Chapter 46 Antitrust Law Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Jentz Miller Cross BUSINESS

Chapter 46Chapter 46Antitrust LawAntitrust Law

Copyright © 2009 South-Western Legal Studies in Business,

a part of South-Western Cengage Learning.

Jentz Miller Cross

BUSINESS LAWBUSINESS LAW Alternate Edition 11Alternate Edition 11ththEd.Ed.



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IntroductionIntroduction

Common law actions intended to limit Common law actions intended to limit restraints on trade and regulate economic restraints on trade and regulate economic competition.competition.

Embodied almost entirely in:Embodied almost entirely in:– The Sherman Antitrust Act of 1890.The Sherman Antitrust Act of 1890.– The Clayton Act of 1914.The Clayton Act of 1914.



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§§ 1: The Sherman 1: The Sherman Antitrust ActAntitrust Act

Section 1 and 2 contain the main Section 1 and 2 contain the main provisions of the Sherman Act.provisions of the Sherman Act.– Section 1: Section 1:

• Requires two or more persons, as a person cannot Requires two or more persons, as a person cannot contract, combine, or conspire alone.contract, combine, or conspire alone.

• Concerned with finding an agreement.Concerned with finding an agreement.

– Section 2: Section 2: • Applies both to an individual person and to several Applies both to an individual person and to several

people, because it refers to every person.people, because it refers to every person.• Deals with the structure of monopolies in the Deals with the structure of monopolies in the

marketplace.marketplace.



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§ 2: Section 1 of the § 2: Section 1 of the Sherman ActSherman Act

Section 1 regulates what are called Section 1 regulates what are called “horizontal” and “vertical” restraints. “horizontal” and “vertical” restraints.

Per sePer se violations vs. the Rule of Reason violations vs. the Rule of Reason– Per se are blatant and substantially Per se are blatant and substantially

anticompetitive.anticompetitive.– Rule of reason agreements do not Rule of reason agreements do not

unreasonablyunreasonably restrain trade. restrain trade.



Horizontal RestraintsHorizontal Restraints

Horizontal restraints are agreements Horizontal restraints are agreements among Sellers (or Buyers) that restrain among Sellers (or Buyers) that restrain competition between rival firms competing competition between rival firms competing in the same market .in the same market .

SellerSeller

BuyerBuyer

SellerSeller SellerSeller

BuyerBuyer BuyerBuyer



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Price FixingPrice Fixing

An agreement between competing firms in An agreement between competing firms in the market to set an established price for the market to set an established price for the goods or services they offer.the goods or services they offer.

Price fixing agreements are Price fixing agreements are per seper se violations of the Act.violations of the Act.



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Group BoycottsGroup Boycotts

Agreement between two or more sellers to Agreement between two or more sellers to refuse to deal with a particular person or refuse to deal with a particular person or firm.firm.

Group boycotts are Group boycotts are per seper se violations of the violations of the Act.Act.



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Horizontal Market Horizontal Market DivisionDivision

Occurs when competitors in the same Occurs when competitors in the same market agree that each will have exclusive market agree that each will have exclusive rights to operate in a particular geographic rights to operate in a particular geographic area.area.

Horizontal market divisions are per se Horizontal market divisions are per se violations of the Act.violations of the Act.



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Trade AssociationsTrade Associations

Trade Associations are industry specific Trade Associations are industry specific organizations created to provide for the organizations created to provide for the exchange of information, representation of exchange of information, representation of the business interests before governmental the business interests before governmental bodies, advertising campaigns, and setting bodies, advertising campaigns, and setting of regulatory standards to govern their of regulatory standards to govern their industry or profession.industry or profession.

Rule of reason is applied to determine if a Rule of reason is applied to determine if a violation of the Act has occurred. violation of the Act has occurred.



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Joint VenturesJoint Ventures

A joint venture is an undertaking by two or A joint venture is an undertaking by two or more individuals or firms for a specific more individuals or firms for a specific purpose.purpose.

The rule of reason is applied to analyze The rule of reason is applied to analyze the agreement if the venture has first been the agreement if the venture has first been found not to involve price fixing or market found not to involve price fixing or market divisions.divisions.



Vertical RestraintsVertical Restraints

Vertical restraints are Vertical restraints are per seper se anticompetitive anticompetitive agreements imposed agreements imposed by Sellers upon by Sellers upon Buyers (or vice Buyers (or vice versa) that may versa) that may include affiliates in include affiliates in the entire supply the entire supply chain of production.chain of production.

BuyerBuyer

SellerSeller

BuyerBuyer

BuyerBuyer



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Vertical RestraintsVertical Restraints

Agreements between firms at different Agreements between firms at different levels of the manufacturing and levels of the manufacturing and distribution process.distribution process.

Vertical restraints may restrain competition Vertical restraints may restrain competition among firms that occupy the same level in among firms that occupy the same level in chain.chain.

Vertical restraints that significantly affect Vertical restraints that significantly affect competition may be per se violations.competition may be per se violations.



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Territorial or Customer Territorial or Customer RestrictionsRestrictions

Imposed by manufacturers on the sellers Imposed by manufacturers on the sellers of the products, to insulate dealers from of the products, to insulate dealers from direct competition with each other.direct competition with each other.

Territorial and customer restrictions are Territorial and customer restrictions are judged under the rule of reason.judged under the rule of reason.



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Resale Price Resale Price Maintenance Maintenance AgreementsAgreements An agreements between a manufacturer and a An agreements between a manufacturer and a

distributor or retailer in which the manufacturer distributor or retailer in which the manufacturer specifies the retail price at which retailers must specifies the retail price at which retailers must sell products furnished by the manufacturer or sell products furnished by the manufacturer or distributor.distributor.

This is a type of vertical restraint and is normally This is a type of vertical restraint and is normally a per se violation.a per se violation.

CASE 46.1 CASE 46.1 Leegin Creative Leather Leegin Creative Leather Products, Inc. v. PSKS, Inc.Products, Inc. v. PSKS, Inc. (2007). (2007).



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Section 2 of the Sherman Antitrust Act Section 2 of the Sherman Antitrust Act deals with:deals with:– Monopolization.Monopolization.– Attempts to monopolize.Attempts to monopolize.

Predatory pricing.Predatory pricing.– Attempt by a firm to drive its competitor from Attempt by a firm to drive its competitor from

the market by selling its product at prices the market by selling its product at prices substantially substantially belowbelow the normal costs of the normal costs of production.production.

§§ 3: Section 2 of the 3: Section 2 of the Sherman Antitrust ActSherman Antitrust Act



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MonopolizationMonopolization

Monopolization in violation of the act Monopolization in violation of the act requires two elements:requires two elements:– The possession of monopoly power The possession of monopoly power andand– The willful acquisition and maintenance of the The willful acquisition and maintenance of the

power.power.



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Monopoly PowerMonopoly Power

Exists when one firm has sufficient market Exists when one firm has sufficient market power to control prices and exclude power to control prices and exclude competition.competition.

Market power is often assessed by the use Market power is often assessed by the use of the Market-Share Test.of the Market-Share Test.– As a rule of thumb, if a firm has 70% or more As a rule of thumb, if a firm has 70% or more

of a relevant market, it is regarded as having of a relevant market, it is regarded as having monopoly power.monopoly power.



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The Intent RequirementThe Intent Requirement

The intent to monopolize is difficult to The intent to monopolize is difficult to prove.prove.

Intent may be inferred from evidence that Intent may be inferred from evidence that the firm had monopoly power and the firm had monopoly power and engaged in anticompetitive behavior.engaged in anticompetitive behavior.



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Attempts to MonopolizeAttempts to Monopolize

Firm actions are scrutinized to determine Firm actions are scrutinized to determine whether they were intended to exclude whether they were intended to exclude competitors and garner monopoly power competitors and garner monopoly power and had a “dangerous” probability of and had a “dangerous” probability of success.success.



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§§ 4: The Clayton Act 4: The Clayton Act

The Clayton Act deals with:The Clayton Act deals with:– Price Discrimination.Price Discrimination.– Exclusionary Practices.Exclusionary Practices.– Mergers.Mergers.– Interlocking Directorates.Interlocking Directorates.



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Price discrimination is the charging of Price discrimination is the charging of different prices to competing buyers for different prices to competing buyers for identical goods. Goods must (1) be identical goods. Goods must (1) be engaged in interstate commerce, (2) be of engaged in interstate commerce, (2) be of like grade and quality, (3) sold to two or like grade and quality, (3) sold to two or more purchasers.more purchasers.

Defenses:Defenses:– Cost justification.Cost justification.– Meeting the price of competition.Meeting the price of competition.– Changing market conditions.Changing market conditions.

Price DiscriminationPrice Discrimination



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Exclusive Dealing Contracts.Exclusive Dealing Contracts.– A contract under which a seller forbids a buyer A contract under which a seller forbids a buyer

to purchase products from the seller’s to purchase products from the seller’s competitors. competitors.

– Prohibited if the effect of the contract is to Prohibited if the effect of the contract is to “substantially lessen competition or tend to “substantially lessen competition or tend to create a monopoly.”create a monopoly.”

Exclusionary PracticesExclusionary Practices



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Tying Arrangements.Tying Arrangements.– The conditioning of the sale of a product The conditioning of the sale of a product

on the buyer’s agreement to purchase on the buyer’s agreement to purchase another product produced or distributed another product produced or distributed by the same seller.by the same seller.

– CASE 46.2 CASE 46.2 Illinois Tool Works, Inc. v. Illinois Tool Works, Inc. v. Independent Ink, Inc.Independent Ink, Inc. (2006). (2006).

Exclusionary PracticesExclusionary Practices



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HorizontalHorizontal Mergers occur between firms at Mergers occur between firms at the same level in the production and the same level in the production and distribution chain.distribution chain.

VerticalVertical Mergers occur between firms at Mergers occur between firms at different levels in the production and different levels in the production and distribution chain.distribution chain.

Market Share and Concentration.Market Share and Concentration.– CASE 46.3 Chicago Bridge & Iron Co. v.

Federal Trade Commission (2008).

MergersMergers



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ConglomerateConglomerate Mergers occur when a firm Mergers occur when a firm seeks to:seeks to:– Extend its product into a new market by Extend its product into a new market by

merging with a firm in that market.merging with a firm in that market.– Extend its product line by merging with a firm Extend its product line by merging with a firm

already producing that product.already producing that product.– Diversify by acquiring a firm that deals in Diversify by acquiring a firm that deals in

unrelated products.unrelated products.

MergersMergers



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Interlocking DirectoratesInterlocking Directorates

Occurs when an individual serves on the Occurs when an individual serves on the board of directors of two or more board of directors of two or more competing companies simultaneously.competing companies simultaneously.

These are prohibited if the two firms meet These are prohibited if the two firms meet certain size requirements.certain size requirements.



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U.S. Department of Justice.U.S. Department of Justice. The Federal Trade Commission enforces The Federal Trade Commission enforces

the FTCA. FTCA provides that:the FTCA. FTCA provides that:– ““Unfair methods of competition in or affecting Unfair methods of competition in or affecting

commerce, and unfair or deceptive acts or commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby practices in or affecting commerce are hereby declared illegal.”declared illegal.”

§ 5: Enforcement of § 5: Enforcement of Antitrust LawsAntitrust Laws



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Private ActionsPrivate Actions

Private party injured under the Sherman or Private party injured under the Sherman or Clayton Act can:Clayton Act can:– Sue for damages and attorneys fees.Sue for damages and attorneys fees.– Plaintiff must prove:Plaintiff must prove:

• Antitrust violation either caused or was a Antitrust violation either caused or was a substantial factor in plaintiff’s injury, and the substantial factor in plaintiff’s injury, and the unlawful actions of Defendant affected Plaintiff’s unlawful actions of Defendant affected Plaintiff’s business protected by antitrust laws.business protected by antitrust laws.

– Treble Damages.Treble Damages.



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§ 6: Exemptions from § 6: Exemptions from Antitrust Law Antitrust Law

Most statutory exemptions to the antitrust laws Most statutory exemptions to the antitrust laws apply to the following areas:apply to the following areas:– Labor.Labor.– Agricultural associations and fisheries.Agricultural associations and fisheries.– Insurance.Insurance.– Foreign trade.Foreign trade.– Professional baseball.Professional baseball.– Cooperative research and production.Cooperative research and production.– Joint efforts y businesspersons to obtain legislative or Joint efforts y businesspersons to obtain legislative or

executive action.executive action.– And Others.And Others.



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ExemptionsExemptions

– Cooperative research and production.Cooperative research and production.– Joint efforts y businesspersons to obtain Joint efforts y businesspersons to obtain

legislative or executive action.legislative or executive action.– And Others.And Others.



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§ 7: U.S. Antitrust Laws § 7: U.S. Antitrust Laws in the Global Contextin the Global Context

Extraterritorial application of U.S. laws: Extraterritorial application of U.S. laws: U.S antitrust laws may be applied to U.S antitrust laws may be applied to protect foreign consumers from U.S. protect foreign consumers from U.S. company violations in foreign nations.company violations in foreign nations.

Foreign “persons” (including governments) Foreign “persons” (including governments) may sue U.S. companies in domestic may sue U.S. companies in domestic courts.courts.

Issue: what is “substantial effect” on U.S. Issue: what is “substantial effect” on U.S. commerce?commerce?

Documents

Chapter 46 Antitrust Law Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Jentz Miller Cross BUSINESS