a competitive levelCore customer is thoroughly committed to a seller and will continue sell and will continue to buy even as prices rise

D. JOINT VENTURES

Congress passed the National Cooperative Research Act of 1984 which says that R and D joint ventures will be evaluated under a ROR and if joint ventures are registered in advance, they will be subject to only single not treble damages if any AT violation is found.

When or whether a non member of a joint venture (judged under Clayton 7 as per Penn Oil) must be permitted access to it, either as a member or a full participant in its services

O US v. Visa: Court said that Visa and MC couldn’t block banks from issuing other kinds of cards since it denied customer innovation that customer brings 

United States v. Penn-Olin Chemical Co. (1964): Pennsalt and Olin entered into a joint venture -- Penn-Olin -- to produce and sell sodium chlorate in the southeastern United States. Pennsalt, which solely produces and manufactures chemicals across the U.S., would operate the Penn-Olin plant. Meanwhile, Olin, a large diversified corporation that produces, among other things, bleached paper employing sodium chlorate, would be responsible for selling Penn-Olin’s products. Where there was an oligopoly in this market, Penn-Olin was able to gain 27.6% of the market share. (This is good for the market – increasing competition.) The Government claims this joint venture us a violation of section 7 of Clayton and section 1 of Sherman.H: Joint ventures are subject to the regulation of Section 7, under analysis similar to that of mergers. Because the district court did not perform an analysis under Section 7, the case is remanded.I: Illustrates “potential entrant.”

DOJ and FTC issued AT Guidelines for Collaborations Among Competitors (2000)a.Competitors include both the actual and potential variety, and a competitor collaboration is joint econ activity that

falls short of being a mergerb. Agreements that remain per se illegal include those to fix prices or output, rig bids, or share or divide marketsc.ROR applies to those agreements reasonably related to, and reasonably necessary to achieve precompetitive

benefits from, an efficiency-enhancing integration of economic activityi. Nature of the agreement and absence of market power together may demonstrate the absence of

anticompetitive harm

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1. Agency won’t challenge the agreementii. Agencies typically define relevant markets and calculate market shares and concentration as an

initial step in assessing whether the agreement may create or increase market power or facilitate its exercise

iii. Agencies examine the extent to which the participants ant the collaboration have the ability and incentive to compete independently

iv. Also look at other market circs, like entryd. Guideline appreciates that multi-firm activity can have significant precompetitive benefits that power prices,

increase quality, speed invention or justify investments that would increase productione.Safety Zones

i. Except for per se illegal agreements, Agencies do not challenge a collaboration when the market shares of the collaboration and its participants collectively account for no more than 20% of each relevant market in which competition may be affected

ii. Agencies do not challenge collaboration in an innovation market where three or more independently controlled research efforts in addition to those of the collaboration process the required specialized asserts and the incentive to engage in R and D that is close substitute for the R and D of the collaboration

Texaco Inc v. Dagher: Texaco and Shell are long time competitors in sale of gas; formed a joint venture, Equilon, pursuant to an FTC consent decree. Equilon refined crude oil in the Western US and sold gas at a single price to retail gas stations under the Texaco and Shell brands, split profits. H: SC said that once Equilon was formed, they were no longer competitors they were investors. No Sherman 1 violation.

E. VERTICAL MERGERS All of our cases so far have been horizontal mergers, as were the guidelines  There are so out there but they are rare With the Court’s reduced concern re the adverse effects of vertical restraints, mergers that raise serious

vertical concerns are relatively rare, but consider this hypo (actually a real case solved using H-S-R NO judicial opinion involved)

a. A accounts for 15% of the competitive market for electricity in southern California.b. B controls 100% of the natural gas transportation market into southern California.c. Would you be concerned about a proposed merger of A and B? 

New firm would have 100% control of gas and 15% of electricity...what might it do with that power 

Charge myself a better rate than competitors, if theres a shortage i get the case first, etc d. Only way to get this through unless we make an affirmative proposal for  mitigating this

What do you do with an essential facilities situation? set up an equal access regime It was only in the state of ca, so not subject to federal equal access rules

e. DOJ ended up saying if you go forward with this will come after you, merger dropped

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