CHAPTER 20

1. CHAPTER 20 Antitrust

2. INTRODUCTION This chapter offers a general overview of the federal antitrust laws, pointing out which aspects are settled and which are not. It begins with a discussion of Sections 1 and 2 of the Sherman Act, then addresses the Clayton Act provisions relating to mergers and combinations. The chapter outlines the Robinson–Patman Act’s prohibitions on price discrimination, and it concludes with a discussion of international application of the U.S. antitrust laws.

3. SECTION 1: AGREEMENTS IN RESTRAINT OF TRADE • Scope Section 1 of the Sherman Act provides “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, is declared to be illegal.” It applies to: • Those restraints of trade that unreasonably restrict competition. • Trade or commerce among states or with foreign nations. • Defendants conduct that directly interferes with the flow of goods in the stream of commerce, or has a substantial effect on interstate commerce.

4. SECTION 1: AGREEMENTS IN RESTRAINT OF TRADE • Enforcement – both criminal and civil penalties. • Criminal violations of Section 1 may be prosecuted as felonies. Corporations can be fined up to $10 million for each violation, twice the gain to the violators or twice the loss to the victims—whichever is greater. Individuals can be fined up to $350,000 for each violation, and imprisoned for up to three years. Civil violations may be brought by the Justice Department. • Private plaintiffs are entitled to recover three times the damages they have sustained. • State attorneys general may bring civil actions for injuries sustained by residents of their perspective states.

5. VIOLATION OF SECTION 1 • Prima Facie Case. Plaintiff must prove: • There is a contract, combination, or conspiracy among separate entities. • That unreasonably restrains trade. • Affects interstate commerce. • Causes an antitrust injury.

6. VIOLATION OF SECTION 1 • A Contract, Combination, or Conspiracy. • Individual Activity – Section 1 does not prohibit unilateral activity in restraint of trade, i.e., an individual or firm may take any action, no matter how anticompetitive, and not violate Section 1. • Horizontal v. Vertical agreements – Horizontal agreements are those between firms that directly compete with each other, such as retailers selling the same range of products. Vertical agreements are those between firms at different levels of production or distribution, such as a retailer and its supplier.

7. VIOLATION OF SECTION 1 • Unreasonable Restraint of Trade –two approaches: • Per se Violations – practices that are completely void of redeeming competitive rationales. The number of truly per se violations of the antitrust laws has declined. • The Rule of Reason – whether, on balance, the activity promotes or restraints competition, or to put it differently, helps or harms customers.

8. VIOLATION OF SECTION 1 Case 20.1 Synopsis. Blomkest Fertilizer v. Potash Corp.. Saskatchewan founded the Potash Corporation of Saskatchewan (PCS), which produces 38 percent of the potash in North America. During the 1980s, PCS suffered huge losses after it mined potash in quantities that far exceeded demand and thereby caused the price of potash to fall dramatically. American potash companies filed a complaint with the U.S. Department of Commerce, alleging that Canadian producers had dumped potash in the U.S. at prices below fair market value causing injury. An international agreement was reach and the price was raised. A class of potash consumers filed a claim, alleging that the potash producers had colluded to increase the price of potash in violation of Section 1 of the Sherman Act. The district court agreed with the producers and dismissed the claim. The class appealed. ISSUE: Did the potash producers engage in price-fixing in violation of Section 1 of the Sherman Act? HELD: NO. The dismissal was affirmed.

9. TYPES OF HORIZONTAL RESTRAINTS • Horizontal Price-fixing (Per se Violation of Section 1) – agreement between retailers to set a common price for a product such as : • Setting prices (including maximum prices). • Setting the terms of sale, such as customer credit terms. • Setting the quality or quantity of goods to be manufactured or made available for sale. • Rigging bids (agreements between or among competitors to rig contract bids). • The Justice Department views price-fixing as “hard crime” punished by jail sentences whenever possible.

10. TYPES OF HORIZONTAL RESTRAINTS • Horizontal Market Division and Non-price Horizontal Restraints (Per se violation of Section 1) – include: • Competitors divide up a market according to class of customer or geographic territory or restrict product output. • Agreements among competitors not to compete on non-price matters may violate Section 1. • Group Boycotts (may be Per se violation of Section 1) – agreement between or among competitors that derives another competitor of something it needs to compete affectively. However, not all boycotts are Per se violations. • Trade Associations and Group Boycotts (may be per se violation of Section 1) – courts do not look favorably upon attempts at self-regulation by trade and professional associations, particularly when such attempt result in group boycotts.

11. TYPES OF HORIZONTAL RESTRAINTS Case 20.2 Synopsis-- California Dental Association v. FTC. The California Dental Association (CDA) is a trade association for California dentists, with approximately 19,000 members out of the 26,000 licensed dentists in California. The CDA provides a variety of services, including marketing, public relations seminars on practice management, continuing education, lobbying, and an administrative procedure for handling patients’ complaints. It also has subsidiaries that provide liability insurance, discounts on long distance calling, and financing for equipment. The CDA has a code of ethics by which members must abide. The Code includes a section that prohibits dentists from advertising or soliciting patients with any communication that is false and misleading. The guidelines forbid advertising that refers to “low” or “reasonable” prices, offers volume discounts, or makes any claims about quality of service. CONTINUED

12. TYPES OF HORIZONTAL RESTRAINTS Case 20.2 – (Cont’d) The Ninth Circuit affirmed the FTC’s finding that the CDA prevented its members from engaging in truthful, non-misleading advertising offering discounts or claims about service quality. On appeal, the U.S. Supreme Court held that the appeals court had erred by engaging in an abbreviated rule-of-reason analysis and had failed to consider a number of theories under which the restrictions might prove pro competitive. The case was then remanded to the appeals court. HELD: CDA’s limitations on advertising were not a violation of Section 5 of the Federal Trade Commission Act because they did not have an anticompetitive effect. .

13. TYPES OF VERTICAL RESTRAINTS • Restraints between firms at different levels in the chain of distri-bution, include price-fixing, market division, tying arrangements, and some franchise agreements. • Vertical Price-Fixing(may be per se violation of Section 1) – agree-ments on price between firms at different levels of production or distribution. Also known as resale price maintenance (RPM) when the agreement fixes minimum prices. • Unilateral Action – the Sherman Act addresses only concerted action, so a manufacturer or distributor can announce list prices to dealers, and the dealers may decide independently to follow those suggestions. • Threats – sanctions that interfere with the retailer’s freedom to set its own minimum price for the goods or services that it sells.

14. TYPES OF VERTICAL RESTRAINTS • Non-price Vertical Restraints and Vertical Market Division – arrangement imposed by a manufacturer on its distributors or dealers that limits the freedom of the dealer to market the manufacturer’s product. They are judged under the rule of reason. • Exclusive Distributorships – manufacturer limits itself to a single distributor in a given territory or, perhaps, line of business. • Territorial and Customer Restrictions – prevent a dealer or distributor from selling outside a certain territory or to a certain class of customers. • Dual Distributors – manufacturers that sell their goods at both wholesale and retail.

15. EXCLUSIVE DISTRIBUTORSHIPS Case 20.3 Synopsis. Paddock Publishing Inc. v. Chicago Tribune Co. The two largest newspapers in Chicago—the Tribune and the Sun-Times—subscribe to supplemental news services; the Tribune to the New York Times and the Sun-Times to the Los Angeles Times. The Daily Herald is the third largest newspaper and was shut out of these two supplemental sources because of exclusive licenses the other two newspapers had. This is a standard practice in the industry to distinguish the news source in a metropolitan market. The Daily Herald sued claiming a Section 1 violation. Both the trial court and the court of appeals rejected the complaint. The court of appeals scolded the Daily Herald that litigation was not the proper forum—the market was. The Daily Herald had never tried to compete with the top two papers for the services.

16. TYPES OF VERTICAL RESTRAINTS • Tying Arrangements (may be per se violation of Section 1) – seller agrees to sell product A (the tying, or desired product) to the customer only if the customer agrees to purchase product B (the tied product) from the seller. Violation if: • The tying and tied products are separate products. • The availability of the tied product is conditioned upon the purchase of the tying product. • The party imposing the tie has market power (“the power to force a purchaser to do something that he would not do in a competitive market”) to force the purchase of the tied product. • A “non insubstantial” amount of commerce in the tied product is affected. • Unlike other per se violations, a tying arrangement may be upheld if there is a business justification for it (quality of parts for business image).

17. TYPES OF VERTICAL RESTRAINTS • Franchise Agreements – business relationship in which one party (the franchisor) grants to another party (the franchisee) the right to use the franchiser’s name and logo and to distribute the franchiser’s products from a specified locale. Section 1 issues arise when franchisor wants to promote uniformity and name recognition, imposes certain types of limitations on the franchise.

18. ANTITRUST INJURY • To recover damages, a plaintiff must establish that it sustained an antitrust injury, that is, a loss due to a competition-reducing aspect or effect of the defendant’s violation of the Sherman Act. • A plaintiff may not recover under the antitrust laws for losses that resulted from competition as such.

19. LIMITATIONS ON ANTITRUST ENFORCEMENT The courts have limited the private enforcement rights of individual citizens and states by invoking the doctrine of standing. They have also limited the liability of state governments by applying state-action exemptions.

20. LIMITATIONS ON ANTITRUST ENFORCEMENT • Standing – plaintiff have suffered an injury from the defendant’s violation of the antitrust law. • State-Action Exemption – the Sherman Antitrust Act only applies to anticompetitive actions by parties, not to anticompetitive actions by state legislatures or administrative bodies. State action is exempt if: • There is a clear state purpose to displace competition. • The state provides adequate public supervision. However, the exemption usually does not extend to local municipalities, except in certain limited circumstances.

21. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Scope. Section 2 of the Sherman Act provides that “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony.” No agreement is required and unilateral action may violate Section 2.

22. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Penalties. Corporations can be fined up to $10 million (or doubled the gain to the violator or double the loss to the victim if that is more than $10 million) for each violation, and individuals can be fined up to $350,000 for each violation and imprisoned for up to three years. There are usually no criminal prosecutions.

23. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Prima Facie Elements • Defendant has monopoly power in a relevant market and • Defendant willfully acquired or maintained that power through anticompetitive acts. • Monopoly Power - the power to control prices or exclude competition in a relevant market. Monopoly power is marked by prices that are higher than they would be in a competitive market over an extended period of time and the unavailability of substitute goods or services.

24. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Relevant Market – markets have two components: a product component and a geographical component. • Multiple-Brand Product Market – product or service offerings by different manufacturers or sellers that are economically interchangeable and may therefore be said to compete. • Single –Brand Product Market – market dominated by one brand and parts are controlled by that manufacturer. Eastman Kodak Co. v. Image Technical Services, Inc,. 504 U.S. 451 (1992). • Geographic Market Competition is also affected by geographical restraints on product movement. The contours of geographic markets may also be affected by government regulations that confine firms to certain regions.

25. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Market Share - Once the relevant market is determined, the plaintiff must show that, within this market, the defendant possessed monopoly power, that can be inferred from a firm’s predominant share of the market, because a dominant share of the market often carries with it the power to control output across the market and thereby control prices. Plaintiff must also show that there are significant barriers to entry in the market.

26. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Monopolistic Intent - Once a prima facie case is proved, defendant’s intent may be relevant. If relevant, monopolistic intent be proved by evidence of conduct (not merely statements) that is inherently anticompetitive.

27. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Predatory Pricing--the attempt to eliminate rivals by undercutting their prices to the point where they lose money and go out of business so that the monopolist can then raise its prices because it is no longer restrained by competition.

28. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Refusal to Deal - generally, antitrust laws do not prevent a firm from deciding with whom it will or will not deal, unless the firm owns or manages an essential facility, i.e., some resource necessary to its rivals’ survival that they cannot feasibly duplicate.

29. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES • Derivative Markets - a firm with monopoly power in one market can use that power to gain an advantage in a separate market, thus violating Section 2.

30. SECTION 2 OF THE SHERMAN ACT: MONOPOLIES Other Anticompetitive Acts - allocation of markets and territories, price-fixing, fraudulently obtaining a patent, or engaging in sham litigation against a competitor.

31. MERGERS: SECTION 7 OF THE CLAYTON ACT • If a merger or acquisition unreasonably restrains trade, it violates Section 1 of the Sherman Act. If it results in monopolization, it violates Section 2. • Scope. The Clayton act prohibits mergers that threaten to harm competition. • Horizontal mergers – between actual or prospective competitors at the same level of distribution. • Vertical mergers – between firms at different points along the chain of production and distribution.

32. MERGERS: SECTION 7 OF THE CLAYTON ACT • Penalties. No criminal sanctions. Government may seek: • Divestiture of acquired stock or assets. • Sale of particular subsidiaries, divisions, or lines of business. • Compulsory sale of needed materials to a divested firm. • Compulsory sharing of technology • Temporary restrictions upon the defendant’s own output or conduct.

33. MERGERS: SECTION 7 OF THE CLAYTON ACT • Hart–Scott–Rodino Antitrust Improvements Act - provides a pre-merger notification procedure whereby the FTC and Justice Department can review the anticompetitive effects of proposed mergers meeting certain size-of-party and size-of-transaction tests. Parties to a merger must give the FTC and Justice Department thirty days to review their filings, or fifteen days in the case of a tender offer.

34. MERGERS: SECTION 7 OF THE CLAYTON ACT • Merger guidelines – developed by the FTC and Justice Department. • Analysis of whether the merger will reduce competition based on Sherman Act Section 2 criteria. • Determination of the relevant geographic and product markets. • Then calculation of the market shares of the companies proposing to merge. • Finally, it will determine the effect of the merger on the relevant market. • If the merger appears to increase concentration in the relevant market by a certain amount, the reviewing agency will ordinarily challenge the transaction.

35. LITIGATION UNDER SECT. 7 • Horizontal Mergers - combining of two or more competing companies at the same level in the chain of production and distribution. Lawfulness is determined by: • Identification of the relevant product and geographic markets, based on Section 2 Sherman Act criteria. • Market shares of the firms involved in the transaction. • Level of concentration in the market. • Whether the market is structurally conducive to anticompetitive behavior.

36. HORIZONTAL MERGERS Case 20.5 Synopsis. FTC v. H.J. Heinz Company. Gerber, Heinz and Beech-Nut are the only three significant manufacturers and distributors of baby food in the United States. Gerber is the largest company, with a market share of approximately 65 percent. Heinz has a market share of 17 percent, and Beech-Nut’s market share is 15 percent. As the dominant firm in the market (with brand loyalty greater than any other product sold in the U.S. including Coca-Cola and Nike), Gerber generally is the first to increase its prices. Beech-Nut and Heinz follow Gerber’s prices, but Heinz markets its baby food at a slightly lower price as a “value brand.” On February 28, 2000, Heinz and Beech-Nut entered into a merger providing for Heinz to acquire Beech-Nut’s voting securities for $185 million. On July 14, 2000, the FTC sued to enjoin the proposed merger. CONTINUED

37. HORIZONTAL MERGERS Case 20.5 (Cont’d). The trial court found that there was very little competition between Heinz and Beech-Nut as they were virtually never found in the same supermarket and did not price against each other. But, the evidence did reveal “distribution competition” — competition between Heinz and Beech-Nut to be the second brand on the shelf. Nevertheless, the trial court held that the FTC had failed to establish that retaining this competition would result in benefits to the consumer. Heinz argued that it would achieve cost savings of approximately $9.4 to $12 million as a result of the merger. These savings would enable the firm to improve the quality of its product and to lower the price. The two companies also produced evidence that the merger would create conditions for increased competition in the form of product innovation and product differentiation. CONTINUED

38. HORIZONTAL MERGERS Case 20.5 (Cont’d). The trial court agreed that the cost savings and efficiencies resulting from the merger would allow it to compete more effectively with Gerber for the benefit of consumers, and it refused to enjoin the merger. The FTC appealed. ISSUE: Will a merger between two of the three main manufacturers of baby food lessen competition in violation of Section 7 of the Clayton Act? HELD: YES. The U.S. Court of Appeals for the District of Columbia Circuit enjoined the merger pending an expedited appeal. The court stated that the merging companies’ argument that the anticompetitive effects of the merger would be offset by efficiencies resulting from the merger was a novel defense that the U.S. Supreme Court had not addressed since the 1960s.

39. LITIGATION UNDER SECT. 7 • Vertical Mergers - acquisition by one company of another company at a higher or lower level in the chain of production and distribution. Courts tend to focus on whether the merger has excluded competitors from a significant sector of the market.

40. LITIGATION UNDER SECT. 7 • Conglomerate Mergers - the acquisition of a company by another company in a different line of business. Prosecution has largely been abandoned. A merger violates Section 7 if : • The market is highly concentrated. • One of the merging firms is an actual, substantial competitor in the market and the other is one of a small number of firms that might have entered the market. • Entry of that firm de novo or anew or by a “toehold” acquisition into the market would be reasonably likely to have pro-competitive effects; and • Entry by that firm absent the merger was likely.

41. PRICE DISCRIMINATION: THE ROBINSON–PATMAN ACT (SECTION 2 OF THE CLAYTON ACT) Price discrimination, the selling the same product to different purchasers at the same level of distribution at different prices, is illegal under the Clayton Act. Generally, only private individuals are involved in litigation.

42. PRICE DISCRIMINATION: THE ROBINSON–PATMAN ACT (SECTION 2 OF THE CLAYTON ACT) • Elements • Discrimination in price, i.e., a difference in the price at which goods are sold, or in the terms and conditions of sale, or in such items as freight allowances or rebates. • Some part of the discrimination must involve sales in interstate commerce. • The discrimination must involve sales for use, consumption, or resale within the U.S.. • There must be discrimination between different purchasers. • The discrimination must involve sales of tangible commodities of like grade and quality, and • There must be a probable injury to competition.

43. PRICE DISCRIMINATION: THE ROBINSON–PATMAN ACT (SECTION 2 OF THE CLAYTON ACT) • Defenses • Meeting Competition – the seller acted in “good faith to meet an equally low price of a competitor.” • Cost Justification – price differentials due to cost of manufacturer, sale or delivery resulting from the differing methods or quantities in which the goods are sold and delivered. • Changing Conditions – Section 2(a) does not prohibit price changes due to fluctuating market conditions.

44. INTERNATIONAL APPLICATION OF THE ANTITRUST LAWS • Sovereign Immunity - protects foreign governments from applications of U.S. laws. • U.S. courts apply sovereign immunity avoid antitrust disputes with foreign governments. • Liability depends on whether a foreign firm’s anticompetitive activity was directed by its government or if it was merely tolerated. If the foreign government tolerates but does not require the anticompetitive acts, the U.S. antitrust laws apply.

45. INTERNATIONAL APPLICATION OF THE ANTITRUST LAWS • Extraterritorial Application of U.S. Law. Sherman Act applies when: • The intent of parties is to affect commerce within the U.S., and • Their conduct actually affects commerce in the U.S. • However, foreign nations do not always accept the applicability of U.S. antitrust laws.

46. EXTRATERRITORIAL APPLICATION OF U.S. LAW Case 20.6 Synopsis. U.S. v. Nippon Paper. NPI, a Japanese manufacturer of fax paper, met in Japan with unnamed co-conspirators to fix prices of paper in the United States. ISSUE: May a U.S. criminal antitrust prosecution be based on conduct that took place entirely outside the United States? HELD: YES. The court of appeals held that NPI could be criminally prosecuted in the United States for acts committed in Japan because the acts violated antitrust laws.

47. THE RESPONSIBLE MANAGER Avoiding Antitrust Violations • To minimize antitrust violations, managers should: • NOT discuss products or pricing among competitors, trade and professional associations. • NOT disseminate information that may result in market division or output restriction. • Be wary of highly-concentrated markets. • Encourage employees to to inform the manager whenever any of the above “red flags” appear. • Seek assistance from competent counsel in analyzing any activity that might violate the antitrust laws. • “Memorably” leave the room (spilling a drink) if she hears competitors discussing price or other terms of sale.

48. REVIEW 1. Why does Section 1 of the Sherman Act not penalize a manufacturer advertising suggested retail prices? 2. Why can a franchise agreement specify that another franchise will not be awarded in the same geographic area? 3. Briefly discuss three defenses to an allegation of a Robinson-Patman Act violation.