THE LEGAL ENVIRONMENT OF BUSINESS The Legal Environment

THE LEGAL ENVIRONMENT OF BUSINESS The Legal Environment of Business A Critical Thinking Approach 5 th Edition Nancy K. Kubasek Bartley A. Brennan M. Neil Browne © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -1

THE LEGAL ENVIRONMENT OF BUSINESS CHAPTER 23 Antitrust Laws © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -2

THE LEGAL ENVIRONMENT OF BUSINESS Introduction to Antitrust Law TRUSTS - Business arrangements favoring owners of several companies q Stocks transferred to trustees q Trustees managed businesses jointly, on behalf of owners, to maximize profits q Trusts became larger, and aggressively squeezed competitors © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -3

THE LEGAL ENVIRONMENT OF BUSINESS Public Concern – Congressional Action q News accounts of trusts and their monopolistic practices alarmed the public q Congress responded with the Sherman Act of 1890 q The Act was the first antitrust law in the U. S. © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -4

THE LEGAL ENVIRONMENT OF BUSINESS Law and Economic Theory Chicago School Efficiency is the key consideration Harvard School Do not allow domination by one participant in the market © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -5

THE LEGAL ENVIRONMENT OF BUSINESS Goals of Antitrust Laws q Preserve small business q Keep many sellers and buyers: more competition is better q Prevent concentration of power q Preserve local control q Promote maximization of consumer welfare Note: Some of these goals conflict. © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -6

THE LEGAL ENVIRONMENT OF BUSINESS Public Enforcement Department of Justice q Sherman Act q Clayton Act q Federal Trade Commission q Clayton act q FTCA q Remedies sought: q injunction; q consent decree q Penalties: fines and incarceration q © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -7

THE LEGAL ENVIRONMENT OF BUSINESS Microsoft Case q q State attorneys tried to prove that Microsoft attempted q To eliminate competitio under Clayton Act q To fix prices under Sherman Act q And engaged in other anticompetitive practices. Settlement allowed Microsoft to remain one company with certain conditions © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -8

THE LEGAL ENVIRONMENT OF BUSINESS Private Enforcement q Clayton Act: Section 4 q Triple amount of damages q Attorneys fees q Brought by individuals or business q Class action q Parens patriae © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -9

THE LEGAL ENVIRONMENT OF BUSINESS Exemptions q State Action q Regulated Industries q Local q Labor Unions Government q Intrastate Activities q Export Activities q Agricultural activities q Baseball © 2009 Pearson Education, Inc. publishing as Prentice Hall q Joint efforts by business to seek Government action Ch. 23 -10

THE LEGAL ENVIRONMENT OF BUSINESS The Sherman Act of 1890 Section 1 - Combinations and Restraints of Trade Combination, contract, or conspiracy q Collusion q Conscious parallelism q Unreasonable restraint of trade q Interstate commerce q © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -11

THE LEGAL ENVIRONMENT OF BUSINESS Court Standard: “Rule of Reason” Indicators: q q Nature and purpose of the restraint Scope of the restraint Its effect on the business and on competitors Its intent Do anticompetitive effects outweigh procompetitive effects? © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -12

THE LEGAL ENVIRONMENT OF BUSINESS Per Se Standard q q Horizontal Price-fixing Group boycotts Tying arrangements Dividing markets Is the practice one of the defined types? © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -13

THE LEGAL ENVIRONMENT OF BUSINESS Horizontal Restraints q Horizontal Price-Fixing q Horizontal Division of Markets q Horizontal Boycotts © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -14

THE LEGAL ENVIRONMENT OF BUSINESS Vertical Restraints Resale-price maintenance (price-fixing) q Territorial and customer restrictions q Tying arrangements (linking of products) q Exclusive-dealings contracts (comparative substantiality) q © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -15

THE LEGAL ENVIRONMENT OF BUSINESS Monopolies Section 2 of the Sherman Act q Prohibits monopolies or attempts to monopolize Monopolies - Test q Relevant product and geographic market q Overwhelming power q Intent © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -16

THE LEGAL ENVIRONMENT OF BUSINESS Relevant Product and Geographic Market q Cross-elasticity of demand; substitutability q Du. Pont and cellophane q Geographic market: the area where defendant’s firm competes head on with others in the previously determined relevant product market. © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -17

THE LEGAL ENVIRONMENT OF BUSINESS Overwhelming Power Factors: q Market share q Size of other firms q Pricing structure q Entry barriers q Unique nature of industry © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -18

THE LEGAL ENVIRONMENT OF BUSINESS Intent to Monopolize q Specific conduct q Exclude competitors q Raise barriers to entry q Foreseeable consequences of an action q Passive or active © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -19

THE LEGAL ENVIRONMENT OF BUSINESS The Clayton Act of 1914 Prohibits the following actions: q Price discrimination q Tying arrangements q Mergers and acquisitions that lessen competition q Interlocking directorates © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -20

THE LEGAL ENVIRONMENT OF BUSINESS Price Discrimination A price below average variable cost q Sales: must be two actual sales q Commodity q Interstate commerce q Injury to competition q q Primary-line injury q Secondary- line injury q Tertiary- line injury © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -21

THE LEGAL ENVIRONMENT OF BUSINESS Defenses to Clayton Act Violations “Meeting-the-Competition” q Made in good faith q To meet equally low price of a competitor © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -22

THE LEGAL ENVIRONMENT OF BUSINESS Mergers and Acquisitions What drives mergers? q Undervalued assets q Diversification q Tax credits q Economies of scale © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -23

THE LEGAL ENVIRONMENT OF BUSINESS Legality of Mergers Section 7 of Clayton Act depends on: q Relevant product q substitutability q Geographic market q Where the merging companies compete q Probable impact on competition q Market foreclosure q Potential elimination of competition q Entrenchment of smaller firm in a market q Trends revealing high rate of concentration of leading competitors q Postmerger evidence revealing anticompetitive effects © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -24

THE LEGAL ENVIRONMENT OF BUSINESS Types of Mergers HORIZONTAL VERTICAL CONGLOMERATE © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -25

THE LEGAL ENVIRONMENT OF BUSINESS Defenses to Section 7 Complaints q Merger does not have a substantial effect on ICC q Merger does not have probability of substantially lessening competition or tending to create a monopoly q One of the companies to the merger is failing q Merger is solely for investment purposes © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -26

THE LEGAL ENVIRONMENT OF BUSINESS Justice Dept. Merger Guidelines Horizontal Mergers q Hertindahl-Hirschman Index (HHI) q The smaller the HHI, the less concentrated the market q Threshold = 1, 800 postmerger score Vertical Mergers q Usually not challenged © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -27

THE LEGAL ENVIRONMENT OF BUSINESS Hart-Scott Robinson Act of 1976 Amended Section 7 of Clayton Act q Requires premerger notification q Applies to large company mergers affecting interstate commerce q Report to FTC and Justice Dept. 30 days in advance q Remedies: injunction; cease and desist; divestiture © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -28

THE LEGAL ENVIRONMENT OF BUSINESS Interlocking Directorates Section 8 Clayton Act q Prohibits being director of two or more corporations q More than 21 million or 2 million in competitive sales q Interstate commerce q Competitors q Potential competitors q Exclusions: banks, trust companies, common carriers © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -29

THE LEGAL ENVIRONMENT OF BUSINESS Other Antitrust Statutes Federal Trade Commission Act of 1914 Prohibits unfair methods of competition Bank Merger Act of 1966 Requires agency approval of all bank mergers © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -30

THE LEGAL ENVIRONMENT OF BUSINESS Global Dimensions q Sherman Act, Sections 1 and 2, apply expressly to international commerce q Clayton Act does not q Other laws provide extraterritorial reach to U. S. antitrust laws q Export Trading Act q Antitrust Enforcement Assistance Act of 1994 q FTC Guidelines © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -31

THE LEGAL ENVIRONMENT OF BUSINESS Limits on Application of U. S. Law Overseas Dept. of Justice guidelines on “substantial and foreseeable effect” of foreign actions on U. S. commerce q State regulated models that encourage price-fixing and collaboration can violate U. S. law q Act of State Doctrine: U. S. courts will not judge acts of foreign governments performed within their own borders q © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -32

THE LEGAL ENVIRONMENT OF BUSINESS All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 23 -33