Antitrust Law Notes
Monopoly and Antitrust Laws
Monopoly Power
A company possesses a monopoly when it holds a substantial market share, enabling it to exert monopoly power that negatively impacts competition.
Monopoly power is defined as the capacity of a monopoly to control prices and other market characteristics within a specific market segment.
Antitrust Laws
Antitrust laws aim to maintain competition as the driving force of the US economy.
Sherman Act
Section 1 prohibits "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations."
Section 2 prohibits monopolization, attempts to monopolize, or combining/conspiring to monopolize any part of trade or commerce.
A rarely used provision allows the government to seize property in transit involved in outlawed contracts, combinations, or conspiracies under Section 1.
Violations of the Sherman Act were originally misdemeanors with a maximum fine of per count and a maximum jail sentence of one year.
Clayton Act
Enacted in 1914 to address perceived loopholes in the Sherman Act, closely linked to the FTC Act.
Prohibits:
Price discrimination among different purchasers of the same commodities.
Conditioning the sale of one commodity on the purchaser not dealing with the seller's competitors.
Acquiring stock of a competing corporation.
Single person serving on multiple corporate boards if companies are competitors.
FTC Act
A civil statute with broadly worded prohibitions, unlike the Clayton Act.
Enforcement of Antitrust Laws
Four means of enforcement:
Federal courts: Power to break up companies convicted of monopolizing or order divestiture in cases of unlawful mergers and acquisitions.
Consent decrees: Defendants agree not to continue the complained activity without admitting guilt.
Treble damages: Private parties are incentivized to police industry for antitrust violations.
Class action: Important development in antitrust law during the 1970s.
Rule of Reason vs. Per Se Rules
Section 1 of the Sherman Act states that “every” restraint of trade is illegal.
Rule of Reason:
A restraint is permissible only if it is ancillary to a legitimate business purpose.
Agreements that directly impair competition are unlawful only if the impairment is unreasonable.
Per Se Rules:
Price-fixing is per se illegal under the Sherman Act, meaning unlawful on its face.
The question is whether the price was fixed, not whether it was reasonable or impaired competition.
The Clayton Act uses a different standard, focusing on acts that may tend substantially to lessen competition.
Enforcement Actions
US Department of Justice:
May bring civil actions to enjoin violations of Sherman and Clayton Acts.
May institute criminal prosecutions for violations of the Sherman Act.
Federal Trade Commission (FTC):
Hears cases under the Administrative Procedure Act.
State Attorneys General:
Authorized to file antitrust suits in federal court for damages on behalf of their citizens (parens patriae claim) under the Antitrust Improvements Act of 1976.
Private Individuals and Companies:
May file suits for damages or injunctions if directly injured by a violation of the Sherman or Clayton Act.
Key Antitrust Principles
Classification of antitrust cases is complex due to varying factual circumstances.
Price-fixing agreements are per se violations of Section 1 of the Sherman Act (United States v. Trenton Potteries).
The Sherman and Clayton Acts apply when a company’s activities affect US commerce.
The interpretation of Section 1 of the Sherman Act often called the Rule of Reason, has two possible meanings.
Some acts intrinsically impair competition, requiring no further analysis if proven.
Horizontal restraint of trade: Occurs between competitors (manufacturers, wholesalers, retailers, etc.).
Vertical restraint of trade: Occurs between parties at different levels of the distribution chain (e.g., manufacturer and retailer).
Knowledge of competitors’ prices can be an effective means of controlling prices.
Territorial allocation can be a vertical or horizontal restraint.
Once an agreement or conspiracy is shown, conviction is possible even without concrete results.
Plaintiff only needs to show injury to themselves, not substantial harm to the public.
Horizontal Restraints of Trade
Competitors can engage in horizontal restraints through price-fixing, territorial allocation, or joint boycotts (refusals to deal).
These restraints need not be substantial to be actionable.
Vertical Restraints of Trade
Resale price maintenance: Agreement where a manufacturer specifies retail prices.
Exclusive dealing agreement: Agreement to sell only if the buyer doesn't buy from a rival.
Tying contract: Forcing a buyer to take a certain product to get the desired product.
Example: "I’ll sell you the potato chips you crave, but only if you purchase five pounds of my Grade B liver."
Vertical allocation of customers or territory: Illegal only if competition to the markets as a whole is adversely affected.
Not per se illegal unless they have an anti-competitive effect.
Price Discrimination: The Robinson-Patman Act
Section 2(a): Unlawful to discriminate in price between different purchasers of commodities of like grade and quality, where the effect may substantially lessen competition or create a monopoly.
Section 2(b): A defense to price discrimination is any price made in good faith to meet competition.
Discriminatory prices must be charged in sales made at the same time or reasonably close in time.
The act applies only to sales of commodities, not leases, rentals, or licenses.
Only sales involving goods of “like grade and quality” can be tested for discriminatory pricing.
Price discrimination must have an anticompetitive effect, using the Clayton Act standard.
Measuring Injury
Impact measured against:
Competitors of the seller.
Competitors of the buyer.
Customers of either of the two types of competitors.
Primary-line injury: Directly injures a competitor, often geographically based.
Secondary-line injury: Injures a competitor of a buyer.
Tertiary-line injury: Injury further down the chain of distribution.
According to Perkins v. Standard Oil Co., "customer" means any person who distributes the supplier-seller’s product.
Defenses
Price discrimination is not per se unlawful.
Cost justification: Lower prices are legal if the cost of serving that buyer is lower.
Meeting competition: Lower prices are offered to meet competition.
Section 2(c): Prohibits payment of commissions by one party to the opposite party in a sale of goods unless services are rendered.
Sections 2(d) and 2(e): Prohibit discriminatory allowances for merchandising and other services.
Exemptions to Antitrust Laws
Several industries are subject to oversight by specific regulatory agencies (banking, securities, communications, transportation, energy).
Labor unions are explicitly exempt under the Clayton Act.
Insurance companies are exempt under the McCarran-Ferguson Act of 1945 to the extent that states regulate insurance.
Under Parker v. Brown (1943), industries regulated by valid state law are exempt.
The Noerr doctrine protects First Amendment rights to petition the government.
Baseball is not considered “in commerce” (1923 Supreme Court ruling).
Sherman Act, Section 2: Concentrations of Market Power
Large companies can thwart competition through monopoly power.
Monopoly is "the power to control market prices or exclude competition."
To determine if a firm has a dominant market share, define the relevant market:
Relevant product market
Relevant geographic market
A company doesn’t have to dominate the world market to be considered a monopolist.
Determining Monopoly Power
After defining markets, determine if the defendant has sufficient power to constitute a monopoly.
Possessing a monopoly is not per se unlawful.
Determine if the company acquired or maintained its monopoly power unlawfully.
Section 2 prohibits not only actual monopolization but also attempts to monopolize.
Leasing and pricing practices lawful for ordinary competitors may be unlawful under Section 2.
Acquisitions and Mergers under Section 7 of the Clayton Act
Neither Section 1 nor Section 2 of the Sherman Act proved useful in barring mergers or acquisitions.
The Supreme Court defines the area of effective competition.
Practices that help a company acquire or maintain its monopoly position need not be unlawful in themselves.
The Clayton Act originally prohibited only mergers through stock sales, not asset acquisitions.
Types of Mergers
Horizontal: Between competitors.
Example: Two bread manufacturers.
Vertical: Between a supplier and a customer. If the customer acquires the supplier, it is known as backward vertical integration; if the supplier acquires the customer, it is forward vertical integration.
Backward: Book publisher buys a paper manufacturer.
Forward: Book publisher buys a bookstore chain.
Conglomerate: Between companies whose businesses are not directly related.
Pure: Steel manufacturer acquires a movie distributor.
Product-extension: Manufacturer of one product acquires the manufacturer of a related product.
Market-extension: Company in one geographic market acquires a company in the same business in a different location.
Relevant Market
Relevant product market: any line of commerce, can include “submarkets”.
Relevant geographic market: any section of the country.
Courts must consider “the commercial realities” of the industry and the economic significance of the market.
Factors in Assessing Horizontal Mergers
The market shares of the merging companies.
The concentration ratios (sales controlled by either a single or a small number of firms).
The trends in the industry toward concentration.
Defenses
Failing company: Applicable if two conditions are satisfied (Citizen Publishing Company v. United States).
Beneficial Effects: That a merger might produce beneficial effects is not a defense to a Section 7 case.
Other Considerations
Vertical Mergers: Plaintiff must show that the merger forecloses competition “in a substantial share of” a substantial market.
Conglomerate Mergers: Require a showing of specific potential effects, such as raising barriers to entry into an industry and thus entrenching monopoly, or eliminating potential competition.
Concentrated Industry: Industry in which a large percentage of market sales is controlled by either a single firm or a small number of firms.
‘Eliminating potential competition’: A theory where the acquiring company might have competed in the acquired company’s market but for the merger.
Reciprocity: The practice of a seller using his volume of purchases from the buyer to induce the buyer to purchase from him
Joint ventures may also be condemned by Section 7.
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires certain companies to notify the Justice Department before completing mergers or acquisitions.