Chapter 46 Antitrust Law 2004 West Legal Studies

Chapter 46 Antitrust Law © 2004 West Legal Studies in Business A Division of Thomson Learning 1

Introduction üCommon law actions intended to limit restraints on trade and regulate economic competition. üEmbodied almost entirely in: § The Sherman Antitrust Act of 1890. § The Clayton Act of 1914. © 2004 West Legal Studies in Business A Division of Thomson Learning 2

§ 1: The Sherman Antitrust Act üSection 1 and 2 contain the main provisions of the Sherman Act. § Section 1: • Requires two or more persons, as a person cannot contract, combine, or conspire alone. • Concerned with finding an agreement. § Section 2: • Applies both to an individual person and to several people, because it refers to every person. • Deals with the structure of monopolies in the marketplace. © 2004 West Legal Studies in Business A Division of Thomson Learning 3

§ 2: Section 1 of the Sherman Act üSection 1 regulates what are called “horizontal” and “vertical” restraints. üPer se violations vs. the Rule of Reason § Per se are blatant and substantially anticompetitive. § Rule of reason agreements do not unreasonably restrain trade. © 2004 West Legal Studies in Business A Division of Thomson Learning 4

Horizontal Restraints üHorizontal restraints are agreements among Sellers (or Buyers) that restrain competition between rival firms competing in the same market. © 2004 West Legal Studies in Business A Division of Thomson Learning Seller Buyer

Price Fixing üAn agreement between competing firms in the market to set an established price for the goods or services they offer. üPrice fixing is a per se violation of the Act. © 2004 West Legal Studies in Business A Division of Thomson Learning 6

Group Boycotts üAgreement between two or more sellers to refuse to deal with a particular person or firm. üGroup boycotts are per se violations of the Act. © 2004 West Legal Studies in Business A Division of Thomson Learning 7

Horizontal Market Division üOccurs when competitors in the same market agree that each will have exclusive rights to operate in a particular geographic area. üHorizontal market divisions are per se violations of the Act. © 2004 West Legal Studies in Business A Division of Thomson Learning 8

Trade Associations üTrade Associations are industry specific organizations created to provide for the exchange of information, representation of the business interests before governmental bodies, advertising campaigns, and setting of regulatory standards to govern their industry or profession. üRule of reason is applied to determine if a violation of the Act has occurred. © 2004 West Legal Studies in Business A Division of Thomson Learning 9

Joint Ventures üA joint venture is an undertaking by two or more individuals or firms for a specific purpose. üThe rule of reason is applied to analyze the agreement if the venture has first been found not to involve price fixing or market divisions. © 2004 West Legal Studies in Business A Division of Thomson Learning 10

Vertical Restraints üVertical restraints are per se anticompetitive agreements imposed by Sellers upon Buyers (or vice versa) that may include affiliates in the entire supply chain of production. © 2004 West Legal Studies in Business A Division of Thomson Learning Seller Buyer

Vertical Restraints [2] üAgreements between firms at different levels of the manufacturing and distribution process. üVertical restraints may restrain competition among firms that occupy the same level in chain. üVertical restraints that significantly affect competition may be per se violations. üCase 46. 1: Continental TV Inc. v. GTE Sylvania, Inc. (1977). © 2004 West Legal Studies in Business A Division of Thomson Learning 12

Territorial or Customer Restrictions üImposed by manufacturers on the sellers of the products, to insulate dealers from direct competition with each other. üTerritorial and customer restrictions are judged under the rule of reason. üCase 45. 2: T. V. , Inc. v. GTE Sylvania, Inc. (1997). © 2004 West Legal Studies in Business A Division of Thomson Learning 13

Resale Price Maintenance Agreements üAn agreements between a manufacturer and a distributor or retailer in which the manufacturer specifies the retail price at which retailers must sell products furnished by the manufacturer or distributor. üThis is a type of vertical restraint and is normally a per se violation. üCase 46. 2: State Oil Co. v. Khan (1997). © 2004 West Legal Studies in Business A Division of Thomson Learning 14

Refusals to Deal üUnlike a group boycott, a refusal to deal is an action by one firm against another, and this is usually legal, unless: § the firm refusing to deal has, or is likely to acquire, monopoly power, and § the refusal is likely to have an anticompetitive effect on a particular market. © 2004 West Legal Studies in Business A Division of Thomson Learning 15

§ 3: Section 2 of the Sherman Antitrust Act üSection 2 of the Sherman Antitrust Act deals with: § Monopolization. § Attempts to monopolize. üPredatory pricing. § Attempt by a firm to drive its competitor from the market by selling its product at prices substantially below the normal costs of production. © 2004 West Legal Studies in Business A Division of Thomson Learning 16

Monopolization üMonopolization in violation of the act requires two elements: § The possession of monopoly power and § The willful acquisition and maintenance of the power. © 2004 West Legal Studies in Business A Division of Thomson Learning 17

Monopoly Power üExists when one firm has sufficient market power to control prices and exclude competition. üMarket power is often assessed by the use of the Market-Share Test. § As a rule of thumb, if a firm has 70% or more of a relevant market, it is regarded as having monopoly power. © 2004 West Legal Studies in Business A Division of Thomson Learning 18

The Intent Requirement üThe intent to monopolize is difficult to prove. üIntent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior. üCase 46. 3: U. S. v. Microsoft Corp. (2001). © 2004 West Legal Studies in Business A Division of Thomson Learning 19

Attempts to Monopolize üFirm actions are scrutinized to determine whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success. © 2004 West Legal Studies in Business A Division of Thomson Learning 20

§ 4: The Clayton Act üThe Clayton Act deals with: § § Price Discrimination. Exclusionary Practices. Mergers. Interlocking Directorates. © 2004 West Legal Studies in Business A Division of Thomson Learning 21

Price Discrimination ü Price discrimination is the charging of different prices to competing buyers for identical goods. ü Exceptions: § Charge of lower price was temporary and in good faith to meet another seller’s equally low price to the buyer’s competitor. § A particular buyer’s purchases saved the seller costs in producing and selling the good. © 2004 West Legal Studies in Business A Division of Thomson Learning 22

Exclusionary Practices üExclusive Dealing Contracts. § A contract under which a seller forbids a buyer to purchase products from the seller’s competitors. § Prohibited if the effect of the contract is to “substantially lessen competition or tend to create a monopoly. ” üTying Arrangements. § The conditioning of the sale of a product on the buyer’s agreement to purchase another product produced or distributed by the same seller. © 2004 West Legal Studies in Business A Division of Thomson Learning 23

Mergers üHorizontal Mergers occur between firms at the same level in the production and distribution chain. üVertical Mergers occur between firms at different levels in the production and distribution chain. © 2004 West Legal Studies in Business A Division of Thomson Learning 24

Mergers üConglomerate Mergers occur when a firm seeks to: § Extend its product into a new market by merging with a firm in that market. § Extend its product line by merging with a firm already producing that product. § Diversify by acquiring a firm that deals in unrelated products. © 2004 West Legal Studies in Business A Division of Thomson Learning 25

Interlocking Directorates üOccurs when an individual serves on the board of directors of two or more competing companies simultaneously. üThese are prohibited if the two firms meet certain size requirements. © 2004 West Legal Studies in Business A Division of Thomson Learning 26

§ 5: Enforcement of Antitrust Laws üU. S. Department of Justice. üThe Federal Trade Commission enforces the FTCA provides that: § “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal. ” © 2004 West Legal Studies in Business A Division of Thomson Learning 27

Private Actions üPrivate party injured under the Sherman or Clayton Act can: § Sue for damages and attorneys fees. § Plaintiff must prove: • Antitrust violation either caused or was a substantial factor in plaintiff’s injury, and the unlawful actions of Defendant affected Plaintiff’s business protected by antitrust laws. § Treble Damages. • Case 46. 4: Paper Systems v. Nippon Paper (2002). © 2004 West Legal Studies in Business A Division of Thomson Learning 28

§ 6: Exemptions from Antitrust Law ü Most statutory exemptions to the antitrust laws apply to the following areas: § § § § Labor. Agricultural associations and fisheries. Insurance. Foreign trade. Professional baseball. Cooperative research and production Joint efforts y businesspersons to obtain legislative or executive action. § And Others. © 2004 West Legal Studies in Business A Division of Thomson Learning 29

§ 7: U. S. Antitrust Laws in the Global Context üU. S. laws may be applied to protect foreign consumers from U. S. company violations in foreign nations. üForeign “persons” (including governments) may sue U. S. companies in domestic courts. üIssue is: substantial effect on U. S. commerce? © 2004 West Legal Studies in Business A Division of Thomson Learning 30

Law on the Web üAntitrust Division of the U. S. Department of Justice. üAmerican Bar Association’s Antitrust Website. üThe Federal Trade Commission’s “Plain English Guide to Antitrust Law. ” üLegal Research Exercises on the Web. © 2004 West Legal Studies in Business A Division of Thomson Learning 31