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ANTITRUST

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					Antitrust                                                                                                                                                              Daniel E. Dreger



                                                                           ANTITRUST

I.        INTRODUCTION............................................................................................................................................................ 3
     A.      STATUTORY STRUCTURE ........................................................................................................................................ 3
     B.      DUAL ENFORCEMENT .............................................................................................................................................. 3
     C.      COMMON LAW-LIKE DEVELOPMENT OF ANTITRUST ...................................................................................... 3
     D.      THE “CHICAGO SCHOOL” OF ANTITRUST ............................................................................................................ 3
     E.      FUNDAMENTAL QUESTIONS THAT RUN THROUGH ANTITRUST ANALYSIS .............................................. 4
II. OVERVIEW OF ANTITRUST ECONOMICS ............................................................................................................ 4
     A.      PRICE THEORY FOR ANTITRUST ............................................................................................................................ 4
     B.      INDUSTRIAL ORGANIZATION: ECONOMIES OF SCALE AND THE DILEMMA OF ANTITRUST POLICY ... 6
     C.      PUBLIC POLICY BEHIND ANTITRUST LAWS ....................................................................................................... 6
III.         RESTRAINT OF TRADE ........................................................................................................................................... 7
     A. COMMON LAW ORIGINS OF THE “RULE OF REASON” ....................................................................................... 7
     B. SHERMAN ACT ........................................................................................................................................................... 7
     C. LITERAL READING OF SHERMAN ACT §1 [ TRANS-MISSOURI FREIGHT (US 1897) ] ...................................... 8
     D. RETREAT FROM LITERAL INTERPRETATION [ JOINT TRAFFIC ASSOCIATION (US 1898) ]........................... 8
     E. ANCILLARY RESTRAINT DOCTRINE AND THE BEGINNINGS OF A PER SE RULE [ ADDYSTON PIPE (US
     1899) ] .................................................................................................................................................................................... 8
IV.          MONOPOLY................................................................................................................................................................ 9
     A.      SHERMAN ACT §2 PROHIBITS MONOPOLIZATION ............................................................................................. 9
     B.      THE ELEMENTS OF MONOPOLIZATION ................................................................................................................ 9
     C.      “MONOPOLY POWER” ............................................................................................................................................... 9
     D.      THE “RELEVANT MARKET”: GEOGRAPHIC AND PRODUCT .......................................................................... 10
     E.      “PURPOSEFUL CONDUCT” ..................................................................................................................................... 11
     F.      PREDATORY PRICING ............................................................................................................................................. 14
V.        ATTEMPT TO MONOPOLIZE .................................................................................................................................. 16
     A.      SHERMAN ACT §2 PROHIBITS ATTEMPTED MONOPOLIZATION .................................................................. 16
     B.      ELEMENTS OF “ATTEMPT TO MONOPOLIZE”.................................................................................................... 16
VI.          HORIZONTAL RESTRAINTS ................................................................................................................................ 18
     A.      HOW AND WHEN PRICE FIXING WORKS ............................................................................................................ 18
     B.      “PER SE” RULE AGAINST PRICE FIXING [ SOCONY-VACUUM OIL (US 1940) ] .............................................. 19
     C.      POLICY PROS/CONS OF A “PER SE” RULE ........................................................................................................... 20
     D.      HORIZONTAL RESTRAINTS THAT ARE TREATED AS PER SE ILLEGAL PRICE FIXING ............................. 21
     E.      PROFESSIONAL ASSOCIATIONS ........................................................................................................................... 21
     F.      CHARACTERIZATION OF HORIZONTAL AGREEMENTS: PER SE VS. RULE OF REASON .......................... 22
     G.      LABOR-ANTITRUST EXEMPTION ......................................................................................................................... 24
     H.      HORIZONTAL MARKET DIVISIONS ...................................................................................................................... 25
     I.      CONCERTED REFUSALS TO DEAL AND BOYCOTTS ........................................................................................ 26
     J.      CONSCIOUS PARALLELISM: INFERRING AN “AGREEMENT”........................................................................ 30
VII.         JOINT VENTURES ................................................................................................................................................... 31
     A.      THE THREAT TO COMPETITION ........................................................................................................................... 31
     B.      THE JOINT VENTURE DILEMMA ........................................................................................................................... 31
     C.      ECONOMIC RATIONALES....................................................................................................................................... 31
     D.      RULE OF REASON ANALYSIS ................................................................................................................................ 32



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Antitrust                                                                                                                                                          Daniel E. Dreger


VIII.            NOERR-PENNINGTON: INFLUENCING THE GOVERNMENT ................................................................. 33
     A.      THE NOERR-PENNINGTON DOCTRINE ................................................................................................................. 33
     B.      EXCEPTIONS TO NOERR-PENNINGTON ............................................................................................................... 34
IX.          VERTICAL RESTRAINTS ...................................................................................................................................... 35
     A.      VERTICAL RESTRAINTS GENERALLY ................................................................................................................ 35
     B.      VERTICAL NONPRICE RESTRAINTS: CUSTOMER AND TERRITORIAL RESTRICTIONS ON SELLERS ... 36
     C.      RESALE PRICE MAINTENANCE AND REFUSAL TO DEAL ............................................................................... 37
     D.      TYING ......................................................................................................................................................................... 38
     E.      EXCLUSIVE DEALING ............................................................................................................................................. 44
X.        MERGERS ..................................................................................................................................................................... 46
     A.      HORIZONTAL MERGERS ........................................................................................................................................ 46
     B.      CONGLOMERATE / POTENTIAL COMPETITION MERGERS / JV ...................................................................... 49
     C.      VERTICAL MERGERS / INTEGRATION ................................................................................................................. 52
XI.          PRICE DISCRIMINATION ..................................................................................................................................... 55
     A.      ECONOMICS OF PRICE DISCRIMINATION .......................................................................................................... 55
     B.      ROBINSON-PATMAN ACT ...................................................................................................................................... 56
     C.      PRIMARY LINE ......................................................................................................................................................... 57
     D.      SECONDARY LINE ................................................................................................................................................... 58
     E.      AFFIRMATIVE DEFENSES ...................................................................................................................................... 59
XII.         STANDING AND ANTITRUST INJURY ............................................................................................................... 60
     A.      STANDING AND ANTITRUST INJURY .................................................................................................................. 60
XIII.            STATE ACTION DOCTRINE ............................................................................................................................. 63
     A.      STATE ACTION DOCTRINE .................................................................................................................................... 63
XIV.             INTERNATIONAL ANTITRUST ....................................................................................................................... 65
     A.      INTERNATIONAL ANTITRUST .............................................................................................................................. 65




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Antitrust                                                                              Daniel E. Dreger




I. INTRODUCTION
    A. STATUTORY STRUCTURE
       1. Sherman Act, 1890
          a. First antitrust law in U.S.; condemns Ks in restraint of trade and monopolization or
              attempt thereof
       2. Clayton Act, 1914
          a. Went after mergers; created private rights of action
       3. FTC Act (1920ish)
          a. Created FTC and gave it general authority to enforce antitrust laws; now there are two
              government entities with jurisdiction over antitrust (DOJ and FTC)
       4. Robinson-Patman Act
          a. price discrimination
       5. Miscellaneous amendments to these over the years
       6. There are also state antitrust laws, mostly overlap federal laws but not always
    B. DUAL ENFORCEMENT
       1. Public enforcement (DOJ, FTC)
       2. Private enforcement
          a. If P has proper standing, he can sue for harms, get treble damages and attorneys fees
          b. A lot of private suits piggyback on the issues decided in a successful government action
              (via res judicata, collateral estoppel, etc.)
    C. COMMON LAW-LIKE DEVELOPMENT OF ANTITRUST
       1. The Sherman Antitrust Act is a vague and general statute, with the following implications:
          a. In the early days, it was challenged as void for vagueness.
          b. The development of antitrust law has been common-law-like.
              (i) Case-driven instead of statute-driven.
              (ii) Courts are open to policy-based and other arguments that they otherwise might not
                   be.
    D. THE “CHICAGO SCHOOL” OF ANTITRUST
       1. The laws should be understood as having the goal of promoting economic efficiency; i.e.
          to maximize the total welfare.
          a. Criticism: the statutes were enacted at time where economic efficiency could not have
              been a motive or known to Congress; the concept of efficiency had not diffused into the
              law at that time
          b. Defense: efficiency dovetails with what the legislators were worried about – i.e.,
              transfers of wealth from consumers to trusts/conglomerates
              (i) It‟s fair to say that the statutes were aimed at those wealth transfers
              (ii) Promoting low prices for consumers and promoting efficiency are well correlated
          c. Possible other motivations for the Acts?
              (i) Protecting small businesses
              (ii) Fear of the political power of giant business conglomerates to affect our political


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Antitrust                                                                                Daniel E. Dreger


                 processes in ways we don‟t like
    E. FUNDAMENTAL QUESTIONS THAT RUN THROUGH ANTITRUST ANALYSIS
       1. Should the law as a normative matter try to do more than promote economic efficiency?
       2. What explains the decisions by the courts?

II.OVERVIEW OF ANTITRUST ECONOMICS
    A. PRICE THEORY FOR ANTITRUST
       1. Price theory is the theory concerning how a firm decides how much of a product or service
          to produce, and what price to charge.
       2. Supply and Price Under Perfect Competition
          a. Perfect competition exists when a large number of firms produce the same product, and
              no single firm has the power to reduce total market output by reducing its own output. If
              a firm in perfect competition did reduce its own output, its competitors would simply
              increase their output by the same amount.
          b. In order to understand the individual firm's output and pricing decisions when the firm
              faces perfect competition, you should know the meaning of the following terms:
              (i) A "Reservation Price" is the highest price that a customer is willing to pay for a
                   certain product.
              (ii) The Supply Curve is a line on the price-output graph that shows the total costs of
                   production in an industry at every level of output. The supply curve generally slopes
                   upward, because as output in an industry increases, costs increase. This is so
                   because the market makes use of the best materials first, then the next best, etc.
              (iii)The Demand Curve is a line on the price-output graph that shows how much of a
                   product or service will be sold at a given price. The demand curve generally slopes
                   downward, because as output in an industry increases, the good must be sold to
                   buyers with lower reservation prices. Thus the rule that as supply goes up, price
                   goes down.
              (iv) Equilibrium is a state that exists when a market is not changing and is not being
                   affected by any changes imposed from outside.
              (v) Consumers' Surplus is the difference between a consumer's reservation price and the
                   price that he or she must pay for a product.
              (vi) Producers' Surplus is the difference between a firm's costs and the price it obtains
                   for a product.
              (vii) Market Elasticities of Supply and Demand describe the rate at which supply and
                   demand change in response to a change in the price, or vice-versa. If the demand for
                   a good drops dramatically when the price rises, then elasticity of demand is said to
                   be high. Likewise, if the supply of a good increases dramatically when the price
                   rises (but costs do not rise proportionately), then elasticity of supply is said to be
                   high.
              (viii) Marginal Cost is the additional cost that a firm incurs when it produces an
                   additional unit of output.
       3. Market Price and Output Under Perfect Competition
          a. In perfect competition the market price and market output will be determined by the
              intersection of the market demand curve and the market supply curve.


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Antitrust                                                                                      Daniel E. Dreger


            4. The Output Decision of the Individual Firm In Perfect Competition: Marginal Cost
               a. An individual firm in perfect competition must accept the market price as given i.e., it is
                  a "price taker." However, such a firm does make its own output decision. It will produce
                  at the rate at which its marginal cost equals the market price. If it produces any more or
                  less than that amount, it will earn less than it could when P=MC. Thus marginal cost
                  pricing is consistent with perfect competition, and is an important goal of the antitrust
                  laws.
            5. Monopoly
               a. A monopoly is a market dominated by a monopolist. A monopolist is technically a firm
                  that produces all of the output in a particular market. For antitrust purposes, however, a
                  firm may be considered a monopolist when it produces a very high percentage say, 75%
                  or more of a particular market.
               b. The Monopolist's Price and Output Decisions
                  (i) Unlike the perfect competitor, the monopolist has the power to reduce total market
                       output by reducing its own output. This is so because there are no competitors (or
                       not enough competitors) to respond to the monopolist's output decrease with an
                       offsetting output increase. As a result, the market price goes up when the
                       monopolist's output goes down.
                  (ii) The Marginal Revenue Curve: The marginal revenue curve is a line on the price-
                       output graph that shows how much additional revenue the monopolist makes when it
                       produces one additional unit of output. The marginal revenue curve slopes
                       downward, and for the monopolist it slopes downward more steeply than the demand
                       curve does.
                  (iii)The Monopolist's Profit-Maximizing Price: The monopolist's profit-maximizing
                       price is the price that will maximize the monopolist's net revenues (i.e., the
                       difference between the monopolist's total revenues and its costs). Assuming that the
                       monopolist controls 100% of its market and that it is unconcerned about entry by
                       competitors, its profit-maximizing price is determined by the intersection of its
                       marginal cost and marginal revenue curves. For most monopolists the profit-
                       maximizing price is higher and output lower than would exist in the same market
                       under perfect competition.
               c. The De Facto Monopolist in the Real World
                  (i) Unlike the absolute monopolist described above, the de facto monopolist in the real
                       world may not control 100% of its market, and it may have to be concerned about
                       entry by competitors. Such a monopolist will often charge a price lower than the
                       price determined by the intersection of its marginal cost and marginal revenue
                       curves. It does this in order to make the market relatively less attractive to potential
                       competitors who might want to enter.
               d. The Social Cost of Monopoly
                  (i) The social cost of monopoly is the amount by which society is worse off as a result of
                       the existence of a monopoly.
                       (1) The Monopoly Wealth Transfer: One effect of monopoly is that it makes the
                           monopolist wealthier and customers poorer, because they must pay a higher price
                           for the monopolized product. This is a wealth transfer, however, and not a social
                           cost. Society as a whole is not poorer because of this overcharge: the monopolist


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                      is better off by exactly the same amount that the customers are worse off.
                  (2) The Deadweight Loss of Monopoly: The deadweight loss of monopoly
                      represents value that is lost to society because some customers who would have
                      purchased a product at the competitive price decide not to purchase it at the
                      monopoly price. This deadweight loss is a true social cost. The customers who
                      substitute another product take something that would not have been their first
                      choice in a competitive market. At the same time, however, the monopolist is no
                      better off, for it does not make any profits from unmade sales.
    B. INDUSTRIAL ORGANIZATION: ECONOMIES OF SCALE AND THE DILEMMA OF
       ANTITRUST POLICY
       1. Industrial organization is the study of how the structure of the market and of the individual
          business firm are determined.
          a. Economies of Scale
             (i) An economy of scale exists whenever the costs of producing some product or service
                  decrease as output increases. Probably all industries are subject to some economies
                  of scale; however, in some industries economies of scale are far more substantial
                  than they are in others.
          b. Natural Monopoly
             (i) A natural monopoly is a market that can be served most efficiently by a single firm,
                  provided that the firm does not charge monopoly prices. More technically, a natural
                  monopoly is a market in which costs decline continuously as output increases, right
                  up to the point that demand in the market is saturated.
          c. The Dilemma of Antitrust Policy: Coping With Bigness
             (i) The existence of economies of scale poses a difficult problem for antitrust policy.
                  High output and low prices are important goals of the antitrust laws. However, in
                  many industries economies of scale are substantial and only very large firms with
                  large market shares will be able to take advantage of all scale economies. As firms
                  obtain larger market shares, however, the danger of monopolization and other
                  anticompetitive activities increases. Antitrust policy faces the very difficult task of
                  permitting firms to grow large enough to take advantage of available economies of
                  scale, but at the same time forcing such firms to perform competitively. This task is
                  complicated enormously by the fact that neither economies of scale nor competitive
                  performance (marginal cost pricing) can easily be quantified.
    C. PUBLIC POLICY BEHIND ANTITRUST LAWS
       1. What is the difference between competition and its absence?
          a. In competition: competitors will produce an additional units of product/service
             whenever they can recover their costs/make a profit; they will produce to the point
             where the price has fallen to the marginal cost of production.
          b. Under monopoly: the monopolist won‟t produce to the point where price = marginal
             cost; he will produce less; [Sykes draws a graph; see “Understanding Antitrust”]; a
             monopolist produces up to the point where the additional revenue for each sale is equal
             to the marginal cost, and the additional revenue for each addt‟l unit is less for a
             monopolist [marginal revenue curve is beneath the demand curve]
       2. What is bad about the monopoly equilibrium vs. the competitive equilibrium?



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Antitrust                                                                                  Daniel E. Dreger


            a. Under competition:
               (i) Every consumer who is willing to pay the marginal cost is able to get it.
               (ii) The consumer surplus is maximized
               (iii)Every customer who values the product at or more than the price can get it.
            b. Under monopoly:
               (i) There are consumers who are willing to pay the marginal cost of production but are
                    priced out b/c the monopoly price doesn‟t go that low.
               (ii) This means there is a loss of consumer surplus [dead weight loss].
            c. There is also a distributional consequence to a monopoly: the transfer of wealth from
               consumers to producers
               (i) Even beyond the mere transfer of consumer surplus to the monopolist, the monopoly
                    will waste some of that wealth to acquire and maintain the monopoly and its
                    benefits.

III. RESTRAINT OF TRADE
    A. COMMON LAW ORIGINS OF THE “RULE OF REASON”
       1. In the 17th and 18th centuries, the English Courts began to hold that certain contracts in
          restraint of trade were valid and enforceable – i.e., the law presumes contracts in restraint of
          trade to be void per se but the presumption can be overcome when the contract is shown to
          be reasonable and useful.
          a. Requirements:
              (i) Ancillary to and facilitating some otherwise lawful transaction – typically, the sale of
                   a business in which the seller covenanted not to compete with the buyer. Some (but
                   not all) courts were willing to uphold covenants not to compete in employment
                   contracts as well.
              (ii) Reasonably limited as to time, scope and locality – i.e., a “partial,” rather than a
                   “total,” restraint on the covenantor.
              (iii)Reasonable as to both the public interest and the interests of the parties – i.e., it
                   could not pose any threat of harm to the public, unreasonable lessening of
                   competition, increase in prices, etc.
          b. Mitchel v. Reynolds (Engl. 1711): A baker sold his bakery and covenanted to the buyer
              that he would not compete in the immediate locality for five years. This covenant was
              held enforceable because it was “ancillary” to the sale of the bakery, “partial” (i.e.,
              limited both in time and geography), and “reasonable” from the standpoint of the parties
              and the public interest.
          c. Why do we have the default rule that general restraints are always invalid?
              (i) Covenants to not compete anywhere are not necessary to make the deal go through
                   and would be over-broad and more injurious to competition than can be reasonably
                   expected
              (ii) Protects small guy from getting into a burdensome covenant that he may not be able
                   to live with, thus becoming a charge of the state
    B. SHERMAN ACT
       1. In 1890, §1 of the Sherman Act was adopted to prohibit restraints illegal at common law or


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Antitrust                                                                                 Daniel E. Dreger


          “those which are comparable to restraints deemed illegal at common law.” [ Apex Hosiery
          (US 1940) ]
          a. “Section 1. 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.” --- Sherman Act, §1
          b. The validity of restrictive covenants under §1 was clearly to be measured by a “rule of
              reason” test.
    C. LITERAL READING OF SHERMAN ACT §1 [ TRANS-MISSOURI FREIGHT (US 1897)
       ]
       1. US v. Trans-Missouri Freight Association (US 1897): Justice Peckham reverses the lower
          courts‟ decisions to dismiss a suit against an association of railroads that coordinated freight
          hauling schedules, transfers of cargo from one line to another, and freight rates on behalf of
          its members
          a. Peckham‟s analysis:
              (i) Asserts that §1 is clear on its face and should be read literally to condemn any
                   restraint of trade, so there is no need for importing the rule of reason analysis
              (ii) Hedges that there are possible exceptions for “collateral” restraints of trade (e.g. a
                   restraint accompanying the sale of a property).
              (iii)Peckham‟s opinion does NOT reflect Chicago School concerns.
                   (1) Economic efficiency isn‟t the motivation for the judgment.
                   (2) Recognizes additional evils beyond wealth transfers from consumers to
                       producers: (1) abuse of small businesses and (2) control of commerce
                       concentrated in few hands.
    D. RETREAT FROM LITERAL INTERPRETATION [ JOINT TRAFFIC ASSOCIATION
       (US 1898) ]
       1. US v. Joint Traffic Association (US 1898): Peckham builds on the exceptions hinted at in
          Trans-Missouri, recognizing an exception for restraints “for the purpose of promoting
          legitimate business.”
       2. Thus, there are two choices:
          a. Court can look for collateral legitimate business purposes
          b. Court can identify that the purpose is to suppress competition and simply say that is
              enough to find illegality
    E. ANCILLARY RESTRAINT DOCTRINE AND THE BEGINNINGS OF A PER SE RULE
       [ ADDYSTON PIPE (US 1899) ]
       1. Earliest cases:
          a. Hopkins v. United States (US 1898): OK that a voluntary association of livestock
              commission merchants forbade members from buying from non-members, fixed
              commissions, fixed the salaries of agents and restricted dissemination of market data
              because the measures were ancillary to the purpose of bettering the conduct of the
              business.
              (i) Court suggests a difference in applicability of the Sherman Act depending upon
                   whether the restraint imposed was DIRECT or INDIRECT.
          b. Anderson v. United States (US 1898): similar facts and result as Hopkins.



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               c. These are examples of early courts saying that agreements don‟t sufficiently impact
                   interstate commerce as a shorthand for finding no illegitimate effects.
            2. US v. Addyston Pipe & Steel Co. (US 1899): a cartel of pipe manufacturers used a complex
               internal bidding scheme and geographic market division to determine who would submit the
               winning bid for a sale
               a. Holding: this sort of restraint is per se illegal no matter how reasonable the fixed prices
                   are or how necessary the restraints were to prevent financial suicide.
                   (i) This opinion is the source of the “ancillary restraints” language that survives today.
                   (ii) The claim was that TransMissouri was different because it was dealing with
                        railroads/common carriers and were subject to higher duty under the CL. The CL
                        rule survives for private pipe companies; court doesn‟t reach this issue – it says that
                        restraint would be illegal under CL, so Ds would lose anyway. The court says that
                        the CL distinction between general and particular restraints is shorthand for picking
                        out restraints that are the chief purpose versus those that are ancillary to a legitimate
                        purpose.
            3. Ancillary Restraint Doctrine:
               a. All direct restraints are per se unlawful, even when the outcome is reasonable. Ancillary
                   restraints that are unreasonable are unlawful; and ancillary restraints that are reasonable
                   are lawful. (I.e., a “rule of reason” type analysis if the restraint is “ancillary.”)
               b. Derived from the line of cases from TransMissouri to Addyston Pipe.

IV. MONOPOLY
    A. SHERMAN ACT §2 PROHIBITS MONOPOLIZATION
       1. “Section 2. 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 …”
       2. The Act does not prohibit monopolies as such, but the act of monopolizing.
    B. THE ELEMENTS OF MONOPOLIZATION
       1. The possession of monopoly power …
       2. … in a relevant market (geographic and product).
       3. “Purposeful act” requirement: the willful acquisition or maintenance of that power
          through exclusionary practices
    C. “MONOPOLY POWER”
       1. “Monopoly power” is the market power sufficient to control prices or to exclude
          competition.. [ US v. E.I. duPont (US 1956) – the “Cellophane Case”]
          a. “Market Power” When “Elasticity of Demand” Is Low:
              (i) “Market power” is principally a function of the elasticity of the demand curve facing
                   the firm. The less elastic the demand, the more market power the firm has.
                   Elasticity of demand is low when a large number of customers will NOT turn to
                   substitute products produced by other firms in response to a firm‟s non-cost-justified
                   price increase.
          b. “Market Power” When the “Elasticity of Supply” Is Low:
              (i) “Elasticity of Supply” is low when manufacturers of the same product or close


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Antitrust                                                                                                 Daniel E. Dreger


                        substitutes cannot quickly respond to a competitor‟s price increase.
                   (ii) In measuring “elasticity of supply” consider:
                        (1) The time it will take other firms to get to market.
                        (2) The amount of easily diverted excess capacity of competitors.
            2. Measuring “Market Power”: at some point, “market power” becomes “monopoly power.”
               Such power is marked by: (1) high (monopoly) profits over an extended period of time; and
               (2) the failure of other goods or services to respond as substitutes.
               a. The Market Share Proxy.
                             Market share is the percentage of sales made in the relevant product and geographic market and
                               often serves as a proxy for market power. This is because it is difficult for a court to
                               measure a firm‟s marginal cost.
              (ii) Market share in excess of 70% may be sufficient.
                   (1) A market share in excess of 70% is strongly suggestive of monopoly power and
                       thus is generally held to be sufficient. [US v. Alcoa (CA2 1945)]
                   (2) Criticism of Alcoa: doesn‟t deal with market share issue in tandem with entry-
                       into-market issues.
              (iii)Market share may not be determinative if barriers to entry are low.
              (iv) Market share of 60-64% or lower is probably insufficient, unless coupled with other
                   factors. [J. Hand in US v. Alcoa, Syufy theater case]
              (v) Market share of 30% is certainly insufficient. [J. Hand in US v. Alcoa]
              (vi) High market share, in and of itself, may indicate that the remaining firms would not
                   have the capacity to quickly increase their sales to respond to the dominant firm‟s
                   price increases.
          b. Other Factors:
              (i) Barriers to entry.
              (ii) Lag time for new entrants.
              (iii)Abnormal profits.
              (iv) Fragmented competition makes it less likely that the dominant firm will act as price
                   leader for others, and therefore weakens the significance of market share.
              (v) Corporate conduct.
              (vi) Future market potential: a company that has depleted its reserves and thus will not
                   continue to dominate the market may not possess monopoly power.
    D. THE “RELEVANT MARKET”: GEOGRAPHIC AND PRODUCT
       1. To determine whether a company has monopolized, it is always necessary to define the
          “relevant market,” which has two parts:
          a. The relevant geographic market; and
          b. The relevant product market.
       2. The Geographic Market:
          a. Hallmarks: a relevant geographic market is some area in which a firm can increase its
              price and …
              (i) Large numbers of customers cannot realistically turn to alternate supplies outside the
                   area (i.e. elasticity of demand is low); and
              (ii) Producers outside the area cannot not quickly flood the area with substitutes (i.e.


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Antitrust                                                                                 Daniel E. Dreger


                  elasticity of supply is also low).
          b. Factors considered:
             (i) Pricing behavior.
                  (1) If the price in Area A consistently and quickly rises and falls in response to price
                       changes in Area B, then the two markets should be grouped together.
             (ii) Transportation costs and other entry barriers.
             (iii)Delivery limitations.
             (iv) Customer convenience and preference.
             (v) Location and facilities of other producers and distributors.
       3. The Product Market:
          a. General Rule: a product market is determined by finding ”commodities reasonably
             interchangeable by consumers for the same purposes”. [US v. E.I. duPont (US 1956)
             – the “Cellophane Case”: market was held to be flexible wrapping material, not merely
             cellophane, so no monopoly]
          b. Factors considered:
             (i) High cross-elasticity of demand indicates products that are in the same market:
                  responsiveness of the sales of one product to price changes of the other.
             (ii) Functional interchangeability of those products.
                  (1) How different in character or use.
                  (2) How far buyers will go to substitute, considering price, use and quality.
          c. Criticisms of Cellophane case:
             (i) High cross-elasticities of demand may indicate that a monopolist is already extracting
                  full monopoly rents and only for that reason have consumers finally turned to other
                  products to be substitutes.
             (ii) Hard to tell much from absolute price differentials, but it‟s suggestive:
                  (1) It‟s possible that people pay a premium for cellophane b/c it‟s better, but would
                       switch if the price increased further
             (iii)There could be people using other products only b/c of an cellophane‟s exorbitant
                  price, sacrificing utility; thus, cellophane is a separate market.
          d. Despite the criticism of Cellophane, many modern cases have defined the product
             market even more narrowly than that case requires … i.e. made it easier to find a
             monopoly.
             (i) The Syufy court finds a distinct product market for “industry anticipated top-grossing
                  films.”
             (ii) The International Boxing Club court found a distinct product market for
                  championship boxing matches, separate from the market for all boxing.
             (iii)The relevant market for Coca-Cola (colas, soft drinks, beverages … ?) is heavily
                  litigated.
    E. “PURPOSEFUL CONDUCT”
       1. Monopoly power in a relevant market is not alone sufficient for a Section 2 violation.
          Additional conduct is required.
       2. Specific intent is not required: intent is inferred from the exclusionary practices
          themselves … i.e. only the intent to do the acts is required:


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                 a. Alcoa: “no monopolist monopolizes unconscious of what he is doing.”
                 b. In Grinnell, the SupCt stated that the offense of monopolization requires some showing
                     of intent. However, courts usually infer intent, as in Alcoa and Aspen Skiing.
            3.   DEFENSE: the acquisition of monopoly power is not illegal IF it is was either [citing US v.
                 Alcoa]:
                 a. Attained by “superior skill, foresight, or industry”; OR
                 b. “Thrust upon” the D because of a thin market or economies of scale (e.g., a “natural
                     monopoly”).
                     (i) Examples:
                          (1) A small-town newspaper in a market that can support only one paper.
                          (2) A pro football team in a city where there aren‟t enough sports fans to support
                              more than one team.
                          (3) A manufacturer who has the only facilities that are able to supply the market.
            4.   NOT A DEFENSE that company that monopolizes market has not extracted more than a
                 “fair” profit – i.e. has not “fully” exploited the monopoly [J. Hand in US v. Alcoa] because:
                 a. unchallenged economic power deadens initiative and fosters complacency
            5.   Injuries to Competition vs. Injuries to Competitors:
                 a. Competitors can be injured by a monopolist‟s efficiency, but this is LAWFUL.
                 b. Competition is UNLAWFULLY injured when a practice is exclusionary and it produces
                     no efficiency gains to the monopolist.
            6.   Examples of UNLAWFUL Exclusionary Practices:
                 a. Predatory pricing.
                 b. Limit pricing: monopoly prices just low enough to keep out new entrants, but inflated
                     w/r/t „competitive‟ prices.
                 c. Refusal to deal as a means of protecting existing power – Aspen Skiing – exception to
                     general rule of no duty to deal with competitor: a firm with monopoly power in the
                     Aspen ski facilities market violated §2 when it attempted to force its sole rival to accept
                     deep concessions in the distribution of proceeds of “all-Aspen lift tickets” by threatening
                     not to participate and thereby changing the existing distribution pattern in the
                     monopolist‟s favor [ Aspen Skiing v. Aspen Highlands Skiing (US 1985) ]
                     (i) Key factors:
                          (1) No “valid business reasons” given for the refusal to deal
                          (2) Change from past arrangements rather than refusing a new arrangement (past
                              distribution was formed in a time of competition)
                          (3) Harm to consumers in discontinuation of shared lift ticket
                          (4) Shared lift ticket is similar to an “essential facility”
                          (5) Absence of duty to cooperate does not mean that refusal can‟t be evidence w/r/t
                              intent to monopolize
                     (ii) Standards proposed in academic literature:
                          (1) Rational conduct that hurts competitors by offering consumers a better choice
                              (quality, price, etc.) is OK
                          (2) Conduct that hurts competitors, offers no benefit to or injures consumers, and has
                              no valid business reason (doesn‟t create efficiencies) is NOT OK


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                 (iii)Data General v. Grumman (CA1 1994):
                      (1) “A unilateral refusal to deal is prima facie exclusionary if there is evidence of
                          harm to the competitive process; a valid business justification requires proof of
                          countervailing benefits to the competitive process”
                      (2) Excluding others from use of copyrighted work is a presumptively valid business
                          justification
            d.   Raising rivals’ costs theory – Prof. Salop:
                 (i) Business conduct that raises rivals‟ costs and thereby causing them to restrain their
                      output
                 (ii) Another view of the conduct in Aspen Skiing
            e.   Exclusion from an “essential facility”: a dominant firm that controls an essential
                 facility may have a duty to share the facility with a competitor
                 (i) Example: Otter Tail Power v. US (US 1973): refusal to sell wholesale power to
                      someone who competes on the retail level violates §2 because the wholesale supply
                      of power is an “essential facility”
                      (1) Criticism of Essential Facility Doctrine: the doctrine doesn‟t accomplish
                          anything b/c it doesn‟t eliminate the monopoly price arising out of the bottleneck
                          … it simply forces the monopoly profits to be shared by a number of firms;
                          REGULATION is required.
                      (2) Bork: if someone has a monopoly at one stage of a multi-stage industry, it
                          doesn‟t further advantage them to gain a monopoly at another (upstream or
                          downstream) stage of the industry [EXCEPT IN REGULATED INDUSTRIES,
                          where gaining a monopoly at a different, unregulated level would circumvent the
                          regulation]
                 (ii) Mere “monopoly leveraging” not a violation: refusal to share the facility must be an
                      attempt to monopolize or actually create a monopoly … merely creating a
                      competitive advantage is not a violation
                      (1) Alaska Airlines v. United Airlines (CA9 1991): Ds‟ exclusion of P from their
                          computer reservation systems gave them a competitive advantage over P but was
                          limited in ability to eliminate competition, therefore there is no violation of §2.
            f.   Mergers to monopoly.
            g.   Purchase and shutdown of rivals‟ plants.
            h.   Needless expansion of output or capacity. [ US v. Alcoa: this rationale is a bit
                 DUBIOUS.]
            i.   Price discrimination. [Also dubious.]
            j.   Vertical integration.
            k.   Price and supply squeezes. [When a vertically integrated monopolist sells to vertically
                 related firms at a high price, but suppresses the output price in the market in which those
                 firms sell.]
            l.   Tying arrangements.
            m.   “Predatory” research and development.
            n.   Acquiring “monopsony” power (monopoly buying power) violates §2 [ US v. Griffith
                 (US 1948) – film exhibitor with monopsony power in a particular geographic market
                 extracted preferences from film distributor over competitors in other geographic markets


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               ]
           o. Patent “abuse”. [obtaining one by fraud or accumulation and non-use of patents]
           p. US v. Microsoft (1995)
               (i) “per processor” Windows license fee violates §2
               (ii) “vaporware” tactics?: public announcement of new products b/f they‟re ready for
                    market to induce customers not to purchase competing products
        7. Practices that have been ALLOWED:
           a. No duty to disclose product info to competitors: even a monopolist has a right to the
               lead time that follows from innovation [ Berkey Photo v. Eastman Kodak (CA2 1979) ]
               (i) Difficult to fashion a rule describing when there would be a duty to disclose.
           b. No duty for a firm that develops superior products or processes to license or disclose its
               technology to rivals: substantial profits from a superior efficiencies and a rational
               pricing policy are legal [ In re E.I. DuPont De Nemours (FTC 1980) ]
               (i) Bad policy to say that if you‟re efficient and grow, we‟ll bust you up.
               (ii) Besides, that would destroy economies of scale and remedies would be hard to
                    fashion.
           c. No duty not to discriminate b/w competitors in a different industry:
               (i) Monopolist publisher of official airline guide, absent any evidence of interest in the
                    effects on the airline industry, is allowed to discriminate between certified air
                    carriers and commuter airlines [ Official Airline Guides v. FTC (CA2 1980) ]
           d. Posner in Olympia Equipment v. Western Union (CA7 1986):
               (i) A lawful monopoly power has no general duty to help its competitors or to pull its
                    competitive punches: that would just be protecting inefficient competitors.
               (ii) If a monopolist does help a competitor and then later withdraws help, that is
                    ALLOWED, given that there is a clear business justification for the withdrawal.
    F. PREDATORY PRICING
        1. Predatory pricing: Refers to firm‟s attempt to drive a competitor out of business, or to
           discourage a potential competitor from entry, by selling its product at an “artificially” low
           (below profit-maximizing levels) price. The benefit comes in reaping future monopoly
           profits.
           a. Dilemma: Low prices and high output are among the goals of antitrust policy. Often a
               price that is alleged to be “predatory” is a function of nothing more than the fact that the
               D is more efficient than its rivals.
           b. Two relevant statutes:
               (i) §2 of the Sherman Act [predatory pricing as an attempt to monopolize].
               (ii) Robinson-Patman Act [prohibits price discrimination if it tends to injure
                    competition].
                    (1) Primary-line discrimination: Direct harm to competitors. This is the type that is
                         involved in predatory pricing claims.
                    (2) Secondary-line discrimination: Retailer getting bad price from supplier is
                         harmed relative to bigger retailer getting better price.
           c. Declining violations – predation is difficult: Few Ps win predatory pricing cases
               today:


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                  (i) Today‟s courts are inclined to believe that injuring one‟s rivals by selling at a low
                       price is competitive.
                  (ii) The courts view actual predatory pricing to be rare, as it is expensive and risky:
                       (1) Even if you succeed in driving out a competitor, a new entrant can foil the
                           predation.
                       (2) The defeated competitor can re-enter.
                       (3) Potential partners and customers will be forewarned that you predate.
                  (iii)“Private information” – attempted modern rehabilitation of predation:
                       (1) Companys have really low costs because they have proprietary information; OR,
                       (2) Companies price below cost to try to feign proprietary information in an effort to
                           discourage new entrants.
            2. Robinson Patman test – high burden on Ps: The Supreme Court has articulated a two-
               prong test for a predatory pricing violation under the Robinson-Patman Act: [ Brooke
               Group v. Brown & Williamson Tobacco (US 1993) ]
               a. Prices below some benchmark level of cost.
                  (i) This could be:
                       (1) Average total cost.
                       (2) Marginal cost.
                       (3) Average variable cost (AREEDA-TURNER‟s proxy for marginal cost).
                              Areeda-Turner concede that there may be times when a price higher than the AVC could be
                                 predatory (esp. if still lower than marginal cost). So, they support a presumption of legality
                                 for such prices that can be defeated with certain evidence. Any price above average total
                                 cost is conclusively legal.
               b. ”Recoupment” or a reasonable prospect of recoupment.
                  (i) This is done by showing:
                       (1) That the prey is likely to succumb; AND
                       (2) The D will likely then be able to set supra-competitive prices.
                  (ii) “Recoupment” is the proxy for finding injury to competition that the Robinson-
                       Patman Act requires.
                  (iii)Simply below-cost pricing isn‟t sufficient because it alone does no harm to
                       consumers … unsuccessful predation is a boon to consumers.
               c. Defenses – test may be overinclusive: There may be good reasons to sell below
                  marginal cost:
                  (i) Steep learning/experience curves: For example, a new semiconductor chip … the
                       more the firm makes, the better its process gets (defect rate goes down). So, it sell
                       lots below price now to get better faster …..
                       (1) Counter: This can cut the other way … a grab at early market share through
                           predatory pricing paves the way for a locked-in competitive advantage for years.
                  (ii) Give away free samples to establish goodwill and get brand recognition.
                  (iii)“Promotional pricing”: new entrant might have to charge a very low price to get
                       consumers to give its product a try.
                  (iv) Loss leaders: Sell complementary product at a very low price because the core
                       product is profitable.



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               d. Problem of underinclusion: There are situations where a firm sells ABOVE marginal
                   cost but still has predatory intent:
                   (i) Where one firm has economies of scale or some other cost advantage over its
                        competitors, it can drive them out of business while still keeping prices above cost.
                        NOTE: Of course, the antitrust laws do not condemn monopoly through superiority.
            3. Alternatives to Areeda-Turner
               a. Debates about legal rules for predatory pricing revolve around the estimates of three
                   uncertain facts:
                   (i) How often predation occurs and how successful it is absent legal intervention.
                   (ii) The degree of difficulty in administering cost-based rules.
                   (iii)The capacity and utility of courts distinguishing between long-term and short-term
                        costs and fixed and variable costs.
               b. Alternatives (pp695-96):
                   (i) Scherer: Cost-based rules are too simplistic. Look to “long-term economic welfare.”
                   (ii) Baumol: Must take “timing” into account. Allow prices to be cut to any level, but
                        then prevent increases for a set period of time.
                   (iii)Posner: Predatory pricing can also occur when price is below long-run marginal
                        costs (higher than short-run marginal costs) accompanied by intent to exclude an
                        equally or more efficient competitor. New entrants may have costs – such building a
                        brand or creating research capacity – which have long since become fixed costs to
                        the established firm.
            4. Sherman §2 test – predation as attempted monopolization: Analyze predatory pricing
               under the “attempt to monopolize” framework: (1) specific intent, (2) dangerous probability
               of success and (3) conduct (the below-cost pricing).
               a. “Dangerous probability of success”: Predatory pricing is only plausible in markets that
                   are structurally conducive to monopolization. These are particularly marked by:
                   (i) High barriers to entry.
                   (ii) Low excess capacity.

V. ATTEMPT TO MONOPOLIZE
    A. SHERMAN ACT §2 PROHIBITS ATTEMPTED MONOPOLIZATION
       1. “Section 2. 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 …”
    B. ELEMENTS OF “ATTEMPT TO MONOPOLIZE”
       1. Specific Intent: proof of specific intent to exclude competitors and gain monopoly power
          is required
          a. Compare: proof of “intent” in an attempt charge must be more substantial than the proof
               of “deliberateness” required for actual monopolizing
          b. Hard to formulate a standard: it is hard to differentiate between hard competition, which
               is allowed, and an attempt to monopolize; this has led the courts to de-emphasize the
               intent requirement
       2. Dangerous Probability of Success


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               a. Market power required to demonstrate attempt: “demonstrating the dangerous
                  probability of monopolization in an attempt case … requires inquiry into the relevant
                  product and geographic market and the defendant‟s power in that market” as well as
                  proof of specific intent to monopolize [ Spectrum Sports v. McQuillan (US 1993) ]
                  (i) Rationale: the rationale could be to require proof of both intent and probability of
                       success to limit the risk of chilling legitimate competitive behavior.
                  (ii) Spectrum Sports reversed a line of cases in the Lessig line of cases Ninth Circuit
                       which had held that if the conduct was sufficiently predatory an assessment of
                       market power was unnecessary.
               b. Appropriate standard unclear: it isn‟t clear what it takes to prove “dangerous
                  probability of success;” it may require proof of the structural requirements to develop a
                  monopoly.
                  (i) No attempt found: US v. Empire Gas (CA8 1976): Empire was a large wholesaler
                       and retailer of gas fuels; Empire invited competitors to raise their rates equal to
                       theirs; when refused, Empire threatened to price the company out of business using
                       price cuts, by acquiring the competitor‟s source of supply and raising the prices, etc.
                       The court found a specific intent to monopolize but did found no attempt in the
                       geographic areas named in the complaint because (1) Empire had no more than 50%
                       market share, (2) the market price of gas was only slighter than in other areas, (3)
                       there may have been other reasons for the difference and (4) Empire‟s profits were
                       not extraordinarily high.
                  (ii) Further guidance provided: the court in International Distribution Centers v. Walsh
                       Trucking (CA2 1987) noted that while market share analysis is essential to finding
                       “dangerous probability of success”, but not sufficient; the court must also look to:
                       (1) strength of the competition
                       (2) probable development of the industry
                       (3) barriers to entry
                       (4) the nature of the anticompetitive conduct
                       (5) elasticity of consumer demand
                  (iii)Sliding scale appropriate?: to limit the risk of chilling legitimate competitive
                       behavior, it may be appropriate to dilute the level of market power required for
                       attempt where the conduct was particularly anticompetitive and lacking in redeeming
                       virtues; and vice versa
            3. Predatory or Anticompetitive Conduct: the conduct, or planned or threatened conduct,
               must be capable of giving the D a monopoly in the relevant market
               a. See the list of exclusionary practices in the “Monopoly” section.
               b. Business torts alone are not sufficient: no matter how worthy of condemnation, business
                  torts (false advertising, misrepresentation and other “dirty tricks”) cannot constitute
                  attempts to monopolize UNLESS they are capable of giving the D monopoly power.
               c. Examples of attempt violations:
                  (i) Inducement of other to boycott a competitor: a newspaper publisher‟s attempt to
                       regain its monopoly over advertising by forcing advertisers to boycott a competing
                       radio station or be excluded from the paper violated §2 [ Lorain Journal (US 1951)
                       ]


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               (ii) Discriminatory pricing in furtherance of a monopoly in another related market: a
                    television station may not use its legal monopoly on broadcasting to give favorable
                    discounts to only three advertising agencies, thus furthering a monopoly on
                    advertising among those three agencies [ Six Twenty-Nine Productions (CA5 1966) ]
                    (1) Counter: this case contradicts the Official Airline Guide case, putting its wisdom
                        in doubt
               (iii)Refusal by a manufacturer with a dominant market position to deal with an
                    independent dealer after the dealer refused to sell out to the manufacturer.
                    (1) Counterexample: a similar refusal to deal was deemed permissible where D
                        lacked “dominant control” of the relevant market [ FTC v. Raymond Bros.-Clark
                        Co. (US 1924) ]
            d. Examples where NO ATTEMPT to monopolize was found:
               (i) Refusal to deal with distributor OK when the distributor has alternatives (i.e. there is
                    no monopoly): a heavy equipment producer X replaces exclusive distributor A with
                    B, refuses to deal with A and then A goes bankrupt – no violation because there are
                    three other manufacturers of the heavy equipment in healthy competition with X [
                    A.H. Cox v. Star Machinery (CA9 1981) ]
               (ii) HYPO: Marshall Fields negotiates a deal with Levi‟s to get a discount that
                    competitors like Carson Pirie Scott are excluded from. No violation because we are
                    confident there are plenty of alternative products to Levi‟s jeans and therefore there
                    is no threat of monopoly power.
               (iii)HYPO: A car dealer gets an exclusive distributorship from Nissan for the Chicago
                    area. Nissan terminates its distributorship agreements with other dealers. No
                    violation because the relevant market is automobile and there is no threat of a
                    monopoly in that market.

VI. HORIZONTAL RESTRAINTS
    A. HOW AND WHEN PRICE FIXING WORKS
       1. A cartel is a group of firms who should be competitors, but who have agreed with each other
          to "fix" their prices. Cartels are analyzed under § 1 of the Sherman Act, and "naked" price
          fixing (i.e., price fixing not accompanied by any integration of the firms' other business) is
          illegal per se under that Act.
       2. The Cartel Market
          a. Price fixing does not work well in all markets. The following characteristics make a
              market conducive to price fixing.
              (i) Market Concentration. The smaller the number of firms in a market, the easier price
                   fixing will be.
              (ii) Barriers to Entry. If entry into a market is easy, the firms within the market will not
                   be able to earn monopoly profits for long. New competitors will come in. Therefore
                   high entry barriers are conducive to cartelization. "Mobility barriers"--i.e., a long
                   period of time required for new entry--also facilitate cartelization.
              (iii)Sales Methods. Some market sales methods facilitate cartelization by making it easy
                   for the cartel to detect cheating members. Price fixing is easiest in "auction" markets
                   with publicly announced prices; it is most difficult in markets where individual sales


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                   are large and prices are negotiated in secret.
              (iv) Product Homogeneity. Cartels work best in markets containing fungible products,
                   for then the cartel members will find it easiest to agree on a cartel price. Product
                   differentiation tends to frustrate cartelization, because some cartel members'
                   products are perceived as superior to the products of other members.
              (v) Facilitating Devices. Firms can facilitate cartelization by standardizing products, by
                   vertically integrating in order to turn their sales into small, public, unnegotiated retail
                   sales, or by using other devices such as advance price announcements and basing-
                   point pricing.
       3. The Cartel Members
          a. Certain characteristics of the cartel members themselves may make a market more
              conducive to cartelization:
              (i) Firm Size. In order for the cartel to operate, each member must reduce its output.
                   The allocation of each member's output reduction will be easiest if the firms are all
                   about the same size.
              (ii) Efficiency. Cartels work best if all members are equally efficient. If efficiency
                   varies widely, the less efficient (higher cost) members will want to set a higher cartel
                   price than the more efficient members.
              (iii)Level of Participation. The cartel will work best if 100% of the firms in the market
                   participate.
              (iv) Incentives to Cheat and Cartel Countermeasures. Because every cartel sale is highly
                   profitable, individual members have a strong incentive to cheat on the cartel by
                   making secret sales at a lower price than that agreed to by the cartel. The cartel may
                   have to take elaborate precautions against such cheating.
       4. Variations on Horizontal Collusion
          a. Cartels sometimes use these variations on price fixing. All of them are per se illegal:
              (i) Horizontal Territorial or Customer Division: reduces the problem of deciding and
                   monitoring the output of each cartel member.
              (ii) Market Share Agreements
              (iii)Output Reduction Schemes: once output is lowered, the market will determine the
                   cartel price. [ Socony-Vacuum ]
    B. “PER SE” RULE AGAINST PRICE FIXING [ SOCONY-VACUUM OIL (US 1940) ]
       1. Price fixing is a per se violation of §1 of the Sherman Act, which bars a “contract [or]
          combination … in the restraint of trade.”
          a. Necessity of agreement: unilateral action is not a violation.
       2. Per se illegality: “Any combination or agreement between competitors, formed for the
          purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of
          a commodity in the interstate or foreign commerce is illegal per se.” [ US v. Socony-
          Vacuum Oil Co. (US 1940) ]
          a. Rejects the waffling of CBOT and Appalachian Coals … declares price fixing per se
              illegal, moving back towards Addyston.
          b. No actual effect on the price is required for a violation: the SupCt implicitly
              approved the trial court‟s instruction that even if the conspiracy didn‟t actually have an
              effect it still violates §1.


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          c. Recent development – Rule of Reason for maximum price fixing: [ State Oil v. Khan
              (US 1997) ]
              (i) Problem: Horizontal maximum price fixing can stifle competition on qualitative
                   product factors because the price cannot be increased to make it profitable.
       3. General rule that no justification is permitted:
          a. “Whatever economic justification [for price fixing, they are per se illegal] because of the
              actual or potential threat to the central nervous system of the economy.” [ Socony-
              Vacuum Oil ]
          b. No defense that the price fixed was actually a “reasonable” price. [ Addyston Pipe ,
              Socony-Vacuum Oil ]
          c. No defense that the price fixing was to end “ruinous competition” or eliminate
              instability of prices. [ Socony-Vacuum Oil ]
       4. Earlier cases -- occasional use of rule of reason analysis: the effect on prices may be
          viewed as an ancillary restraint and subject to a rule of reason analysis if a credible
          argument can be made that an agreement has the purpose and effect of making a market
          function more competitively or of creating integrative efficiencies.
          a. Making the market [allegedly] more competitive: CBOT‟s “Call rule,” which fixed
              off-hours prices at the market close was upheld on the grounds that it was mere
              regulation and had pro-competitive effects. [Chicago Board of Trade v. US (US 1918) ]
              (i) J. Brandeis avoids the “price-fixing” label, but its not clear that the so-called benefits
                   stand up to close scrutiny. The Call rule may have been beneficial but limits on
                   trading hours would have been less thorny.
              (ii) Perhaps this case can be reconciled with Addyston by characterizing the restraint
                   here as falling under the “ancillary restraint” exception of Addyston.
              (iii)The CBOT case is viewed as an outlier.
          b. protecting a distressed industry: a rule of reason analysis was adopted to examine a
              price fixing cartel in the coal industry; the practice was upheld largely because the price
              fixing was keeping the distressed coal industry afloat during the Depression [ US v.
              Appalachian Coals (US 1933) ]
              (i) Again, this case probably has little application outside of the Depression-era
                   setting. Anti-competitive practices were tolerated in a time of general distress.
              (ii) Probably wasn‟t even sound policy, since cartels prop up inefficient producers.
       5. Exception for Regulated Industries: Businesses that fix prices according to rates set by
          the government “in the public interest” are immune from the antitrust laws.
    C. POLICY PROS/CONS OF A “PER SE” RULE
       1. Pros:
          a. Clarifies The Law: creates a “bright line” standard as to specific illegal conduct
              (i) Promotes certainty for business planning
              (ii) Can be made effective through self-policing of businessmen and their legal
                   counsellors
              (iii)Promotes judicial economy
                   (1) The alternative to a simple per se rule would be continuing supervision by
                       agencies and the judiciary



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                  (2) In the overwhelming majority of cases, a full examination would show
                      anticompetitive effects, so we live with the few “errors”
          b. Flatly prohibits a practice that:
             (i) Usually results in anticompetitive effects and misallocated resources
             (ii) Is rarely justified by significant redeeming values or efficiencies
       2. Cons:
          a. Prevents Ds from introducing evidence that may establish a business justification for the
             conduct or procompetitive, efficiency-generating benefits
          b. May create overdeterrence, which chills innovation/creative competition
    D. HORIZONTAL RESTRAINTS THAT ARE TREATED AS PER SE ILLEGAL PRICE
       FIXING
       1. An expansive interpretation of “price fixing” has been followed, such that practices beyond
          minimum prices, maximum prices, etc.:
          a. Tampering with supply is per se illegal: a collective agreement among sellers as to how
             much to sell or produce is prohibited.
          b. Tampering with demand is per se illegal: a collective agreement among buyers to limit
             purchases so as to depress the market price is illegal per se [ National Macaroni
             Manufacturers v. FTC (CA7 1975) ]
          c. Restricting competition on credit terms is per se illegal: an agreement among beer
             distributors to eliminate free short-term credit on sales to retailers was tantamount to
             agreeing to limit discounted prices and therefore extinguished one form of competition
             among the sellers and was per se illegal [ Catalano v. Target Sales (US 1980) ]
             (i) Counter: they aren‟t restricting competition in any other aspect, including the basic
                  price; plus, the free market price will drop to reflect the elimination of the credit
                  feature.
                  (1) Reply: the fewer elements of competition, the easier it is to coordinate on the
                      remaining elements and fewer opportunities for competitors to “cheat” on the
                      price leader; facilitates “oligopoly pricing”
          d. Elimination of competitive bidding is per se illegal: see the Professional Association
             section below [ National Society of Professional Engineers v. US (US 1978) ]
          e. Market share agreements are per se illegal.
          f. Territorial or customer division is per se illegal.
    E. PROFESSIONAL ASSOCIATIONS
       1. A number of professional associations have ethical rules that suppress certain kinds of
          competition as unethical.
          a. Per se rule where ethical rule brands competition as unreasonable: an ethical rule
             prohibited fee negotiations with a client until an engineer was selected for a particular
             project; this operated as a ban on competitive bidding but was defended by the
             professional association on the grounds that competitive pressure to offer engineering
             services at a low price would be dangerous and therefore the rule was reasonable; the
             SupCt held that ethical rules with anticompetitive effects are per se illegal because
             the Sherman Act does not support a defense that states that competition itself is
             unreasonable. [ National Society of Professional Engineers v. US (US 1978) ]
          b. Rule of reason where restriction could be better targeted: the FTC analyzed the


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                AMA‟s prohibition on price advertising; the AMA‟s justification was that medical
                advertising was unethical because it could lead to low cost services that are not in the
                best interests of consumers with poor information; the Court found the ethical rules
                illegal under a rule of reason because the effects were unreasonably broad and
                should be targeted to achieve proper goals without widely suppressing advertising [
                AMA v. FTC (US 1982) ]
           c. Rule of reason where no obvious indication of bad intent: the American Society of
                Appraisers expelled Vogel on ethical grounds when he worked for a fixed percentage of
                the appraisal; J. Posner mandated a full trial under a rule of reason because there was no
                preliminary evidence that the ethical rule was a subterfuge for cartelization or had any
                effect on price whatsoever; it was left to Vogel, on a full trial and under a rule of
                reason, to show anticompetitive purpose or effect [ Vogel v. American Society of
                Appraisers (CA7 1984) ]
           d. “Quick look” rule of reason applied sparingly: the California Dental Ass‟n
                prohibited advertisement of across-the-board discounts; instead, the regular fee had to
                be posted along with the individual discounted prices, making uneconomical to advertise
                blanket discounts; the Ninth Circuit applied a “quick look” analysis, between the per
                se rule and the rule of reason and found the practice illegal. [ In Re California Dental
                Ass’n (FTC 1996) ]
                (i) “Quick look” is used where per se condemnation is inappropriate, but elaborate
                     industry analysis isn’t required because the type of restraint is inherently suspect
                     and/or the courts have experience with the restriction; a lack of any plausible
                     efficiency justification suspends further rule of reason analysis and activates per se
                     condemnation …
                (ii) Is the restraint “inherently suspect”? If NO, use the traditional rule of reason. If
                     YES, is there a plausible efficiency justification? If NO, then the restraint is quickly
                     condemned. If YES, then under the full balancing test of the rule of reason is
                     brought to bear to determine the legality of the practice.
        2. Case-by-case Analysis Necessary: the lesson of the cases above is that these type of
           ethical rules can‟t be lumped together; they must be viewed individually to determine
           whether they are per se “naked restraints” or are subject to a rule of reason analysis
    F. CHARACTERIZATION OF HORIZONTAL AGREEMENTS: PER SE VS. RULE OF
        REASON
        1. Per se analysis where complicating factors are absent: the initial inquiry is to determine
           whether the conduct or effect fits neatly into a recognized per se category of horizontal
           restraint or whether further analysis, under a rule of reason or a “quick look” rule of reason,
           is required.
           a. Traditional per se categories include:
                (i) “Naked” price restraints with no redeeming values.
                (ii) Market division.
                (iii)Certain types of boycotts.
                (iv) Otherwise sufficient experience with the conduct for the court to know that it is
                     almost always anticompetitive and almost never socially beneficial.
           b. Factors that could lead to further (rule of reason) analysis:



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                  (i) Horizontal restraints are necessary for the product to exist at all.
                  (ii) Unfamiliarity of the courts with the restraint or industry in question.
                  (iii)Obvious efficiencies economies created by the restraint.
                  (iv) The presence of intellectual property issues.
                  (v) Network industries.
                  (vi) Otherwise novel fact situations.
                  (vii) Public conduct. [Clandestine conduct naturally arouses more suspicion.]
            2. Otherwise a rule of reason analysis: if the purpose or effect is unclear or the D is able to
               make a plausible argument that the restraint (i) enhances the market by making it more
               competitive, or (ii) increases efficiency through integration, then a rule of reason analysis
               should be conducted:
               a. Balancing test: balance the harms and the procompetitive benefits, considering:
                  (i) The structure of the industry.
                  (ii) Facts peculiar to the firm‟s operation in that industry (including the firm‟s power and
                       position).
                       (1) Softer market power analysis: many horizontal restraint rule of reason cases do
                           not analyze market power as rigorously as in monopolization or merger cases.
                  (iii)The history and duration of the restraint.
                  (iv) The reasons why the restraint was adopted.
               b. BMI v. CBS (US 1979): BMI had a blanket license arrangement where a customer,
                  such as CBS, had to pay a fee in proportion to the customer‟s size for a period of time or
                  per program for access to the BMI catalog; BMI defended the arrangement as
                  procompetitive because it increased efficiency by reducing transaction and monitoring
                  costs, thereby making mass marketing of performance rights feasible; the Court rejected
                  per se treatment, even though the license is literal “price fixing,” and upheld the
                  arrangement after a rule of reason analysis, largely because the license was non-
                  exclusive (anyone could license from the artists individually):
                  (i) Factors in deciding against per se treatment:
                       (1) A consent decree between the government and ASCAP/BMI had determined
                           some of the license‟s terms, including that it not be exclusive (i.e. the artist can
                           still license on an individual basis).
                       (2) Copyright considerations complicate the situation.
                       (3) Economies are clearly created by the license.
                       (4) The blanket license created a “new product” that wouldn‟t otherwise exist.
               c. NCAA v. Board of Regents of the U. of Oklahoma (US 1984): a plan by NCAA
                  member schools to limit the number of televised intercollegiate football games and fix
                  the allocation of TV money to the schools with the purported motive of protecting live
                  attendance; top football schools sue for the right to make their own TV deals; the
                  Supreme Court observed that plan constituted price fixing and output limitation, which
                  would ordinarily be illegal per se, but nevertheless applied the rule of reason in
                  determining the plan still violated §1. Note, though, that the court‟s rule of reason
                  analysis was weak: it glossed over the relevant market analysis and probably should
                  have found the restraint to be a reasonable attempt to maintain competitive balance
                  between schools through a type of „revenue-sharing.‟


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               (i) Factors in deciding against per se treatment:
                    (1) Because “this case involves an industry in which horizontal restraints on
                        competition are essential if the product is to be available at all.”
                         Counter: why are restrictions on price/output necessary to have competitive sports? The court
                            itself finds the restraints unrelated to preserving the character of the sporting competiton –
                            which is why it ruled against the NCAA in the rule of reason analysis.
          d. HYPO: Schools give academic financial aid based on need but not on merit. Schools
             agree to use one formula that effectively set the price at which each would offer needy
             students financial assistance as an inducement to enroll. The stated goal was to insure
             that available funds are best used to promote the matriculation of the disadvantaged,
             increase diversity through all the schools and promote equal access and opportunity.
             OK under the antitrust laws?
             (i) In US v. Brown University (CA3 1993), the Third Circuit ordered the lower court to
                  use an extended rule of reason analysis (rather than a “quick look”) even though the
                  scheme was “anticompetitive on its face” because it considered some of the
                  justifications as potentially meritorious.
    G. LABOR-ANTITRUST EXEMPTION
       1. Statutory and common law exemptions:
          a. Statutory: it has been settled by statute that collective bargaining is exempt from the
             Sherman Act
          b. Common Law: there are also common law exemptions to employers and others where
             restrictive conduct is motivated by sensible labor concerns.
             (i) Example: the manufacturer of handblown glass did not violate the Sherman Act
                  when they collectively set a wage scale that allowed a given factory to offer the
                  highest wage for only part of the year to encourage factories to best use the
                  undersized workforce [work at full capacity for part of the year then shut down for
                  the rest] [ National Ass’n of Window Glass Manufacturers v. US (US 1923) ]
             (ii) Sixth Circuit’s standard for the scope of the nonstatutory exemption: Federal
                  labor policy favoring collective bargaining trumps the antitrust laws where:
                  (1) The restraint on trade primarily affects only the parties to the collective
                       bargaining; AND,
                  (2) The agreement sought to be exempted concerns a mandatory subject of
                       collective bargaining.; AND,
                  (3) The agreement sought to be exempted is the product of bona fide arm’s-length
                       bargaining.
             (iii)Application: In In re Detroit Auto Dealers Ass’n v. FTC (CA6 1992), the FTC
                  challenged an agreement by 90 automobile dealers to keep their showrooms closed
                  all day Saturdays and on three weekday evenings. The Sixth Circuit affirmed the
                  FTC‟s finding of unreasonable restraint of trade on the grounds that:
                  (1) The agreement at issue was among the dealers and did not involve unions or
                       employees and thus was a direct restraint of trade by closing showrooms and
                       restricting availability of new cars to the public.
                  (2) The purpose of the agreement was to avoid collective bargaining with the
                       affected salespersons and unreasonably reduce competition.
             (iv) Hours reduction agreements instituted by employers tend to get rule of reason


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                  treatment because they appear not to reduce total output but rather shift it around.
       2. Working standards for analyzing labor-antitrust problems:
          a. If the employer capitulates or agrees to something that the union is demanding, although
             anticompetitive, that's OK.
          b. If the employer initiates the arrangement or the intent is to disadvantage competitors,
             then it‟s not covered by exemption. Then one has to decide if it deserves per se
             treatment or rule of reason analysis. Not being covered by the exemption doesn‟t make
             it necessarily illegal.
    H. HORIZONTAL MARKET DIVISIONS
       1. Horizontal market division is per se illegal under §1: any agreement (explicit or tacit)
          among competitors not to compete is per se illegal under §1 of the Sherman Act. [
          Addyston Pipe, US v. Topco Associates (US 1972) ]
          a. Rationale: such an agreement gives each party an effective monopoly in its share, with
             the power to fix prices in that share.
          b. An agreement not to compete may include:
             (i) Territorial divisions.
             (ii) Customer divisions.
             (iii)Functional divisions (e.g. wholesale market to some and the retail market to others).
             (iv) Product divisions (e.g. small appliances to some and large appliances to others).
       2. Applications:
          a. Violation where “least restrictive alternative” not taken: In Timken Roller Bearing
             Co. v. US (US 1951), the Ds were a corporate parent and its partially owned
             subsidiaries. They were parties to agreements that licensed the trademark “Timken,”
             allocated territories for marketing “Timken” bearings and set minimum prices to be
             charged when one D sold bearings in another‟s territory. Ds argued that the agreements
             were ancillary to the lawful purpose of protecting the trademark. The Court rejected the
             defense, reasoning that the agreement was broader than necessary to protect the
             trademark and that market division was the dominant purpose. Implicit in the court‟s
             decision is a “least restrictive alternative” test. Notes:
             (i) Maybe we don‟t want to give extra „rents‟ to reward a trademark --- unlike patents,
                  trademarks are not the product of extensive effort/innovation.
             (ii) The court does no market power analysis.
             (iii)The agreement may be purely to solve the free-rider problem (see below). The free-
                  rider effect would prevent recovery of promotion costs for the trademark.
          b. In US v. General Motors (US 1966), upon the complaint of some dealers, GM pressured
             all franchisees to agree to eliminate sales through discounters. Discounters sold GM
             cars at bargain prices by either referring the customer to a dealer (who sold at the
             bargain price and paid the discounter a commission) or by buying from the dealer at a
             discount and reselling. GM pointed to the “location clause” in its franchise agreement
             that prohibits the dealer from moving to or establishing a sales branch. Held that the
             agreement was invalid.
             (i) Note that the free-rider argument could be made to defend this practice: GM may
                  have needed to stamp out the free ride that discounters got on the promotional efforts
                  and showrooms of its dealers.


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           c. Efficiencies ignored by the court: In US v. Topco Associates (US 1972), the Ds were
              several dozen regional supermarket chains that operated as a purchasing agent for its
              members in order to compete with national chains that marketed their own private-label
              groceries. Topco chains had an average 6% market share. Each Topco member was
              licensed to sell private-label Topco products only in a designated territory. Most
              licenses were exclusive. Topco members could veto the membership applications of
              competitors. Ds argue that they need the exclusive territorial divisions in order to make
              the Topco-brand viable and to compete with the larger national chains. The Court found
              the arrangement to be a per se illegal geographic market division.
              (i) Note that Topco didn‟t have market power. Also, the arrangement may have had the
                   purpose of solving the problem of some members free-riding on others‟ advertising
                   costs.
                   (1) On the other hand, there may have been a less restrictive way to solve the free-
                       riding problem.
              (ii) Topco has been criticized because the Court failed to balance the loss of interbrand
                   competition against the gains of increased interbrand competition. [The court
                   begged off by saying that it wasn‟t competent to weigh the effects – one reason for a
                   per se rule.] Others have argued Topco should have been analyzed under the rule of
                   reason because it was really a joint venture with integrative efficiencies and ancillary
                   anticompetitive effects.
           d. Indirect market division also prohibited: In US v. Sealy (US 1967), the Ds were
              mattress manufacturers who combined to form Sealy. Sealy licensed the brand name to
              thirty manufacturers (who owned almost all of Sealy) and allocated geographic
              territories and set minimum retail prices for Sealy-brand mattresses. There were no
              restrictions on non-Sealy brands. The Ds argued that this was a vertical restraint. The
              Court reasoned that since the franchisees controlled Sealy, the arrangement was an
              indirect way of instituting a horizontal market division.
        3. Generally, no defenses/justifications permitted: For example, in Topco, it was held
           immaterial that the supposed purpose of the market division was to enable small grocers to
           compete with supermarket chains.
           a. However:
              (i) Free rider defense of market division: some courts have suggested that horizontal
                   market divisions may be justified by the need to prevent “free riding” among
                   distributors, who can take advantage of product advertising and service provided by
                   other nearby distributors.
              (ii) See criticisms of Topco (above).
              (iii)NCAA v. Board of Regents involved a market allocation scheme but was treated
                   under the rule of reason on the grounds that it was necessary to facilitate
                   competition.
    I. CONCERTED REFUSALS TO DEAL AND BOYCOTTS
        1. Antitrust Policy and Refusals To Deal
           a. As far as the antitrust laws are concerned, a firm is generally free to deal or not to deal
              as it pleases. A refusal to deal raises antitrust concerns only:
              (i) When it is concerted--that is, two or more firms agree not to deal with someone; OR



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                  (ii) When it is an attempt by a firm to create or maintain a monopoly.
               b. Concerted refusals to deal are generally analyzed as combinations in restraint of trade
                  under § 1 of the Sherman Act. Unilateral refusals to deal are dealt with as
                  monopolization or attempt to monopolize under § 2 of the Sherman Act.
               c. Value as aids in characterizing conduct: In Aspen Skiing, the refusal to deal was
                  taken as evidence of a monopolist's anticompetitive intent, which, with the other
                  elements of the offense are present, condemned the defendant of monopolization or
                  attempt to monopolize.
            2. Concerted Refusals To Deal
               a. Per se vs. rule of reason: It has been widely said that concerted refusals to deal are per
                  se violations of §1 of the Sherman Act. However, that rule is so full of exceptions that it
                  applies far less than half the time. In fact, the rule to be applied to concerted refusals
                  varies with the nature of the refusal. The trend is to apply the rule of reason in cases
                  where the Ds jointly have no market power.
                  (i) Causation: even if conduct is determined to be per se illegal, the P still has to show
                       that the concerted refusal to deal led to the P‟s specific injury.
                  (ii) Characterization issues: the purpose of concerted refusal to deal may be to punish
                       a maverick, or to gain market power, or to enhance the efficiency of a joint venture
                       (making the market more competitive), to avoid free riders, toetc. Whether the court
                       characterizes the conduct as exclusionary, regulatory or commercial can
                       predetermine the legal conclusion.
               b. Per se rule as the baseline: A retailer, Broadway, entered into an agreement with
                  suppliers not to sell to Klor‟s or to sell only on unfavorable terms. Broadway argued
                  that consumers and other competitors had access to supply, thus there was no injury to
                  the public. The Court concluded that a concerted refusal to deal by competitors is per
                  se illegal and did not entertain any arguments that the boycott was reasonable in the
                  specific circumstances. [ Klor’s v. Broadway-Hale (US 1959) ]
                  (i) Counter: Why would the suppliers want to facilitate the creation of a monopoly on
                       the retail level? Something else must be going on here.
               c. Self-regulation by industries: wherever industry-wide self-regulation operates as a
                  boycott or unreasonable restraint, it is unlawful.
                  (i) Protecting “IP”: The activities of a trade association of clothing manufacturers in
                       boycotting retailers who sell pirated products is unlawful. The Court came close to
                       a per se standard of illegality except that it did look to evidence of the
                       reasonableness of the methods used, purpose, market power and availability of less
                       restrictive alternatives. [ Fashion Originators’ Guild of America (FOGA) v. FTC
                       (US 1941) ]
                       (1) Rationale: The purpose of the conduct was to exclude competition from copied
                           designs, but FOGA‟s designs were not copyrighted or patented.
                       (2) “Stopping piracy” is an insufficient defense: The Court found that even if the
                           copying were a tort, the FOGA would not be justified in inflicted “extra
                           governmental” punishment.
                              Posner: Don‟t allow the boycott because that would be stepping on the social judgment that the
                                 tort remedy is sufficient. It would be overprotecting the intellectual property.
                       (3) Free-riding defense: If the case were brought today, a defense argument that


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                        free-riding was the object of the boycott might have more traction.
               (ii) Mandatory arbitration terms: Members of the Motion Pictures and Distributors of
                    America agreed to use standard contracts with exhibitors that included mandatory
                    arbitration of disputes. An exhibitors failure to comply resulted in a distributor
                    boycott. The Court found this practice illegal on the grounds that it unreasonably
                    restrained competition. [ Paramount Famous Lasky Corp. v. US (US 1930) ]
                    (1) Doesn‟t seem plausible that restricting competition on ADR terms should be
                        illegal a la Catalano.
                    (2) HYPO: The insurance industry produces standard policy terms for all
                        homeowners in IL but still compete on premium. OK?
                          They would argue that limited competition on a few terms (like price) is all that consumers can
                             understand or have time to investigate. Obviously, this sounds tenuous w/r/t Famous Lasky,
                             so the industry has secured statutory approval of the practice.
            d. Standard setting – old rule: A trade association refused to certify P‟s gas burner. The
               Court calls this per se illegal. Of course, it‟s nonsense to call standard setting per se
               illegal. This holding is not considered incorrect. [ Radiant Burners v. American Gas
               Association (US 1961) ]
               (i) Modern rule: Standard setting by associations of competitors is generally analyzed
                    under the rule of reason.
                    (1) Example: In Structural Laminates v. Douglas Fir Plywood Ass’n (CA9 1968),
                        the court found that standard setting alone cannot be a per se violation and that a
                        P must show that the standard that adversely affected its business “was either
                        unreasonable or done with an evil intent.”
                    (2) Example: Absent discrimination or “manifestly anticompetitive and
                        unreasonable conduct,” alleged boycotts arising from “standard making or even
                        industry self-regulation” [note the latter conflicts with the FOGA holding] does
                        not violate the Sherman Act. [ Eliason Corp. v. National Sanitation Foundation
                        (CA6 1980) ]
               (ii) Counter – barrier to entry problem: Argue that standards are set and maintained by
                    large players who are interested in creating barriers to entry for innovative
                    manufacturers and price-cutters.
                    (1) Response: Is the “barrier to entry” problem real if the standard wins nationwide
                        acceptance of its criteria?
            e. Rule-Making:
               (i) The leading precedent before Northwest Wholesale Stationers was Silver v. NYSE
                    (US 1984). There, the exchange denied access to facilities to non-members. The
                    Court held that the NYSE held qualified immunity from the antitrust laws under the
                    SEC Act, otherwise the refusal to deal would be per se unlawful. The Court held
                    that Ds did violate the law, though, because they had denied due process to the P.
               (ii) “Structural filter” to applying the per se rule: A cooperative purchasing agency
                    expelled a member without a Silver due process hearing after it began dealing as a
                    wholesaler as well as a retailer. The expulsion allegedly created a competitive
                    disadvantage to the P as a nonmember. The D urged that the coop‟s purpose was to
                    achieve economies of scale and reduce transaction costs in purchasing and
                    warehousing. The Court held that the Silver due process requirement was irrelevant


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                        and would apply only if the challenged conduct had qualified antitrust immunity
                        (which the SEC Act provided in Silver, but the Robinson-Patman Act doesn‟t here).
                        The Court refused to apply a per se rule. Under the holding, such refusals to deal
                        will always be treated under the rule of reason, unless the D has market power or
                        control of an essential facility. The case was remanded for an appellate review of
                        the rule of reason analysis. [ Northwest Wholesale Stationers v. Pacific Stationery
                        and Printing (US 1985) ] Implies that there are categories where the per se rule
                        would still apply; the threshold test to get a per se standard is now a showing of:
                        (1) Market power;
                        (2) Exclusive or unique access to an essential element; OR
                        (3) A lack of efficiency rationale when the boycott is aimed at a competitor.
                   (iii)The Northwest Wholesale Stationers Court distinguishes Silver on the grounds that
                        the Robinson-Patman Act does not provide the kind of antitrust exemption that the
                        SEC Act does.
                   (iv) HYPOs:
                        (1) Dentists agree to collectively refuse to submit X-rays to insurance companies
                            along with dental claims, contrary to the insurance companies‟ wishes. Dentists
                            argue that X-rays are not dispositive and will lead to arbitrary judgments on the
                            claims.
                              This was NOT ALLOWED on the grounds that it was a collective suppression of a cost-control
                                 measure.
                       (2) Atlas has 6% of the interstate moving business. Atlas prohibits local affiliates
                           from competing with it on interstate routes. Atlas throws a local member when it
                           does compete in that way.
                              This restraint was ALLOWED on the grounds that Atlas had little market power and the
                                 restraint was reasonable to stamp out free-riding.
               f. Concerted Refusals and Efficiency
                  (i) Efficient Joint Ventures With Efficient Refusals to Deal
                       (1) Some efficient joint ventures need refusals to deal or they will not work properly.
                           For example, a risky joint venture to develop a new product or process cannot be
                           placed under an obligation to admit new members to the venture after it has
                           proved successful. If every firm knew that it could avoid the risk now and join
                           the venture only after it became a success, all would wait and the venture would
                           never come into being.
                  (ii) Efficient Joint Ventures With Inefficient Refusals to Deal
                       (1) Several litigated concerted refusal cases involved joint ventures that were
                           efficient. However, the participants' refusal to admit new members to the
                           venture was inefficient, and could have created the opportunity for collusion. In
                           these cases the correct response of the court is to permit the joint venture to exist,
                           but to throw it open to new members. This is the approach the Supreme Court
                           took in the Terminal Railroad case and the Associated Press case.
            3. Boycotts – Political vs. Economic:
               a. Boycott with intent to gain economic advantage is per se illegal: an attempt by DC
                  attorneys who represented indigent Ds to extract a fee increase for that representation
                  violates §1 because its intent was to gain economic advantage. [ FTC v. Superior Court


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             Trial Lawyers Ass’n (US 1990) ]
          b. Boycott with political intent is allowed: a black boycott of white business was upheld
             because there was no intent to gain economic advantage – rather it was political
             expression protected by the First Amendment. [ NAACP v. Claiborne Hardware (US
             1982) ]
    J. CONSCIOUS PARALLELISM: INFERRING AN “AGREEMENT”
       1. Conscious Parallelism
          a. Anticompetitive contracts, combinations and conspiracies (i.e. agreements) are
             violations of §1 of the Sherman Act. However, when direct evidence is lacking,
             circumstantial evidence is sufficient to infer an “agreement” from consciously parallel
             conduct.
          b. Interdependent “conscious parallelism” among competitors:
             (i) A large theater chain sends identical letters to eight distributors naming all eight as
                 addressees to announce that it will not deal with any distributor unless the distributor
                 agreed not to distribute prime films to “second run” theaters competing with the
                 chain, except on specified conditions. Each distributor agreed. The Court found that
                 there was an unlawful agreement among the distributors. ”It was enough that,
                 knowing that concerted action was contemplated and invited, the distributors gave
                 their adherence to the scheme and participated in it.” [ Interstate Circuit v. US
                 (US 1939) ]
                 (1) Key Factors in Interstate Circuit:
                        Knowledge that they all were propositioned and motive because benefits accrued only where
                           there was concerted action – i.e. interdependency.
                        Substantial unanimity of the distributors in reaching virtually identical arrangements.
               (ii) Problems with conscious parallelism doctrine:
                    (1) Hard to imagine relief … can‟t order firms not to observe what their competitors
                         are doing.
                    (2) Shouldn‟t go after practices that might facilitate conscious parallelism when they
                         have efficiency justifications (e.g. a computerized airline fare info system).
            c. “Mere” conscious parallelism insufficient – need “plus factors”:
               (i) Behavior explained by independent business judgment: The Ds, motion picture
                    producers and distributors, were alleged to have conspired to restrict first-run films
                    to downtown Baltimore theaters, thus confining P‟s suburban theater to subsequent
                    runs and unreasonable clearances. There were valid efficiency reasons that would
                    have led each D to these business practices – i.e. there was no interdependency.
                    ”This Court has never held that proof of parallel business behavior conclusively
                    establishes agreement” and thus a Sherman Act violation. There must be a “plus
                    factor” or “other evidence” in addition to proof of parallel conduct to infer
                    agreement. [ Theatre Enterprises v. Paramount Film Distributing (US 1954) ]
               (ii) It is generally settled in the lower courts that consciously parallel business behavior
                    cannot support a submission to the jury unless the conduct is inconsistent with
                    independent, non-concerted action.
            d. Possible “plus factors”:
               (i) Knowledge (concerted action contemplated) … motive … interdependency.
                    Interstate Circuit.


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               (ii) Behavior in contradiction to economic self interest. Milgram v. Loew’s (CA3 1951)
                    (1) A traditional dual rate system for print ads (industry-wide 15% discount given to
                        ads placed through agencies) where there was no evidence of a legitimate
                        business reason, except continuity and fear of reprisal. Ambook Enterprises v.
                        Time (CA2 1979).
                    (2) In Bogosian v. Gulf Oil (CA3 1977), oil companies were found to have acted
                        contrary to their economic self-interest to tying gas station leases to purchases of
                        their respective brands of gas.
                          Counter: There could be efficiency arguments for this practice, e.g. protecting the brand name
                             by requiring the „your‟ stations to buy your gas.
            e. Facilitating practices:
               (i) Practices that facilitate conscious parallelism. There may be some kinds of business
                    practices that are so pernicious in fostering parallelism that the practices should be
                    per se condemned.
               (ii) Price information exchanges: Comments about future pricing at trade meetings
                    (along with dubious evidence of price effects) lead to condemnation as a facilitating
                    practice. [ American Column & Lumber Co. v. US (US 1921) ]
                    (1) In later cases, information exchanges were judged on a rule of reason basis. US
                        v. Container Corp. (US 1969)
                    (2) Standard: Information exchange is vulnerable to condemnation IF:
                        There is a market structure (as in the concentrated industry in Container Corp.) that suggests
                           that info exchange would be a facilitating device; OR
                        The practice goes beyond a pure info exchange into pressure to conform (as in American
                           Column & Lumber Co.).


VII. JOINT VENTURES
    A. THE THREAT TO COMPETITION
       1. A joint venture is any association of two or more firms for carrying on some activity that
          each firm might otherwise perform alone.
          a. Signs of an Anticompetitive Joint Venture
              (i) The participants are competitors. [This invites the possibility of price-fixing.]
              (ii) The participants control a large market share. [The firms collectively wield market
                   power.]
              (iii)The joint venture‟s activities affect price or output. [E.g. JVs for marketing, product
                   standardization and reporting of market conditions.]
              (iv) The joint venture is exclusive. [I.e. the members agree to make sales only through
                   the JV.]
    B. THE JOINT VENTURE DILEMMA
       1. A JV could both creates efficiencies and the market power to raise prices to monopoly
          levels. If the cost savings are greater than the price increases (negative change in consumer
          welfare but positive change in social welfare), then should the JV be permitted? The answer
          depends on your view of the purpose of the antitrust statutes.
    C. ECONOMIC RATIONALES
       1. Most firms engage in joint ventures in order to reduce their costs. Joint ventures can create


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          economies in the following ways:
          a. Economies of scale.
          b. Economies of distribution.
          c. Solving free rider problems.
               (i) A JV can solve problems with firms free-riding off of others‟ R&D, advertising, etc.
                    by forcing firms share the costs and rewards.
          d. Network industries.
               (i) Certain markets perform efficiently only if the firms in them engage in substantial
                    cooperation.
          e. The problem of market information.
               (i) On the one hand, markets in which price and output information are freely available
                    to all participants operate very efficiently. On the other hand, competitor exchanges
                    of price information can be used to facilitate collusion.
               (ii) These JVs are generally condemned if 1) concentration in the market is high; and 2)
                    there is evidence that the information exchange had some effect on price or output.
                    Competitor exchanges of non price information are generally legal.
          f. Market facilitators.
               (i) Many joint ventures either create a market or make it operate much more efficiently
                    than it would in the absence of the joint venture. For example, the "Call" rule in the
                    Chicago Board of Trade case tended to force market transactions into a setting where
                    all buyers and sellers could rely on the same information and bid competitively for
                    the commodities exchanged there. Likewise, the blanket licensing arrangement at
                    issue in the Broadcast Music case substantially reduced the transaction costs of using
                    the market for performance rights to music.
    D. RULE OF REASON ANALYSIS
       1. Rule of Reason: If the JV produces plausible efficiencies, a court will judge the JV under a
          rule of reason analysis. See BMI, Northwest Wholesale Stationers and SCFC ILC v. Visa
          USA (“Discover v. Visa”). The VISA court used a two-step analysis: looking first at market
          power in the relevant market and then at possible efficiency justifications such that the
          restraint is ancillary.
       2. Joint Venture Around an Essential Facility/Natural Monopoly: An association of
          railroad, bridge and ferry operators took advantage of the geographic bottleneck at St. Louis
          to form a joint venture for transfering rail freight. All firms had access, but members paid
          lower charges. The by-laws made it easy to veto prospective memberships. The court
          found a §1 violation, holding that because the system is an essential facility the joint venture
          must act as an ”impartial agent”, thus it must stop price-discriminating and open up
          membership to all. [ US v. Terminal R.R. Ass’n (US 1912) ]
          a. Criticism of Essential Facility Doctrine: It doesn‟t break up the monopoly rents, it
               just forces the firms to share it among a wider group. Consumers are still gouged.
               Regulation is required.
       3. Efficient Joint Venture with a Refusal to Deal: AP is a JV of hundreds of newspapers
          collecting and sharing news. By-laws allowed members to veto the prospective
          memberships of competing papers and prohibited members from selling news to non-
          members. The Court found a violation of §1 because the net effect of the by-laws was to


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               seriously limit the entry of new newspapers into the market. [ Associated Press v. US (US
               1945) ]
               a. Criticism: Other services existed (UPI, INS). Except in cities where AP, UPI and INS
                   have locked up the existing papers, why should the court be concerned?
               b. Criticism: Efficiency justification for the by-laws: If you have to let your local
                   competitor into AP, then every local scoop you put on the wire will be picked up by the
                   competitor. The by-laws provide an incentive for each AP member to put the quality
                   local news promptly on the wire.
            4. Efficient Joint Venture OK Absent Proof of Anticompetitive Harm: Visa USA has a
               bylaw that excludes from membership any firm associated with Sears/Discover or Amex.
               Sears sues. The Court holds for Visa, reasoning that the Visa offers a plausible efficiency
               argument (preventing Sears from free riding on the credit card network that Visa has spent
               years creating) and Sears failed to prove (1) that it could not offer a competing card without
               Visa‟s help or (2) the bylaw harms consumers or (3) the credit card market isn‟t
               competitive. [ SCFC ILC, Inc. v. Visa USA, Inc. (CA10 1994) (“Discover v. Visa”) ]
               a. Counter: A lesser restraint would be for Visa to charge Sears more for membership.
               b. Counter: It may be better for consumers for the transaction economies of scale to be
                   furthered by allowing Sears in.
                   (i) Rebut: Letting Sears into Visa may lead to detrimental concentration in some
                       markets.

VIII. NOERR-PENNINGTON: INFLUENCING THE GOVERNMENT
    A. THE NOERR-PENNINGTON DOCTRINE
       1. The Noerr-Pennington Doctrine: Efforts by individuals or groups to petition the
          government are given antitrust immunity. Such activities are not illegal, even if undertaken
          for anticompetitive purposes.
          a. Origin: No violation of Sherman Act where complaining truckers charged the railroad
              in a concerted public relations and misinformation campaign to foster the adoption of
              laws that would be adverse to the truckers. The Court reasoned that the Sherman Act
              can’t be construed to regulate political activity. In any case, the Court felt that the First
              Amendment and the right of petition would probably trump the Sherman Act if they
              chose to construe the Sherman Act in the opposite way. [ Eastern Railroad President’s
              Conference v. Noerr Motor Freight (US 1961) ]; reaffirmed in United Mine Workers of
              America v. Pennington (US 1965)
              (i) Additional rationale: Without antitrust immunity for these petitions, the legislature
                   would be deprived of valuable information about the wishes of their constituents.
              (ii) “Third-party technique”: Even indirectly political campaigns (the campaign here
                   was aimed at the public, not directly at the legislature) are given immunity. The
                   indirectness was held to be legally irrelevant.
       2. Immunity for Influencing Courts (Litigation) and Agencies: Attempts to influence the
          administrative agencies and courts (i.e. petition agencies or pursuing litigation) are also
          given antitrust immunity. The reasoning of Noerr Motor Freight extends beyond
          petitioning the legislature. [ California Motor Transport (US 1972) ]
          a. “Sham litigation” not immune: The test of “sham litigation” comes from Pre v.


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              Columbia (US):
              (i) Litigation is a sham IF:
                   (1) The antitrust D who filed the litigation subjectively thought he would lose; AND
                   (2) The case was objectively likely to lose.
              (ii) Even if this test for “sham” is met, the FTC has implied that sham litigation is NOT
                   enough for a per se antitrust violation … there must be some other structural
                   justification for finding a violation.
              (iii)Even partially successful litigation may not be immune: One case has held that
                   partial success on the merits of the litigation does not preclude a finding of “sham”
                   on the basis of the underlying motives for the litigation. [ In Re Burlington Northern
                   (CA5 1987) ]
          b. Criticism: It isn‟t sensible to subject Ds to antitrust liabilities (incl. treble damages) just
              because their litigation or agency action was lacking merit.
       3. Immunity for Politically-Motivated Boycott: NOW organized a convention boycott of
          states that hadn‟t ratified the proposed ERA. The Court found Noerr immunity because the
          boycott was an effort to influence legislation on a political/social issue and the economic
          injury was incidental to that effort. [ Missouri v. NOW (CA8 1980), cert denied ]
    B. EXCEPTIONS TO NOERR-PENNINGTON
       1. “Mere Sham” Not Immune:
          a. Efforts to influence the government that are a “mere sham” to cover up what is actually
              nothing more than an attempt to interfere with a competitor are not immune from
              antitrust scrutiny. [ Noerr Motor Freight (US 1961) ]
          b. Probable Standard for “Sham”: Expectancy that the lobbying/litigation will not work
              but that the mere instigation of it will harm the competitor.
              (i) A group of highway truckers sued another group of highway carriers, charging that
                   the Ds had instituted litigation and agency proceedings to delay and defeat
                   applications for operating rights. Ds claimed Noerr immunity. The Court had that
                   immunity would hold in principle, but that these actions were a sham attempt to
                   deny the Ps access to adjudication of their rights. [ California Motor Transport (US
                   1972) ]
              (ii) Repetitive litigation a “sham.” [ Otter Tail Power v. US (US 1973) ]
              (iii)Filing of tariffs with various state utilities commissions while D knew that they
                   lacked jurisdiction to approve them is presumptively a “sham.” [ MCI v. AT&T
                   (CA7 1983) ]
       2. No Noerr Immunity for Filing False Data:
          a. Competitive injury caused by false production forecasts filed by the Ds with the Texas
              Railroad Commission. [ Woods Exploration v. Alcoa (CA5 1971) ]
       3. No Noerr Immunity for Efforts to Influence a PRIVATE Body:
          a. Rigging private standard-setting: Ds packed the annual meeting of the National Fire
              Protection Ass‟n with new member in order to vote down inclusion of the P‟s conduit
              product in the NFPA safety code. State governments went on to incorporate the code in
              their regs. The Court reasoned that the Noerr defense did not protect the Ds because the
              NFPA could not be viewed as a quasi-legislative body. [ Allied Tube & Conduit v.
              Indian Head (US 1988) ]


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                  (i) Criticism: The Court does not convincingly distinguish the lobbying of the NFPA,
                       which was influential on state governments, from the sort of indirect lobbying that
                       was immune in Noerr.
                  (ii) No damages for state actions: No damages could be awarded for the adoption of
                       the illegitimate standard by state government. The damages were only those from
                       harm to private reputation.
               b. Noerr immunity where harm is purely political (CA9): D persuaded the Western Fire
                  Chiefs Ass‟n to change their Uniform Fire Code to require removal of the P‟s
                  underground storage tanks. P sued D for violating the antitrust laws. The Ninth Circuit
                  held that D‟s action were protected by Noerr. The court distinguished Allied Tube &
                  Conduit by pointing out that the P in Allied had been awarded damages for independent
                  harm in the marketplace, where the P here was harmed only when the local govt‟s
                  adopted the Code. [ Sessions Tank Liners v. Joor Manufacturing (CA9 1994) ]
            4. No Noerr Immunity for Boycott Aimed at Government:
               a. The Court held that Noerr-Pennington did not protect a lawyers‟ collective boycott
                  against the government for higher fees because a contrary rule would protect all cartels
                  who sell to the government and coerce higher prices. [ FTC v. Superior Court Trial
                  Lawyers Ass’n (US 1990) ]

IX. VERTICAL RESTRAINTS
    A. VERTICAL RESTRAINTS GENERALLY
       1. The Ongoing Controversy over Antitrust Policy Toward Vertical Restraints
          a. There are broad differences of economic and legal opinion respecting antitrust policy for
             vertical restrictions. The reasons are:
             (i) Neither Congress nor the courts have adequately explained exactly what is bad about
                  vertical restraints.
             (ii) The economic analysis is complex and controversial.
          b. Vertical restraints are covered by two different legal rules -- per se illegality for RPM,
             rule of reason for vertical nonprice restraints – which is controversial because:
             (i) Most economists argue that the effects of the two practices are similar.
             (ii) In many real world situations, it isn‟t easy to characterize a scheme as “price” or
                  “nonprice”, which injects some arbitrariness into legal decisions.
       2. Why Might Suppliers Use Vertical Restraints On Distribution?
          a. Competitive reasons:
             (i) Control “free rider” problems. Imposing vertical restraints to lock out discounters
                  who free ride on the marketing or service of your full-service distributors.
                  (1) Counter: These “free riders” are low overhead, high volume sellers who
                      compete aggressively on price … this is benefiting consumers.
             (ii) To “purchase” retail services by supporting a profit margin. Vertical restraints, esp.
                  RPM, can operate as a guarantee to quality retailers that a particular product will not
                  be sold by discounters at a lower price. Thus, the quality retailers will not worry
                  about price competition and will concentrate on service competition and push the
                  product: place it in its best display space, advertise it, etc.
          b. Anticompetitive reasons:


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             (i) Vertical restraints can facilitate cartels by making it easier to monitor for cheating on
                  the cartel price.
                  (1) Counter: All the firms would have to agree to use the restraints and this doesn‟t
                      seem to happen enough to warrant per se treatment.
             (ii) Vertical restraints can mask horizontal collusion between distributors/retailers to
                  price-fix.
                  (1) Counter: If there are several brands on the market, distributors/retailers would
                      have to obtain the cooperation of all or most of the manufacturers. Otherwise,
                      consumers would just switch brands not subject to restraints.
                  (2) Counter: Why would manufacturers go along? … they have no interest in
                      creating a retail monopoly that would shrink their sales and profits.
    B. VERTICAL NONPRICE RESTRAINTS: CUSTOMER AND TERRITORIAL
       RESTRICTIONS ON SELLERS
       1. While it may be lawful generally for a manufacturer to pick and choose to whom he will sell
          goods, it may not be lawful to impose these vertical nonprice restraints on how the buyer
          can resell those goods.
          a. Inconsistent judicial history:
             (i) In White Motor Co. v. US (1963), when confronted with a territorial restraint on
                  distributors, the Supreme Court held that it was too early determine whether a per se
                  rule was appropriate for vertical nonprice restraints.
             (ii) Old “Schwinn” Rule – restrictions illegal per se: The Supreme Court decided that
                  vertical nonprice restraints should be treated the same way as resale price
                  maintenance and applied a per se rule. Schwinn had two types of distributors:
                  commission agents that never take title to bikes and regular wholesalers who do.
                  Out of concern of intruding on employer-employee type relationships, the Court
                  applied the rule of reason to territory restraints on the commission agents but a per
                  se rule against the territory restraints on the wholesalers. The restraint on the agent-
                  type distributors was held reasonable. [ US v. Arnold, Schwinn & Co. (US 1967) ]
                  (1) Counter: Schwinn‟s interest would not be to create little distributor monopolies
                      unless there were efficiencies gained by the practice.
                  (2) Counter: Although territories may foster price discrimination, it‟s not clear that
                      price discrimination has a net negative effect on national wealth.
       2. Modern rule – “rule of reason” governs vertical nonprice restraints:
          a. The Court has overruled Schwinn and held that the “rule of reason” should be used to
             evaluate all vertical nonprice restrictions – whether customer, territorial or location. [
             Continental TV, Inc. v. GTE Sylvania (US 1977) ]
          b. “Interbrand competition” vs. “intrabrand competition”: The Court specifically
             rejected the “goods sold-goods consigned” distinction drawn in Schwinn and
             emphasized that certain nonprice restrictions may foster interbrand competition
             (competition among all dealers all the brands of TVs) and thus have sufficient
             procompetitive merit to overcome their reduction of intrabrand competition
             (competition that might exist among different dealers of the same brand of TV). A rule
             of reason is appropriate in order to balance these two effects and determine whether a
             particular vertical nonprice restraint is, on balance, procompetitive or anticompetitive. [



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               GTE Sylvania (US 1977) ]
               (i) Note: Sylvania does not apply in any way to horizontal market division, which is still
                    a per se violation.
               (ii) Key Factors in the Balancing Test:
                    (1) Sylvania didn‟t have market power.
                    (2) Restrictions were on location rather than customers [i.e. resale to discounters was
                        not prohibited].
                         Counter: There may be valid efficiency reasons to cut out discounters … e.g. free-riding on
                            your marketing, service, etc.
                    (3) Not a backdoor cartel – no evidence that the distributors were using Sylvania‟s
                        restrictions as a cover for their desire to have horizontal market division.
               (iii)General Factors:
                    (1) Is there a less restrictive alternative that would achieve the legitimate efficiency
                        goal?
                         Note: In the Holiday Inn case the CA3 said that a less restrictive alternative need not
                            necessarily be taken … D only needs to show a plausible connection between the restriction
                            and the goal. Holiday Inn‟s restriction against franchisees opening competing motels was
                            upheld as plausibly related to the goal of incentivizing franchisees to steer to other Holiday
                            Inns, even though less restrictive methods are obvious.
    C. RESALE PRICE MAINTENANCE AND REFUSAL TO DEAL
       1. RPM is per se illegal: Resale price maintenance (RPM) is supplier control of the price at
          which merchandise is resold by the dealer. The practice is per se illegal, whether or not the
          D has market power and regardless of the D‟s motives. However, the rule is subject to a
          number of judicially created exceptions that call for a rule of reason analysis.
          a. Per se rule for minimum RPM: A manufacturer of proprietary medicines tried to set a
             minimum RPM, arguing that it had the right to determine to whom it would sell and
             therefore it should have the right restrain the resale price. The Court rejected the
             argument and found an impermissible restraint on alienation, likening the RPM to a
             horizontal agreement. This case has been read a rejection of minimum and maximum
             RPM, although this case deals only with the former. [ Dr. Miles Medical Co. v. John
             D. Park & Sons (US 1911) ]
          b. Rule of Reason for maximum RPM: The Supreme Court recently overturned the per
             se rule against maximum RPM (from Albrecht v. Herald Co.) in favor for a rule of
             reason analysis for maximum price-fixing, whether vertical or horizontal. [ State Oil v.
             Khan (US 1997) ]
             (i) Problem: A so-called maximum resale price could be tacitly treated as an agreed
                  minimum resale price.
          c. Subterfuge of “consignment” not allowed: Union Oil set the retail price of gasoline
             and retained “title” to the gasoline as it passed from the distributor “agent” to the
             consumer. The Court described the arrangement as a subterfuge and held it to be a per
             se illegal vertical restraint. [ Simpson v. Union Oil (US 1964) ]
             (i) Criticism: Just provides an incentive for D to buy the franchises and make them
                  employees … then whatever‟s bad about the practice won‟t be solved and the costs
                  of vertical integration and lost efficiencies are added.
       2. Exceptions to the Per Se Rule Against RPM:


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          a. Unilateral refusals to deal: Another method of controlling resale prices is for the
             supplier to announce “suggested” resale prices and then refuse to deal with retailers who
             do not adhere to those prices. Since RPM falls within §1 of the Sherman Act, this
             strategy rests on the fact that the P must establish evidence of an “agreement.”
             (i) RPM through unilateral conduct is OK: Colgate had engaged in a number of
                  practices designed to influence the resale price of its products including prior
                  announcement of desired resale prices, persistent urging of dealers to adhere to those
                  prices and the termination of sales to dealers who did not observe the requested retail
                  price. The Court noted that the Government indictment did not allege the existence
                  of an “agreement” between Colgate and the retailers (it only alleged Colgate‟s
                  announced policy to only deal with stores that followed the price requests).
                  Therefore, the Court held that the per se rule of Dr. Miles did not apply because
                  suppliers are free to deal with whomever they wish and to announce in advance
                  under what circumstances they would refuse to deal. [ US v. Colgate (US 1919) ]
             (ii) Colgate exception alive but on life support: Although much criticised and even
                  ridiculed (for it‟s refusal to find an “agreement”), the decision in Colgate has never
                  been overruled and remains good law. However, in order to avail itself of the
                  Colgate exception, a supplier must tread carefully:
                  (1) Suppliers MAY:
                       Merely announce its intention not to deal with price cutters and then refuse to
                          fill an order when the occasion arises.
                  (2) Suppliers MAY NOT:
                       Threaten, intimidate, warn or take other action which a court might characterize
                          as an attempt to induce an agreement from a non-complying retailer.
                       Draw wholesalers into assisting in the policing of the RPM: Wholesalers were
                          told that they would be cut off from supplies if they sold for less than
                          suggested wholesale prices or if they sold to retailers who sold for less than
                          suggested retail prices. The Court found that the D had gone well beyond
                          Colgate in that it used the threat of refusal to deal as “the vehicle to gain the
                          wholesalers‟ participation in the program” to maintain prices.” Anything
                          beyond “mere declination to sell” is a violation. [ US v. Parke, Davis (US
                          1960) ]
                       Set up a policing mechanism: The D used code numbers on its products to
                          catch pricing policy violators, cut off their supply and then restored it when
                          they assured future compliance. Held to be an “agreement”, so no Colgate
                          exception. [ FTC v. Beech-Nut ]
                       Solicit reports from retailers about pricing policies of their competitors. [
                          Girardi v. Gates Rubber (CA9 1963) ]
    D. TYING
       1. “Tying” and “Tied” Products
          a. Under a tying arrangement, the seller refuses to sell the tying product to a customer also
             agrees to buy the tied product. Thus, demand for the tying product is used to „coerce‟
             the buyer and to „foreclose‟ other sellers.
       2. Economics of Tying



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            a. The economics of tying are complex. It is difficult to segregate the tying arrangements
               that harm consumers from those that are unlikely to be anticompetitive.
            b. Reasons For a Firm to Use Tying Arrangements
               (i) To Extend Monopoly Power, Create Entry Barriers
                   (1) The Chicago School argues that it is implausible that a monopolist in the tying
                       market can use that power as leverage to gain a monopoly in the tied market.
                       The monopolist is unable to make any more profit selling the bundle than it made
                       on the tying product. At best, it will gain market share but will not have the
                       power to raise prices or restrict output.
                   (2) Some argue that simply increasing market share in the tied market introduces
                       barriers to entry because a new entrant would have to enter the market for both
                       the tying and tied products.
                          Counter: The barrier to entry will not be created unless the tying arrangement itself reduces the
                             firm‟s costs. If there are no cost savings, then two independent firms operating at each level
                             can compete with the monopolist.
                    (3) The entry barrier argument might be plausible where the monopolist is protected
                        by law from competition in the tying market. For example, for many years
                        AT&T forced lessees of its lines to lease a telephone as well.
               (ii) To Protect Its Products, Image or Goodwill
                    (1) There may be plausible arguments along these lines for tying.
               (iii)To Engage In Price Discrimination
                    (1) A monopolist can maximize its profit by charging each customer that particular
                        customer‟s reservation price – price discrimination. However, it is difficult for a
                        monopolist to identify different buyer who have different reservation prices and
                        then to prevent arbitrage by buyers who buy at the lower prices and sell to buyers
                        with higher reservation prices. The monopolist may be able to solve these
                        problems by using a variable proportion tying arrangement – different customers
                        used the tied product in differing amounts and volume of use of the tied product
                        correlates with the value that customer places on the tying product. By using this
                        tying arrangement, the monopolist is able to increase profits by tying the product
                        and charging a monopoly price for the tied product. However, the tying
                        arrangement works as a price discrimination device ONLY if the firm is able to
                        charge a monopoly price for the tied product.
               (iv) To Create a “Metering” Device
                    (1) A manufacturer may have maintenance or use costs which vary with the intensity
                        of the machine‟s use by the customer. A tying arrangement where the tied
                        product is sold at a slightly supercompetitive price can “meter” the machine‟s
                        use and allow the manufacturer to legitimately spread costs onto the customers
                        that impose higher maintenance or use costs.
               (v) To Evade Price Regulation
                    (1) A regulated firm can use a tying arrangement to evade price controls. If, for
                        example, a cable TV company‟s monthly rate is fixed by statute, the firm may try
                        to circumvent it by requiring its customers to „lease‟ converter boxes at
                        unregulated, inflated rates.
               (vi) To Take Advantages of Efficiencies And Economies of Scale


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                       (1) It is probably more efficient to have a car‟s engine or air conditioning unit „tied‟
                           to the rest of the car. The courts address efficiency issues implicity when they
                           determine whether the tying and tied products are separate products or not. Note
                           that the car/car stereo case is not as clear.
            3. Clayton Act §3
               a. It is unlawful to lease or sell commodities or fix a price therefor “on the condition [or]
                  agreement … that the lessee or purchaser thereof shall not use or deal in the
                  commodities of a competitor … of the lessor or seller, where the effect may be to
                  substantially lessen competition or tend to create a monopoly in any line of
                  commerce.”
                  (i) Notes:
                       (1) “Commodities” include goods and machinery, but does not include business
                           services, intangibles or real property. [See Times-Picayune.]
                       (2) Coercion is required. If the customer voluntarily buys both products, there is no
                           tying arrangement.
                  (ii) What does Clayton §3 add to the antitrust laws?
                       (1) A softer standard – “substantially lessen competition.” The Act was pitched in
                           Congress as a tool to take in incipient monopolies.
                       (2) Clayton §3 can be applied to a single economic actor … a unilateral policy isn‟t
                           covered by Sherman §1. To get the conduct under Sherman §2, the actor must
                           already be a monopolist or dangerously close to being a monopolist.
               b. Sherman Act §1
                  (i) This can be applied to tying “contracts” and “combinations” that involve services,
                       intangibles and real property that are in restraint of trade and are not covered by
                       Clayton Act §3.
                  (ii) In Times-Picayune, the Court held that a tying arrangement could be condemned
                       under the per se rule of Sherman §1 if the P could show both market power in the
                       tying product and a “not insubstantial” amount of commerce was restrained in the
                       tied market, where Clayton §3 would require either condition.
            4. Analysis of Tying Arrangements
               a. Tying arrangements are nominally per se illegal (with limited exceptions) IF the
                  following are present:
                  (i) A tie … i.e. separate tying and tied products.
                  (ii) Market power in the tying product (sufficient to restrain competition appreciable in
                       the tied product?).
                       (1) Tying product market?
                       (2) Tying geographic market?
                       (3) Prove market power.
                  (iii)[More than a de minimus amount of commerce restrained in the tied market.]
                  (iv) Some modern courts add: The power in the tying market must have the probable
                       effect of preventing competition on the merits between products in the tied market.
                       Jefferson Parish.
               b. Note: These requirements do not invite the courts to examine efficiency arguments in



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                  favor of the tying arrangement.
               c. Rule of reason: If the P cannot establish the elements of a „per se‟ violation, he may
                  proceed under a rule of reason theory but success is unlikely.
            5. The “Separate Products” Requirement
               a. “Separate products” is somewhat a term of art in tying cases. Usually common sense
                  will indicate when products should be considered a single product (right shoe and left
                  shoe), but sometimes analysis is required.
               b. One standard: Two items are a “single” product for purposes of the law to tying
                  arrangements when they are subject to certain economies of joint production or
                  distribution that can be achieved only if all customers can be forced to take the entire
                  package.
                  (i) Ex] In Times-Picayune, the D could charge a much lower rate of advertising in the
                       morning and evening newspapers together than for separate advertising. It decreased
                       the transaction costs of soliciting, billing and setting type.
               c. The products are separate if the markets for them are “distinguishable in the eyes of
                  buyers.” Jefferson Parish (interpreting Times-Picayune).
            6. Proving Market Power – Early Cases
               a. United Shoe Machinery v. United States (US 1922)
                  (i) Facts: D controlled 95% of the shoe machinery business. Its machines were
                       patented. Leases for its machinery are tied to the use and purchase of related
                       machinery and effectively prevent its customers from using the machinery of any of
                       its competitors.
                  (ii) Holding: The Court identifies this as a tying arrangement and therefore illegal
                       without actually establishing its harm. The factual record was very skimpy.
               b. International Salt v. United States (US 1947): Per Se Rule
                  (i) Facts: The D leased its patented machines only on the condition that lessees purchase
                       from the D all the unpatented salt to be used in the machines. The D argued that the
                       arrangement was a quality control measure because its machines required high-
                       quality salt to function properly. The D offered a „matching clause‟ in that if the
                       customer found the same quality salt for less, the D would match the price or let the
                       customer purchase the other salt.
                  (ii) Holding: Struck down. The Court held the tying arrangement unreasonable per se
                       under Clayton §3 and Sherman §1 because it “foreclose[d] competitors from [a]
                       substantial market.” Essentially, the Court assumes that market power in the tying
                       market distorts competition in the tied market. The Court did not believe that the
                       matching clause relieved the restraint on trade, because it still deterred competitors
                       from taking the D on. The Court also made note that there were less restrictive
                       alternatives to ensuring salt quality.
                       (1) Notes: Why shouldn‟t we entertain this as plausibly efficient (it may be cheaper
                            to force the customer to buy the salt rather than monitoring the salt the customer
                            uses) since it is very unlikely that the D will monopolize the salt market and the
                            matching clause reduces the threat to competition?
               c. Times-Picayune Publishing v. United States (US 1953)
                  (i) Facts: The Court considered the requirement of a New Orleans newspaper publisher


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                       that advertisers buy space in both its morning and evening newspapers. The US
                       proceeded on Sherman §1 and §2 grounds because it did not want to assume the
                       burden of showing that ad space was a “commodity” with the meaning of Clayton
                       §3.
                  (ii) Holding: Upheld. The Court held that tying arrangements violate Sherman §1 when
                       there is both market power in the tying market and a substantial volume of
                       commerce in the tied market is restrained. [The Court noted that either condition
                       would be sufficient under Clayton §3.] The Court noted that the allegedly
                       “dominant” Times-Picayune had only 40% of ad sales and that the ad space in the
                       morning Times-Picayune and the evening States were in fact a “single product.”
                       Therefore, there was no tying and the arrangement also survives the rule of reason
                       analysis under §1.
               d. Northern Pacific Railway v. United States (US 1958): Times-Picayune Standard
                  Softened
                  (i) Facts: Northern Pacific leased land for various uses on the condition that lessees use
                       NP to ship all commodities produced on the land as long as NP‟s rates were equal to
                       those of competitors. There were alternative means of transportation available,
                       including two major rail carriers. The US sued under Sherman §1.
                  (ii) Holding: Struck down. The Court construed Times-Picayune to say that a per se
                       rule against tying arrangements required nothing more than “sufficient economic
                       power to impose an appreciable restraint on free competition in the tied product
                       (assuming all the time, of course, that a „not insubstantial‟ amount of interstate
                       commerce is affected).” Thus, it chose not to follow language in Times-Picayune
                       that referred to “monopoly power” and “dominance.” The Court held that the unique
                       strategic location of the land and the economic distance of transportation facilities
                       made the land very desirable and conferred sufficient economic power to NP to meet
                       the standard.
            7. Proving Market Power – Modern Cases
               a. Jefferson Parish Hospital District No. 2 v. Hyde (US 1984)
                  (i) Facts: The D hospital contracted with a firm of anesthesiologists to provide all the
                       hospital‟s anesthesiology services. 70% of the patients in the area go to other
                       hospitals. An excluded anesthesiologist charged the hospital with tying
                       anesthesiology services to hospital services. The P sued under Sherman §1.
                  (ii) Holding: The Court upheld the arrangement. The Court noted a violation required
                       more than market power in the tying market, but also that a D use that power to
                       “force the buyer into the purchase of a tied product that the buyer either did not want
                       at all, or might have preferred to purchase elsewhere on different terms.” Thus, a
                       probable impact on competition on the merits in the tied market is required. The
                       Court held that the record contained no evidence that the hospital was able to force
                       customers to take anesthesiology services that they would not select in the absence
                       of a tie. The Court reasoned that third-party payers (insurance co‟s) and ignorance
                       did insulate consumer from questions of price, value and quality, but that the
                       hospital could not be said to have forced consumers to forego preferences. The
                       Court then proceeded under a rule of reason theory and found no unreasonable
                       restraint of trade.


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                    (1) “Separate products”: For there to be separate products, the markets must be
                         distinguishable in the eyes of buyers. The Court held these services are separate
                         because the record supported the conclusion that consumers differentiate
                         between anesthesiology services and other hospital services.
            b. Eastman Kodak Co. v. Image Technical Services (US 1992)
               (i) Facts: Kodak instituted a policy of selling parts for its equipment only to buyers who
                    repaired their own machines or used Kodak service. The charge was that Kodak had
                    tied service to Kodak replacement parts to foreclose independent service
                    organizations (ISOs). Kodak also limited ISO access to other sources of Kodak parts
                    through agreement with independent OEMs and pressure on parts distributors. The P
                    sued under Sherman §§1,2. Kodak argued that its lack of market power in the
                    original equipment market precluded an antitrust violation for tying. It also argued
                    that the policy was for quality-assurance.
               (ii) Holding: The Court struck down Kodak‟s policy. The Court held that absence of
                    market power in the tying market does not necessarily preclude market power in
                    the tied market. It cited Jefferson Parish for the proposition that the relevant market
                    power is the power to influence the tied market. The Court reasoned that Kodak had
                    that power here, even though it didn‟t have a monopoly in original equipment,
                    because once purchasers bought Kodak‟s equipment, they are “locked-in” for
                    replacement parts and services. The Court noted that Kodak increased the price of
                    service without incurring decreased equipment sales. Kodak tried to reconcile this
                    fact with its theory by saying that customers evaluate the cost of its equipment over
                    the life of the equipment (price, plus cost of parts and service). Thus, higher costs
                    are offset by lower original equipment prices and the entire cost of the package is
                    competitively determined. The Court responded by noting the importance of
                    information and switching costs as sources of market power. The Court believed
                    that that „lifecycle pricing‟ required a significant investment by buyers in acquiring
                    information about repair costs, breakdown frequency, etc. If these costs are high
                    enough, supercompetitive prices for the package could be set.
               (iii)Caveat: The holding could be limited to cases where the policy was not known or
                    was instituted after the sale. Otherwise, the tied parts/service would more obviously
                    be a part of the tying product and market power in the tying market would be
                    critical.
               (iv) Problems:
                    (1) It isn‟t in Kodak‟s long-term interest to gouge its customers. It wants a long-
                         term relationship.
                    (2) There are plausible efficiencies: quality control, reduce inventory costs, prevent
                         ISOs free-riding on Kodak training (by hiring ex-Kodak repairers).
                    (3) Is consumers‟ lack of information an antitrust concern? Why can‟t they predict
                         life cycle costs on the front end but can evaluate ISO quality on the back end?
               (v) Aftermath:
                    (1) Kodak is viewed by commentators as a retreat from Jefferson Parish, which was
                         receptive to efficiency arguments for tying.
                    (2) Kodak may poses problems for manufacturers who make durable goods that need
                         parts/service.


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       8. Modern Tying Doctrine
          a. Some courts take support from International Salt and Northern Pacific and confine their
             analyses to separate products, the D‟s power in the tying market and the amount of
             commerce affected in the tied market.
          b. Other courts have asked the additional question of whether the tying arrangement
             probably precluded the buyer from considering the tied product on its competitive
             merits. Jefferson Parish v. Hyde.
    E. EXCLUSIVE DEALING
       1. Economic Arguments
          a. Anticompetitive Concerns
             (i) “Foreclosure” theory: Exclusive dealing is anticompetitive on the theory that long-
                  term requirements contracts “ties up” one or both levels of the market so that
                  remaining participants or potential entrants do not have adequate sources of supply
                  or outlets.
             (ii) “Entry barrier” theory: Exclusive dealing is anticompetitive on the theory that it
                  makes it more difficult for new firms to enter a market because suitable trading
                  partners have already committed their capacity to others and the new entrant will
                  have to be vertically integrated, which increases the cost of entry.
          b. Response to Anticompetitive Concerns
             (i) There can be no anticompetitive effects if the manufacturer has no market power,
                  because it will have to offer the retailer something in return for the exclusivity
                  agreement.
             (ii) Even if the manufacturer has market power, there is no real cause for concern. If the
                  manufacturer demands an exclusive dealing agreement, the argument is that it cannot
                  be motivated simply by desire to charge higher prices since the profit maximizing
                  price can be exacted through the direct use of the firm‟s market power.
             (iii)Closing the door to exclusive dealing invites actual vertical integration.
          c. Benign Efficiencies
             (i) Produces Efficiencies: Having an assured outlet or a dependable source of supply
                  lowers lowers transaction and risk-related costs.
             (ii) Promotes Interbrand Competition: If the retailer is obligated to purchase only one
                  brand, it will be inclined to promote that brand, increasing interbrand competition.
             (iii)Eliminates Interbrand Free-Riding: Exclusive dealing is a response to free riding by
                  a retailer on the promotional efforts of a manufacturer from whom it purchases. The
                  manufacturer‟s promotional efforts may generate customers for the retailer, who
                  then sells them competing brands.
       2. Relevant Antitrust Statutes
          a. Clayton Act §3: Exclusive dealing is analyzed under Clayton §3‟s “substantial
             lessening of competition” standard.
          b. Sherman Act §1: Exclusive dealing could also be analyzed under Sherman §1 as a
             restraint of trade.
       3. Cases
          a. Standard Fashion Co. v. Magrane-Houston Co. (US 1922)



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                  (i) The Court invalidated an exclusive dealing arrangement for garment patterns that
                       resulted in a 40% foreclosure. The Court finds that this to violate Clayton §3 but it‟s
                       hard to discern the Court‟s standard.
               b. The “Standard Stations” Case (US 1949) (Standard Oil Co. of California v. US)
                  (i) Facts: Standard Oil had contracts with independent retailers that required all
                       purchases of gasoline to be from Standard Oil. Standard Oil was the largest seller of
                       gasoline in the “Western Area” which included AZ, CA, ID, NV, OR, UT and WA.
                       16% of the retail stations in the area were covered. This accounted for 6.7% of the
                       total volume of gas sold in the area. The US sued under Clayton §3.
                  (ii) Holding: The Court looked to amount of the market foreclosed and concluded that
                       “competition has been foreclosed in a substantial share of the line of commerce
                       affected.” It seems to have based this on the 6.7% but it may have considered that
                       combined with exclusive dealing contracts used by other major refiners, 65% of the
                       market was foreclosed by such contracts. I.e., aggregation may have been used.
                       (1) Counter: Closing the door to exclusive dealing invites firms to vertically
                           integrate – a more harmful alternative.
               c. FTC v. Motion Picture Advertising Service (US 1953): Aggregation?
                  (i) The Court struck down an exclusive deal between the D and theaters for advertising
                       films. The D had foreclosed 40% of the market but the Court may be been
                       influenced by the fact that the D plus three other major companies had foreclosed
                       75% of all available theater outlets.
               d. Tampa Electric v. Nashville Coal (US 1961): Three-Step Analysis
                  (i) Facts: Tampa Electric instituted the use of coal as boiler fuel and contracted with
                       Nashville Coal for all its coal requirements over a 20-year period. The supplier
                       refused to perform, after which it sought a declaratory judgment that the contract
                       violated Clayton §3.
                  (ii) Holding: The Court approved the exclusive dealing. It used a broader analysis than
                       the Standard Stations court. The Court (1) defined the line of commerce affected
                       (coal), (2) defined the geographic market and (3) determined whether a substantial
                       share of commerce in that market had been foreclosed. The Court found a broad
                       geographic market by looking to the larger sales markets of the coal suppliers
                       operating in central Florida, such that the contract here covered only 1% of the
                       market. The Court also looked at other factors: exclusive dealing was not industry
                       wide, Nashville Coal was not a dominant seller, the length of the contract was not
                       extraordinary, etc.
                  (iii)Note: Tampa Electric retreats from Standard Stations and follow a more rule-of-
                       reason type approach.
            4. Summary of the Judicial Tests
               a. Standard Stations: Look at the percentage of the relevant market “foreclosed” by the
                  exclusive dealing arrangement.
                  (i) Note: It may be possible to aggregate, citing Motion Picture Advertising Service.
               b. Tampa Electric: Three-step inquiry …
                  (i) Define the line of commerce affected.
                  (ii) Define the geographic market.


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                  (iii)Determine where a substantial share of commerce in that market is foreclosed,
                       considering:
                       (1) Percentage share covered under the contract.
                       (2) Duration of the arrangement.
                       (3) Degree to which the contract hinders new entry.
                       (4) Degree to which exclusive dealing is used by others in the market.
                       (5) Market power of the parties to the arrangement.
            5. Miscellaneous
               a. What Is An Exclusive Deal?
                  (i) US Healthcare v. Healthsource (CA1 1993)
                       (1) P challenged an exclusive dealing clause in the contracts between D and doctors
                           who provide primary care for D‟s HMO in NH. The deal provided a 16% bump-
                           up in fees for the doctors, but contained a termination clause where any doctor
                           could gain release upon giving D 30 days notice. P lost, but CA1 suggests that it
                           would have found for the P had he not failed to define the relevant geographic
                           market. The important lesson of the case is that the CA1 suggests that a 30-day
                           lock-up may be enough “exclusivity” and hints that even the 16% fee bonus may
                           be enough.
               b. Quality Control Defense?
                  (i) Pick Manf’g v. GM (CA7 1935)
                       (1) The Court excuses exclusive dealing because as a legitimate action by GM to
                           protect its reputation from defective parts.
                             Does Kodak reverse this case?


X. MERGERS
    A. HORIZONTAL MERGERS
       1. Horizontal Merger
          a. A merger is “horizontal” when it involves the union of two firms that had been selling
             the same product in the same geographic market – i.e. the two firms were competitors
             before the merger occurred. If only one of the two criteria are two (different products or
             different geog. mkts.), then the competition between the two firms is “potential” rather
             than “actual” and the merger is usually analyzed as a conglomerate merger.
       2. Arguments for/against Horizontal Mergers
          a. Against:
             (i) Horizontal mergers increase concentration, which increases the danger of:
                  (1) Collusion; oligopoly pricing (tacit collusion).
                  (2) Monopolization.
             (ii) Experience curve: High market shares of the leading firm or two leading firms
                  correspond to higher volume which determines future cost, because costs decline
                  with cumulative experience. Future costs attract future volume which determines
                  subsequent costs, etc. Experience curve theory says that a trailing competitor cannot
                  gain a share in a slowly growing market unless the leader blunders.
          b. For: Many mergers create economies, including:


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                  (i) Economies of scale.
                  (ii) Economies of distribution.
            3. Relevant Statutes
               a. Sherman §1: Prohibiting “combinations” in restraint of trade.
               b. Clayton §7: Clayton §7 was enacted out of the perception that Sherman §1 was not
                  heading off enough anticompetitive mergers or incipient trends toward concentration.
                  (i) §7: No person/corporation may acquire “the whole or any part of the stock … or the
                       whole or any part of the assets of one or more persons engaged in commerce,” where
                       “in any line of commerce” in “any section of the country” the effect of the
                       acquisition “may be substantially to lessen competition, or tend to create a
                       monopoly.”
                       (1) “Any section of the country” = any relevant geographic market
                       (2) “Any line of commerce” = any relevant product market, although this may be
                           stretched in order to realize the prophylactic purpose of §7.
            4. Presumptive Illegality - United States v. Philadelphia National Bank (US 1963)
               a. Facts: The merger between the 2nd and 3rd largest banks in Philadelphia would create
                  the largest firm in the market, with 30% of the banking business in the relevant four
                  county Philadelphia metro area. The D justified the merger as necessary in order to
                  compete with larger commercial banks outside the Philadelphia area. The US sued
                  under Clayton §7.
               b. Holding: The merger was invalidated under Clayton §7, so Sherman §1 was not dealt
                  with. The Court held that 30% of the relevant market constituted an ”undue percentage
                  share of the relevant market”. The Court also focused on the ”increased concentration in
                  the relevant market”. The Court states that undue market share and increased
                  concentration presumptively “substantially lessens competition” absent clear evidence
                  that anticompetitive effects aren’t likely.
                  (i) Product market: The Court deemed it “commercial banking,” but concentrated on
                       two things only banks do: checking and commercial loans.
                       (1) Sykes: Why not look at each product market separately?
                  (ii) Geographic market: The case largely turned on the definition of the four-county area
                       as the market, a compromise between the neighborhood segment (checking) and the
                       national segment (commercial loans).
                       (1) Sykes: This is a bit loose!.
                  (iii)Efficiency arguments?: The Court stated rejected as defenses enhanced efficiencies,
                       economies of scale and enhanced competition in other markets.
            5. Merger Defenses
               a. Investment Exception
                  (i) Clayton §7 does not apply to persons purchasing “stock solely for investment and not
                       using same by voting or otherwise to bring about, or in attempting to bring about, the
                       substantial lessening of competition.”
               b. “Failing Company” Exception
                  (i) Some decisions indicate that a merger between a failing company and a competitor
                       should be allowed, in the absence of other purchasers. International Shoe v. FTC
                       (US 1930).


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            6. Other Cases
               a. US v. Alcoa (US 1964): Product Market; Concentration of Market As a Whole
                  (i) Merger invalidated between a company that made aluminum and copper conductor
                       and a larger firm that made only aluminum conductor. The lower court grouped
                       aluminum and copper conductor into the same market, finding that they was
                       “complete manufacturing interchangeability” between them. The Supreme Court
                       reversed, finding the aluminum to be the relevant market. The Court also focused
                       not only on the market shares but on the concentration of the market as a whole.
               b. US v. Continental Can (US 1964): Horizontal
                  (i) The Court described as horizontal the merger between a maker of metal cans and a
                       maker of glass bottles because there was intense competition between the two in
                       certain markets, incl. baby food and beer.
               c. US v. Pabst Brewing (US 1966): Geographic Market
                  (i) The Court invalidated the merger between Pabst and Blatz. The Court said that it
                       was not the US‟ burden to show a “relevant geographic market”, rather only to a
                       lessening of competition in any market. The Court found competition lessened in
                       WI.
                       (1) The Court‟s handling of geography is suspect. Given the low barriers to entry
                           and transport costs, the Court probably should have used a broader geographic
                           market.
               d. US v. Von’s Grocery (US 1966): Tiny Merger Condemned
                  (i) The Court invalidated a grocery merger where the combined market share was 7.5%,
                       citing a “threatening trend toward concentration” in the retail grocery market in the
                       L.A. area.
            7. Summary of the Analysis
               a. Look for presumptive illegality. ( Philadelphia National Bank presumption.)
                  (i) Relevant product market.
                  (ii) Relevant geographic market.
                  (iii)Market structure/concentration and post-merger market share.
                       (1) Four-firm concentration ratio.
                       (2) HHI Index.
               b. Look at various non-market share factors that might make the merger more likely or less
                  likely to be anticompetitive. (Is the presumption overcome?)
                  (i) Barriers to entry.
                  (ii) Transportation costs.
                  (iii)Efficiencies … if they are likely to be passed to consumers.
                  (iv) Adequacy of irreplaceable raw materials. [A firm‟s current output may overstate its future market
                        position if its resources are in short supply.]
                   (v) Excess capacity. [A market with a lot of excess capacity is not conducive to monopolization.]
                   (vi) Degree of product homogeneity. [The more, the easier cartelization.]
                   (vii) Marketing and sales methods. [Collusion more likely where buyers are poorly informed.]
                c. Are there defenses? [ Investment exception; “failing company”].
                d. Discuss how the merger would be treated in the Hart-Scott-Rodino pre-merger


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             notification process using the FTC/DOJ Merger Guidelines. [SEE BELOW].
       8. Rise of the Merger Guidelines and Pre-Merger Notification
          a. After the 1960s, few merger cases made it to the courts because the government began
             screening mergers through the Hart Scott Rodino process. In addition, the merger
             guidelines are more lenient than the Supreme Court precedents.
          b. Also, large scale mergers are more likely to go through because the government will
             order selected divestures as part of the merger screening process.
          c. Analysis Under The FTC/DOJ Merger Guidelines
             (i) Define the Market
                  (1) Interesting idea of market definition: Define the market by asking whether a
                      hypothetical monopolist in the proposed product and geographic market could
                      impose a „small but significant and nontransitory increase in price.‟
                  (2) Market participants include the current sellers plus other firms that would enter
                      quickly in the event of a price increase.
             (ii) Look at concentration using the pre- and post-merger HHI index (Herfindahl-
                  Hirschmann Index).
                  (1) HHI is the sum of the square of the market share of all the top firms.
                       Post-Merger HHI Below 1000: Unconcentrated.
                       Post-Merger HHI Between 1000 and 1800: Moderately concentrated, increases
                          of 100+ points are flagged.
                       Post-Merger HHI Above 1800: Highly Concentrated; increases of 50+ points
                          are flagged.
                  (2) Economic Theory Behind HHI: [avg of diff b/w price and marginal cost] = [HHI
                      / (Elasticity of demand)]
                       So, higher HHI theoretically corresponds to a greater difference between price
                          and marginal cost.
                  (3) Squaring the market shares makes HHI much different than 4-firm or 8-firm
                      concentration ratio … the HHI is more sensitive to big firms within a given level
                      of concentration. There‟s some logic to weighting that factor because big firms
                      can turn into a price leader and create oligopoly conditions.
                  (4) HHI is _not the end of the analysis …
             (iii)Three other considerations beyond how high the HHI is or how much it is increased
                  (1) Ease and likelihood of entry of other firms
                  (2) Efficiencies considered, but with the proviso that they should be of a form that is
                      passed to the consumer.
                  (3) Failing company exception… if a firm was going to fold anyway, then it isn‟t
                      really harmful that it‟s being swallowed up.
    B. CONGLOMERATE / POTENTIAL COMPETITION MERGERS / JV
       1. Conglomerate Merger
          a. Where the relevant market definitions are too narrow to classify a merger as horizontal,
             the merger is analyzed under the conglomerate merger doctrine as a “product or market
             extension” merger. There are no direct anticompetitive effects (no change in market
             structure, market shares) but there may be secondary anticompetitive effects.


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            2. Arguments For/Against Conglomerate Mergers
               a. Against:
                  (i) Merger may lessen or eliminate potential competition by:
                       (1) Eliminating a perceived potential entrant („wings effect‟); OR
                       (2) Elimination an actual potential entrant („future deconcentration effect‟).
                  (ii) Merger may make powerful firms even more powerful by:
                       (1) Increasing barriers to entry; OR
                       (2) Increasing the opportunity for anticompetitive behavior.
               b. For:
                  (i) The Chicago School says we shouldn‟t worry about any non-horizontal mergers
                       (conglomerate, vertical) because they
                  (ii) Merger may create efficiencies and benefits, including:
                       (1) In distribution and marketing, if complementary products merged.
                       (2) If tender offer, transfer productive assets to more efficient managers.
                       (3) Raise capital internally.
                       (4) Economies of scale in manufacturing, if similar technologies used.
                       (5) Advertising efficiencies.
                       (6) Efficiencies of distribution if geographic markets merged.
                       (7) R&D efficiencies.
            3. Relevant Statutes
               a. Like horizontal mergers, conglomerate mergers are dealt with under Sherman §1 and
                  Clayton §7 …
               b. Sherman §1: Prohibiting “combinations” in restraint of trade.
               c. Clayton §7: Clayton §7 was enacted out of the perception that Sherman §1 was not
                  heading off enough anticompetitive mergers or incipient trends toward concentration.
                  (i) §7: No person/corporation may acquire “the whole or any part of the stock … or the
                       whole or any part of the assets of one or more persons engaged in commerce,” where
                       “in any line of commerce” in “any section of the country” the effect of the
                       acquisition “may be substantially to lessen competition, or tend to create a
                       monopoly.”
            4. Cases
               a. United States v. Penn-Olin Chemical (US 1964): Actual Potential Entrant
                  (i) Pennsalt Chemicals and Olin-Mathieson Corp. had jointly formed Penn-Olin to build
                       a plant to produce sodium chlorate in KY, and to sell the product in the Southeast.
                       Before the JV, two other firms controlled 90% of the Southeastern market, but
                       neither Olin nor Pennsalt sold sodium chlorate in that market. Both had considered
                       and rejected the possibility of independently entering the market. The US sued
                       under Clayton §7 and Sherman §1. The district court found the JV procompetitive
                       since it increased the number of competitors in the market and the two would not
                       have come in separately.
                  (ii) Holding: The Court disagreed. The Court only requires a showing of reasonable
                       probability of entry. It ruled that if, on remand, the court found that (1) one firm
                       probably would have entered the market AND (2) the other would have remained a


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                    potential entrant, then the merger should be invalidated. [Seems futile, since the
                    district court found that neither firm would enter – but perhaps on a tougher
                    standard.]
               (iii)Criticism of potential competition rationale: It‟s speculative whether anyone will
                    come in on their own – the market may stay concentrated – so it‟s unwise to exclude
                    an actual entrant that will make the market more competitive.
            b. United States v. El Paso Natural Gas (US 1964)
               (i) The Court invalidated a merger between El Paso and Pacific Northwest, two natural
                    gas suppliers. El Paso was the sole out-of-state natural gas supplier in CA. It sold a
                    majority of the natural gas consumed in CA. Pacific Northwest also was an out-of-
                    state supplier but it never succeeded in selling in CA, though it tried. The Court
                    noted that Pacific‟s attempts to sell to CA customers had resulted in El Paso
                    lowering its price substantially. The Court viewed Pacific Northwest as a potential
                    competitor whose presence on the sideline restrained El Paso‟s pricing. [Actually,
                    PN wasn‟t on the sideline … it was a direct, but unsuccessful competitor…].
            c. General Motors/Toyota (FTC 1984): Pro-Competitive Effects of JV
               (i) The FTC approved a JV between GM and Toyota to manufacture subcompact cars in
                    the US, despite the fact that Toyota was 2d in subcompacts with 16% and GM was
                    3d with 14%. The car would be priced by a complicated formula that tracked the
                    prices of the 10 other best selling models. The key factor was that this would be a
                    new product that wouldn’t come about otherwise …
                    (1) The FTC saw three significant procompetitive effects: (1) introduction of a new
                        small car into US market, which Toyota couldn‟t do alone because of import
                        ceilings, (2) the JV car would be produced efficiently and thus cost consumers
                        less, and (3) GM could learn Japanese techniques.
            d. FTC v. Procter & Gamble (US 1967): Product Extension; Potential Entrant
               (i) Facts: Procter & Gamble sought to acquire Clorox, the leading manufacturer of
                    bleach. Procter did not manufacture bleach, but did manufacture related household
                    products. The merger would give Procter advertising and other efficiencies.
               (ii) Holding: The Court invalidated the merger. Its concerns were (1) potential entry:
                    Procter had the potential to enter the market de novo, so the merger removed a
                    potential future competitor, AND (2) Procter buying Clorox would chill smaller
                    firms from aggressively competing and create entry barriers.
                    (1) The Court says that “possible economies cannot be used as a defense to
                        illegality.”
                          Criticism: The Court doesn‟t make clear what it means w/r/t efficiencies … the opinion has the
                             flavor of saying that inefficient mergers are OK and efficient mergers are suspect.
                   (2) Potential entrant argument:
                          Counter: If Procter is such a natural competitor, then its presence already has competitive
                             effects, but no efficiencies; there is no evidence of a need for a new entrant (no evidence of
                             supercomp prices).
                   (3) Anticompetitive argument:
                          Counter: Why should we be concerned with advertising power/efficiencies … do they harm
                             the consumer?
                                 Rebut: Ads are the primary tool to differentiate products, so new entrants can be scared
                                  away by the fear of an ad avalanche.


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                      (4) This case has not been well received by commentators. This has had an
                          influence against regulators … it is now rare to see challenges to conglomerate
                          mergers.
            5. Summary of Conglomerate / Potential Competition Analysis
               a. The cases teach that in order to strike down a merger/JV under potential competition
                  theory there must be a showing of:
                  (i) A reasonable probability that the acquiring firm, but for this merger, would have
                      entered the market in the near future either through de novo entry or a toehold
                      merger;
                      (1) Reasonable probability means the D has the capacity and incentive to enter.
                      (2) NOTE: Courts are less likely to find potential competition IF the market did not view the D as a
                             potential entrant.
             (ii) Entry through other means would have resulted in a deconcentrated market or a
                  procompetitive effect; AND
             (iii)The market under review is concentrated.
          b. Leniency Toward Research JVs
             (i) The courts are lenient towards research JVs because:
                  (1) If it‟s a patentable product, a single firm would have had a monopoly anyway.
                  (2) If it‟s not patentable, neither firm will invest in the innovation for fear of the
                      other firm free-riding off of its efforts.
             (ii) See GM/Toyota.
    C. VERTICAL MERGERS / INTEGRATION
       1. Vertical Merger
          a. A “vertical merger” is one between companies with a supplier-customer relationship,
             with the result that the acquiring firm integrates into different stages of the production
             process. On its face, it leaves competitive levels unchanged in the marketplace – only
             ownership changes.
       2. Arguments For/Against Vertical Mergers
          a. For:
             (i) Each firm is assured of supply and demand for its production.
             (ii) The integration may produce advantages over non-integrated firms, such as
                  economies of scale, distribution efficiencies, and reduced transaction costs
                  (elimination of risks and costs of market transactions).
          b. Against: Although vertical mergers are rarely anticompetitive (usually only when
             undertaken by a monopolist), they are often harshly treated …
             (i) Foreclosure Theory: Most commonly invoked rationale for condemning a vertical
                  merger. The theory holds that vertical mergers are bad because they deprive firms
                  that are not vertically integrated access to necessary inputs or outlets. Some courts
                  have even invalidated mergers with low foreclosure percentages on the theory that
                  an incipient “trend towards concentration” must be nipped in the bud.
                  (1) Counter: True foreclosure can only occur when one of the firms being integrated
                      is a monopolist. Otherwise, there is only a realignment of buyers and sellers but
                      no foreclosure.



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                       (2) Entry Barriers Theory: Similar to foreclosure theory except that it focuses on the
                           ability of new firms to enter the market, rather than the ability of existing firms
                           to find inputs or outlets. The theory suggests that vertical merger creates entry
                           barriers because they require new firms to enter a market at two levels instead of
                           one. In a market with high entry barriers, foreclosure of that market generally
                           attracts condemnation at lower percentages thresholds.
                              Counter: Vertical integration will not create such an entry barrier unless a high percentage of
                                 sales in the market are made by vertically integrated firms.
                  (ii) Facilitation of Cartelization: Sometimes cartel members will merge vertically in
                       order to discourage cheating on the cartel. If the effect of the vertical merger is that
                       the cartel members‟ final output sales are small, and made at publicly announced and
                       unnegotiated prices, then cheating on the cartel by a member will be much more
                       difficult.
                  (iii)Rate Regulation Avoidance: If the downstream firm has monopoly power and is rate
                       regulated on a cost-plus basis, the firm may use the acquisition of an upstream
                       supplier to spread profits over several transactions … e.g. a regulated electricity
                       producer merges with a coal supplier and „purchases‟ coal from it at an inflated
                       price. It then presents these increased „costs‟ to the rate-making authority to justify a
                       higher rate. In other words, vertical integration with supply sources for rate-
                       regulated monopolists make proper rate base computation more complex and gives
                       the monopolist more opportunities to artificially inflate costs.
            3. Relevant Statute: Clayton §7
               a. Prior to 1950, vertical mergers were condemned only under Sherman §1. However, in
                  1950 Clayton §7 was amended by the Celler-Kefauver Amendments to make clear that it
                  covered vertical mergers. Since then, virtually all vertical mergers are analyzed under
                  Clayton §7.
               b. Clayton §7: No person/corporation may acquire “the whole or any part of the stock …
                  or the whole or any part of the assets of one or more persons engaged in commerce,”
                  where “in any line of commerce” in “any section of the country” the effect of the
                  acquisition “may be substantially to lessen competition, or tend to create a monopoly.”
                  (i) Defense: Recall that Clayton §7 provides an “investment exception.”
            4. Analysis of Vertical Mergers/Integration
               a. The relevant geographic and product markets are determined.
               b. The probable effect of the merger is measured by the amount of foreclosure, in terms of
                  market share.
               c. If a significant share of the market is foreclosed or potential competition is eliminated,
                  the court considers economic or historical factors of the case, including trend toward
                  vertical integration in the industry, barriers to new entry created by the merger, and the
                  nature and purpose (intent to foreclose? justification?) of the merger.
                  (i) Courts generally hold that foreclosure of 15% or more is sufficient for illegality,
                       though it may be lower if there are high entry barriers. However, the Supreme Court
                       last decided a vertical merger case in 1972 ( Ford Motor ) and the Circuit Courts
                       disagree widely over the relevant percentages.
            5. Foreclosure Cases
               a. United States v. E.I. du Pont de Nemours & Co. (US 1957)


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               (i) The Court held that stock acquisitions by Du Pont of 23% of GM stock before 1920
                    had an anticompetitive effect. The relevant product market was determined to be
                    automotive fabrics and finishes, despite a showing that other non-automotive
                    finishes were interchangeable with automotive finishes. In this limited market, Du
                    Pont‟s sales to GM were 33% of the market of automotive finishes. The court held
                    that this amount of foreclosure established the reasonable probability of a substantial
                    lessening of competition.
               (ii) Concerns with the opinion:
                    (1) Concerns with the narrow market definition:
                         Evidence of interchangeability suggests a broader market was appropriate,
                            which would dilute the degree of foreclosure.
                         Lack of investigation into whether fabric/finish suppliers for non-auto
                            customers could easily switch over to compete with automotive fabric/finish
                            suppliers (supply-side substitutability).
                    (2) There is no foreclosure, only a realignment of buyer-seller relationships. Plus,
                        there is no evidence that GM could be influence Du Pont to foreclose, or vice
                        versa. What is the causation theory … why did GM prosper?
                    (3) What consumers are being hurt? GM continues to have an interest in buying a
                        quality product at a fair price, and its protection of that interest will protect
                        consumers.
                    (4) Why didn‟t the court permit the “investment exception” to Clayton §7?
                    (5) The US Govt‟s strategic delay in bringing the transaction is ominous.
                         GM was a much smaller player and the amount of „foreclosure‟ is smaller and
                            it is questionable that the govt could have won
                         The case became more winnable as GM grew because the policy is to evaluate
                            the challenge to the acquisition based on the evidence at the time of suit and
                            not at the time of the acquisition.
                         The jurisprudence that size and success make a vertical integration
                            anticompetitive threatens to produce a chilling effect on efficient deals.
                         Fortunately, the Hart-Scott-Rodino pre-clearance process has prevented much
                            litigation, but the doctrine is still afoot.
            b. Brown Shoe Co. v. US (1962)
               (i) The Supreme Court went much further and condemned a merger between a shoe
                    manufacturer and a shoe retailer which foreclosed only 1% or 2% of the market.
                    The Court relied heavily on the “incipiency” rationale and its “domino” theory of
                    vertical mergers, holding that condemnation was warranted even on such low
                    foreclosure percentages, because the market had exhibited a “trend” towards
                    concentration and vertical integration.
               (ii) Concerns with the opinion:
                    (1) The Court overlooked the fact that markets generally exhibit a trend toward
                        vertical integration because it produces efficiencies through reduced costs. The
                        result is higher output and lower prices for consumers. This sort of holding is a
                        threat to efficiency.
                    (2) The product market definition was dubious. Mens‟, womens‟ and childrens‟


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                        shoes were lumped together.
                    (3) This case have never been overruled – so it occasionally has to be dealt
                        with/distinguished. But, it is oft-criticized for its lack of a coherent theory as to
                        what was objectionable.
            c. Ford Motor Co. v. United States (US 1972)
               (i) The Supreme Court condemned Ford‟s acquisition of spark plug manufacturer
                    Autolite. The market foreclosure was 10-15%. The Court reasoning included the
                    theory that the acquisition would raise a “barrier to entry” against new firms trying
                    to enter the spark plug market, that it tended to transmit the rigidity of automaker
                    market shares to the spark plug market, and that it reduced the chances of future
                    deconcentration through a de novo entry by Ford.
            d. Vertical Integration Approved: Fruehauf v. FTC (CA2 1979)
               (i) Fruehauf was the largest truck manufacturer in the US and Kelsey-Hayes (K-H)
                    supplied heavy-duty wheels and brakes to truck manufacturers. The FTC had
                    enjoined the merger on the theory that K-H would sell only to Fruehauf in times of
                    shortage and that competitors of K-H would be foreclosed in dealing with Fruehauf.
                    The Second Circuit disagreed and approved the merger. It found that K-H was not a
                    significant supplier to Fruehauf‟ competitors, that K-H did not account for more than
                    7% of the supply, and that good business practices and threat of private antitrust
                    suits would prevent K-H from giving Fruehauf preferential treatment. All despite
                    some evidence of concentration in the wheel market and that barriers to entry were
                    substantial.
               (ii) Note: The court dealt with Brown Shoe by looking for a distinguishing fact … it
                    found no „trend toward vertical integration‟.

XI. PRICE DISCRIMINATION
    A. ECONOMICS OF PRICE DISCRIMINATION
       1. Price Discrimination
          a. “Price discrimination” (PD) occurs when identical or similar products are sold to
             different customers at prices that have different ratios to the marginal cost of producing
             the products for those customers. If two items have the same marginal cost, then
             different prices would be discriminatory. If two items have different marginal costs,
             then identical prices would be discriminatory.
       2. Conditions Required For Price Discrimination
          a. Persistent price discrimination cannot occur unless:
             (i) The firm has some market power in the markets containing the disfavored buyers.
                  Without such power, its prices would simply be undercut by competitors.
             (ii) The firm or natural market features must prevent arbitrage [resale of products by
                  low-price customers to high-price customers, thus short-circuiting the price-
                  discrimination].
       3. Effects of Price Discrimination
          a. Positive:
             (i) It may provide an incentive for a seller to increase output. Recall that a firm with
                  market power has an incentive to restrict output.


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             (ii) It may allow a firm to cover total costs and thus enable it to offer a new product that
                  it otherwise couldn‟t.
          b. Negative Effects:
             (i) It allows firms with market power to earn excess profits.
             (ii) It may be used as a predatory pricing mechanism to harm competitors in a certain
                  market.
             (iii)It injures competition between the favored and disfavored buyers.
       4. Degrees Of Price Discrimination
          a. Perfect Price Discrimination (First Degree)
             (i) Under perfect price discrimination, a monopolist charges every buyer that buyer‟s
                  individual reservation price.
                  (1) Effect: Perfect PD creates the same level of output that you‟d have in a market
                       with perfect competition. Thus, from an total economic welfare standpoint, there
                       is no difference between PD and perfect competition. Perfect price
                       discrimination has no wealth effect. However, perfect PD does transfer the
                       consumer surplus into monopoly profit.
                  (2) Perfect PD Unlikely: It is unlikely that a firm can have perfect knowledge of its
                       customers‟ reservation prices and can prevent all arbitrage.
          b. Imperfect Price Discrimination
             (i) Second Degree
                  (1) Where the price discrimination takes the form of quantity-based discounts.
                       Recall the related practice of using tied products to profit from customers who
                       used a product more intensely.
             (ii) Third Degree
                  (1) Where the price discrimination is based upon division of customers into logical
                       groups. For example, charging customers in different geographic area different
                       price, not based upon differences in distribution costs (e.g. higher prices for skis
                       in mountainous regions).
          c. Ambiguous Wealth Effects
             (i) It is generally believed that the effect on wealth due to 2d and 3d degree PD are
                  ambiguous.
    B. ROBINSON-PATMAN ACT
       1. Why Legislate Against PD If No Clear Wealth Effect?
          a. Consumer Protection: PD may shift wealth from consumers to producers. If you‟re of
             the view that the goal of antitrust is consumer protection (as opposed to economic
             efficiency), then PD laws are appropriate.
          b. In real life, we don’t generally outlaw price discrimination. Price discrimination is
             illegal only if it MAY substantially lessen competition.
       2. Robinson-Patman Act of 1936
          a. The Robinson-Patman (RP) Act (§2 of the Clayton Act) was the product of the
             Depression-era lobbying by small grocers against the purchasing power of chain stores.
             Thus, the Act is philosophically outdated. The RP Act was designed to protect small
             businesses from the more efficient buying and selling practices of larger, more


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             integrated businesses … i.e. it was meant to condemn price differences, not true PD.
          b. §2(a): Under §2(a) of the Clayton Act (the RP Act), it is unlawful for any person:
             (i) Engaged in commerce …
             (ii) To discriminate in price between different purchasers …
             (iii)Of commodities of like grade and quality …
             (iv) Where the effect may be to substantially lessen competition in any line of commerce,
                  or tend to create a monopoly, OR …
             (v) To injure, destroy, or prevent competition with any person who either grants or
                  knowingly receives the benefits of such discrimination, or with the customers of
                  either of them.
          c. “Sales of Commodities”
             (i) RP applies to sales, not leases or offers to sell. RP applies to sale of commodities
                  only, not services.
          d. ”Harm to Competition”
             (i) Harm to competition at either the buyer level OR seller level is prohibited.
             (ii) “Primary-Line” (Direct) Effects
                  (1) Harm to direct competitors of the discriminators.
             (iii)”Secondary-Line” (Indirect) Effects
                  (1) Harm to the competitors of the discriminator‟s customers.
          e. Affirmative Defenses?
             (i) Cost Justification
             (ii) Good Faith Meeting Competition
             (iii)[Functional Discounts?]
    C. PRIMARY LINE
       1. Old, Outdated Case: Utah Pie Co. v. Continental Baking Co. (US 1967)
          a. Utah Pie, a local producer and seller of frozen dessert pies with a dominant share of the
             Salt Lake City market, began to experience stiff price competition from national firms.
             Utah Pie‟s market share declined from 66% to 45%. At the same time, though, its total
             sales increased and it continued to earn a profit. The competitors of Utah Pie were, in
             fact, selling in the Utah market at prices that were lower than those charged in their
             other markets. There was some evidence that the competitors were charging less than
             „direct cost plus allocation for overhead.‟ There was some evidence of industrial spying
             by the competitors and their identification of Utah Pie as a „problem.‟
          b. Holding: The Court held that there was sufficient evidence from which a jury could
             find the necessary injury to competition. The opinion came very close to saying that
             price differences and the resulting increase in competitive pressure is sufficient for a
             §2a violation.
          c. Problems:
             (i) The Court‟s benchmark for a predatory price („direct cost + allocation for overhead‟)
                  was similar to avg. total cost and therefore inappropriate.
                  (1) Note: Evidence of predation IS relevant as to whether competition is injured, but
                      is not required by §2a.
             (ii) The geographic market of Salt Lake City was too small since it‟s easy to ship frozen


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                    pies from out of state.
               (iii)The Court‟s evidence of injury to competition is insufficient.
                    (1) Lost market share and declining price in the market is consistent with more
                        competition in the market.
                    (2) There is no evidence that Utah Pie was in danger of being driven from the
                        market and a monopoly or oligopoly created.
                          There are low barriers to entry into the pie market.
          d. Lesson: This is an old precedent, oft-criticized by never overruled. Accordingly, it
              often has to be distinguished somehow.
       2. Modern Approach: International Air Industries v. American Excelsior Co. (CA5 1975)
          cert. denied (US 1976)
          a. Mere diversion of business from one competitor to another does not signify detriment to
              competition on the seller level. The RP Act does not compel the sheltering of an
              individual competitor from the competitive process. The court suggests, in imprecise
              language, that the P in a Robinson-Patman action must show the same elements as a
              Sherman §2 predation action.
          b. The Circuit is essentially refusing to follow Utah Pie, though it would probably just
              distinguish it in some superficial way. For instance, the posture of the two cases could
              suggest that the standard here is the appropriate one to win as a matter of law, and the
              Utah Pie standard gets you to a jury.
          c. Lingering issue: Is there a difference between an RP primary line case and a Sherman
              §2 predation case?
              (i) Compare:
                   (1) The RP standard is “may” substantially lessen competition.
                   (2) Sherman §2 requires “dangerous probability” of monopolization (tougher to
                       prove).
              (ii) So, RP cases bring in some of the predation rhetoric and terminology, but the P
                   doesn‟t have to prove as much. So, predation cases on a price discrimination
                   theory are easier for plaintiffs than a Sherman §2 theory.
                   (1) In re General Food Corp. (FTC 1984) is in agreement.
                   (2) There is no economic reason for this, it‟s just a legal oddity.
    D. SECONDARY LINE
       1. FTC v. Morton Salt (US 1948)
          a. The FTC sues over Morton‟s system of quantity-based discounts on salt, allegedly
              giving an advantage to large chain stores over their smaller independent competitors.
              The Court treated the evidence of substantial quantity-based discounts as prima facie
              violation of §2(a). Morton replied with the affirmative defense that the differences were
              cost-justified but were unable to meet their burden of proof. According, Morton lost.
          b. Notes:
              (i) The Court takes a hard line against price discrimination (really, price differentials). It
                   makes it quite easy for the P to win … he just shows price differentials and the
                   burden shifts to the D to make an affirmative defense. The Court didn’t require
                   much, if any, evidence of harm to competition.
              (ii) In a sense, the Court makes an aggregation argument that although salt is just a small


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                  % of a small grocers business, the Court must nip (allegedly) bad practices in the
                  bud.
             (iii)Sykes: This case is harmful to competition/consumers because it hurt chain
                  stores’ ability to get discounts and pass them to consumers.
       2. FUNCTIONAL DISCOUNTS
          a. Texaco v. Hasbrouck (US 1990)
             (i) Facts: Gas retailers complain about favorable gas prices given to “distributors”,
                  really hybrid retailers/distributors. Texaco responds that the price differences are
                  permissible as “functional discounts” … Texaco must reimburse these “distributors”
                  for the functions they perform in distributing Texaco‟s gas. Texaco also argues that
                  it shouldn‟t be held liable for the resale price decisions of its customers, the
                  “distributors.”
             (ii) Holding: The Court finds that the functional discount defense will note stand and
                  finds Texaco guilty on the basis of the priced differentials. It implies that mixed
                  retailers/wholesalers are not proper candidates for functional discounts, but the Court
                  does not establish a standard for the defense.
             (iii)Notes:
                  (1) The Court doesn’t even discuss the “harm to competition” requirement and the
                       structure of the market. There was no evidence of such harm, just an indication
                       that the Ps weren‟t doing well and the distributors were. All in all, the Court
                       follows in the mold of FTC v. Morton Salt.
                  (2) Lesson: The showing required of P under RP is much less strict w/r/t “harm to
                       competition” than the other antitrust states. The Court reads RP as basically
                       condemning price differentials as price discrimination.
    E. AFFIRMATIVE DEFENSES
       1. Cost Justification Defense
          a. §2(a) provides that “nothing herein contained shall prevent [price] differentials which
             make only due allowance for differences in the cost of manufacture, sale or delivery.”
             (i) The burden of proof is with the D and in practice the courts have required detailed
                  cost studies. As a result, it has been easier for sellers to engage in true price
                  discrimination to charge the same price to different class of customers, even though
                  the costs of serving them differ.
       2. “Good Faith Meeting Competition” Defense
          a. A D with a good faith belief that its discount was required to meet competition establish
             a defense to price discrimination. D can rely on a believable buyer‟s statement that the
             buyer could obtain a lower price elsewhere. This obviates the dilemma of having to call
             competitors to find out their pricing, thus risking a Sherman §1 price information
             exchange violation.
       3. ”Functional Discounts” Defense
          a. Price differentials that reimburse certain customers for their performance of functions
             normally provided by the seller. Texaco v. Hasbrouck leaves open the possibility that
             functional discounts possibly is a defense, but leaves the precise requirements unclear.
             In any case, the burden of proof would have to be carried by the D.



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XII. STANDING AND ANTITRUST INJURY
    A. STANDING AND ANTITRUST INJURY
       1. Action for Damages
          a. Clayton §4: “Any person who shall be injured in his business or property by anything
             forbidden in the antitrust laws may sue therefore … [for treble damages and attorneys
             fees].
          b. Requirements for Standing:
             (i) Allegation “antitrust injury” to business or property (incl. money) caused by D.
             (ii) Check for judicially-created limitations on standing:
                  (1) The McCready factors.
                  (2) Employment-related restrictions.
                  (3) Restrictions on suing against merger of competitors.
       2. Antitrust Injury Requirement
          a. The P must have suffered an “antitrust injury” to business or property (incl. money).
          b. Brunswick Corp. v. Pueblo Bowl-O-Mat (US 1977)
             (i) Facts: Before Brunswick‟s acquisition of a bowling alley, the P and the acquired firm
                  were struggling bowling alleys competing in the same medium-sized city. The
                  acquired firm was in poor financial condition and likely to go out of business. The P
                  alleged that the acquisition of its competitor by Brunswick, a large operator of
                  bowling alleys, caused the acquired firm to remain in competition with the P. P sues
                  for damages for „lost profits‟ – i.e. profits it would have accrued had the acquired
                  firm gone out of business.
             (ii) Holding: The Court ruled that P had established no “antitrust injury” – harm from
                  the anticompetitive consequences of an antitrust violation … “injury of the type the
                  antitrust laws were intended to prevent and that flows from that which makes Ds’
                  acts unlawful”. In fact, the P was complaining about harm from increased
                  competition, which is a goal of the antitrust laws.
       3. Judicially Created Limits on Standing
          a. The McCready Factors
             (i) Facts: The P was a member of the Blue Shield health insurance plan provided
                  through her employer. Blue Shield refused to reimburse her for visits to
                  psychologists, although it would reimburse comparable treatment by psychiatrists. P
                  alleged that she was injured by Blue Shield‟s unlawful conspiracy to boycott
                  psychologists.
             (ii) Holding: The Court held that the P had standing to sue Blue Shield. The Court
                  reasoned that the P‟s alleged injury was “inextricably intertwined with the injury the
                  conspirators sought to inflict on the market.” Blue Shield of Virginia v. McCready
                  (US 1982)
             (iii)Notes:
                  (1) The Court raised four non-statutory concerns that could limit standing; “the
                      McCready factors”:
                       Risk of duplicative recovery. [Are the injuries conceptually distinct?]
                       Risk of costly, complex litigation (due to difficulty of proofs, damage




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                            measurement, number of parties, etc.).
                         Remoteness of harm.
                         “Antitrust” injury. Relying on Brunswick.
                    (2) The Court did not find these to pose a problem in the instant case.
               (iv) Application: Associated General Contractors v. CA State Council of Carpenters
                    (US 1983)
                    (1) The Court held that a union lacked standing to sue a multi-employer association
                        that allegedly coerced certain third parties not to enter business relationships
                        with union firms. The alleged injury was foreclosure of competition and loss of
                        business.
                    (2) The Court based its decision primarily on:
                         Remoteness of the harm. The Court did not find a direct link between an injury
                            to the union and a decrease in competition because the union did not allege
                            that any collective bargaining agreement was terminated, that share of market
                            controlled by union firms diminished, union revenues had decreased, etc.
                         Doubt about “antitrust injury.” The Court had some doubt as to whether a
                            union, whose role is protecting inflated wages, is of the class of persons that
                            the antitrust laws is designed to protect. The antitrust laws‟ goals of
                            increased competition and reduced costs may be antithetical to the union‟s
                            goals.
            b. “Direct Purchaser” Requirement
               (i) An “indirect purchaser” from an antitrust D (i.e. someone who purchased from
                    someone who purchased from the D) may NOT sue for damages under Clayton §4.
                    Illinois Brick v. Illinois (US 1977)
                    (1) Rationale: To avoid double recovery; to simplify litigation
                    (2) Exceptions:
                         Cost-Plus Contracts: Where the “direct purchaser” sold to the P on a “cost-
                            plus” contract that pre-existed the rise of the cartel.
                                Rationales:
                                  We can be sure the “direct purchaser” passed on the monopoly
                                    overcharge to the “indirect purchaser”.
                                  Incentive to litigate is greater if one party is going to get the full
                                    recovery, as opposed to apportioning the losses.
                         Co-Conspirator in the Middle: Where the “direct purchaser” is owned by the
                            seller or is a co-conspirator, such that the “direct purchaser” is not a victim of
                            an antitrust violation.
            c. Employment Related Restrictions
               (i) An employee is fired for refusing to participate in an antitrust violation and sues for
                    lost wages, etc. Antitrust injury?
                    (1) The courts are SPLIT on whether there is a cause of action.
                          Policy: Recovery would induce valuable whistle blowing where employees quit-and-tell.
               (ii) An employee of a firm driven out of business by an antitrust violation of another
                    firm sues for lost wages, etc. It is generally held that …



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                       (1) There is NO CAUSE OF ACTION.
            4. Standing to Sue Competitors in Merger Cases?
               a. Cargill v. Montfort (US 1986)
                  (i) P alleged that the successful cost-cutting merger of competitors are going to “price-
                       cost squeeze” the P, severely narrowing its profit margins.
                  (ii) The Court held that P had no standing because it alleged only increased competition,
                       which is not an “antitrust injury”.
                       (1) However, the Court hinted that if P had alleged predation, it may have had
                           standing. This leaves a little opening for the proposition that a P might possibly
                           have standing to contest a merger if P alleges that the market will become less
                           competitive.
                  (iii)Variation: Merged firm will be dominant and CEO hates P, so there is no doubt that
                       a predatory campaign will be instituted.
                       (1) P might have standing if smoking-gun proof of pending campaign is available,
                           citing Cargill.
               b. Can XYZ allege that it can‟t compete with the mergers of competitors Alpha and Beta
                  because of the resulting economies of scale?
                  (i) No, because harm due to increased competition is not an “antitrust injury.” See
                       McCready.
               c. Can C challenge the merger of A and B, claiming that consumers will be hurt?
                  (i) Common sense would say “No”, but the cases are a little mushy on the point.
                       (1) Policy: Do you want competitors to be allowed to challenge mergers?
                              No, because they are likely to challenge only the competitive mergers.
               d. Can the target of a hostile takeover challenge the takeover on the theory that it will be
                  anticompetitive?
                  (i) Yes, on the theory that the takeover target is injured (even though merged entity
                       benefits from market power) because it has lost the power of independent decision-
                       making as to price and output – keys to competition. Consolidated Gold Fields v.
                       Minorco (CA2 1989).
                       (1) Counter: Could argue that those who will complain of takeovers are SHs who
                           don‟t like their shares of the deal, or managers bringing suit to save their jobs,
                           against the best interests of SHs.
            5. Optimal Damages
               a. Posner: The correct level of damages is disgorgement of monopoly profits plus social
                  harm (dead weight loss). Any more would deter “efficient monopolies” – i.e efficient
                  violations of the antitrust laws.
                  (i) Posner would say that treble damages plus attorneys fees is overcompensation.
                  (ii) Counter: There is an underdetection problem, so higher damages are appropriate to
                       maintain deterrence.
               b. The facts of McCready would make us worry about damages being too high, due to
                  multiple conceptions of the injuries that were caused. Should we worry there?
                  (i) No, since a conspiracy was alleged. There was no real danger of overdeterring
                       conspiracy … since there is no chance that it‟s efficient.



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Antitrust                                                                                    Daniel E. Dreger


XIII. STATE ACTION DOCTRINE
    A. STATE ACTION DOCTRINE
       1. Antitrust and Federalism
          a. Parker v. Brown (US 1943) – The “State Action” Doctrine
             (i) The Court upheld a CA statute that created a commission to set prices and restrict
                  output among raisin growers.
             (ii) Reasoning: For reasons of federalism and legislative history, the antitrust laws are
                  not to be construed to interfere too substantially with the states‟ ability to displace
                  competition in certain markets by creating regulatory regimes of various kinds.
                  (1) Counter: The plain text does not exempt the states.
             (iii)Qualification: However, the states cannot immunize private parties from the
                  antitrust laws by authorizing illegal private anticompetitive conduct.
             (iv) Criticism: Well, isn‟t it even worse that a state coordinates the anticompetitive
                  behavior? Why allow that? The decision has been criticized on this point
          b. Lingering Issue: The Parker court did not spell out the required degree of state
             authorization/involvement needed in order to create immunity for an anticompetitive
             practice.
       2. Intermediate Development of the Parker Doctrine
          a. Schwegmann Bros. v. Calvert Distillers Corp. (US 1951)
             (i) Facts: A state law authorized private RPM agreements in the liquor industry – the
                  state law was immunized from the Sherman Act by the Miller-Tydings Act. The D
                  refused to enter into such a RPM contract. The P sought an injunction against the
                  D‟s sales at a lower price, relying on a state law deeming such sales “unfair
                  competition.
             (ii) Holding: The Court refused the P‟s injunction, construing the Miller-Tydings Act to
                  immunize state-law toleration of voluntary RPM agreements, but not state-law
                  imposition of RPM agreements upon retailers.
             (iii)Outlier: The Court does not deal with Parker, nor does its decision agree with
                  Parker. It either suppressed or missed the Parker issue and therefore the case is
                  considered an outlier, though it‟s occasionally cited.
          b. Goldfarb v. Virginia State Bar (US 1975)
             (i) P challenged enforcement of a minimum fee schedule by the State Bar (a state
                  agency). The State Bar had made deviation from a County Bar (not a state agency)
                  minimum fee schedule an ethical violation. The State Supreme Court had approved,
                  but not compelled or supervised, the State Bar‟s enactment of the ethical rule.
             (ii) Holding: Anticompetitive conduct is immunized only when the state requires the
                  practice in question, therefore the minimum fee schedule here is not immune because
                  it wasn‟t compelled.
                  (1) Counter: In Parker, the immunized raisin marketing program wasn‟t compelled
                      either. This doesn‟t seem to be a valid distinction.
          c. Cantor v. Detroit Edison (US 1976)
             (i) P alleged as anticompetitive the electric utility‟s practice distributing light bulbs to its
                  customers, including the cost in the state-regulated electricity rates.



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Antitrust                                                                                     Daniel E. Dreger


                  (ii) Holding: The conduct is not immune. Although the states authorizes the electricity
                       rates, such approval does not authorize the distribution of light bulbs because (1) the
                       state has no independent interest in the market for light bulbs and (2) the utility
                       instigated the practice.
                       (1) Problems: These are tough lines to draw … questioning whether agency
                           approval is „approval‟, and whether an idea came from the government (really, a
                           lobbyist) or a private entity.
               d. Bates v. State Bar of Arizona (US 1977)
                  (i) The Court held a State Bar (a private entity) prohibiting lawyer advertising was
                       immune from antitrust scrutiny (though, not the 1st Amndt). This was because rule
                       of the AZ Supreme Court compelled the Bar‟s rule and actively supervised its
                       enforcement.
               e. New Motor Vehicle Bd. of CA v. Orrin W. Fox Co. (US 1978)
                  (i) A state-created Board had the power to exclude new car dealerships from the market
                       area of an existing dealer. The P argued that allowing dealers to exclude competitors
                       by petitioning the Board was as bad as the RPM the court struck down in
                       Schwegmann.
                  (ii) Holding: Held that the process was immune under Parker, reasoning that setting up
                       a procedure whereby a private party can petition the state to interfere in the market
                       does not change the fact that it is the state that interferes.
                       (1) Counter: Why is a petition to the Board (here) different than a petition to a state
                           court (Schwegmann)?
            3. The Midcal Test
               a. The Court recharacterized the Parker doctrine in Midcal.
               b. CA Retail Liqour Dealers Assn v. Midcal Aluminum (US 1980)
                  (i) The Court held that a state legislative scheme which permitted wine producers and
                       wholesalers to set the retail prices of their products were not immune under the state
                       action doctrine. This was because the state simply authorized the price-setting and
                       enforced it, but did not actively review or involve itself in the prices set by the
                       private parties.
                  (ii) Two-prong Midcal test: In reaching its conclusion, the Court developed a two-
                       prong test:
                       (1) The challenged restraint must be “one clearly articulated and affirmatively
                           expressed as state policy”; AND
                       (2) The policy must be “actively supervised” by the state itself.
               c. Application of Midcal:
                  (i) Southern Motor Carriers Rate Conference v. United States (US 1985)
                       (1) Facts: Collective rate proposals were filed by trucker trade associations with
                           state regulatory commissions in 4 states. The US claims that these proposals
                           amount to price fixing. There is nothing in the state regulatory schemes that
                           compels these collective rate proposals (allowed in 3 states; silence on the issue
                           in the 4th).
                       (2) Holding: The proposals are Parker immune. The Court notes that Midcal
                           provides that proper test, and state compulsion is not required for immunity. The


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Antitrust                                                                                    Daniel E. Dreger


                           Court recharacterizes Goldfarb as not turning on a compulsion requirement
                           because such a requirement is inconsistent with federalism because it reduces the
                           range of regulatory alternative available to the states. Private entities acting
                           under permissive rather than compulsory state policies should have immunity. In
                           addition, Goldfarb would have been the same result under the Midcal test.
               d. Earlier Cases Revisited:
                  (i) Using the Midcal test:
                       (1) Parker, Goldfarb, Cantor, Bates and New Motor Vehicle Bd. come out the same
                           way.
                       (2) Schwegmann is harder to reconcile and may still be an outlier.
               e. Possible Forms of “Clear Statement of Policy”
                  (i) In cases where immunity was allowed:
                       (1) Parker: State creation and administration of an anticompetitive raisin marketing
                           program.
                       (2) Bates: State Supreme Court‟s requirement of rules against lawyer advertising.
                       (3) New Motor Vehicle Bd.: State creation of a board with the authority to restrain
                           competition.
            4. Easterbrook’s Proposal
               a. Pre-dates Midcal.
               b. Using federalism as the guiding principle, use the following test for state action
                  immunity:
                  (i) Does the harm at issue cross state borders?
                       (1) If all the harm of state-sponsored anticompetitive conduct is contained in the
                           state (cartel doesn‟t export, etc.), then allow immunity.
                       (2) If the harm is exported to other states, then state governments won‟t deal with it
                           well, so disallow immunity.
               c. Obviously, the Midcal court didn‟t buy into this proposal.

XIV.         INTERNATIONAL ANTITRUST
    A. INTERNATIONAL ANTITRUST
       1. Policy Issues
          a. When should the federal government exert authority over anticompetitive activity
             occurring abroad?
             (i) Sovereignty argument: Each nation should regulate solely within their own
                  boundaries.
          b. Is there any difference between a domestic or foreign monopolist?
             (i) If every economic actor is domestic (firm & consumers), consumer surplus is
                  transferred to the firm but the wealth remains in the US.
             (ii) If the firm is foreign, the wealth is transferred out of the US.
             (iii)If the firm is domestic and the consumers foreign, then wealth is transferred into the
                  US.
          c. So, if selfish national interests are the guide, then the sovereignty intuition is a bit
             backwards … it‟s the foreign monopolies that are worrying and the domestic


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Antitrust                                                                                       Daniel E. Dreger


                  monopolies that we should leave alone.
            2. Old Precedents
               a. Respect for Foreign Sovereignty
                  (i) Domestic D causes a foreign government to use its army to seize the P‟s banana
                       plantation and therefore disable the P as a competitor. The Court, through J.
                       Holmes, holds that the P has no valid antitrust claim against this foreign activity.
                       American Banana v. United Fruit (US 1909)
                  (ii) Reasoning: No cause of action because …
                       (1) No extraterritorial jurisdiction: acts of Congress are presumed to apply only in
                            the US and that conduct abroad is not covered. Even if it did …
                       (2) Acts of foreign states: Acts of sovereign foreign states are by definition lawful.
                  (iii)Hypo] What if D had sent private mercenaries abroad to interfere with P?
                       (1) Hard to answer because Holmes doesn‟t make it clear whether relying on the
                            extraterritoriality ground or the foreign sovereignty ground.
                  (iv) Is this holding the right policy?
                       (1) It may be more appropriate to focus on the nationality of the D as opposed to
                            where the D is acting
                  (v) American Banana has never been overruled, but it has been limited …
               b. “Substantial Effects” Test for Extraterritoriality
                  (i) J. Hand holds that foreign activity that has substantial anticompetitive effects in the
                       US market may be reached by the US antitrust laws, at least where there was an
                       intent to import/export from/to the US. Thus, the opinion showed little concern for
                       foreign sovereignty. US v. Alcoa (CA2 1945).
               c. No Immunity for Petitioning a Foreign Government
                  (i) The Noerr doctrine does not provide immunity where the private D has acquired the
                       discretionary power to eliminate a competitor in a foreign market from that foreign
                       government. Continental Ore v. Union Carbide (US 1962).
            3. Modern Timberlane Formulation
               a. Facts: D pressed its adverse claim to P‟s Honduran lumber mill in the Honduran courts.
                  The D succeeded in obtaining an attachment and the appointment of a „judicial officer‟
                  (alleged to be on the payroll of the D), who caused guards and “troops” to cripple the P‟s
                  milling operations. P sues D and the case is dismissed by the district court under the act
                  of state doctrine. The Court vacates the dismissal and remands the case. Timberlane
                  Lumber v. Bank of America N.T. & S.A. (CA9 1976), cert. denied (US)
               b. Reasoning: The court separates out Holmes‟ two issues, act of state and
                  extraterritoriality. The court holds there must be a balancing test to determine the
                  propriety of applying US antitrust laws extraterritorially. Hand‟s “substantial effects”
                  test alone is too insensitive to foreign affairs concerns.
               c. Three-Part Timberlane Analysis:
                  (i) Does the alleged restraint have “some effect”, actual or intended, on American
                       foreign commerce?
                  (ii) Is there an antitrust injury?
                  (iii)“Jurisdictional rule of reason” analysis: Is extraterritorial application of US antitrust


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Antitrust                                                                                     Daniel E. Dreger


                       law appropriate? This is a balancing test, weighing the following factors:
                       (1) Act of state: The degree of conflict with foreign law or policy.
                       (2) The nationality or allegiance of the parties and the locations or principal places
                           of business or incorporation.
                       (3) The extent to which enforcement by either state can be expected to achieve
                           compliance.
                       (4) The relative significance of effects on the US as compared with those elsewhere.
                       (5) The extent to which there is explicit purpose to harm or affect American
                           commerce.
                       (6) The foreseeability of such effect.
                       (7) The relative importance to the violations charged of conduct within the US as
                           compared to conduct abroad.
               d. Comments:
                  (i) Why no act of state in Timberlane?
                       (1) A foreign judicial process had been invoked to seize a lumber mill, but that is not
                           the right „type‟ of act of state
                       (2) What is the difference b/w this and sending in the army to seize a banana
                           plantation?
                            just some local judge doing his job VS. a high-level policy decision by a
                               foreign sovereign (only concerned with respecting the latter)
                  (ii) Hypo] What if the mill was shut down for violations of Honduran safety
                       regulations?
                       (1) Maybe enough important foreign policy interests are now implicated such that
                           there is an act-of-state defense.
                  (iii)Corollary to the act-of-state defense:
                       (1) Foreign sovereign compulsion defense: foreign state compelled a private
                           parties anticompetitive action. Note that this is still a valid defense under
                           Timberlane.
                  (iv) How do we know whether foreign relations are threatened? are there better ways for
                       the courts to handle it? Alternatives …
                       (1) Maybe the court should invite comment from foreign government on the case.
                       (2) Maybe we shouldn‟t care what the foreign govt thinks.
                       (3) Maybe we should decline to hear a „foreign‟ case only if the fed govt asks the
                           court not to
                  (v) Problem: Who knows which factors are decisive? The outcome of cases could be
                       unpredictable, which is bad for international commerce.
                  (vi) Why drop „substantial‟ from the „effects‟ formulation?
                       (1) It may be still be looked for through the back door when looking at the
                           jurisdictional factors, but keeping „substantial‟ in the first prong would cut out
                           weak cases earlier in the analysis.
            4. Return To Earlier De-emphasis on Foreign Sovereignty
               a. Facts: There was a big cutback in pollution liability and a legislative shift to claims-
                  based coverage (covered for claims brought during period of policy, not accidents


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Antitrust                                                                                Daniel E. Dreger


               during policy). The states did these things at the same time. P alleges a conspiracy
               between the states and Lloyds of London to effect these policy changes. The Court held
               that international comity does not act as a restraint on extraterritorial application of
               the Sherman Act. Hartford Fire Ins. v. California (US 1993)
            b. Comments:
               (i) The Court did not even try to apply the jurisdiction jurisprudence or analyze the
                    international issue.
               (ii) The opinion respects only the foreign policy compulsion defense.
               (iii)Seen as a step back from the respectful treatment of foreign relations of Timberlane
               (iv) Scalia‟s dissent is scathing and basically restates the Timberlane factors.
               (v) Our trading partners don‟t like Hartford Fire.
               c. This is a thorny, unresolved area. Hartford Fire is the latest statement …
            d. Take it to mean the American courts feel they have the authority to reach foreign actions
               that impact the US … but not to say that they wouldn‟t back off if it became a foreign
               relations issue.




                                                  - 68 -

				
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