CHAPTER 37 ANTITRUST LAW DAVIDSON KNOWLES FORSYTHE Business

CHAPTER 37 ANTITRUST LAW DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed. )

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE BASIS OF REGULATORY REFORM l l Little federal or state regulation of business in early history of United States. Federal courts took “hands off” attitude toward business. Tide began to turn in late 1800 s as public tired of irresponsible corporate behavior. Government regulation of business has become major factor in management of commercial affairs. © 2004 West Legal Studies in Business A Division of Thomson Learning 2

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE SHERMAN ANTITRUST ACT l Passed in 1890. l Purpose is to preserve economic ideal of a pure-competition economy. l Prohibits: – Combinations that restrain trade. – Attempts to monopolize any area of commerce. l Violations can result in fines, imprisonment, injunctive relief, and civil damages. © 2004 West Legal Studies in Business A Division of Thomson Learning 3

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 1: THE SHERMAN ACT l Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. – Prohibits contracts, combinations, or conspiracies which restrain interstate commerce. – Requires two or more persons acting together before a violation can be found. © 2004 West Legal Studies in Business A Division of Thomson Learning 4

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 1: THE SHERMAN ACT l Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. – Rule of Reason: Method for evaluating contracts that allegedly restrain trade. l Courts examine the purpose and effect of conduct to determine whethere is unreasonable restraint of trade. l Not the conduct itself, but the effect in a given industry makes conduct illegal. l © 2004 West Legal Studies in Business A Division of Thomson Learning 5

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 1: THE SHERMAN ACT l Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. – Per se Violations: Acts inherently contradictory to the economic theory of pure competition. l Per se violations were: l – – © 2004 West Legal Studies in Business A Division of Thomson Learning Horizontal price fixing. Vertical Price fixing. Horizontal market divisions. Group boycotts. 6

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 1: THE SHERMAN ACT l Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. – “Quick Look” Analysis. Allows defendant firm an opportunity to rebut presumption that certain conduct is automatically anticompetitive. l If court agrees with evidence of defendant, court removes conduct from per se category and applies a rule-of-reason analysis. l Gives firms opportunity to show there is business justification for their conduct, and should not be found in violation of the law. l © 2004 West Legal Studies in Business A Division of Thomson Learning 7

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 2: THE SHERMAN ACT l Section 2: Monopolizing and Attempts to Monopolize. – Prohibits seeking a monopoly or attempting to keep monopoly once one is attained, either act is illegal. – Can be violated by one or more persons. – If firm controls 70 percent or more of a relevant market, firm has monopoly power. – Courts examine relevant market, may include product produced by firm and substitute goods. © 2004 West Legal Studies in Business A Division of Thomson Learning 8

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 2: THE SHERMAN ACT l Section 2: Monopolizing and Attempts to Monopolize. – Courts then look at elasticity of demand between challenged product and substitute. – Defenses to rebut Section 2 was/is violated: Firm argues not attempting to retain power. l Position was legally acquired. l Position was “thrust upon” it. l © 2004 West Legal Studies in Business A Division of Thomson Learning 9

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE SHERMAN ACT: REMEDIES l Remedies. – Sherman Act violation is shown, both civil and – – – criminal remedies are available. An individual may be fined up to $100, 000. May be sentenced up to three years in prison. Corporation can be fined up to $1 million. Injunction issued against prohibited conduct. Injured parties may recover treble damages and attorneys’ fees. © 2004 West Legal Studies in Business A Division of Thomson Learning 10

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE CLAYTON ACT l Sherman Act alone not sufficient to solve major business problems of the country. l Sherman Act remedial in nature. l By time remedy sought, injured party had suffered irreparable harm or had ceased to exist. l Congress intervened and enacted the Clayton Act designed to nip problems “in their incipiency. ” © 2004 West Legal Studies in Business A Division of Thomson Learning 11

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 2: THE CLAYTON ACT l Section 2: Price Discrimination. – Made it illegal for seller to discriminate in price between different purchasers unless price differences could be justified by differences in costs. – Amended by the Robinson-Patman Act. Prohibits buyers from knowingly accepting a discriminatory price. l Prohibits dummy brokerage fees and promotional kickbacks. l Sellers still prohibited from granting discriminatory prices. l © 2004 West Legal Studies in Business A Division of Thomson Learning 12

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 2: THE CLAYTON ACT l Section 2: Price Discrimination. – Person accused of price discrimination can defend against charge by showing: Price offered meets, but does not beat, a competitor’s price. l Lower price is being charged for goods because they are obsolete, damaged, or seasonal variations. l Price differential based on legitimate cost savings based on quantity discounts, and such discounts are available to any customer who places sufficient size orders. l © 2004 West Legal Studies in Business A Division of Thomson Learning 13

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 2: THE CLAYTON ACT l Section 2: Price Discrimination. – Under Section 2, was necessary to show that general competition had been harmed. – Under Robinson-Patman Act, it is sufficient to prosecute on a showing that a competitor was injured. © 2004 West Legal Studies in Business A Division of Thomson Learning 14

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 3: THE CLAYTON ACT l Section 3: Exclusive Dealings and Tying Arrangements. – Bans exclusive-dealing contracts and tying arrangements when “effect may be to substantially lessen competition or tend to create a monopoly. ” – Actual harm need not be shown. – In an exclusive dealing contract, one party requires the other party to deal only with them. © 2004 West Legal Studies in Business A Division of Thomson Learning 15

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 3: THE CLAYTON ACT l Section 3: Exclusive Dealings and Tying Arrangements. – In a tying arrangement seller refuses to sell one product unless buyer also purchases another product. – Defense to a charge : Seller attempts to show that tied product if tied for quality control. l Seller must prove that no competitors produce a competing product that works with controlled product. l © 2004 West Legal Studies in Business A Division of Thomson Learning 16

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 7: THE CLAYTON ACT l Section 7: Anti-Merger Provisions. – Originally written to prohibit mergers where stock of one firm acquired to substantially lessen competition or create a monopoly. – Amended by Cellar-Kefauver Act l Prohibits acquisition of stock/assets of another firm that may tend to have negative effect on commerce. – Government must allow merger. © 2004 West Legal Studies in Business A Division of Thomson Learning 17

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 7: THE CLAYTON ACT l Section 7: Anti-merger Provisions. – Challenge to merger, government might argue “concentration trend” has been established. – Or one of firms was a “potential entrant” into one of the industries affected by the merger. – As defense, company might show without merger, one of the companies would have gone out of business. © 2004 West Legal Studies in Business A Division of Thomson Learning 18

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. SECTION 8: THE CLAYTON ACT l Section 8: Interlocking Directorates. – Prohibits interlocking directorates. – No one may sit on board of directors of two or more competing corporations. – If either of the firms has capital and surplus in excess of $1 million. – If merger violates antitrust law. © 2004 West Legal Studies in Business A Division of Thomson Learning 19

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE FEDERAL TRADE COMMISSION ACT l FTC Act created the Federal Trade Commission (FTC) to enforce antitrust laws. l Section 5 prohibits unfair methods of competition and deceptive trade practices. l Broad language permits FTC to regulate conduct that technically might be beyond the reach of other, antitrust statutes. © 2004 West Legal Studies in Business A Division of Thomson Learning 20

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE FEDERAL TRADE COMMISSION ACT l Conduct need not deceive to be unfair; it need only have a “fair possibility” of deception. l Representation is considered deceptive if it is ambiguous. l If FTC opposes business practice as unfair or deceptive issues a cease-and-desist order. l Business must stop conduct or face fine of $5, 000 per violation. © 2004 West Legal Studies in Business A Division of Thomson Learning 21

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. THE FEDERAL TRADE COMMISSION ACT l FTC is concerned about bait-and-switch and deceptive advertising. l Bait-and-switch involves advertising a product at an enticing price to get customer into store and then talking the customer into buying a more expensive product. © 2004 West Legal Studies in Business A Division of Thomson Learning 22

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. UNFAIR TRADE PRACTICES l Common law unfair trade practices include: – Palming off: Advertising, designing, or selling goods so they appear to be goods made by someone else. – Trade secrets: Any special processes or formulas that are guarded by holder of trade secret. l Employees who reveal trade secrets to others may be liable in tort. © 2004 West Legal Studies in Business A Division of Thomson Learning 23

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. UNFAIR TRADE PRACTICES l Common law unfair trade practices include: – Trade secrets (cont’d). Person or company who receives trade secret is guilty of appropriating trade secret, use of trade secret can be stopped by an injunction. l Recipient of information will be liable for damages suffered by the trade secret. l © 2004 West Legal Studies in Business A Division of Thomson Learning 24

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. UNFAIR TRADE PRACTICES l Common law unfair trade practices include: – Patent. Federally created and protected monopoly power of inventors. l Grants inventor exclusive right to use, make, or sell product for 20 years. l Holder can file an infringement suit against violators, and infringer will be enjoined from further production and will be liable for damages to holder. l © 2004 West Legal Studies in Business A Division of Thomson Learning 25

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. UNFAIR TRADE PRACTICES l Common law unfair trade practices include: – Copyright: Protects writers, artists, and composers. l Copyright grants creator exclusive right to profit from work for creator’s life plus 50 years. l Injunctive relief and damages awarded to holder for an infringement action. l – Trademark: Mark or symbol used to identify a brand name product. l Violator subject to an injunction and the imposition of damages. l © 2004 West Legal Studies in Business A Division of Thomson Learning 26

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. EXEMPTIONS l Labor unions are exempt from the Sherman and Clayton Acts. l Applies only to “labor disputes” and normal union activities. l Farm cooperative are exempt as long as they are engaged in sale of farm produce. © 2004 West Legal Studies in Business A Division of Thomson Learning 27