Antitrust Laws- Regulating Competition

1. 13 Antitrust Laws- Regulating Competition

2. Anti-Trust Regulation • Purpose: to break monopolies and encourage competition • Why is competition a good thing?

3. Competition • Encourages efficient allocation of resources • Stimulates innovation • Keeps prices low • Promotes quality • Promotes variety of choices • Is consistent with the principle of individual freedom

4. Antitrust Laws:Economic Assumptions • Many Small Competitors Better Than Few Larger Ones • No Organization/Individual Should Control Production Quantities Or Set Prices

5. Historical DevelopmentOf Antitrust Laws Clayton Act Sherman Antitrust Amended 1914 1890 1936 1950 1938 Federal Trade Commission Amended

6. Sherman Antitrust Act (1890) • The Sherman Antitrust Act prohibits contracts, combinations & conspiracies in restraint of interstate trade via such devices as: • Price fixing agreements among competitors to control market prices (for examples see chart p. 392) • Horizontal- Between Competitors • Vertical- Resale Price Maintenance, Exception: Announced Policy (Colgate Doctrine) • Indirect- Protect Marketing • Market allocation/Territorial Agreements by competitors in splitting the market into non-competing areas. • Boycotts in restraint of trade by competitors against a particular entity.

7. Sufficient Interstate Nexus • A physician claimed that a hospital and its medical staff conspired to misuse a congressionally regulated peer review process to exclude him from the market for ophthalmological services in Los Angeles. Issue: Is there a sufficient nexus with interstate commerce to support federal jurisdiction under Section 1 of the Sherman Act? Held: Yes. A proper analysis of the alleged conspiracy in restraint of interstate trade in violation of Section 1 focuses upon potential harm that would ensue if conspiracy were successful, not upon its actual consequences. If the conspiracy is successful, there will be a reduction in the services available. The boycott of a single surgeon may have a general impact on the market. Summit Health Ltd. v. Pinhas, 111 S.Ct. 1842 (1991).

8. Colgate Doctrine? • Parke Davis announced that it would sell its products only to those wholesalers and retailers who observed minimum resale prices suggested by Parke Davis. To promote compliance, Parke Davis refused to sell to any wholesaler who supplied its products to any retailer who did not observe the suggested minimum retail prices. Several retailers continued to sell Parke Davis vitamins at a discount, and when their names were furnished to the wholesalers, both Parke Davis and the wholesalers refused to fill their orders for any of the manufacturer's products. Issue: Were these actions a violation of the Sherman Act? Held: Yes. The program upon which Parke Davis embarked to promote general compliance with its suggested resale prices plainly exceeded the limitations of the Colgate Doctrine. Parke Davis did not content itself with announcing its policy regarding retail prices and following this with a simple refusal to have business relations with any retailers who disregarded that policy. United States v. Parke, Davis & Co., 362 U.S. 29 (1960).

9. Territorial Restriction? • A manufacturer of television sets marketed its products through a retail franchise system that required franchisees to sell its products only from the locations at which it was franchised. A disenchanted franchisee claimed that defendant had violated Section 1 of the Sherman Act by entering into and enforcing these agreements. Issue: Are vertical territorial restrictions per se violations? Held: No. Territorial restrictions are subject to the rule of reason. Vertical restrictions reduce intra-brand competition but promote inter-brand competition. As such, inquiries as to the harm, if any, on competition are required. Continental T.V., Inc. v. GTE Sylvania, Inc., 97 S.Ct. 2549 (1977).

10. Vertical Price Fixing • State Oil Company v. Khan, 118 S. Ct. 275 (1997), p. 392 • FACTS: Barkat U. Khan and his corporation entered into an agreement with State Oil Company to lease and operate a gas station and convenience store owned by State Oil. The agreement provided that Khan would obtain the station’s gasoline supply from State Oil at a price equal to a suggested retail price set by State Oil, less a margin of 3.25 cents per gallon. Under the agreement, Khan could charge any amount for gasoline sold to the station’s customers, but if the price charged was higher than State Oil’s suggested retail price, the excess was to be rebated to State Oil. Khan could sell gasoline for less than State Oil’s suggested retail price, but any such decrease would reduce their 3.25 cents-per-gallon margin. About a year after Khan began operating the gas station, he and his company fell behind in lease payments. State Oil then gave notice of its intent to terminate the agreement and commenced a state court proceeding to evict. Khan sued State Oil claiming that State Oil has engaged in price fixing in violation of § 1 of the Sherman Act by preventing Khan from raising or lowering retail gas prices. The District Court found that the allegations in the complaint did not state a per se violation of the Sherman Act because they did not establish the sort of “manifestly anticompetitive implications or pernicious effect on competition” that would justify per se prohibition of State Oil’s conduct. The Court of Appeals reversed. • ISSUE: What is the appropriate standard of antitrust analysis when judging the legality of vertical maximum price fixing?

11. Vertical Price Fixing • State Oil Company v. Khan, 118 S. Ct. 275 (1997), p. 392 • DECISION: The rule of reason. • REASONS: 1. Although the Sherman Act’s terms prohibits every agreement in “restraint of trade,” the Court recognizes that only unreasonable restraints are illegal. • 2. The Court reviewed its holdings in Dr. Miles Medical Co., Socony-Vacuum Oil Co., Kiefer-Stewart Co., White Motor Co., Schwinn Co., Albrecht, and GTE Sylvania. • 3.The rule-of-reason analysis will effectively identify those situations in which vertical maximum price fixing amounts to anticompetitive conduct.

12. Sherman Antitrust Act (1890) • The Sherman Antitrust Act also allows for the break up of monopolies. • a monopoly exists when a single business entity acquires exclusive control of a particular market or industry (see Aspen Skiing example on p. 383)

13. Sherman Antitrust Act (1890) • To break up a monopoly must show: • Actual “Market Power” and that • Such power resulted from a deliberate course of action or that the holder intends to maintain such power by particular conduct • (Microsoft is a frequent target of such claims)

14. Intent to Monopolize • Through a series of relationships and transactions, Spectrum Sports, Inc. became the national distributor for sorbothane (a patented elastic polymer) in athletic shoes. Sorboturf, Inc., which had been a distributor of sorbothane, failed as a business. Sorboturf, Inc. sued Spectrum Sports, Inc. for violating § 2 of the Sherman Act. The jury found that Spectrum Sports, Inc. was "monopolizing, attempting to monopolize, and/or conspiring to monopolize." The court of appeals upheld the jury's verdict ($1,743,000 to be tripled plus almost $100,000 in attorney's fee) even though there was no specific finding by the jury as to Spectrum's precise violation. Issue: Is a jury required to focus on the alleged violator's intent to monopolize a particular (relevant) market? Held: Yes. Intent to monopolize alone is insufficient to establish the dangerous probability of success which requires inquiry into the relevant product and geographical market and the alleged violator's economic power in that market. Spectrum Sports Inc. v. McQuillan, 113 S.Ct. 884 (1993).

15. Sherman Antitrust Act (1890) • The Sherman Antitrust Act also prohibits “predatory conduct”, that is, seeking to gain market share by injuring actual or potential competitors by means other than improved performance. Pricing policies are frequently examined for this.

16. Analysis In Antitrust Law • Rule Of Reason- Test Of Reasonableness • Announced in Standard Oil Co. v. U.S. (1911) • Nature/Character Of Contract • Surrounding Circumstances Giving Rise to an Inference • Per Se Illegality- Proof Of Activity = Proof Of Violation (e.g. price fixing) • Quick Look Analysis - Behavior that tends to be anti-competitive

17. Per Se Illegality • The only two daily newspapers of general circulation in Tucson, Arizona, the Citizen and the Star, signed a joint operating agreement. Under this agreement, each paper retained its own news and editorial department and its corporate identity. Tucson News, Inc. (TNI), owned equally by both parties, was formed to manage all other departments for each paper. The agreement eliminated competition between the parties through three control devices: (a) price-fixing -- distribution, sales and placement of advertising were all handled by TNI, while subscription and advertising rates were set jointly; (b) profit pooling -- all profits were commingled and distributed pursuant to an agreed ratio; and (c) market control -- neither paper nor its stockholders could engage in the other competing business, that is, publishing, in the Tucson metropolitan area. Issue: Is this arrangement illegal? Held: Yes. It is a Sherman Act violation. Price-fixing is illegal per se. Profit pooling at a set ratio reduces, and possibly eliminates, incentive to compete. The market control arrangement is a "division of fields," prohibited by the Sherman Act. Citizen Publishing Co. et al. v. United States, 89 S.Ct. 927 (1969).

18. Per Se Illegality • Plaintiffs, beer retailers, brought suit alleging that their wholesalers had engaged in an unlawful conspiracy to restrain trade by refusing to sell beer unless plaintiffs paid cash in advance or at the time of the delivery. The wholesalers had an agreement that none of them would grant short-term credit although such credit had been extended in the past. Issue: Is the agreement illegal per se? Held: Yes. Extending interest-free credit for a period of time is equivalent to giving a discount equal to the value of the use of the purchase price for that period of time. Thus, credit terms must be characterized as an inseparable part of the price. Catalano, Inc. v. Target Sales, Inc., 100 S.Ct. 1925 (1980).

19. Quick Look Analysis California Dental Assoc. v. FTC 119 S.Ct. 1604 (1999), p. 386 FACTS: Through its Code of Ethics and local dental societies, the California Dental Association, a nonprofit organization, attempted to limit the amount of advertising dentists could do. The Federal Trade Commission alleged that the CDA unreasonably restricted advertising of discounted fees and of the quality of dental services. The FTC found the CDA’s restrictions were an unreasonable restraint of trade under the Sherman Act (and a violation of § 5 of the FTC Act). The FTC used an abbreviated rule-of-reason (quick-look) analysis. The 9th Circuit affirmed the FTC’s findings and conclusions. ISSUE: What type of antitrust analysis is appropriate in this case?

20. Quick Look Analysis California Dental Assoc. v. FTC 119 S.Ct. 1604 (1999), p. 386 DECISION: The rule of reason analysis. REASONS: 1. The CDA restrictions might be viewed as having a procompetitive effect. 2. Restrictions on misleading or deceptive advertising can be viewed as protecting patients. 3. Thus, a more thorough analysis than a quick assumption is necessary to judge the degree of restraint imposed by such restrictions. 4. The quick-look analysis used by the FTC is not sufficient.

21. Sherman Act- Sanctions • Criminal Prosecution, subject to: • Fines, up to $350,000 for an individual and $10,000,000 for a corporation • Imprisonment, up to 3 years • Requires proof beyond a reasonable doubt • Civil Action • Enjoined By Courts • Triple Damages • Preponderance Of Evidence • Property in Interstate Transport Subject To Seizure & Forfeiture

22. Antitrust Criminal Fines ($M) Source: “Trends In U.S. Government Antitrust Enforcement”, The Antitrust Practice Group, www.globalcompetitionreview.com

23. Antitrust Incarcerations Source: “Trends In U.S. Government Antitrust Enforcement”, The Antitrust Practice Group, www.globalcompetitionreview.com

24. Triple Damages • Examples of triple damage recoveries include the following: • a. Nintendo paid $30 million for price-fixing of video games. • b. Delta, American, United, TWA, Northwest, and U.S. Air airlines paid $44 million in cash and $458 million in coupons to travelers to settle a case involving the use of reservation systems to set prices. • c. Mead Johnson paid $38.8 million in a price-fixing of infant formula case. • d. Twenty-two manufacturers of corrugated cardboard agreed to pay $300 million to 300,000 firms that purchased corrugated cardboard between 1960 and 1978. • e. Recording companies have agreed to grant discounts on purchases of CDs to settle a class action claim of price fixing.

25. Sherman Act- Exemptions • Insurance Companies • Farm Cooperatives • Shipping • Milk Marketing • Investment Companies • State Action (Parker v. Brown Doctrine) • Labor Unions- Normal Activities • Noerr-Pennington Doctrine (Lobbying)

26. State Action Exemption • Rate bureaus representing common carriers in five southeastern states provided a forum for carriers to discuss and agree on rates for intrastate transportation of commodities. These rates were then proposed to the public service commissions for approval. The U.S. instituted action to enjoin this activity. Issue: Is the state action exemption applicable? Held: Yes. It is not enough that the anticompetitive conduct is prompted by state action; it must be compelled by the state. The rate bureaus are entitled to Sherman Act immunity under the state action doctrine. Southern Motor Carriers Rate Conference, Inc. v. United States, 105 S.Ct. 1721 (1985).

27. Noerr-Pennington • A group of lawyers who regularly acted as court-appointed counsel for indigent defendants in District of Columbia criminal cases agreed to stop providing such representation until the District increased their compensation. The boycott had a severe impact on the District's criminal justice system, and the District government capitulated to the lawyers' demands. After the lawyers returned to work, the Federal Trade Commission (FTC) filed a complaint alleging a conspiracy to fix prices and to conduct a boycott that constituted unfair methods of competition in violation of § 5 of the FTC Act. Issue: Are Noerr-Pennington and the First Amendment a defense? Held: No. A per se violation (price fixing). The Noerr doctrine does not extend to horizontal boycotts designed to exact higher prices from the government simply because they are genuinely intended to influence the government to agree to the conspirators' terms. F.T.C. v. Superior Court Trial Lawyers Assn., 110 S.Ct. 768 (1990).

28. Noerr-Pennington • The country's largest producer of steel electrical conduit attempted to prevent the National Fire Protection Association from approving the use of plastic conduit in the National Electric Code. Issue: Is this action exempt from the Sherman Act? Held: No. Efforts to influence private associations that set product safety standards that are routinely incorporated into state and local laws are not immune from antitrust liability under the Noerr-Pennington Doctrine which protects petitioning of government officials. The association is not a quasi-legislative body. Allied Tube & Conduit Corp. v. Indian Head, Inc., 108 S.Ct. 1931 (1988).

29. The Clayton Act (1914) • Enacted as an amendment to the Sherman Act to clarify some of its ambiguities. • It was later amended itself in 1936 and 1950 to clarify its own provisions

30. The Clayton Act • The Clayton Act (1914) prohibits: • Price discrimination in charging more to smaller competitors. • Tying agreements that force unwanted products on purchasers. • Binding contracts that restrict supplier choice by purchasers. • Interlocking directorates of board members of competing firms. • Community of interests created by purchasing the stocks of competitors.

31. Clayton Act • Outlawed Practices • Substantially Lessen Competition • Creates Monopoly • Eased Burden Of Proof • Justice Dept.- Court Injunctions • Triple Damages, Costs & Fees

32. Clayton Act:Special Arrangements • Tying Contract • Reciprocal Dealing • Exclusive Dealing • Requirements Contract

33. Injunctive Relief • Monfort is the country's fifth-largest beef packer. Excel Corporation (Excel), the second-largest packer, is a wholly owned subsidiary of Cargill, Inc., a large privately owned corporation with more than 150 subsidiaries in at least 35 countries. Excel signed an agreement to acquire the third-largest packer in the market, Spencer Beef, a division of the Land O'Lakes agricultural cooperative. Spencer Beef owned two integrated plants and one slaughtering plant. After the acquisition, Excel would still be the second-largest packer, but would command a market share almost equal to that of the largest packer, IBP, Inc. (IBP). Monfort brought an action to enjoin the prospective merger. Its complaint alleged that the acquisition would "violate Section 7 of the Clayton Act because the effect of the proposed acquisition may be substantially to lessen competition or tend to create a monopoly in that it would impair Monfort's ability to compete. Issue: Is Monfort entitled to an injunction? Held: No. A plaintiff seeking injunctive relief must show a threat of antitrust injury, and that a showing of loss or damage due merely to increased competition does not constitute such injury. Cargill, Inc. v. Monfort of Colorado, Inc., 107 S.Ct. 484 (1986).

34. Federal Trade Commission Act (1914) • Created FTC, and independent agency charged with keeping competition free and fair. • Enforces the Clayton Act • Note: Anti-trust laws are also enforced by the Department of Justice as well as various state agencies.

35. Federal Trade Commission Act (1914) TOYS “R” US, INC. v. FEDERAL TRADE COMMISSION 221 F.3d 928 (7th Cir. 2000) • FACTS: Toys “R” Us created an express policy to encourage toy manufacturers to limit distribution of toys sold by Toys “R” Us. In particular, this policy restricted sales to warehouse clubs. The FTC brought action and found that the policy violated § 5 of the FTC Act in that the policy was an unfair method of competition. • ISSUE: Does Toys “R” Us violate § 5 of the FTC Act through negotiating with manufacturers to abide by the new distribution policy?

36. Federal Trade Commission Act (1914) TOYS “R” US, INC. v. FEDERAL TRADE COMMISSION 221 F.3d 928 (7th Cir. 2000) DECISION: Yes. REASONS: 1. Toys “R” Us is creating vertical agreements with manufacturers. These agreements restrict the manufacturers’ sales in violation of § 1 of the Sherman Act. 2. Through its market power, Toys “R” Us is leading a boycott of the warehouse clubs by the manufacturers. This boycott is illegal per se. 3. Taken together and separately these actions amount to unfair methods of competition in violation of § 5 of the FTC Act.

37. Robinson-PatmanAmendment • An Amendment to the Clayton Act • Quantity Purchase Advantage (FTC) • Sale Of Goods • Predatory Pricing • Exceptions • Good-Faith Transactions • Pricing Due To Changing Conditions • Cost Justification • Good-Faith Meeting-Of-Competition

38. Robinson-PatmanAmendment • Standard Oil sold gasoline at a lower price to another oil company, which in turn sold it to a wholesaler, who in turn sold it to a competitor of the plaintiff at a price that was still lower than the price paid by the plaintiff for similar gasoline. Issue: Is this type of price discrimination within the coverage of Robinson-Patman? Held: Yes. The law does not immunize Standard's price discrimination simply because the product in question passed through an additional formal exchange before reaching the level of Perkins' actual competitor. From Perkins' point of view, the competitive harm done him by Standard is certainly no less because of the presence of an additional link in this particular distribution chain from the producer to the retailer. Perkins v. Standard Oil Company of California, 89 S.Ct. 1871 (1969).

39. Present Anti-Trust Environment • The present antitrust environment • Current factors influencing the enforcement and effectiveness antitrust legislation • The growing presence of foreign firms in American markets • The attitude of the courts toward antitrust laws • Political considerations that affect how actively the FTC and the Justice Department pursue antitrust cases

40. Antitrust Merger Investigations Source: “Trends In U.S. Government Antitrust Enforcement”, The Antitrust Practice Group, www.globalcompetitionreview.com

41. Deal Value Of DOJ & FTC Antitrust Investigations 0% Source: “Trends In U.S. Government Antitrust Enforcement”, The Antitrust Practice Group, www.globalcompetitionreview.com

42. Types of Mergers/Acquisitions Horizontal = AB B A Conglomerate Vertical

43. Types Of Mergers (cont’d) Market Extension Geographic Extension = Market Extension

44. Federal Trade Commission Act • Unfair Competition • Enforcement • Conduct Injure Consumers? • Offend Public Policy? • Conduct Oppressive, Immoral, Unscrupulous, Unethical • Primary Function = Prevention

45. Unfair Competition and Consumer Legislation • The Federal Trade Commission Act (1914) • Prohibited deceptive business practices. • The Robinson-Patman Act (1936) prohibited: • Price differentials not based on lower costs for large orders. • Advertising and promotional allowances, unless offered to all.

46. Unfair Competition and Consumer Legislation • The Celler-Kefauver Act (1950) • Prohibited the purchase of the assets of a competing firm, if the purchase reduces competition. • Required approval of mergers by the FTC and Justice Department. • The Antitrust Improvements Act (1976) • Provided additional time for Justice and FTC to consider mergers. • Authorized state attorneys general to prosecute price fixing and recovery of monetary damages for consumers.

47. The Deregulation Movement • The process of removing existing government regulations, forgoing proposed regulations, or reducing the rate at which new regulations are enacted. • The primary aim of the deregulation movement is to minimize the complexity of regulations that affect business and the cost of compliance.