Antitrust Outline

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Contents

1 Defining Monopolies..........................................................................4

1.1 Product Market...........................................................................4 1.2 Product Submarkets?.............................................................. 4

1.3 Geographic Market.....................................................................5

1.4 Proving Market Power............................................................... 5

1.4.1 Direct Proof..........................................................................5

1.4.2 Indirect Proof.......................................................................6

1.4.3 Rebutting an Inference of Market Power..........................6

2 Analyzing Violations of Sherman Act 1........................................6

2.1 Per Se Rule................................................................................. 6

2.2 Rule of Reason............................................................................ 6

2.3 Choosing the Rule to Apply.......................................................7 3 Horizontal Restraints........................................................................7

3.1 Hardcore Price Fixing (Per Se Prohibition)..............................7

3.2 Horizontal Agreements Requiring Rule of Reason..................7

3.3 Quick Look Analysis of Horizontal Agreements....................8

3.4 Professional Self-Regulation......................................................8

3.5 Allocation of Markets.................................................................8

3.5.1 Additional Considerations in Market Divisions...............9

3.5.2 Permissible Market Divisions............................................9

3.6 Refusals to Deal..........................................................................9

3.6.1 Per Se Rule or Rule of Reason?.......................................... 9

3.6.2 Market Power in Relation to Refusals to Deal................10 3.7 Industry Regulations...............................................................10

3.8 First Amendment Concerns.....................................................11

3.9 Joint Ventures.......................................................................... 11

3.9.1 Harm to Competition........................................................ 11

3.9.2 Review Under the Clayton Act.........................................11

3.10 Research and Development...................................................11

3.11 Horizontal Conspiracies.........................................................12

3.11.1 Conscious Parallelism.....................................................12

3.11.2 Plus Factors.....................................................................12

3.12 Trade Associations and Exchange of Information...............12

3.12.1 Per Se Rule...................................................................... 12

3.12.2 Shift Toward the Rule of Reason...................................13

4 Vertical Restraints...........................................................................13

4.1 Rule of Reason.......................................................................... 13

4.1.1 Practical Effect of Shift.....................................................13

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4.2 Policy Considerations...............................................................14

4.3 Additional Considerations....................................................... 14

4.4 Vertical Non-Price Restraints.................................................14

4.5 Vertical Conspiracies............................................................... 14

4.5.1 Requirement of Plus Factors............................................14

5 Conduct by a Single Firm................................................................15

5.1 Two Elements of Monopolization............................................15

5.2 Analytical Framework............................................................. 15

5.3 Categories of Forbidden Conduct............................................15

5.3.1 Generally Permitted Conduct..........................................15

5.3.2 Maintenance of Excess Capacity......................................16

5.3.3 Refusals to Deal................................................................ 16

5.3.4 Relationship to Essential Facilities.................................16

5.3.5 Bottom Line....................................................................... 16 5.3.6 Price Squeezing Not Cognizable...................................17

5.3.7 Technological Considerations ..........................................17

5.4 Attempted Monopolization......................................................17

5.4.1 Dangerous Probability of Success.................................17

6 Other Limitations on Single-Firm Action......................................18

6.1 Predatory Pricing..................................................................... 18

6.1.1 Measuring Cost................................................................. 18

6.1.2 Effect on Victim.................................................................18

6.1.3 Harm to Competition........................................................ 18

6.2 Tying..........................................................................................18

6.2.1 Per Se Rule........................................................................19 6.2.2 Rule of Reason...................................................................19

6.3 Exclusive Dealing Arrangements............................................19

6.3.1 Rule of Reason...................................................................19

6.3.2 Exclusive Dealing Under the Clayton Act.......................20

6.3.3 Exclusive Dealing Under the Sherman Act.................... 20

6.3.4 Exclusive Dealing Under the FTC Act............................20

7 Mergers.............................................................................................20

7.1 Horizontal Mergers.................................................................. 21

7.1.1 Efficiencies as a Defense...................................................21

7.2 Analytical Framework............................................................. 21 7.3 Failing Company Defense.....................................................22

7.4 Conglomerate Mergers.............................................................22

7.4.1 Extension Mergers............................................................ 22

7.4.2 Pure Conglomerate Mergers............................................22

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8 Exemptions.......................................................................................23

8.1 Noerr-Pennington Doctrine..................................................... 23

8.1.1 Sham Exception................................................................ 23

8.1.2 Providing Fraudulent Information to the Government. 23

8.2 State Action Immunity.............................................................24

8.2.1 Extension of Immunity to Individuals.............................24

8.2.2 Unilateral Government Action.........................................24

8.3 Cleary Articulated.................................................................24

8.4 Actively Supervised...............................................................24

8.5 Municipalities........................................................................... 25

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1 Defining Monopolies

A firm is a monopoly when it has the power to control prices or ex-

clude competition. United States v. E.I. du Pont de Nemours & Co.Whether such power exists depends on the definitions of (1) the

product market and (2) the geographic market in which the firm oper-

ates.

1.1 Product Market

The product market is usually defined by estimating the cross-elasti-

city between a firms products and the products of its competitors. In

laymens terms, cross-elasticity measures the degree to which con-

sumers may be held hostage to the product of a particular firms. Al-

though some degree of cross-elasticity exists in all cases, the character-istics of the product may be taken into account in setting the boundar-

ies of the product market. See, e.g., Intl Boxing Club v. United States

(championship boxing matches were a distinct product from ordinary

boxing matches); Syufy Enters. v. Am. Multicinema, Inc. (top-grossing

first-run films occupied a distinct market from other first-run films);

United States v. Microsoft Corp. (high cost of switching between Win-

dows and Mac OS meant that Windows occupied its own product mar-

ket).

1.2 Product Submarkets?

In some cases, it may be appropriate for a court to define a submar-

ket, a subset of goods within a market which are sufficiently distinct-

ive to have limited cross-elasticity with other goods within the same

market. See, e.g.,Brown Shoe Co. v. United States (a submarket may

exist where products have peculiar characteristics and uses, unique

production facilities, distinct customers, distinct prices and so forth);

FTC v. Whole Foods Market, Inc. (premium, natural, organic super-

market is a cognizable subclass of supermarkets); FTC v. Staples, Inc.

(office supply superstores are a distinct submarket).

A submarket may consist entirely of the products of one firm. See, e.g.,

Eastman Kodak Co. v. Image Tech. Servs., Inc. (distinct submarket for

aftermarket parts and services for Kodak photocopiers). Alternatively,

a submarket may be defined by a bundle of services. See, e.g., United

States v. Philadelphia Natl Bank; United States v. Grinnell Corp.

(central station alarm services).

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1.3 Geographic Market

Geographic markets generally depend on the extent to which physical

distances impose barriers to entry on would-be competitors. Trans-portation costs are often a major factor in determining whether a dis-

tant firm is capable of meaningful competition with a local firm. See,

e.g., United States v. Aluminum Co. of Am. (cost of transporting alu-

minum from overseas meant that Alcoa had effective control of the

American market for aluminum).

Furthermore, a firm may be found to have nationwide market power

even if its products are available on a locality-by-locality basis. See,

e.g., United States v. Grinnell Corp. (Grinnell had nationwide market

power for central station alarm services even though each individual

service covered only local communities). Localities, in turn, may bedefined by consumers standards of convenience. See, e.g., Jefferson

Parish Hosp. Dist. No. 2. v. Hyde (East Bank of Jefferson Parish was

a cognizable geographic market because patients tended to choose hos-

pitals by proximity); United States v. Philadelphia Natl Bank (indi-

viduals and businesses tended to patronize local banks rather than

those located farther away).

In rare cases, a product may be so widely distributed that its geograph-

ic market is worldwide. See, e.g., United States v. Microsoft Corp.

(Microsoft products had a global market). Alternatively, a firm may

have a nationwide monopoly on one level and numerous local monopol-

ies on another. See, e.g., FTC v. Proctor & Gamble Co. (Proctor &

Gamble found to have nationwide monopoly in the manufacture of

bleach but also regional markets defined by barriers to transportation).

1.4 Proving Market Power

1.4.1 Direct Proof

Market power can be directly proven by showing conduct that would

immediately restrain competition. See, e.g., FTC v. Superior Ct. Trial

Lawyers Assn (collective refusal by trial lawyers to deal with indigent

criminal defendants caused court system to grind to a halt); FTC v.Ind. Fedn of Dentists (dentists concerted refusal to submit X-rays to

insurance companies for cost determinations had actual, sustained ad-

verse effects on competition).

Direct proof, however, can be hard to come by.

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1.4.2 Indirect Proof

Market share can be a proxy for market power, but a defendant may

rebut the link between market share and market power.In using indirect proof, it is important to avoid the cellophane fallacy.

Just because a firm cannotfurther raise prices without losing custom-

ers does not mean that it is not already making supracompetitive

profits on its goods or services. Relevant factors in assessing market

power include (1) entry barriers, (2) abnormal profits, (3) historical

trends, (4) fragmented competition, (5) and corporate conduct, and (6)

vulnerability of consumers to abuses of market power. Furthermore, a

finding of market power may be weakened where it can be shown that

competing firms would quickly enter the market if prices were to be

raised.

1.4.3 Rebutting an Inference of Market Power

A firm may rebut an inference of market power by showing (1) that it

possesses only a temporary advantage because of technological superi-

ority or (2) that the market has low entry barriers.

2 Analyzing Violations of Sherman Act 1

2.1 Per Se Rule

The per se rule operates against agreement whose nature and neces-

sary effect are so plainly anticompetitive that no elaborate study of the

industry is needed to establish their illegality. Natl Socy of Profl

Engineers v. United States. The main advantage of aper se rule is ease

of application and administrative convenience.

2.2 Rule of Reason

The rule of reason is applied to conduct that merits a review of the un-

derlying market conditions before a court can come to a sensible con-

clusion as to any potential anticompetitive effects. See Chicago Bd. of

Trade v. United States. The rule of reason has evolved to accommodate

a sliding scale approach, where the depth of review of the underlyingmarket varies according to the obviousness of the potential anticom-

petitive effect.

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2.3 Choosing the Rule to Apply

Categorize the conduct by (1) determining whether a horizontal or ver-

tical arrangement is involved, (2) assessing if there has been an agree-ment, and (3) categorizing the particular restraint at issue.

Then, apply the appropriate rule, depending on whether the conduct

meritsper se prohibition or a fuller analysis under the rule of reason.

3 Horizontal Restraints

3.1 Hardcore Price Fixing (Per Se Prohibition)

In general, hardcore price fixing (i.e., price fixing without even an at-

tempted procompetitive justification) is a violation of 1 of the Sher-

man Act. The Court has described such price fixing as a combinationformed for the purpos and with the effect of raising, depressing, fixing,

pegging, or stabilizing the price of a commodity in intersatte or foreign

commerce. United States v. Socony-Vacuum Oil Co. Even without

overt action, intent alone is sufficient to establish a violation. Id.

Furthermore, setting any ingredient of price is equivalent to setting

price itself. See, e.g., Natl Macaroni Mfrs. Assn v. FTC(limiting pur-

chase of durum wheat when supplies were low was price fixing);

Catalano, Inc. v. Target Sales, Inc. (eliminating short-term credit is

price fixing); Arizona v. Maricopa Co. Med. Socy (setting maximum

prices, rather than a specific price, is price fixing); Virginia Excelsior

Mills, Inc. v. FTC(creating a joint sales agency for the purpose of set-

ting uniform prices is price fixing).

3.2 Horizontal Agreements Requiring Rule of Reason

When a horizontal agreements appears to have some procompetitive or

efficiency-improving characteristics, courts have applied the full rule of

reason. See, e.g., Chicago Bd. of Trade v. United States (Board of

Trade could prohibit after-hours trading because it made the market

more competitive overall and had minimal effect on overall exchange of

grain); Broadcast Music, Inc. v. Columbia Broadcasting System, Inc.

(blanket license was acceptable because it provided a valuable service);United States v. Brown Univ. (price fixing with respect to financial aid

was acceptable because universities were non-profit organizations with

social goals); Calif. Dental Assn v. FTC (ethical concerns proffered to

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justify restriction on advertising of discounts should be analyzed under

full rule of reason).

3.3 Quick Look Analysis of Horizontal Agreements

The court may apply a quick look analysis only if an observer with

even rudimentary understanding of economics could conclude that the

arrangement in question would have an anticompetitive effect on cus-

tomers and markets. Calif. Dental Assn v. FTC. Quick look analysis,

however, assumes that there is at least some likelihood of anticompet-

itive harm. See, e.g., NCAA v. Bd. of Regents of Univ. of Okla. (partial

rule of reason was appropriate, though court ultimately found the re-

strictions on TV broadcasts unjustified); Natl Socy of Profl Engineers

v. United States (code of ethics analyzed under quick look but found to

do anticompetitive harm).

3.4 Professional Self-Regulation

Horizontal restraints resulting from professional self-regulation have

generally received rule of reason analysis on the ground that codes of

ethics are concerned with more than just profits. See, e.g., Natl Socy

of Profl Engineers, supra; AMA v. FTC(ethical canons for physicians

analyzed under rule of reason, and several canons were found to be of -

fending); Vogel v. Am. Socy of Appraisers (rule of reason review prohib-

iting appraisers from accepting compensation consisting of a percent-

age of the appraised value); Calif. Dental Assn v. FTC, supra.

3.5 Allocation of Markets

Markets can be divided on the basis of (1) fixed percentages of avail-

able businesses, (2) geographical regions, or (3) allotment of particular

customers. In general, market divisions result in aper se violation of

1 of the Sherman Act. See, e.g., Timken Roller Beaing Co. v. United

States (Timken prohibited from engaging in geographic market divi-

sions); United States v. Sealy, Inc. (Sealy could not divide licenses to

use the Sealy brand among different mattress manufacturers); United

States v. Topco Assocs., Inc. (geographic market division violated 1 of

Sherman Act even though it was arguably done for the purpose of pro-

moting competition between the Topco label and other brands);Palmer

v. BRG of Georgia, Inc. (two bar-exam-review companies committed 1

violation by reaching agreement where one company agreed to yield

the state of Georgia to the other).

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3.5.1 Additional Considerations in Market Divisions

Market divisions, however, may serve procompetitive purposes. They

may, for example, prevent companies in one area from free-riding offthe services and advertising provided by companies in another. This

was essentially the concern that motivated the market divison in

Topco. See also General Leaseways, Inc. v. Natl Truck Leasing Assn.

Because ofTopco, however, it is unclear whether courts will readily ac-

cept preventing free-riding as a justification for market divisions.

3.5.2 Permissible Market Divisions

An association of firms may designate an area of primary responsibil-

ity for each member firm with regard to advertisements. Firms may

also enter into pass-over clauses, which require firms selling in par-

ticular markets to compensate other firms within that market for lost

sales.

3.6 Refusals to Deal

Horizontal boycotts were formerly prohibited under aper se rule. See,

e.g., Paramount Famous Lasky Corp. v. United States (producers and

distributors of motion pictures refused to deal with any theater which

declined to submit disputes to mandatory arbitration or to post $500

security); Fashion Originators Guild of Am. (FOGA violated 1 in re-

fusing to deal with stores known to distribute Guild designs to other

designers); Klors, Inc. v. Broadway-Hale Stores, Inc. (causing distrib-utors to decline to sell to a competing retailer, if proven, would be a 1

violation); Radiant Burners, Inc. v. Peoples Gas Light & Coke. Co.

(withholding trade associations mandatory approval to sell a new

product can amount to a 1 violation); FTC v. Superior Ct. Trial Law-

yers Assn (refusing to accept indigent criminal defendants is a viola-

tion of 1, in addition to being an attempt at price fixing, supra at

1.4.1). Recently, courts have increasingly applied the rule of reason

where such boycotts may have procomptitive effects.

3.6.1 Per Se Rule or Rule of Reason?

In general, the per se rule has been applied when the refusal to deal

features (1) joint efforts to disadvantage competitors, (2) a restriction

of access to supply, facility, or market necessary to enable the boycot-

ted firm to compete, (3) a dominant position in the relevant market,

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and (4) practices generally not justified by plausible arguments that

they were intended to enhance overall efficiency and make markets

more competitive. N.W. Wholesale Stationers, Inc. v. Pacific Stationery

& Printing Co. The bottom line is that the features of the refusal to

deal must add up to a predominantly anticompetitive effect. Id. Ad-

ditionally, the courts have suggested that a core group of situations

resembling group boycotts are worthy ofper se condemnation: (1) hori-

zontal combinations at one level of distribution having the purpose of

excluding direct competitors from the market, (2) vertical combinations

designed to exclude from the market direct competitors of some mem-

bers of the combination, and (3) coercive combinations intended to in-

fluence the trade practice of boycott victims.

In Toys R Us, Inc. v. FTC, the court held that a boycott could be con-

demned under the per se rule if (1) the boycotting firm has cut off ac-cess to a supply, facility, or market necessary for the boycotted firm, (2)

the boycotting firm possesses a dominant position in the market, and

(3) the boycott cannot be justified by plausible arguments that it was

designed to enhance overall efficiency. The problem, however, is that

the factors in this standard require an inquiry into market conditions

and pretty much defeats the purpose of aper se rule.

3.6.2 Market Power in Relation to Refusals to Deal

From a practical standpoint, group boycotts are effective only when the

boycotting parties have market power. However, older cases did notexplicitly discuss market power. Later cases, however, have stated

that market power has a role in the analysis. See, e.g., Ind. Fedn of

Dentists; N.W. Wholesale. According to Superior Court Trial Lawyers,

it is not necessary to actually disadvantage a competitor to be liable for

a refusal to deal. However, the rule does not apply topurely vertical

refusals to deal. NYNEX Corp. v. Discon, Inc.

N.W. Wholesale applied the full rule of reason to a refusal to deal,

where as Indiana Federation of Dentists applied a quick-look analysis.

3.7 Industry RegulationsIndustry regulations may promote product quality and serve other pro-

competitive ends, but they may be abused for anticompetitive ends. In

general, any industry association operating as a de facto boycott is pro-

hibited. E.g., FOGA. Regulations on quality are generally permitted,

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unles they (1) allege unreasonable standards or (2) impose an inappro-

priate standard of review. In re Rambus addresses the issue of using

industry standards to strong-arm competitors into paying royalties for

patented technologies. The Rambus court said that the FTC did not

prove that the standard-setting body would not have adopted some oth-

er standard absent Rambuss deception.

3.8 First Amendment Concerns

Courts should be aware that some boycotts have expressive content.

However, the expressive content cannot be tied to commercial gain.

See, e.g., Superior Trial Ct. Lawyers Assn.

3.9 Joint Ventures

In general, joint ventures are reviewed under a rule of reason becausea joint venture presumably has some purpose other than to stifle com-

petition. Such sham ventures include situations where membership

in the venture seems to be a pretext for excluding certain firms. There

have been, however, some characterization problems. See United

States v. Topco Assocs., Inc. Furthermore, sham joint ventures will be

reviewed as ordinary horizontal agreements. Review by courts, how-

ever, does not cover arrangements wherein two firms incorporate joint

ventures as separate entity. Joint ventures, however, have been con-

demned under aper se rule when they engage in market division.

3.9.1 Harm to Competition

The courts are concerned with competition, not withparticular compet-

itors.

3.9.2 Review Under the Clayton Act

Under 7 of the Clayton Act, joint ventures might be analyzed as con-

glomerate mergers. See, e.g., United States v. Penn-Olin Chemical Co.

(district court needed to decide whether one of the joint venturers

would have entered the market but for the merger).

3.10 Research and Development

Joint ventures can help to accelerate research and development. The

National Cooperative Research Act limits liability against research or-

ganizations.

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3.11 Horizontal Conspiracies

Because colluding firms must make their intentions known in un-

der-the-table ways, courts have developed standards of proof for con-spiracies to commit anticompetitive acts.

3.11.1 Conscious Parallelism

When a firm has taken steps to communicate its intentions to all other

relevant parties, a court may infer a horizontal conspiracy. Interstate

Circuit v. United States (theater chains committed conspiracy by send-

ing letter to eight movie distributors and listed every distributo as a

recipient on each copy of the letter); cf. Theater Enters. v. Paramount

Film Distrib. Corp. (no inference of conspiracy when movie distributors

refused to sell movies to a suburban theater when there were good

business reasons to decline doing so).

3.11.2 Plus Factors

Plus factors, which weigh in favor of finding a conspiracy, often entail

evidence that (1) parties acted contrary to their economic interests and

(2) were motivated to enter into a price-fixing conspiracy. In re Baby

Food Antitrust Litig. See also Toys R Us, Inc. v. FTC(inference of ho-

rizontal conspiracy where various toy manufacturers knew about Toys

R Uss demands and all decided to depart from past distribution prac-

tices).

The bottom line is that plus factors are necessary if a case is to go to

trial; an absence of plus factors will result in summary judgment for

the defendant. See, e.g.,Bell Atlantic Corp. v. Twombly.

3.12 Trade Associations and Exchange of Information

Trade associations can exchange useful information about price, terms

of sale, output, and other statistics, but such information may also fa-

cilitate collusion. Information exchanges within trade associations are

generally reviewed under a rule of reason. There are, however, two

ways of treating information exchanges under 1 of the Sherman Act:

(1) as evidence of a conspiracy and (2) as a violation of 1 in itself.

3.12.1 Per Se Rule

Older cases focused on the use of the exchanged information. If the in-

formation was being applied toward an anticompetitive purpose, then

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courts were likely to find a violation. See, e.g.,Am. Column & Lum-

ber Co. v. United States (exchange of information about lumber pricing

prohibited where firms apparently intended to raise prices); Cement

Mfrs. Protective Assn v. United States (no 1 violation because inform-

ation was being collected to prevent customers from speculating on ce-

ment prices); Sugar Inst. v. United States (sugar sellers committed 1

violation by forcing each other to commit to openly announced prices).

3.12.2 Shift Toward the Rule of Reason

Later, courts turned toward a per se rule. See Container Corp. of Am.

(exchange of pricing information about cardboard boxes was a 1 viol-

ation because it tended to restrict price competition). The Container

concurrence, however, suggested that a rule of reason would be appro-

priate. Subsequent cases, however, have added qualifications to theuse of the per se rule. See, e.g., Todd v. Exxon Corp. (exchange of de-

tailed salary information was anticompetitive owing to market condi-

tions). Todd suggested that five factors are important in evaluating an

exchange of information: (1) market power; (2) concentration of the

market; (3) elasticity of demand; (4) fungibility of products; and (5)

nature of the information exchanged. The bottom line is that exchange

of information regardingfuture prices tends to have a high risk of cre-

ating anticompetitive results whereas information regarding past

prices is less dangerous.

4 Vertical Restraints

4.1 Rule of Reason

Courts currently subject all vertical restraints to a rule of reason ana-

lysis. Leegin Creative Leather Prods., Inc. v. PSKS, Inc. Leegin over-

turned Dr. Miles Medical Co. v. John D. Park & Sons Co., in which a

vertical restraint was prohibited by aper se rule.

4.1.1 Practical Effect of Shift

The practical effect of the shift is questionable. Under Colgate, firms

were already allowed to refuse unilaterally to deal with firms whichdid not comply with pricing demands. On a practical level, the rule of

reason will discourage the bringing of cases since a finding of a viola-

tion is significantly less likely under the rule of reason.

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4.2 Policy Considerations

The Leegin court cited several considerations which are relevant to re-

views of vertical restraints: (1) the tension between intrabrand com-petition and interbrand competition; (2) the fact that manufacturers

are more likely than retailers to side with consumers; (3) the free-rider

problem, wherein some retailers might take advantage of advertising

and services provided by others; and (4) the possibility of coercion by

retailers, which might use price maintenance as a way to squeeze com-

peting retailers out of business.

4.3 Additional Considerations

Vertical price maintenance arguably protects smaller businesses,

which might not be able to compete against larger ones in a price war.

This protection, however, comes at a cost to consumers, who end up

paying more than they would otherwise. Furthermore, price mainten-

ance may serve a business purpose for luxury goods and other products

that depend on the snob effect.

4.4 Vertical Non-Price Restraints

In general, vertical non-price restraints are evaluated under the rule of

reason. Continental T.V., Inc. v. GTE Sylvania, Inc. The GTE

Sylvania court, however, left room for the possibility ofper se prohibi-

tions in the future.

4.5 Vertical Conspiracies

4.5.1 Requirement of Plus Factors

As with horizontal conspiracies, courts have required plaintiffs to show

the presence of plus factors in order to establish the existence of vertic-

al conspiracies. See, e.g., Monsanto Co. v. Spray-Rite Serv. Corp. (ter-

mination of price-cutting distributor following complaints from other

distributors not enough to show conspiracy unless plaintiff proved that

termination was part of an attempt to fix prices). See also Garment

Dist., Inc. v. Belk Stores Servs. Inc. (termination of price-cutting retail-

er not a vertical conspiracy when manufacturer effected termination in

order to preserve the business of a more valuable customer).

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5 Conduct by a Single Firm

5.1 Two Elements of Monopolization

Section 2 of the Sherman Act states that a firm becomes liable for

monopolization through (1) the possession of monopoly power in the

relevant market and (2) the willful acquisition or maintenance of that

power as distinguished from growth or development as a consequence

of superior conduct, business acumen, or historic accident. See, e.g.,

United States v. Grinnell Corp.; United States v. Aluminum Co. of Am.

InAlcoa, the court stated that specific intent to monpolize was not ne-

cessary. As long as a firm had intent to engage in the immediate con-

duct giving rise to a monopoly. Furthermore, the court has stated that

courts with monopoly power are subjected to heightened scrutiny.

See, e.g., Eastman Kodak Co. v. Image Tech. Servs., Inc. ;Aspen Skiing

Co. v. Aspen Highlands Skiing Corp.

5.2 Analytical Framework

There are four steps in analyzing single-firm conduct: (1) define the

relevant market; (2) assess the market power of the alleged monopolist

constitutes monopoly power; (3) examine the nature of the conduct;

and (4) consider business justifications for the conduct.

5.3 Categories of Forbidden Conduct

5.3.1 Generally Permitted Conduct

While monopolies are restrained from abusing their dominant market

positions, they are allowed to compete like any other business.

Olympia Equip. Leasing Co. v. Western Union Telegraph. This is be-

cause the emphasis of antitrust policy [has] shifted from the protectin

of competition as a process of rivalry to the protection of competition as

a means of promoting economic efficiency. Id. See also Berkey Photo,

Inc. v. Eastman Kodak Co. (Kodak was not obligated to disclose in-

formation concerning its Instamatic 110 even though it had a domin-

ant market position); In re E.I. du Pont de Nemours & Co. (expansion

of production capacity for titanium dioxide pigments was permissible;

Du Pont had no duty to disclose its special process for making the pig-

ments to competitors).

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5.3.2 Maintenance of Excess Capacity

In Alcoa, the court found that Alcoa had abused its dominant market

position by continuing to expand production capacity in such a waythat discouraged competitors from entering the market. It is unclear,

however, whether this ruling is still valid today.

5.3.3 Refusals to Deal

A monopolists power to refuse to deal with competitors is not absolute.

If a court finds that the main effect of the refusal to deal is to squeeze

competitors out of a market, then the monopolist must show that the

refusal serves some valid business justification. See, e.g.,Aspen Skiing

Co. v. Aspen Highlands Skiing Corp. (Aspen Skiing violated by refus-

ing to deal with Aspen Highlands because the refusal would harm con-

sumers and had no business justification); Eastman Kodak Co. v. Im-

age Tech. Servs., Inc. (Kodaks proffered justifications for refusing to

sell aftermarket parts to third-party service providers raised factual

questions and therefore did not warrant summary judgment); Verizon

Communications v. Law Office of Curtis V. Trinko (Verizon did not vi-

olate 2 by refusing to let competing phone services use its network

because a regulatory agency already oversaw such matters).

5.3.4 Relationship to Essential Facilities

Although refusals to allow access to an essential facility would prob-

ably be a 2 violation, the courts have imposed fairly strict standardson what constitutes refusal to deal in an essential facility. There are

four requirements: (1) the essential facility must be controlled by a

monopolist; (2) a competitors would not be able practically or reason-

ably to duplicate the essential facility; (3) access to the facility was

denied to a competitor; and (4) it would have been feasible to provide

the essential facility to competitors.

5.3.5 Bottom Line

The bottom line is that courts have been leaning toward a rule which

says that arbitrary refusals to deal are not 2 violations unless thereis some anticompetitive purpose. Furthermore, there is no general

duty to assist competitors. Olympia Equip. Leasing Co. v. Western

Union Telegraph Co.

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5.3.6 Price Squeezing Not Cognizable

In Pacific Bell Telephone v. Linkline Communications, Inc., Linkline

alleged the Pacific Bell had tried to squeeze it out of business by sellingwholesale equipment at expensive prices and retail equipment at very

low prices. The court, however, found no violation because Pacific Bell

had no duty to deal with Linkline. Unless Pacific Bell engaged in pred-

atory pricing, there was no violation of Sherman Act 2.

5.3.7 Technological Considerations

Network effects tend to create monopolies. Consider, for example, the

fact that people generally use Microsoft products to ensure interoper-

ability with other people who also use Microsoft products. Further-

more, the fast-paced development of high-tech markets means that an-

titrust suits often become irrelevant by the time a final decision is

reached because the market has simply moved on.

5.4 Attempted Monopolization

Section 2 of the Sherman Act also covers attempts to create monopol-

ies, not just monopolies that have been established. There are three

elements to attempted monopolization: (1) intent; (2) the nature of the

conduct; and (3) a dangerous probability that, if the conduct that con-

stitutes the attempt is allowed to proceed unchecked, it will result in

monopoly power. See, e.g., Lorain Journal Co. v. United States (Lorain

Journal committed 2 violation by refusing to run ads for any clientthat also placed ads with an upstart radio station); A.H. Cox & Co. v.

Star Machinery Co. (no violation of 2 when Star Machinery convinced

Cox to be its exclusive distributor and Cox subsequently went bank-

rupt); Six Twenty-Nine Productions, inc. v. Rollins Telecasting, Inc.

(section 2 violation where TV station refused to deal with an advert-

ising agency with evident intent to monopolize).

5.4.1 Dangerous Probability of Success

Conduct amounts to an attempt to monopolize only when there is a

dangerous probability of success. Spectrum Sports, Inc. v. McQuillan.To determine whether a dangerous probability exists, a court should

first determine the relevant market, including (1) the strenght of the

competition, (2) the probable development of the industry, (3) the bar-

riers to entry, (4) the nature of the anticompetitive conduct, and (5) the

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elasticity of consumer demand. Intl Distrib. Ctrs., Inc. v. Walsh

Trucking Co. The bottom line is that the courts are concerned with

competition rather than competitors. This means that elbows-out busi-

ness tactics are acceptable as long as they do not threaten to create a

monopoly.

The problem, however, is that the requirement of dangerous probabil-

ity means that 2 does not cover thuggish behavior by smaller firms.

6 Other Limitations on Single-Firm Action

6.1 Predatory Pricing

Predatory pricing requires proof that (1) a firm has priced below cost

and (2) there is dangerous probability that the firm will recoup its

losses through future supracompetitive pricing. Brooke Group v.Brown & Williamson Tobacco (note there has never been a successful

case under theBrooke Group standard).

6.1.1 Measuring Cost

Ideally, we would use marginal cost as the lowest price at which a

product could be sold without causing the firm to lose money. Because

it is hard to separate marginal costs from other costs, however, aver-

age variable cost is an acceptable substitute.

6.1.2 Effect on VictimA predatory-pricing firm need not completely drive its competitors out

of business in order to achieve its purpose. Rather, it can simply in-

timidate other firms into raising their prices or otherwise to back off

from competing.

6.1.3 Harm to Competition

The bottom line is that predatory pricing makes sense only if a firm

has a reasonable expectation of recouping the costs through future

supracompetitive pricing. The problem, however, is that there is not

much theory stating what circumstances are necessary for recoupment.

6.2 Tying

Tying is prohibited under 1 of the Sherman Act and 3 of the

Clayton Act. Under the Sherman Act, tying of any kind of product is

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prohibited, and tying is defined by two factors: the business engaged

in tying must have a monopolistic position in the tying product and (2)

a substantial volume of business in the tied product must be re-

strained. The Clayton Act covers only commodities, but the standard

of review is the same as that under the Sherman Act.

6.2.1 Per Se Rule

Tying is condemned under a per se rule. The analysis consists of (1)

determining if there are two products involved and (2) assessing

whether the seller has sufficient market power to compel buyers to

purchase the tied product. E.g., Jefferson Parish Hosp. Dist. No. 2(an-

esthesiology services are a distinct product from other services since

patients often request specific anesthesiologists). Tying may be imple-

mented by obscuring the true costs of a good or service. SeeEastmanKodak Co. v. Image Tech. Servs., Inc. (customers unfamiliarity with

total cost of ownership meant that Kodak could tie aftermarket ser-

vices to sales of photocopiers). See also Intl Salt Co. v. United States

(manufacturer not allowed to tie salt to machines which used salt).

6.2.2 Rule of Reason

Other types of tying are examined under a a rule of reason. E.g.,

United States v. Microsoft Corp. The point is that some forms of tying

may have procompetitive effects, usually by introducing efficiencies.

See also United States v. Jerrold Electronics Corp. (distributor of TVequipment could bundle equipment together to form full sets because it

was a pioneer in a new industry).

6.3 Exclusive Dealing Arrangements

The Sherman Act and the Clayton Act both prohibit exclusive dealing

arrangements that place unreasonable restraints on competition. The

Sherman Act requires proof of competitive harm whereas the Clayton

Act requires only aprobability of a substantial lessening of competition .

Again, the Clayton Act is limited to commodities. Additionally, the

FTC Acts general prohibition on unfair methods of competition

seems also to cover exclusive dealing arrangements (and then some).

6.3.1 Rule of Reason

In general, exclusive dealing arrangements are analyzed under a rule

of reason. E.g., U.S. Healthcare, Inc. v. Healthsource, Inc.; Roland Ma-

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chinery Co. v. Dresser Indus., Inc. There is a three step process for de-

termining whether an exclusive dealing arrangement exists: (1) look

for an agreement to deal exclusivelyunder 1 of the Sherman Act

and 3 of the Clayton Act, an agreement must be proven, but 2 of the

Sherman Act covers unilateral conduct that is functionally equivalent

to exclusive dealing; (2) define the relevant market; and (3) apply the

rule of reason.

An exclusive dealing arrangement need not be explicit in order to viol-

ate antitrust laws. Courts have sometimes inferred a meeting of the

minds. E.g., United States v. Dentsply Intl, Inc.

6.3.2 Exclusive Dealing Under the Clayton Act

The Clayton Act covers any exclusive dealing arrangement that tends

to substantially lessen competition. A substantial lessening of com-

petition is found by examining market conditions and relative condi-

tions of competitors. Tampa Electric Co. v. Nashville Coal Co. (no viol-

ation where amount of coal market foreclosed was tiny compared with

the overall market for coal).

6.3.3 Exclusive Dealing Under the Sherman Act

Under 1 of the Sherman Act, exclusive dealing is recognizd only

when it is proven that 4050 percent of the market will be foreclosed.

United States v. Microsoft Corp. Otherwise, the analysis is the same

as that under the Clayton Act.

Under 2 of the Sherman Act, monopolists may become liable for

smaller amounts of market foreclosed. Microsoft. Furthermore, liabil-

ity may exist for unilateral conduct. United States v. Dentsply Intl,

Inc.

6.3.4 Exclusive Dealing Under the FTC Act

In FTC v. Brown Shoe Co., the court found that Brown Shoes fran-

chise agreement was an unfair method of competition.

7 Mergers

Section 7 of the Clayton Act governs horizontal and vertical mergers.

It prohibits mergers which threaten to substantially lessen competi-

tion in any line of commerce. A line of commerce may include dis-

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tribution of goods in any submarket. Brown Shoe Co. The Clayton Act

is intended to address threats to competition in their incipiency.

7.1 Horizontal Mergers

The Department of Justice and the FTC have promulgated guidelines

for reviewing mergers. One salient point of these guidelines is that

they use the Herfindahl-Hirschman Index to calculate market concen-

trations and changes therein. The greater the increase in concentra-

tion resulting from a merger, the more suspect the merger is. Firms,

however, may rebut inferences of anticompetitiveness arising from the

HHI.

7.1.1 Efficiencies as a Defense

Section 4 of the guidelines states that proffered efficiencies must bemerger-specific and verifiable in order to be cognizable as defenses. Ul-

timately, a merger does not pass muster unless the efficiencies out-

weigh the potential anticompetitive effects. Efficiencies are also accor-

ded different weight depending on their respective natures. Hard ef-

ficiencies, such as the merging of production facilities, are given signi-

ficant weight. Soft efficiencies, such as better research & develop-

ment, are accorded less weight.

In rare cases, a government may allow a merger to go forward if it

finds that the merger would allow the resulting firm to compete in lar-

ger markets. E.g., United States v. Philadelphia Natl Bank (mergingbanks argued that the larger resulting entity would be able to compete

with larger New York banks.

7.2 Analytical Framework

FTC v. H.J. Heinz Co. provides the current analytical framework for

mergers. (1) Determine the market using the standard market analys-

is. (2) Assess the concentration in the relevant market before and after

the merger. (3) If the merger would lead to a substantial increase in

concentration, then the merger is presumed to be illegal. (4) Examine

rebuttal arguments and potential defenses. (5) Consider if plaintiffcan rebut defendants justifications with other factors.

Generally, post-merger evidence of concentration or other effects on

market is accorded little weight since it is susceptible to manipulation

by the firms in question.

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7.3 Failing Company Defense

Courts have been willing to allow a merger to go forward when one

company is obviously in dire financial straits. Under the guidelines ofthe DOJ and FTC, the failing firm defense is available only when (1)

the allegedly failing firm would be unable to meets its financial obliga-

tions in the near future; (2) it would not be able to reorganize success-

fully under Chapter 11 bankruptcy; (3) it has made unsuccessful good-

faith efforts to elicit reaosnable alternative offers of acquisition; and (4)

absent acquisition, the assets of the failing firm would exit the relevant

market.

See, e.g., Hosp. Corp. of Am. v. FTC(inelasticity of demand for hospital

services and tradition of collusion between hospitals in region meant

that merger should not go forward); FTC v. H.J. Heinz Co. (merger ofbaby-food manufacturers failed because merging firms failed to estab-

lish an adequate procompetitive justification); FTC v. Staples (signific-

ant increases in concentration, combined with speculative efficiencies,

meant that merger should not be permitted).

7.4 Conglomerate Mergers

7.4.1 Extension Mergers

Extension mergers involve firms which produce similar or complement-

ary types of products or firms which produce similar items in different

geographical markets. These mergers may reduce potential competi-tion or actual competition. See, e.g., United States v. Penn-Olin Chem.

Co. (district court should have considered whether one member of joint

venture would have entered market and the other would have stayed

out had the venture not happened); FTC v. Proctor & Gamble Co.

(P&Gs proposed acquisition of Clorox disallowed because P&G would

have been able to leverage enormous market clout to squeeze other

bleach sellers); United States v. Falstaff Brewing Corp. (Falstaffs pro-

posed acquisition of local brewery found to be impermissible because it

was a way for Falstaff to squeeze into a market).

7.4.2 Pure Conglomerate Mergers

In a conglomerate merger, firms in unrelated markets merge for the

sake of achieving efficiencies. Because there is no increase in concen-

tration in either market, the Sherman Act and the Clayton Act gener-

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ally do not reach these firms. In general, only the FTC Act could be

used to question these mergers.

8 Exemptions

8.1 Noerr-Pennington Doctrine

In general, efforts to lobby the government for changes in policy are

immunized from antitrust liability, even if such efforts are plainly de-

signed to disadvantage a competitor. Eastern R.R. Presidents Conf. v.

Noerr Motor Freight Co. Furthermore, the Noerr exception extends to

efforts to influence judicial and administrative actions. Calif. Motor

Transport Co. v. Trucking Unlimited .

8.1.1 Sham ExceptionHowever, lobbying is anticompetitive when it is designed to abuse gov-

ernmental processes in such a way as to disadvantage a competitor.

The sham exception applies if (1) the conduct is objectively baseless

and (2) there is clear subjective intent to harm a competitor. Profl

Real Estate Investors v. Columbia Pictures .

8.1.2 Providing Fraudulent Information to the Government

See, e.g., Calif. Motor Transport Co. v. Trucking Unlimited (litigation

found to be antitrust violation because it was intended to harass com-

petitors); Otter Tail Power Co. v. United States (court remanded casefor evaluation of lawsuit intended to make it difficult for a power com-

pany to sell bonds); Woods Exploration and Producing Co. v. ALCOA

(court declined to apply Noerr where defendant allegedly filed false

production statistics with the Texas R.R. Commission); MCI Commu-

nications Corp. v. AT&T Co. (filing of tariff proceedings against MCI

was a sham because AT&T knew that the recipients of the tariff filings

could do nothing about the filings); Clipper Express v. Rocky Mountain

Motor Tariff Bureau (blanket protest against competing firms lower

tariff rates was antitrust violation because there was no attention paid

to merit of complaints); Allied Tube & Conduit Corp. v. Indian Head,

Inc. (ballot-stuffing designed to prevent approval of a new type of elec-trical conduit was violation of antitrust laws).

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8.2 State Action Immunity

A state may effect a policy that supports a monopoly as long as that

policy is clearly articulate and affirmatively expressed and activelysupervised by the state. Calif. Retail Liquor Dealers Assn v. Midcal

Aluminum, Inc. However, this immunity extends to states only. A mu-

nicipality cannot authorize monopolies. Town of Hallie v. City of Eau

Claire. There are four reasons for this limitation: (1) states create mu-

nicipalities; (2) municipalities do not exercise sovereign powr and can-

not because their interests are more parochial; (3) redress through

political action would not protect people living outside the municipal-

ity; (4) the sheer number of municipalities would threaten national an-

titrust enforcement.

8.2.1 Extension of Immunity to Individuals

A private actor is immune from antitrust liability as long as that actor

is acting under a scheme that meets the requirements of Midcal and

Parker.

8.2.2 Unilateral Government Action

Unilateral government action does not qualify as a conspiracy to

monopolize because there is only one actor.

8.3 Cleary Articulated

As long as a policy is clearly articulated, it need not be mandatory to

fall within the scope of Midcal and Parker. Southern Motor Carriers

Rate Conf. v. United States.

8.4 Actively Supervised

See, e.g., Calif. Retail Liquor Dealers Assn v. Midcal Aluminum, Inc.

(regulation of wine prices was not actively supervised because state ex-

ercised no control over definition of reasonable prices); FTC v. Ticor

Title Ins. (joint price-setting by insurance companies, which filed pro-

posed rates with the state, was not actively supervised because the

state had no say in setting prices); 324 Liquor Corp. v. Duffy (no im-munity where state merely ratifies the independent decision of a

private body); Patrick v. Burget (harassing peer reviews proceedings

against a surgeon not immune because state could not review outcome

of proceedings). InPatrick, the court declined to decide whether judi-

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cial review of a peer-review decision itself is enough to constitute active

supervision.

8.5 Municipalities

A statutory provision authorizing municipalities to engage in anticom-

petitive conduct does not need to acknowledge the potential anticom-

petitive effects. The effect must merely be a foreseeable result. See,

e.g., Town of Hallie v. City of Eau Claire (municipal-level monopoly

over sewage disposal was immune because the state had authorized

the monopoly and determined the area to be served); Columbia v.

Omni Outdoor Advertising, Inc. (billboard monopoly was immune be-

cause it was carried out pursuant to a state policy that granted muni-

cipalities plenary zoning power).

The rationale for this rule is that municipalities authorized to enact

policy should not have to look over their shoulders for potential anti-

trust enforcement.

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Documents

Antitrust Outline