Class 17 Antitrust Fall 2021 Antitrust Injury and

Class 17 Antitrust Fall 2021 Antitrust Injury and Remedies Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2000 -21 Randal C. Picker. All Rights Reserved.

Tomorrow at Lunch December 11, 2021 2

What Today is About n Two Takes on “Antitrust Injury” u. What does it mean to have an antitrust injury? u. What does that mean for who has standing to bring an antitrust claim? December 11, 2021 3

Brunswick n Questions u. What was bowling like in the early 1960 s? u. What sort of market power does Brunswick have, if any, and what is the source of that power? Does that matter? December 11, 2021 4

Brunswick Financial Position December 11, 2021 5 Brunswick Annual Report 1964

Pin-Setting Innovation December 11, 2021 6 U. S. Patent No. 2, 967, 708

Brunswick Patent (Paramas NJ) December 11, 2021 7 U. S. Patent No. 2, 967, 708

Brunswick December 11, 2021 8 429 U. S. 477 (1977)

TTYN (1 of 3) Liability in Brunswick? n Hypo u. Brunswick sells bowling equipment, but buyers fail and it then vertically integrates into bowling centers n What are theories of antitrust liability here? Predatory pricing? CA 7 violation? December 11, 2021 9

TTYN (2 of 3) Liability in Brunswick? n Building Out the Hypo u. Step 1 Assume five towns each with an independently-owned (IO) bowling center w Assume entry in each town by a new (IO) bowling center w u. Assess December 11, 2021 the change in competition 10

TTYN (3 of 3) Liability in Brunswick? n Building Out the Hypo u. Step w 2 Assume the new entrants fail and Brunswick, who had not operated bowling centers, takes over all five of them u. Assess n the change in competition Is this Brunswick? December 11, 2021 11

Brunswick: Understanding Antitrust Injury n Key Facts u. Brunswick sold automatic pinsetters on secured credit. u. When purchasers could not pay, it took over many bowling centers. u. In so doing, it came to control 2% of bowling centers in the United States. December 11, 2021 12

Brunswick n Suit and Result u. Competitors in three markets brought suit alleging a violation of Sec. 7 of the Clayton Act. u. Verdict of $2. 4 million, before trebling, was awarded. u. Damages measured additional income of plaintiffs had the failing bowling centers closed. December 11, 2021 13

Brunswick n But For Causation and Antitrust Violations u. Assume the Sec. 7 violation. u. Damages should reflect alternative world without violation? December 11, 2021 14

Defining Antitrust Injury n Understanding Antitrust Injury u. Damages resulted from inability to have market power and exercise it. u. Market power is bad, not good, and denial of it is not antitrust injury. December 11, 2021 15

Brunswick: Antitrust Injury Required “We therefore hold that the plaintiffs to recover treble damages on account of Sec. 7 violations, they must prove more than injury causally linked to an illegal presence in the market. Plaintiffs must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes the defendants’ acts unlawful. ” December 11, 2021 16 Brunswick (US 1977)

Nature of the Injury “The injury should reflect the anticompetitive effect either of the violation or of anticompetitive acts made possible by the violation. ” December 11, 2021 17 Brunswick (US 1977)

Standing n Hypo u. Manufacturers (M) sell to Retailers (R) who sell to Ultimate Consumers. u. Ms engage in price-fixing raising input cost to Rs. n Who has standing to sue for the violation? u. Retailers (direct purchasers)? u. Consumers (indirect purchasers)? December 11, 2021 18

Standing n Question u. What should determine how we allocate standing as between direct purchasers and indirect purchasers? n Answer u. Hanover Shoe/Illinois Brick doctrine says direct purchasers can sue and indirect purchasers cannot December 11, 2021 19

Understanding Damages n Hypo u. Retailers face our standard demand curve: P = 10 –Q u. Retailers incur a marginal cost of 2 per unit, plus the wholesale price paid to M u. Manufacturing has a marginal cost of 2 as well December 11, 2021 20

Version 1: Competitive R, Competitive M P = MC at both levels, so wholesale price is 2, retail price is 4 n Quantity is 6 n December 11, 2021 21

Version 2: Competitive R, Monop M Assume cartel forms in M n Demand Curve faced by M n u. P = MC is the key condition at R w 10 – Q = 2 + Pw w So, Pw = 8 – Q is the demand curve faced by M December 11, 2021 22

Ver 2: Comp R, Monop M n Monop maxes by setting MC = MR u. The demand curve gives rise to a function for marginal revenue of 8 – 2 Q u. Max implies 8 – 2 Q = 2 or Q = 3, Pw = 5, and P = 7 December 11, 2021 23

Version 2 n Results n Deadweight loss of 4. 5 December 11, 2021 24

Calculating Damages: The Overcharge n Calculating the Overcharge u. Pw is 5 with M power, before Pw was 2 u. Overcharge is 3 per unit u 3 units sold under monop, so damages of 9? n Overcharge as Disgorgement of Profits w This is just the monop’s profits, so this damages measure is to require that profits be disgorged. December 11, 2021 25

Alternative: Deadweight Loss as Measure of Damages Social harm here is deadweight loss of 4. 5, not profits of 9, which is just a transfer n Should we assess DWL as damages? n u. Monop will not be deterred here, as profits gained (9) exceed DWL n What does this say regarding standing? December 11, 2021 26

Treble Damages Penalty may reflect under-enforcement risk n What consequences for standing? n Try this: Pw = 5, Oh Goody! n u. Retailers recognize M power exercise, know they will get treble damages u. Actual price is Pw list minus anticipated damages December 11, 2021 27

Treble Damages u. They compete this away so consumers benefit, even if no indirect action allowed u. Less “unfairness” to Cs in barring indirect actions u. Plausible? December 11, 2021 28

Hanover Shoe December 11, 2021 29 392 U. S. 481 (1968)

Rejection of Passing-On Defense n Issue u. The defendant manufacturer argued that its purchaser had “passed on” the illegal overcharges to its customers, hence the purchaser had suffered no injury. u. The Supreme Court rejected this passing on defense, making it possible for the retailer/purchaser to sue. December 11, 2021 30

Hanover Shoe: Antitrust Defendant Can’t Assert Passing On Defense “Our conclusion is that Hanover proved injury and the amount of its damages for the purposes of its treble-damage suit when it proved that United had overcharged it during the damage period and showed the amount of the overcharge; United was not entitled to assert a passing-on defense. ” December 11, 2021 31 Hanover (US 1968)

Illinois Brick December 11, 2021 32 431 U. S. 720 (1977)

Ban on Indirect Purchaser Suits n Issue u. Indirect purchasers attempted to sue under Sec. 4 of the Clayton Act. u. To avoid the possibility of multiple recovery by both direct purchasers and indirect purchasers and to avoid allocation issues, consistent with Hanover Shoe, the Court found that indirect purchasers lacked standing. December 11, 2021 33

Ban on Indirect Purchaser Suits w Cost-Plus Contract Exception • The Court suggests that an indirect purchaser might have standing if it purchased from the direct purchaser under a cost-plus contract. n The Rule of Illinois Brick u. Only direct purchasers have standing to sue under CA 4. December 11, 2021 34

Block Indirect Purchasers from Bringing CA 4 Claims “We are left, then, with two alternatives: either we must overrule Hanover Shoe (or at least narrowly confine it to its facts), or we must preclude respondents from seeking to recover on their pass -on theory. We choose the latter course. ” December 11, 2021 35 Illinois Brick (US 1977)

Utilicorp United December 11, 2021 36 497 U. S. 199 (1990)

Upholds Hanover Shoe and Illinois Brick December 11, 2021 37 Utilicorp United (US 1990)

i. Phone Launch “Apple® today introduced i. Phone, combining three products—a revolutionary mobile phone, a widescreen i. Pod® with touch controls, and a breakthrough Internet communications device with desktop-class email, web browsing, searching and maps—into one small and lightweight handheld device. ” December 11, 2021 38 Apple (9 Jan 2007)

Interface Key “i. Phone introduces an entirely new user interface based on a large multi-touch display and pioneering new software, letting users control i. Phone with just their fingers. ” December 11, 2021 39 Apple (9 Jan 2007)

App Store Launch “Apple® today announced that more than 500 native applications will be available on the i. Phone’s App Store when Apple’s i. Phone™ 3 G goes on sale tomorrow. …. ” December 11, 2021 40 Apple (10 July 2008)

The App Store “These apps will be available on Apple’s revolutionary new App Store, enabling customers to wirelessly download them directly onto their i. Phones and start using them immediately. ” December 11, 2021 41 Apple (10 July 2008)

TTYN (1 of 3) The i. OS App Cartel n Av. P Hypo 1 u. All i. OS app developers form a cartel and fix prices u. Apple buys apps from developers and resells those to consumers. Apple adds a fee for providing retail services that it folds into the price of the apps it sells to users. n Who has standing to assert a claim re the cartel? December 11, 2021 42

TTYN (2 of 3) The i. OS App Cartel Again n Av. P Hypo 2 u. All i. OS app producers form a cartel and fix prices u. Apple does not buy apps from developers. Apple is just an agent and title to apps passes directly from developers to consumers. Apple sells apps at the price specified by the developers. December 11, 2021 43

TTYN (3 of 3) The i. OS App Cartel Again n Av. P Hypo 2 u. Apple charges a fee to developers for distributing the apps. n Who has standing to assert a claim re the cartel? December 11, 2021 44

Buying i. OS Apps December 11, 2021 45 Receipt from Apple

Apple’s Contract with i. OS Users December 11, 2021 46 Apple Terms of Service (17 Sept 2018)

Apps are Licensed, Not Sold December 11, 2021 47 Apple Terms of Service (17 Sept 2018)

Apple as Agent for Third Party Apps December 11, 2021 48 Apple Terms of Service (17 Sept 2018)

Pepper v Apple Complaint December 11, 2021 49 Original Complaint (29 Dec 2011)

TTYN (1 of 2) Buying and Selling i. OS Apps n Av. P Hypo 3 u. I transfer $15 to Apple. At the end of the process, Apple gets $4. 50 and Filmic. Pro get $10. 50. u. Does it matter how the money flows? User A $15 F $10. 50? w User F $15 A $4. 50? w User F $10. 50, User A $4. 50? w December 11, 2021 50

TTYN (2 of 2) Buying and Selling i. OS Apps n Questions u. Does the flow of funds matter for antitrust? u. Does the fact that Apple is running a platform matter? That this is a two-sided market? u. What does Sup Ct say about that? December 11, 2021 51

Majority: Apple As Seller December 11, 2021 52 Apple v. Pepper (U. S 2019)

Dissent: Apple Not The Seller December 11, 2021 53 Apple v. Pepper (U. S 2019)

Majority: Users as Direct Purchasers from Apple December 11, 2021 54 Apple v. Pepper (US 2019)

Majority: And Again December 11, 2021 55 Apple v. Pepper (US 2019)

Av. P Hypo 1 Answer n Answer u. This is just Illinois Brick. u. Indirect purchasers—the actual users of the apps —lack standing to assert the cartel claim against the developers. u. Apple has to assert the claim. December 11, 2021 56

Av. P Hypo 2 Answer n Answer u. We only have one purchaser here, not two u. The app users purchaser directly from the developers and should be able to assert the price fixing claim against them. December 11, 2021 57

Av. P Hypo 3 Answer n Answer u. Flow of funds shouldn’t matter, though flow of title may December 11, 2021 58