Law School Legal Outline Notes for Antitrust Law

							ANTITRUST CLASS NOTES & OUTLINE Read Lurie Articles – especially 1978 one in VLR. *Settlement – read about Microsoft case in papers (November 2, 2001)

INTRODUCTION – COMMON LAW ANTECEDENTS OF THE SHERMAN ACT

A.

THE CASE OF MONOPOLIES (KINGS BENCH 1603) – P1
1.

Concern about monopolies and restraints of trade did NOT begin with the SA.

B.

A NOTE ON ECONOMICS OF MONOPOLY
1.

Recurring Theme: is economic theory central to AT analysis? Which economic theory? Basic Assumptions Underlying Economic Analysis as Applied to Competition and Monopoly – p6-20:
a. b. c. d. e.

2.

The principle of scarcity. People act so as to maximize their own self-interest. Life is lived at the margins. We deal with each other in markets. The quest for allocative efficiency 1) Efficiency can be used in different ways – make sure you know how court is using it. How prices are set in competition: 1) Demand side of setting your price 2) Supply side of price setting 3) Setting the price based on both demand and supply The distortions imposed by monopoly.
1

f.

g.

h. i. j.

The matter of productive efficiency – economies of scale and transaction costs. Dynamic efficiency OR regulation can do more harm than good. The Competence Problem – how much economic activity can be analyzed? 1) Big problem in AT law: how to analyze economic info in a way that is sufficiently general to be practical, yet sufficiently accurate to avoid making matters worse instead of better.

C.

CASE – MITCHEL V. REYNOLDS (KING’S BENCH 1711) – P20:

D.

A NOTE ON COMMON LAW CONTEXT FOR THE SHERMAN ACT
1.

Early state and federal cases were critical of cartels, mergers and monopolies.
a.

Remedy = non-enforcement of such contracts.

2.

Is the existence of a “restraint of trade” a question of law or fact?
a.

Case law is confused on this point and most courts do not even address the question.

3.

Ancillary Restraints of Trade:
a.

C/L meaning of “restraint of trade”: covenants not to compete (i.e., barber shop hypo). Ancillary b/c this restraint of trade facilitated, and made more like to occur, the major business transaction (i.e., selling of business). Rule for C/L ancillary restraints of trade: valid as long as reasonable to time and geography.

b.

c.

4.

Non-Ancillary Restraints of Trade:
a.

Not much C/L on this b/c the 2 prices fixers usually did not sue each other and there was no positive law to prevent this or allow others to sue.
2

b.

If the SA addresses this problem, then we can get the price fixers.

5.

Economic Analysis:
a.

Public interest 1) What goes into a consideration of the “public interest”? Does application of AT laws vary by product and service? 1) Courts say no but they clearly do.

b.

E.

A NOTE ON THE ADOPTION OF THE SHERMAN ACT
1.

AT law is a peculiarly American invention. Before adoption of Sherman Act in 1890, there was nothing comparable to the AT laws. There was at the time and still is NO consensus on what the SA was intended to do. Congress seems to leave much of the ultimate decision-making up to the courts.
a.

2.

3.

4.

Congress supplied general principles while courts could hash out the lines.

F.

THE SHERMAN ACT
1.

Provisions:
a.

??? Section 1 prohibits restraints of trade:
1)

Horizontal arrangements covered by this section: a) Price fixing b) Market division c) Group boycotts d) Mergers (or is this under Clayton Act) Vertical arrangements covered by this section:
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2)

a) b) c) d) e) b.

Resale price maintenance? Territorial allocation? Vertical integration? Exclusive dealing? Tying arrangements?

??? Section 2 prohibits monopolies and attempts to monopolize:
1)

Horizontal arrangements covered by this section: a) Monopolization Vertical arrangements covered by this section: a) ???

2)

c. d. e.

Section 4 gives juris to federal courts. Section 7 allows treble damages for violation of s1 or 2. Section 8 makes clear that “person(s)” includes corps and associations.

2.

Possible Goals Underlying SA:
a.

Allocative Efficiency: 1) Definition: the allocation of economic goods to the people who value them most. Productive Efficiency: 1) Definition: letting firms achieve the size at which the cost of production is least, even if that means there will be only a relatively few, large firms in some industries. Dynamic Efficiency: 1) Definition: desire to protect the competitive process itself and especially to preserve the opportunity for new firms to enter existing markets or create new ones. Desire to break up large firms so as to advance the interests of small businesses and prevent the concentration of economic and political power.

b.

c.

d.

3.

Scope: applies to both civil and criminal conduct.

G.

ORGANIZING THE CONCEPTS THAT YOU WILL SEE IN AT LAW

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1.

Horizontal Arrangements:
a. b. c. d. e.

Price fixing Market Division Group boycotts Monopolization Mergers

2.

Vertical Arrangements:
a. b. c. d. e.

Resale price maintenance Territorial allocation Vertical integration Exclusive dealing Tying arrangements 1) Why are these considered vertical?

3.

Jurisdiction and Procedural Issues:
a. b. c. d. e.

Interstate commerce Private litigant standing AT injury Summary judgment standards Interplay b/w AT and other federal and state regulatory policies

4.

Themes:
a.

AT Law Varies With CT’s Composition: 1) Effect = focus on irrelevant factors:
5

Why? b/c rather than overruling earlier cases, the CT merely distinguishes them by seizing on a factual difference that was irrelevant - thus, turning the irrelevant factual difference into the most important factor. b) This inhibits a coherent development of AT law.
a) b. c. d.

Rule of Reason Approach v. Per Se Approach. Impact of economic analysis on AT law is very strong – see Problem Set #2. Does CT focus on intent, effect or mkt power?

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CHAPTER 1 – THE FIRST 25 YEARS UNDER THE SHERMAN ACT – 1890 TO 1914:

A.

JURISDICTION AND SCOPE OF ACT:
1.

Case – US v. E.C. Knight Co. (US 1895) – CJ Fuller p33:
a. b.

Held: no monopoly here b/c no interstate commerce. Notes 1) CT does not take as narrow a view today of “commerce” as it did in E.C. Knight a) This case shows how far the CT has come with its view of commerce under the SA – Goldfarb v. VA (1975): (1) Fact: couple buying house in VA – went to a couple of attorneys – minimum fee schedule - couple brought AT action allege min fee schedule was violation of SA. (2) Held: for P - minimum fee schedule b/w attys violates s1 of SA.. (3) Reason: (a) CT had to reach far to come to idea that this was an AT S1 violation.  Atty practice in VA not cross state lines.  Real estate not cross state lines. (b) Where is nexus b/w min fee schedule and title search?  CT said the $ that couple has to borrow from bank (located in VA) probably crosses state lines and thus, there is some effect on interstate commerce – awfully small nexus. (c) Effect on state commerce is irrelevant for jurisdictional purposes as long as we can find some impact/effect on interstate commerce. (4) Notes: (a) Now, there is NO LIMIT on what can = “interstate commerce” – SA is an “affecting commerce” provision as opposed to statutes requiring “in commerce”

2.

A Note on Foreign Commerce Jurisdiction – A Case of Banana – p37.

Lurie did not discuss.

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B.

HORIZONTAL COMBINATIONS IN RESTRAINT OF TRADE: 1. Definitions:
a.

Horizontal arrangement: parties involved in contact . . . are competitors operating at same level of distribution. 1) Here we are focusing on horizontal arrangements. Vertical arrangement: parties involved in contact . . . are in the chain of distribution.

b.

2. Case – US v. Trans-Missouri Freight Assoc. (US 1897) – Peckham - p38:
a.

Facts: 1) Competitors form a committee to fix price a) Remember in competitive market, firms are price takers 2) Ds argue that “restraint of trade” language in SA only prohibits “unreasonable” restraints – thus, they argue that the rates they established were reasonable and thus not in restraint of trade – p39, 43. Issue: whether SA outlaws all price fixing or only price fixing when rates that are fixed are unreasonable. Held: for govt - agreement violated s1 of SA. Reason 1) SA applies to common carriers. 2) SA applies to all restraints of trade – not just unreasonable ones. a) SA not meant to simply codify C/L – thus, SA prohibition on restraints of trade is broader than C/L prohibition on restraints or trade – thus, reaches reasonable restraints. b) Rationale: too hard to figure out what “reasonable” is anyway. c) CT says intent is irrelevant: unlawful intent to restrain trade not matter (p47) – effect is what matters. White’s dissent:

b.

c. d.

e.

Lurie did not discuss.
f.

Notes: 1) THEME = Lurie says key question to ask as we look at each case is what does CT say about intent and effect and power? a) Ask whether, for conduct to be unlawful under SA, the court requires:
8

Proof of an intent to restrain trade. Proof of the effect of the parties action is that trade is being restrained Proof of both intent and effect. Proof that the parties had the power to restrain trade. 2) In later cases, reason comes back in as a way to determine a violation. 3) WHAT IS REQUIRED TO ESTABLISH A VIOLATION OF s1 of SA? Lurie wants us to figure this out – it changes with the composition of the CT. 4) Other questions to keep in mind: a) Is it unlawful if all the firms in market agree to same price? Should a criminal statute (SA) apply when same consequences occur as if it was a competitive market? b) Key question = what is an unreasonable as opposed to a reasonable price? Is there only one reasonable price? Isn’t there a range?
(1) (2) (3) (4)

3. A Note on Natural Monopolies – p52:
a.

Definition: mkt where firms; marginal cost of production does not increase with an increase in output, at least not over the relevant ranges of production. 1) Occurs when capitol investment is very large in relation to operating costs. 2) Ex: compare enter nuclear power plant industry and restaurant industry; like grades – have to get a higher grade to pull average up. Characteristics - see chart and comments on p53. 1) Demand curve crosses AC and MC at some point where AC is still going down 2) Any new firm will have a higher AC to enter 3) In NM, firm will not price at MC cost b/c it would be losing $ - it has to at least charge a price = AC in order to survive. Significance: competition will not survive in such a market – if we had competition in such a market, it would be destructive competition.

b.

c.

4. A Note on US v. Joint-Traffic Assoc. (US 1898) - p54:
a. b.

Held: CT said not every restraint of trade was illegal. Reason: 1) Said CT’s language in Trans-Missouri was too broad. 2) CT says s1 of SA cannot mean what it says when it says “every K . . . in restraint . . . is unlawful” a) b/c “every K restrains trade” and thus every K would be a restraint of trade and thus a violation of SA. 3) This notion will also be expressed in Chicago BD of Trade. 4) Lurie says this notion is “utterly absurd” but it is a continuing theme in the AT case law
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c.

Notes: 1) Cannot find any decisions that really discusses the question of what = “restraint of trade” under SA - Lurie says courts and commentators fail to deal with the basic questions. 2) THEME = what is dividing line b/w those K that are lawful and those that are not – then we are back to notion that only unreasonable restraint of trades are prohibited but this is not an adequate dividing line either.

5. Case – US v. Addyston Pipe & Steel Co. (CA6 1898) – p55:
a.

Facts: 1) 2 manufacturers of cast-iron pipe agreed to fix prices thru a number of techniques. 2) District court dismissed the complaint on the merits. 3) Ds argued that the fixed prices were reasonable. Issue: what if it is a reasonable price that is fixed? Does this determine whether the K is unlawful or not? Does it matter what prices are fixed? Held: for govt - conduct here violated SA. Reason:
1)

b.

c. d.

CA6 goes through C/L rules and exceptions against restraints of trade. a) Finds this case does not fall into any of the exceptions and that the public was harmed by D’s conduct here. Reasonableness of price fixed is IRRELEVANT: a) CA6 says it will not look to see whether the price is reasonable or unreasonable – it is fact that parties acted to fix prices that makes its unlawful. b) Rationale: b/c price-fix agreement eliminates price competition b/w the parties (agree not to compete on base of price – this is what violates s1). c) ALL price fix agreement are unlawful. (1) CA6 does not say so but this seems to be the source of per se rule against price fixing. Share of market controlled (aka market power) is IRRELEVANT: a) CA6 says a firm does not have to have a complete monopoly to violate SA. b) It is the act of price fix that is unlawful.

2)

3)

e.

Notes
1)

Example of classic cartel.
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2) 3)

Although only a Circuit CT opinion, given great weight. Application to Unions: a) Initially, SA applied to union-type activity: (1) If workers get together and demand higher wages from boss, that seems like an agreement among workers not to compete on basis of price of their labor. b) Congress amended AT laws to allow union and EEs to do this. c) Later, governments start using SA to apply to professional associations: like they did against unions in early days.

6. A Note on the Economics and Operation of Cartels – p64. Lurie did not discuss. 7. A Note on Some Early Group Boycotts – p65.
a.

Group Boycott Defined: an agreement among competitors to boycott certain other firms. Case – Eastern States Retail Lumber Dealers’ Assn v. US (US 1914) – p66: 1) Facts: members of an association of retail lumber dealers circulate a list of wholesalers who had begun selling directly to consumers – although there was no direct proof of agreement not to buy from the listed wholesalers, that seemed to be the intent. 2) Held: for govt – violation of s1 of SA. 3) Reason: a) Any individual retailer can refuse to deal with any wholesaler – like Colgate. b) Circulation of the list tended to directly restrain the freedom of commerce by intimidating the wholesalers from selling at retail.

b.

8. Labor Unions and the SA – p66 – see note above.

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C.

MONOPOLIZATION AND MERGER: 1. Current Events – Microsoft Case: Federal district court judge held Micro was monopoly, remedy = split into 2 companies. On appeal, CADC appointed new district court judge to come up with new remedy. Before new remedy was given, DOJ (on 09-06-01) said not it would not pursue a breakup of Micro but just put an end to conduct that Micro engaged in. d. Lurie thinks CADC favors Micro. 1) “Chicago School” attitude of courts toward business – companies do the right thing. e. Critics say Micro is moving from monopolization of operating system market to monopolization of other markets. f. We should be following this issue in the news.
a. b. c.

2. Monopolization and Mergers Generally:
a. b.

Monopolists are not evil or bad – they are acting rationally. But monopoly has an adverse effect on market b/c monopolies gets profits over and above normal profits [monopoly profits]. If we see that an industry is not acting competitively, ask why? 1) Natural monopoly: industry not big enough to have more than one firm. 2) Capital costs are too big: there are structural barriers to entry. 3) Did the firm engaged in anti-competitive behavior? This is focus of AT law. Bad effect of monopoly – thus, reasons to prefer competition over monopoly: 1) Higher prices and lower output 2) Consumer surplus goes to the producer. Clayton Act included provision dealing with mergers specifically.

c.

d.

e.

3. Case – Northern Securities Co. v. US (US 1904) – Harlan - p67:
a.

Facts: 1) 2 RR systems want to consolidate and create a holding co to buy a third corp. 2) Ds argue they had no intent to monopolize. 3) Remember this is pre-CA case. Issues: 1) Is SA constitutional? YES
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b.

2) c. d.

Did D violate s1 of SA here? YES.

Held: the SA is constitutional and holding co/merger violates s1 of SA. Reason: 1) CT goes thru propositions from its AT precedents – p70-71. 2) SA is constitutional: SA = valid exercise of Congress’s power. 3) CT characterizes conduct here as a “trust” or “combination” – thus, s1 applies. a) Congress’ intent was to protect public – this conduct hurts public – thus, it violates SA. Brewer Concur: White Dissent: 1) This is not “commerce” – thus, SA not apply. 2) Concerned that if SA applies to holding companies, it will apply to individuals. Holmes Dissent: 1) Concerned that SA is too broad, will apply to individuals. 2) SA only applies to 2 classes of cases: (1) K in restraint, and (2) combinations or conspiracies in restraint.

e. f.

g.

4. Case – Standard Oil Co. of New Jersey v. US (US 1911) – p82:
a. b.

This case gave rise to the rule of reason approach. Facts: 1) Trust in this case was a holding co. 2) At this time, there was the creation of trusts in certain industries. 3) Govt attacked the trusts as violating the SA b/c they were “combinations” in restraint of trade. Held: for govt – CT applies rule of reason analysis - this trust violated SA b/c it was an unreasonable restraint of trade. 1) ??? I thought Lurie said CT had never applied rule of reason analysis and found for govt. Reason: 1) B/c every K restrains trade in some way, Congress must have intended to touch only unreasonable restraints of trade. a) Seems to contradict earlier cases (i.e., Addyston and Trans-Missouri). 2) Thus, CT says standard of reason = determinant of whether there is a violation of s1 of SA – p89. 3) Rule of Reason Applied: restraint here was unreasonable.
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c.

d.

4) e.

CT says this case limits Trans-Missouri and Joint Traffic.

Harlan Concur/Dissent: 1) ??? Would have just affirmed without discussion – does this mean he preferred the per se approach. 2) Worried that now there will be lots of litigation and it will all boil down to question of “reasonableness” – he says this term does not appear in the statute – statute says “every K” Notes: 1) Later cases will rely on this case for support for rule of reason approach. 2) Lurie’s criticism: says there is no “rule” to the “rule of reason.”

f.

5. Another Look at Monopolization - The American Tobacco Case – p98. Lurie did not discuss. 6. A Word About Attempts to Monopolize – The Swift Case – p99. Lurie did not discuss. 7. The Problem of Remedy – the Terminal Railroad Case – p100.
a.

Essential facilities doctrine = if someone has an essential facility, then that must be made available to all competitors on equal terms. 1) Common characteristic: this is an issue in markets where there is necessity of access to compete in the market. 2) Questions: What is an essential facility? Who makes this determination? Examples: 1) RR market: several competing RRs but only one facility for getting across the river. If one of the competing RR acquired ownership of bridge, then he would be able to exclude his competitors from the bridge. 2) Tobacco market, all transactions happen in one market (in a warehouse) – if you as a farmer cannot get into warehouse b/c warehouse owner will not let you in, then you cannot sell your product b/c the buyers do not go anywhere else – they only buy in the warehouse. 3) MicroSoft example: argument that Windows OS is an “essential facility” – Lurie asks “without Windows, where would we be?” a) Why did Micro give its product away for free? B/c it found another way to make more $ (like give away a razor but you have to buy the blades). Not really free – cost is included in price.
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b.

b) c)

d) e) f)

Like a battery in a car – we do not go to PepBoys after buying a car and get a new battery. If you make things simple/easy/convenient for people, they are not going to go look for something that is harder. Lots of people who use computers who know very little about them – the simpler it is, the more people who will buy it. If we are already had Netscape, why did Gates bother to create another provider? If there were no competitors of Explorer, would Micro charge $ for it? YES Lurie says Windows has become a defacto standard – Netscape posed a threat to Micro b/c it showed you could do a lot on browser/WWW without ever needing to resort to Windows – thus, Micro would lose its control if one only needed a browser as opposed to an operating system – thus, Micro shifted its control of OS market to control of browser market – imagine if you controlled all access to the internet – advances in technology that most of us cannot comprehend (we do not know what is going to happen next).

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D.

VERTICAL RESTRAINTS OF TRADE – RESALE PRICE MAINTENANCE: 1. Case – Dr. Miles Medical Co. v. John D. Park & Sons Co. (US 1911) – p102:
a.

Facts: 1) Govt allegation = vertical price fixing. 2) Resale price maintenance agreement: a) D (manufacturer) entered into identical agreements with all its retailers, obligating retailers to sell product at a price that is not less than manufacturer’s stated price. b) There is interference with retailers’ freedom to set a price. c) Differs from horizontal restraint b/c not colluding with competitors. (1) Here there are no agreements b/w the retailers – this would be horizontal. Issue: is manu entitled, through agreements, to secure the price that he desires in the retail with retailers who own what they sell? Held: for P – resale price maintenance agreements violate s1 of SA. Reason:
1)

b.

c. d.

CT concluded that these agreements = unlawful restraint of trade b/c: a) Vertical price fixing agreements are just as unlawful as horizontal price fixing agreements b/c they have the same effect on the consumer (public). (1) Analogous to price fixing agmt b/w horizontal competitors at retail level. (2) We want to have retailers competing on price [e.g., Crest costs more at CVS than at ACME]. b) Agreement interfere with ownership rights of retailers (1) Retailers purchased the product from manufactures – thus they own them. (2) Agreements prevent retailer (as owner of prop) from selling prop as he deems fit – lead to same effect as horizontal price fix agreement. (3) Open question: what about when manufacturer just leases the product? Manu wants to control resale price of his product b/c: a) Scenario: manu says to all its retailers “I do not want you to charge more than X” b/c if dealer charges more, sell less gas OR suppose Exxon says “I do not want you to charge less than X” [set a floor] b/c if dealer charges lower price, he sells more gas. b) But this seems counter-intuitive: (1) Manu does this b/c he is concerned about brand image, status as a higher quality product: (a) If image of product falls, whole demand curve may shift (as people value product less highly). c) But this image can still be maintained by the manu raising his price.
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2)

3)

Bigger question – does intent/motive matter? a) Or should our concern only be on effect/impact on market place?

e.

Holmes dissent: 1) ??? What is Holmes’ philosophy? 2) He says we exaggerate the value and importance to the public of competition as fixing a “fair” price – what does “fair” mean? 3) He calls retailers “knaves” – does not think public will benefit from allowing knaves to set prices. Notes:
1)

f.

Rule: CT said vertical arrangement is unlawful b/c same impact as horizontal arrangement. a) ??? Is this a per se rule? Open Questions: a) Is an agreement estb resale prices, where distributors do not compete, also unlawful b/c consequence is not the same? (1) There is no clear precedent to give us an answer b) Is an agreement estb resale prices, where manu has only a single distributor, also unlawful? (1) There is no clear precedent to give us an answer. (2) If we say VPF is per se unlawful, then yes this is unlawful. No clear precedent: VPF may not achieve same result as HPF, thus in some instances VPF may not be unlawful – there is no clear precedent to give us an answer – we only know the Dr. Miles scenario (series of agreements where distributors do compete) is unlawful.

2)

3)

2. Qualification on Dr. Miles Rule – the Colgate Case:
a.

Similar factual setting: Colgate is almost identical to Dr. Miles except US is a party in Colgate case. Case – US v. Colgate & Co. (US 1919) – p112.
1)

b.

Facts: a) Govt issued indictment (we might read it as against Colgate and dealers) charging vertical price fix agreements. b) Trial ct read indictment and interpreted it to run only against Colgate as having done something unlawful, thus, read indictment to charge only unilateral conduct by Colgate.
17

c) 2)

We would probably read indictment differently.

Held: for D a) Rule: SA does not prohibit unilateral conduct by manu b/c CT read indictment as trial court set it out - thus, there is no combination or conspiracy, only unilateral conduct and s1 does not reach unilateral conduct. b) Problematic Dicta: manu may announce in advance the circumstances under which he will refuse to sell and this is lawful as long as unilateral – known as the Colgate rule – p113. (1) This was a problematic opening. Notes: a) ??? In cases after Colgate (and up until recently), the CT concluded that Ds had gone beyond what Colgate permitted (rather than overruling Colgate, CT kept narrowing it) – now, one can say Colgate has been effectively overruled. b) We will come back to Colgate rule later. c) SUMMARY: VPF unlawful but there is Colgate exception (b/c this is unilateral conduct so s1 of SA cannot reach). (1) What if manu says we “suggest” min retail prices? Lurie says there may be an unlawful agreement here.

3)

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E.

ADOPTION OF CLAYTON AND FEDERAL TRADE COMMISSION ACTS: 1. Clayton AT Act (1914) – p115:
a.

Section 2 prohibited price discrimination. 1) We will talk more about this later. 2) It was substantially amended later. Section 3 aimed at specifying certain practices as unlawful. 1) Exclusive dealing arrangements 2) Tying arrangements Section 4 provided procedural, damages provision. 1) Rationale for providing 3x damages and reasonable atty fees in private AT suits: Congress wanted to encourage private AT enforcement. Section 5 was meant to supplement s4. 1) If govt brought action first and won, private litigants could utilize govt’s successful action as prima facie evidence that AT laws had been violated. Section 6 exempted labor union activity and collective bargaining from AT laws. Section 7 prohibited certain mergers and acquisitions – we will talk more about it later. Section 15 provided for injunctions in govt suits. Section 16 provide for injunctions in private suits.

b.

c.

d.

e. f. g. h.

2. FTC Act (1914) – p117: Lurie did not go over.

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CHAPTER 2 - THE RULE OF REASON – 1915 TO 1939
 

Rule of reason approach = dominant model for AT analysis in this time period. Might also be called the Brandeis era of AT thinking.

A.

CASES GIVING DEFINITION TO THE RULE OF REASON: 1. Case – Bd. of Trade of City of Chicago v. US (US 1918) – Brandeis - p119:
a.

Facts: 1) Lurie says only thing govt was really challenging was the call rule [price at which grain would be sold was price that was established at close of trading day] – see p120. 2) Govt’s Allegation: said this was an agreement to not compete on basis of price for most of the day. 3) Ds’ Argument: Ds admitted the adoption and enforcement of call rule but averred that its PURPOSE was not to prevent compete or control prices but to promote and protect convenience of members. a) Govt’s Response: PURPOSE and EFFECT are irrelevant – only look at fact that Ds fixed prices, thus, agreements to fix prices are per se illegal. 4) Dis Ct held for govt: excluded any evidence on PURPOSE of call rule. Held: for D – CT says this is not per se case and thus applies rule of reason approach. 1) CT says district court erred when it excluded evidence of purpose. Reason: 1) CT NEVER char Ds’ conduct as price fixing. 2) CT says this is NOT per se case but rule of reason case (thus, you look at other factors). a) Rule of Reason Test = whether challenged restraint merely regulates and perhaps promotes competition or whether it suppresses or destroys competition - p120. b) Factors to be considered in applying the test (1) Sample Factors: (a) Intent/Purpose (b) Effect (actual or probable) (c) Market power (d) Business (e) Market’s condition b4 and after restraint is imposed. (f) History of restraint (g) Etc.
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b.

c.

(2)

CT seems to say courts can look at everything when applying rule of reason test.

d.

Notes:
1) 2)

CT is unanimous in applying rule of reason here. Compare position taken by govt and position taken by CT: a) Govt argues that agmts to fix prices are per se unlawful b) CT rejects that notion but CT does not view what has happened in this case to be price fixing – shows that CHARACTERIZATION is very important. Rule of Reason v. Per Se Approaches – what is difference?
a)

3)

Very important distinction in AT law: (1) Case will be won or lost at outset – outcome of case determined by characterization as rule of reason or per se case. Per Se Cases – P/govt usually wins:
(1)

b)

Definition: know that s1 has been violated simply by looking at conduct of Ds. Requirements of s1 violation under per se case: (a) Existence of K, combo or conspiracy is all that is needed. i. Thus, govt must prove an agreement of a particular character. ii. Thus, char becomes crucial – almost determinative.  P will always want to try to char case as in one of categories of per se case  D will always try to char case as rule of reason case. (b) Existence of Restraint of Trade is NOT necessary in per se offense. i. K, combos and conspiracies of a particular character are presumed to be illegal restraint of trade (e.g., agmt to fix prices) – there is conclusive presumptive that there is a restraint of trade when you engage in certain kinds of conduct. ii. ??? What are per se categories? iii. Limits amount of evidence that D can show in defense – says such other evidence is irrelevant. iv. Lurie says this is analogous to someone saying “I know world is flat and I am not even going to let you try to explain to me that it is not flat because I know it is flat.”

(2)

c)

Rules of Reason Cases – D usually wins:
(1)

Definition: require more thorough analysis.
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(2)

Requirements of s1 in rule of reason case: (a) Existence of K, combo or conspiracy must be proved: (b) Existence of Restraint of Trade must also be proved  Opens door to all sorts of evidence by D re: purpose, effect, etc. – thus, making it hard for P to prove a restraint of trade.  If you cannot define it, how can you ever prove it

4)

CT never characterizes the Ds’ conduct as price-fixing – this is a crucial distinction (accord to Lurie) a) By not char as such, CT avoids a lot of difficulty that it would have if it did label as price fixing. This case cited as setting forth the rule for the rule of reason (even though this is misnomer since no real “rule”). a) Compare to Standard Oil which set rule of reason as appropriate analysis but no rule was set down there.

5)

2. Case – US v. US Steel Corp (US 1920) – McKenna - p124:
a.

Facts: 1) CT’s philosophy: a) SA is still young – CT just beginning interpretations. b) At this time, CT had anti-SA bias, pro-business philosophy. 2) Number of steel companies pull together into one corp – control 90% of entire output. Issue: is this a combination in restraint of trade? Held: for D – CT applies rule of reason and finds no violation of s1 or s2. Reason: 1) Look at power at time of case – p127. 2) No monopoly effect was achieved here – p127. a) CT says mere existence of unasserted power is not an offense: CT ignores govt’s argument that there was great potential for monopoly. 3) Thus, CT says govt’s argument is reduced to size of corp. a) CT says mere size is not an offense. b) CT says bigness is NOT bad. 4) Distinguish Standard Oil by saying purpose was clearly anti-competitive – no clear purpose here. Day Dissent: 1) Thinks CT is narrowing SA.
22

b. c. d.

e.

2) f.

SA not require monopolization effect – attempt is sufficient.

Notes:
1)

Why didn’t govt use s7 of Clayton Act, rather than s1 of SA? a) B/c Clayton Act not yet enacted when this case began. b) Lurie will ask this question again in other cases – reason may be b/c of jurisdictional impediment. THEMES throughout course: a) What is necessary to estb violation of s1 of SA? b) Is purpose sufficient alone? c) What about effect? d) What about power? e) Or do we need a combo of any of these?

2)

3. Note on Eastman Kodak v. So. Photo Materials ((US 1927) – p132. Lurie did not discuss.

23

B.

THE TRADE ASSOCIATION CASES:
1.

Case – Amer. Column & Lumber Co. v. US (US 1921) – Clarke - p133:
a.

Facts: 1) Members of trade association collected info about prices and other things and distributed it: a) Stated goal was to keep prices at stable levels. b) Very specific info was requested about prices (names of customer, quantity, prices). c) Lurie says this is not normal behavior of competitors who are interested in competing with each other. Held: for govt – CT applies rule of reason and finds that D’s conduct violates s1 of SA. Reason:
1) 2)

b. c.

CT applies rule of reason approach Even though there is no explicit agreement here, purpose and effect evidence provide enough to find violation of s1 of SA. CT looks at PURPOSE and EFFECT (not POWER): a) Violate s1 b/c PURPOSE of plan was to raise prices – p137, 138, 139, 140, 141. b) CT also notes that plan had the EFFECT of raising prices – p139, 140, 141. Does whether you are collecting info explicitly re: prices make a difference?

3)

4) d. e.

Holmes Dissent: well-respected – why are they dissenting? Brandeis Dissent: well-respected – why are they dissenting? 1) B/c companies cannot form an association to get necessary info, they will just merger which will be worse for public interest. Notes:
1)

f.

Was CT’s true concern that the firms in the association had formed an “implicit cartel” here? Is an agreement that says nothing about prices lawful? Probably. When can a plan include info on prices and still be lawful? a) Past Prices: no illegality in disseminating past prices if sufficiently far in the past.
24

2) 3)

09-17-01
2.

Present Prices: (1) Exchanges of present info is RISKY but not per se unlawful. (2) Counsel clients against discussions and exchanges about prices unless they are past prices. (3) Different argument when client is charged. (4) Not much distinction b/w present prices and future prices c) Future Prices: very RISKY – probably per se illegal. d) Guidelines: (1) These rules only apply if there is no INTENT and no EFFECT to fix prices. (2) Generally, any exchange of price info is risky.
b)

Note on the Broader Problem of Dealing with Oligopoly – p146.

Lurie did not discuss.
a.

Posner’s tell-tale signs of implicit cartel or collusion – p148.

3.

Case – Maple Flooring Manufactures’ Assn. v. US (US 1925) – Stone – p149:
a.

Facts: 1) Look for loaded words that indicate CT’s philosophy – “fairer” on p154.
2)

b. c.

Held: for D – CT applies rule of reason and finds D’s conduct was not unlawful. Reason: 1) Info exchange is good for the public: a) Loaded language: leads to “fairer” prices – p154.
2)

RULE: a) Full text: “We decide only that trade associations or combinations of persons or corporations which openly and fairly gather and disseminate info as to the cost of their product, the volume of production, the actual price which the product has bought in past transactions, stocks of merchandise on hand, approximate cost of transportation from the principal point of shipment to the points of consumption, as did these defendants, and who, as they did, meet and discuss such info and statistics without however reaching or attempting to reach any agreement or any concerted action with respect to prices or production or restraining competition, do not thereby engage in unlawful restraint of commerce” - p154. b) Important parts: “trade associations or combinations . . . which openly and fairly gather and disseminate info . . . without . . . reaching or attempting to reach
25

any agreement . . . with respect to prices . . . do not engage . . . in unlawful restraint of commerce” – p154.
3)

Compare to Amer. Column & Lumber: c) Same kind of info was collected by Ds in both cases. d) Intent: in Amer., CT was persuaded that D had INTENT and EFFECT – contrast to CT’s approach in Maple Flooring: (1) D here did not have any unlawful INTENT to fix prices. e) Prices: while American dealt with present and future prices, Maple dealt with past and closed transactions price info.

d. e. f.

Taft Dissent: thinks this is same as American Column and thus CT should find for govt. McReynolds Dissent: Notes: 1) Lurie says facts of both cases are same, it is philosophy of CT that is different. 2) When CT focuses on a difference to distinguish, it focuses on something irrelevant and makes it the most important factor (distinguishing factor b/w legality and illegality). a) Lurie asks whether differences b/w 2 cases ought to distinguish the result – thinks CT is making irrelevant distinctions b/c it does not want to overrule.

4.

More on Proof of Agreement - Sugar Institute and Interstate Circuit:
a.

Sugar Institute v. US (US 1936) – p156:
1)

Facts: agreement b/w sugar refiners that refiners can only change their price after they announce a “move.” a) Ask yourself – what is wrong with that (putting out a price list, have to charge those prices). b) The Scenario: When product you are selling is fungible with what your competitor is selling, and price is going down, you care a lot about what your competitor’s price is. But how do you know what price you should charge? Have to know what competitor’s price is to know what price to charge? Wouldn’t it be helpful to have competitor’s price list? But what if competitor is not adhering to price list? If only you could be sure competitor was charging the prices that he listed on his price list. c) Without this agreement, prices may fall drastically – thus, this agreement has a stabilizing effect. 2) Held: for govt – CT applies rule of reason and finds that agreement violates SA. 3) Reason: adherence to agreement had EFFECT of fixing prices. 4) ??? What is lesson from this case.
26

27

C.

THE INTERPLAY B/W PATENTS AND ANTI-TRUST LAW:
1.

Case – US v. General Electric Co. (US 1926) – CJ Taft - p159:
a.

Facts: 1) GE had agreements with retailers of its light bulbs that controlled retail (“resale”) price that consumers paid for light bulbs. 2) Facts sound similar to Dr. Miles where CT said such an agreement was unlawful b/c vertical agmts produce same effect as a horizontal agreement among retailers. Issue: should the retail sellers of the light bulbs here be treated as agents of the manufacturer or owners? Held: for D – CT applies rule of reason and holds K are lawful b/c they are agency Ks Reason:
1)

b.

c. d.

Consignment/Agency Issue:
a)

Line of Reasoning: (1) K is legal b/c it is CONSIGNMENT K (a) There is principal/agent relationship. (b) Thus, there is no resale price maintenance issue: merchandise is simply consigned, GE never parted with title, retailers were agents of GE in selling the light bulbs. (c) This is only unilateral conduct and SA not reach unilateral conduct. (2) Analogous to clerk/EE who sells merchandise in the retail store as an agent. (a) An agent has no power to deal with the product in anyway that is inconsistent with the ownership of the product retained by the manufacturer – p162. (3) Agency K is not violation of SA. This characterization lets CT distinguish Dr. Miles. RULE: “the owner of an article patented or otherwise is not violating the c/l or the AT Act, by seeking to dispose of his article directly to the consumer and fixing the price by which his agents transfer the title from him directly to such consumer” – p163. (1) ??? What does CT mean by “patented or otherwise”? Lurie’s view:
28

b) c)

d)

Lurie says CT is saying there is no existence of K, combo or conspiracy here – this is merely unilateral conduct – thus, not meet first requirement of s1 (2) CT never gets to second requirement of s1 (about restraint of trade). (3) Lurie: but doesn’t s1 say “every K . . . that restrains trade . . . is unlawful” – not matter if K itself is lawful or not - BUT remember CT’s philosophy at the time.
(1)

09-21-01
2)

Patent Issue – p163:
a)

RULE: A can grant a license to B to make and sell the patented item and can require that B only sell the patented item at the price that A sets. Problem with Patents and AT: patents are lawful monopoly – how do we harmonize protections of patent laws with SA? Patents Generally: (1) Definition: gives patentee the right to exclude others from making, issuing or selling the item. (2) Rule once patentee sells patented item: but once patentee sells patented item, he can exercise NO future control over what purchaser may wish to do with it after the purchase. (a) Thus, patentee wants to use licenses to maintain some control.

b)

c)

e.

Notes: 1) Result in this case is consistent with Maple b/c same CT composition.

2.

Other Rules on Patents from VC Problem Set entitled “Patent-Antitrust Problems”:
a.

Definition: gives patentee the right to exclude others from making, issuing or selling the item. Controlling Factors in Analysis: 1) Sale of patented item 2) License to produce patented item 3) License to a patented machine or process that produces an unpatented item Patentee’s right not to use the patent: patentee has exclusive right to make, use and vend the patented product, and this includes the right not to use the patent. Rules when A (patentee) sells the patented item:
1)

b.

c.

d.

Once a patentee makes the patented item and sells it, he can exercise no future control over what the purchaser may wish to do with the item.
29

2) e.

Patentee cannot put a resale restriction on sale of patented item.

Rules when A (patentee) licenses the patented item:
1) 2)

A (patentee) can license B to make the patented item and use it but not to sell it. A (patentee) can license B make and sell the patented item and A can require B to sell the item only at the price A sets. a) Rationale: so long as the patentee could himself do what he is asking of the licensee, he may likewise do by a restrictive license. Patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se. a) Patentee cannot ask for royalties for a period of time after the patent expires as a condition of using the patent before it expires. b) Lurie disagrees with reasoning behind this rule but says it is the rule. c) What patentee can do: (1) Patent owner can charge a flat price for the license that is equal to the sum he would get under the contract provision for post-expiration royalties. (2) Patent owner can charge monthly payments of a set amount that extend beyond the life of the patent. (3) flat price for the license that is equal to the sum he would get under the contract provision for post-expiration royalties.

3)

f.

Cross-License Arrangements: 1) Separate owners of separate patents cannot, by cross licenses or other arrangements, fix the price of all devices produced by them and their licensees. Patents on Machines and Widgets:
1)

g.

Rules when patentee has patent on the widgets: a) Patentee cannot sell widget to purchaser with restriction that purchaser may not resell it. Rules when patentee has patent on machine that makes the widgets: a) Patentee MAY condition the royalty payment on the total # of widgets sold. b) Patentee MAY make the royalty a percentage of the total dollar sales of the licensee’s sale of widgets. c) Patentee MAY NOT require licensee to sell widgets at price stipulated by patentee-licensor. (1) Reason: b/c patent is on the machine, not the widget.

2)

h.

Field Use Restrictions
1)

Any use beyond the valid terms of the license is an infringement of a patent.
30

A (patentee) can license patent to B to produce the patented item for one industry/field but not for another. b) If patentee sells the patented item, he cannot restrict the resale of the item to one field/industry.
a) i.

Exclusive territorial licenses:
1)

Patentee can grant a license and restrict the territories within which licensee can sell the patented item. But if patent is only on process, then patentee cannot limit territories in which licensee may sell product.

2)

j.

Grant back restrictions: 1) Patentee can license others to sell and produce his patented item on the condition that they grant him any improvements that they may develop for the item. a) ??? How is this not a tying arrangement? Conflicting Patents 1) When there are legitimately conflicting claims or threatened interference, a settlement by agreement, rather than litigation, is not precluded by SA – Standard Oil (Ind.) v. US.

k.

3.

Case – Standard Oil (Indiana) v. US (US 1931) – p166:
a.

Rule: when there are legitimately conflicting claims or threatened interference, a settlement by agreement, rather than litigation, is not precluded by SA – Standard Oil (Ind.) v. US. Facts: 1) This hypo is similar to facts of Standard Oil. 2) Facts: a) 2 patents already issued and 2 patent applications are pending b) 4 companies have conflict over ownership, scope and what falls under patent applications – the 4 companies agree to cross-license each other c) Agmt: each released from liability for past patent infringement; each permitted to use patents of any of the others; each of them will be allowed to license others to use its patents; will share equally in royalties of any license agreements. Held: for D – no violation of AT laws here. Reason: 1) CT relies on policy consideration: CT finds it s public interest is best served by allow parties to settle this matter in the way they have.
31

b.

c. d.

e.

Was this a good decision by CT?
1)

In absence of the agreement, what are possible results of litigation? a) Only one patent is valid: public is no better or worse off. b) All patents valid: public is better off b/c competition among 4 patent processes. c) All patents invalid: public is better off b/c free and open competition. BUT CT DID NOT REACH THESE RESULTS.

2)

4.

Note on Patent-Tying “Misuse” Cases:

Lurie did not discuss.
5.

Note on Related Issue of Exclusive Dealing:

Lurie did not discuss.

32

D.

TESTING THE LIMITS OF THE RULE OF REASON:

09-24-01 1. Case – US v. Trenton Potters Co. (US 1927) – Stone - p174:
a. b.

RULE: any agreement to fix prices is per se illegal Facts: 1) Trial court refused to give jury instruction on reasonableness – seemed to adopt a per se approach. 2) D argued this was error. 3) Appeals court: said trial court was wrong. Issue: whether trial judge correctly withdrew from the jury the consideration of the reasonableness of the particular restraints charged. Held: for govt - CT agrees with trial court – price fixing is PER SE illegal. Reason:
1) 2)

c.

d. e.

Policy behind SA is competition – good for public. Any agreement to fix prices, regardless of reasonableness, violates s1 of SA – p176. a) CT cites to Trans Missouri, Joint Traffic and Dr. Miles. CT has to distinguish Chicago Board of Trade – p177: a) CT distinguishes on basis that that case dealt with regulation of board of trade, not an open market. (1) Govt did not make this distinction when it brought suit. (2) Lurie says there is no rational basis for drawing distinction b/w board of trade or open market. b) Remember CT in Chicago Board did not label the conduct as “price-fixing”

3)

f.

Notes: 1) Lesson: shows CT is questioning continuing vitality of rule of reason approach and heading toward a per se approach.

2. Interplay b/w AT and Direct Regulation – the Keogh Case: Lurie did not discuss.

33

3. Case – Appalachian Coals Inc. v. US (US 1933) – CJ Hughes - p179:
a. 1) b.

Facts: Ds form a joint sales agency for all coal.

Held: for D – CT applies rule of reason and finds no SA violation b/c there was no intent and effect was not proved. Reason:
1) 2) 3)

c.

Govt’s argmt: violates SA b/c eliminates competition among Ds themselves. Ds’ argmt: argue that primary purpose of agmt is to increase sale and production. Why did the Ds agree to this agency agmt? a) Depression – price of coal was going down – industry was suffering – but if you increase supply, it generally does not increase prices b) This may affect CT’s reasoning. Crucial sentence: “mere fact that the parties to an agreement eliminate competition b/w themselves is not enough to condemn it” (citing Chicago Board) - p181. a) Seems to be in direct conflict with Trenton Potteries. b) CT says determinations of illegality are based on INTENT and EFFECT. (1) CT in this opinion suggests that intent and effect are relevant and that power is irrelevant CT uses rule of reason b/c this is not price fixing case. Intent Analysis – Ds had no intent to raise prices (or limit production): a) CT notes that no attempt was made to limit production – p183: (1) BUT the facts seem to indicate that Ds were thinking about limiting production. b) CT says Ds were trying to make prices “fairer” – p184 (1) Lurie asks how do you make competition “fairer” – what was unfair about competition before? Lurie says “fairer” usually means engage in activities that will keep the producers in business. c) Ds rely on US Steel to make them look good: (1) Ds say under US Steel we could have joined as one company and that would have been lawful – we have done less that what US Steel did – if what US Steel did was not unlawful, then this cannot be unlawful – p186. (2) CT buys this argument. Effect Analysis – we do not know effect b/c plan has not gone into effect: a) CT indicates that if once the plan goes into effect and it has the alleged effect, then govt can sue again.
34

4)

5) 6)

7)

8)

Isn’t this holding inconsistent with Trenton Potters? a) CT here says this plan does not contemplate or involve “price fixing.” b) Doing same thing it did in Chicago Board of Trade – CT refuses to view conduct as “price fixing” – therefore, do not have to apply a per se approach – instead we can examine it under the rule of reason – look at everything. c) Thus no inconsistency.

d.

Notes: 1) ??? CT seems to say either intent or effect will be sufficient to violate SA. 2) Shows rule of reason approach is still alive and well. 3) Note the impact of the Depression on this decision.

4. Note on Economic Thinking During Depression – p189. Lurie did not discuss.

35

CHAPTER 3 – PER SE RULE AND FOCUS ON MARKET STRUCTURE – 1940-1974:

A.

HORIZONTAL COMBINATIONS IN RESTRAINT OF TRADE
1.

Price Fixing
a.

Case - US v. Socony-Vacuum Oil Co. (US 1940) – Douglas – p192:
1)

Facts: a) ??? What exactly did Ds do? (1) Need to reread the case. b) Facts similar to Appal. Coal – oil companies got together to market and sell gas. c) Oil and gas industry was suffering. Held: for govt – CT applies per se approach b/c this is price fixing case and finds Ds violate s1 of SA. Reason: a) Douglas goes back to Trenton Potteries – per se rule. b) Distinguish Appal. Coal (1) B/c it did not deal with “price fixing” - p202. (2) B/c effect was unknown. c) Distinguish Chicago Board (1) B/c it did not have purpose of effect of price fixing. d) Douglas talks about consistency of rule – (1) “CT has consistently adhered to principle that price fixing agmts are per se illegal” – p203 (2) Lurie makes fun of Douglas’ use of word “consistent.” e) Douglas adopts BROAD definition of what = “price-fixing:” (1) “Any combination which tampers with prices structures is engaged in unlawful activity ” – p204 (2) “They are fixed because they are agreed upon” (3) Power is irrelevant. (4) SA protects against any degree of interference with free market forces. (5) See p201, 203, 204, 205 for exact definition and examples. f) FN#6 is crucial FN: (1) Power is irrelevant to issue of whether D violated s1 of SA. Roberts Dissent: a) This case is nothing like Trenton Potteries.
36

2)

3)

4)

5)

09-26-01
b.

Notes: a) Note Douglas’s pro-SA approach: Lurie says he has one approach – only inconsistent in one regard that we will discuss later. b) So all comes down to whether you call it “price fixing”. c) We only examine purpose and effect when it is a rule of reason case – if it is price fixing cases, then it is per se unlawful and we do not need to look at intent or effect.

Gas Plan Hypo #1 – General Price Fixing: 1) Facts: gas dealers control 73% of gasoline sold in metro area - dealers agree to all sell gasoline at same price - Ds admit the agmt but assert no intent, effect or power 2) Issue: should we grant govt’s motion for summ jdgmt? 3) Held: grant govt’s motion b/c this is classic price fixing. 4) Reasoning: a) Element 1 of s1 of SA is satisfied b/c there is a agmt b) Is element 2 of s1 of SA met? Yes b/c this is price fixing – we do not even need to assess element 2 b/c this is per se unlawful. c) Any reason not to grant govt’s motion? (1) Ds say they do not have power to fix prices but CT in Socony-Vacuum said power is irrelevant. Gas Plan Hypo #2 – Common Sales Agency: 1) New facts: a) Dealers form new corp – MetroGasoline Co. Inc. - all stock is owned by gas station dealers - series of uniform agmts b/w new corp and each of them individually as gas station dealer, each dealer agrees to allow corp to determine on daily basis the price of gas to be sold - effect of new corp – it will act as sales agency for all gas sold - Ds admit agmt but assert no intent, effect or power. 2) Issue: should we grant govt’s motion for summary jdgmt? 3) ??? Held: 4) Reasoning: a) Compare to Appal Coals: (1) This looks a lot like Appal Coals and CT in that case says this was not price fixing. (2) But distinct from Appal Coals b/c Appal Coals did not involve direct price fixing and b/c Appal Coals had not gone into effect yet (CT left this open). (3) Doesn’t decision in Appal Coals seem to be odd since it would not be hard to figure out what effect would be: (a) LURIE says all CT did in Appal Coals was not say it could not tell yet. (b) CT did not say what Ds were doing was lawful. b) CHARACTERIZATION is crucial in these cases b/c CT has repeatedly said price fixing is per se unlawful – to get around this rule, have to characterize behavior as NOT price fixing. c) What happens when plan goes into effect?
37

c.

Fix prices at same level. Achieve same result as Hypo#1 d) If you deny govt motion, what do you want the govt to prove at trial? (1) Prove intent on part of D (2) ??? Judge not have any doubt what effect will be – thus, govt does not have to prove this. e) Ds should point to sentence to remember for Appal Coals – “mere fact that parties to agmt eliminate competition among themselves is not enough to condemn it” - p181 – very helpful to quote this b/c Appal Coals has not been overruled and this quote argues your case very well – at the least this will get you over the motion for summary jdgmt.
(1) (2) d.

Gas Plan Hypo #3: 1) Facts: a) Gas dealers agree to not use curbside price signs - Ds admit they agreed to get rid of price signs and say they did not intend to fix prices, intend to do public service (make neighborhood nicer, safer drivers). 2) Issue: should we grant govt’s motion for summary jdgmt? 3) ??? Held: probably grant motion for summary jdgmt 4) Reasoning: a) Argmt that this is violation of SA: (1) Sugar Institutes (held that adhere to one’s own price list until announce change violates SA) stands for proposition that it doesn’t make any difference what prices are if they have fix price agmt – thus, mere fact that prices are not uniform does not let Ds off the hook. (2) This would fall under Douglas’ definition of “price-fixing” from SoconyVacuum b/c this is “tampering” or “interfering with market forces. b) Argmt that this is NOT a violation of SA – isn’t there some way Ds can do this? (1) Go to governing body and ask them to enact an ordinance prohibiting curbside price signs and then you are just abiding by law. c) Distinguish grocery store example – why don’t grocery violate SA when they do not chose to advertise with signs – b/c they do not have agmt to do it. 5) Legal Advice - get govt to make the no curb-sign regulation - Comments from 0928-01: a) Facts: go to governing body and ask them to enact an ordinance prohibiting curb-side price signs and then you are just abiding by law. b) Issue: (1) Is agmt to seek anti-competitive legislation a violation of s1 of SA? Parker v. Brown does not answer this – see comments on Noerr-Pennington doctrine. (2) Would it be unlawful for dealers, as a group, to seek legislation that would have anti-competitive effect? c) ??? Held: this is probably legal (not violate SA) – see Noerr-Pennington doctrine below.
38

09-28-01
e.

Case - Parker v. Brown (US 1943) – Stone – p210:
1) 2) 3) 4)

RULE Facts Held Reason a) Does CT say state can authorize private parties to engage in conduct that would violate SA absent state authorization? (1) YES - see p213: “We find nothing in the language of the SA or in its history which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature.” (2) NO – see p214: “a state does not give immunity to those who violate the SA by authorizing them [when retailers do it themselves] to violate it, or by declaring that their action is lawful.” b) These can be reconciled (1) SA does not prohibit state from regulating commerce within the state. (2) State cannot authorize individuals to do what the SA prohibits. (3) See Gas Hypo #4 and #5 for distinction. Compare Gas Hypo #4: not allowed b/c violates SA - “a state does not give immunity to those who violate the SA by authorizing them [when retailers do it themselves] to violate it, or by declaring that their action is lawful.” a) Dealers agree to lobby state for legislation - state passes statute that lets gas dealers [them] form gas district and set prices – defense is that they are following state law. b) Probably violate SA. Compare Gas Hypo #5: allowed under SA - “We find nothing in the language of the SA . . . which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature.” a) Dealers agree to lobby state for legislation - state passes statute that, rather than authorizing retailers to form gas district, sets up state agency gas pricing board. b) Probably ok under SA. “Fair Trade” Agreements – p219: a) Miller-Tydings Act amended SA – passed in 1937: (1) Specifically authorized state laws upholding “Fair Trade” agmts - meant states could authorize vertical price fix agmts. (2) Legislation allowed enforcement against non-signers (and lots of people did not want to sign) – CT kept striking down these provisions.
39

5)

6)

7)

1975: Congress repealed the “Fair Trade” provision with the Consumer Goods Pricing Act. (4) In old cases, we will see references to these.
(3) f.

AT Liability for Seeking Regulatory Change – The Noerr and California Motor Transport Cases – p219. 1) ??? RULE: under, Noerr-Pennington Doctrine, an agmt to seek anti-competitive legislation is NOT a violation of s1 of SA. a) Mere Sham Exception. 2) CAVEAT: CT has not equated conduct of subordinate govt unit of state with state itself – only state is sovereign – Lurie says they are not the same. 3) This doctrine is influenced by 1A.

10-01-01
2.

Group Boycotts (or concerted refusal to deal):
a.

Case - Fashion Originators’ Guild Of Amer. v. FTC (US 1941) - Black – 221:
1)

Facts: FOGA, original dress designers/manu, refuses to sell to retail merchants who also buy from style pirates. a) D’s argument: FOGA argues that style piracy is a tort – the tort of unfair competition under state law – FOGA says we are trying to use self-help in prevent this tort – we do not want to be forced to sue – want to protect ourselves. Issues: a) Are concerted refusals to deal unlawful? YES b) Are concerted refusals to deal per se unlawful or must govt prove more than existence of agmt? PER SE Held: for govt – CT applies per se approach to find concerted refusal to deal violates s1 of SA. Reason
a)

2)

3)

4)

Compare Eastern States Retail Lumber . . . v. US (US 1914) – p66: (1) Facts: Wholesalers were also selling lumber at retail, in competition with their retail dealer customers. Retailer dealers agree not to buy from wholesalers who also sell in competition with retailers. (2) Held: for govt – conduct is unlawful. (3) Reason: says individual retail dealer could refuse to buy from any wholesaler but group of retailers cannot create a list and refuse to buy from wholesalers on that list. (4) Note: not clear whether this is per se rule or not.
40

b) c)

CT says this is per se rule. There is no affirmative defense: (1) FTC thought D’s argument was irrelevant – CT agrees. (2) Even if copying were an acknowledged tort, it would not justify the D’s action in combining together to regulate and restrain interstate commerce in violation of SA.

5)

Pharmacy Hypo #1: a) Facts: state statute permit pharmacists to fill prescriptions for trade mark drugs with generic equivalent unless Dr. indicates “no substitute” – suppose Merck (as solo drug manu) refuses to sell any of its trade-marked, patented prescription products to any pharmacist who fills prescriptions with generic equivalents - govt sues Merck under s1 – Merck moves to dismiss? b) Held: no s1 violation b/c s1 requires more than unilateral conduct. c) Reason: (1) Like Colgate – manufacturer simply choosing its own retailers - there is no s1 violation. Pharmacy Hypo #2: a) Facts: drug manufacturers only produce and sell trademarks drugs – do not manufacturer generic equivalents – form an association – at annual meeting, members discuss generic equiv substitution laws, agree to refuse to sell any of their drugs to any pharmacist who engages in substituting less expensive generic equivalents. Govt charges manu assn with violation of s1. Assn admits factual allegations but denies that s1 of SA has been violated. Govt moves for summ jdgmt – should we grant it? b) ??? Held: probably a per se violation like FOGA. c) Reason: (1) No longer purely unilateral conduct – concerted activity that “restrains trade.” (2) This agreement restrains trade by force pharmacists to not use the generic equivalents and thus hurt/reduce competition b/w generic drug manus and proprietary drug manus. Pharmacy Hypo #3: a) Facts: drug manufacturers only produce and sell trademarks drugs – do not manufacturer generic equivalents – form an association – agree to refuse to sell any of their drugs to any pharmacist who engages in substituting a generic substitute which is the same size, shape and color as their trademarked drugs (because this is trademark infringement). Govt charges manu assn with violation of s1. Assn admits factual allegations, denies that s1 of SA has been violated, and asserts affirmative defense that pharmacists are engaged in trademark infringement and the proprietary drug manu are merely seeking to protect
41

6)

7)

b) c) d)

e) 8)

their interests. Govt moves to strike that affirmative defense – should we grant it? Issue: is making the generic equiv in same size, shape and color this trademark infringement? ??? Held: grant govt’s motion b/c this is per se violation Reason: (1) There is no affirmative defense when there is per se rule. (2) Generic drug manu wants to make it look like trademark drug: (a) Reason – this is legitimate reason: if not same shape, size and color, people will think they have gotten the wrong drug – think of Grams, she definitely knows what her drugs look like and will not take the drugs if they do not look like what she thinks they should look like. (3) If the question - whether making the generic equiv in same size, shape and color this trademark infringement – is open, then do we have to deny govt’s motion? See Fashion case – no – it is a per se rule. Notes:

Pharmacy Hypo #4: a) Facts: state trade assn of pharmacists commissioned study to compare generic equiv with trademarked drugs. After getting results of study, assn concludes that generic equiv are not as safe or efficacious as trademarked drugs. Assn urges its pharmacist members not to engage in generic equiv substitution and members agree they will not engage in generic equiv substitution even when DR says it is ok to substitution. b) Issue: is this a violation of s1 of SA? c) ??? Held: d) Reason: (1) Are there 2 classes of competitors? (2) Are state pharmacists seeking to eliminate competition with another class of state pharmacists. (3) Satisfies first element of s1 of SA (4) Where is restraint of trade here? Is any competition being adversely affected? Competition b/w generic manu and non-generic manu. Competition among pharmacists is being affected – any pharmacists could have decided to do this on its own – why did they need to form an agmt? Isn’t this an agmt among pharmacists not to compete on basis of utilizing cheaper generic equiv

b. c. d.

A Note on Standards Setting – p227. Antitrust and the News Business – The Associated Press Case – p228. A Note on Due Process in Exclusion From Organizations – p230.

10-03-01
42

3.

Market Division
a.

Generally:
1) 2)

Definition: division of markets among competitors. 2 types: a) Geographic market division b) Customer market division or class of customer division: (1) Example: Ford sells to Hertz and GM sells to Avis

b.

Case – Timken Roller Bearing Co. v. US (US 1951) – Black – p231:
1) 2)

Facts: Ds agreed to territorially divide world market for sale of bearings. Held: for govt – CT applies per se approach to find horizontal market division is per se unlawful. Reason: a) A fiotori: because if it is illegal to eliminate competition on basis of price, and instead sellers agree not to compete on other basis – in fact, eliminate all competition b/w sellers – this includes the elimination of competition on the basis of price. Reed Concur: Jackson Dissent: result of CT’s ruling will restrain more trade than it frees. Notes: a) Open question: is vertical market division unlawful?

3)

4) 5) 6)

c.

Fixing Maximum Prices – p236.

Lurie did not discuss. 1) ??? Maximum price fixing is also illegal per se – p237.
d.

??? Intra-Enterprise Conspiracy – p237.
1) 2)

See hand notes. New Rule: you cannot have s1 violation b/w wholly owned business entities.
a)

Rationale: the subsidiaries legally and practically CANNOT disagree (therefore there is no need for an agreement). (1) SA does not prohibit unilateral conduct.
43

(2)

Coordinated activity of a parent and its wholly owned subsidiary must be viewed as that of a single enterprise for the purposes of s1 of SA. (a) Thus, such conduct will be viewed as unilateral. (b) Example: Prez of GM calls Prez of Chevy and tells him to set price same as Caddy - President of Chevy cannot and will not say “no” to President of GM.

3)

Old Rule: s1 of SA could be satisfied by agmt to fix prices by separately incorporated units of a wholly owned business. a) Definition: (1) A (GM) owns 2 companies (company B (Chevy) and company C (Caddy)). (2) B and C sell same product, agree not to compete on base of price (3) Is this an “agmt” within meaning of s1 of SA? (4) ??? Does it matter whether subordinate units are separate legal identities or merely divisions of mother corp? (5) Usually occurred when there was impact on something outside the entity. b) This rule was overruled in Cooperweld Corp v. Independence Tube Corp (US 1984) – p238: (1) This case ended intra-enterprise conspiracy doctrine. (2) Left open question of what you do when subsidiary corps are not 100% wholly owned.

e.

Conscious Parallelism – p238.

Lurie did not discuss.
4.

Cases Testing the Limits of the Per Se Rule:
a.

KEY CASE – US v. Container Corp of America (US 1969) – Douglas - p240:
1)

Facts: a) Exchange of price info but no agreement to adhere to price schedule (unlike Sugar Institute where there was such an agreement). b) Note that Ds formed this agmt to get around problem of lying customers (who say X will sell it to me for less) - b/c Ds cannot believe customers on price quotes, they form agmt to tell each other price quotes. c) Why would sellers agree to this – b/c it will stabilize prices. Held: for govt – not clear whether CT applies rule of reason or per se approach to find that this agreement violates s1 of SA. Reason:

2)

3)

44

a)

Accord to Lurie, Douglas never clearly says whether the exchange of price info is per se unlawful or if this is rule of reason?
(1)

“Inferences were irresistible” (same language from Socony-Vacuum) that exchange of info had an “anti-competitive” effect on industry . . .

b)

This agmt for info exchange violates SA b/c stabilizing prices violates SA:
(a)

Agmt stabilizes prices by slowing rate at which prices fall rather than letting them fall precipitously:  If you do not know what price your competitor charges and you have to guess and you guess too low, then prices fall precipitously – you only want to lower your price to the amount necessary to make the sell – just a little lower than what your competitor is asking –  If you have agmt to exchange info, prices will fall slowly rather than precipitously. Lurie says that all of govt’s evidence actually does show that the effect of agmt was to stabilize prices at a slowly falling rate. RULE: p242 stabilizing prices as well as raising them is banned by SA (citing Socony-Vacuum). RATIONALE: stabilization is but one form or “interference” – cites to American Column and Lumber.

(b)

(c)

(d)

c)

Govt’s wins b/c it uses an economic argmt – p244: (1) Govt shows that entry is easy and the product is fungible (2) Starting price in industry is above a competitive price: (a) Price was greater than necessary to have a normal return (b) This price induced entry (c) The price induced expansion by existing firms. (d) Supply at these prices exceeded demand at these prices, causing prices to fall – you would expect them to fall to the equilibrium point.

4)

Fortas Concur: a) Does not think the exchange of price info = per se violation (1) “I do not understand the Court’s opinion to hold that the exchange of specific info among sellers as to prices charged to individual customers, pursuant to mutual agmt, is a per se violation of SA.” b) Absent per se violation, proof is essential for govt to win. c) Believes govt proved its case. Marshall Dissent: a) This is not per se case
45

5)

b) 6)

Govt has not proved its case

Note: a) Is this a per se case or did govt show a restraint of trade? (1) Douglas is getting as close to saying this is per se case without expressly saying that. b) THEME: when we get to point where we are trying to determine whether there is restraint of trade and it is question of proof and question of judgment, reasonable minds are going to disagree. c) Douglas also wrote Socony-Vacuum and painted very broad brush – any tampering with prices is unlawful. (1) Lurie says Douglas generally thinks everything is per se (with one exception). (2) Lurie does not think Douglas could muster a majority to say that the exchange of price info is per se unlawful so he muddies the water to get majority. d) Note how Douglas deals with other cases and distinguishes them (1) THEME: when CT distinguishes prior cases for irrelevant reasons, it elevates the irrelevance to being the most important factor b/w legality and illegality. (2) See p240: “this case is unlike any other case we have decided . . .” (a) Reminiscent of Socony-Vacuum where he distinguished Appal Coal (3) Distinguishes Sugar Institute: (4) Distinguishes Maple Flooring: as statistical info which does not identify particular customers. (5) Distinguishes Cement case: elevate distinction, gives rise to assertion that there is a “controlling circumstances doctrine” e) Sign of effective cartel = a mechanism to detect cheating and to punish cheating.

b.

Hypo – same as Container Corp: 1) Facts: Govt alleges agmt b/w group of D who control 90% of containers in S.E. part of US. Agmt is that they will exchange price info upon request re: specific sales to identified customers. Ds admit the existence of the agmt but denies that it is restraint of trade and denies that it violates s1 of SA. Govt offers not additional evidence – moves for summary jdgmt a) If you grant it, what are you saying? You are saying mere existence of agmt is per se unlawful. b) If you deny it, what are you saying? You are saying mere existence of agmt is NOT unlawful – rule of reason. 2) Facts Revised: assume that ct denies motion, tells govt to bring on its proof. Govt offers evidence the following: (a) No uniformity of prices; (b) Prices have been falling continuously over period of agmt; (c) demand for product is increasing; (d) entry into industry is easy; (e) 60% increase in the # of manu; (f) 100% increase in # of plants. Ds move for directed verdict on ground that govt has failed to prove its case.
46

3)

Held: this is unlawful b/c these facts are same as Container Corp.

10-05-01
5.

Case - US v. TOPCO Associates, Inc (US 1972) – Marshall – p247
a. b.

Need to read. Facts
1)

General Facts: a) Regional supermarkets form a cooperative to enable smaller supermarkets to compete with larger supermarkets that were big enough to have their own brands – smaller supermarkets banded together so that they could all have TOPCO brands. b) ??? Competition allegedly eliminated in this case is only competition with respect to TOPCO brands – changes this from being horizontal market division situation to being a vertical market situation. c) Does fact that TOPCO is owned by small supermarkets matter? (1) If horizontal market division is per se unlawful (Timkin) and if vertical price fixing is per se unlawful (Dr. Miles), then should vertical market division be per se unlawful – CT distinguishes it. (2) What if TOPCO is not owned by the smaller supermarkets but is a separate business and it decides that it will sell to regional supermarket chains that are not in competition with each other? It might be allowed to do this under Colgate ??? Compare to Timkin: a) Like Timkin where CT said horizontal division of markets is per se unlawful. b) Unlike Timkin, accord to Lurie, b/c this is not a horizontal division of markets case. (1) but CT says this is a horizontal market division case.

2)

c.

Held: for govt – CT applies per se rule to find that this agreement violates s1 of SA b/c it = a horizontal market division case. Reason: horizontal market division (territorial restrictions) are per se unlawful and this is a horizontal market division case.
1)

d.

D’s argued that this was a vertical territorial market division and thus should be treated differently than a horizontal market divisions.
a)

District court agree with TOPCO - thought this was a vertical restraint of trade.
47

b)

TOPCO argued that effect of restricting intra-brand competition enhanced inter-brand competition. (1) TOPCO says it needs territorial division to compete: association increases competition by enabling it to compete with larger regional chains. CT rejects this argument. (1) But it comes back in later cases and is accepted.

c)

2)

CT says district court erroneously treated this like a rule of reason case.
a)

CT thinks this is clearly a horizontal restraint and per se a violation of s1 of SA – p250. CT says per se rules are necessary b/c of judicial competence concerns and deference to Congress: (1) Judicial competence: courts are ill-equipped and ill-suited to weigh whether impact of restricting intra-brand competition enhanced inter-brand competition – p251top. (2) Deference to Congress: if decision is to be made to sacrifice competition in one part of the economy for greater competition in another portion, [it] is a decision that must be made by Congress – p251bottom.

b)

3)

CT’s misstatements according to Lurie:
a)

CT says it uses the rule of reason when deciding “most” AT cases – p250. (1) Lurie says this is a huge misstatement: at this time, only rule of reason type cases were like Maple Flooring. (2) This misstatement will be repeated later after significant change in CT’s composition and philosophy. “It is only after considerable experience with certain business relationships that courts classify them as per se violations of the SA” p250. (1) Lurie says nonsense: CT applies per se the first time it sees certain business relationships. (2) Bootstrap Problems: (a) Lurie says problem with making stmts like this is that lawyers will quote them later – bootstraps – we end up relying on stmts, have a whole body of law, which has absolutely no support – look at AT law today, this stmt is now true (even though it was a lie at the time it was said) – today there is very little that is per se unlawful.

b)

e.

CJ Burger Dissent:

48

Burger buys the argument that vertical market territorial divisions could have different effect than horizontal market divisions 2) Courts have the ability to engage in weighing and balancing process and it is the duty of the courts to do this.
1) f.

Notes
1)

Marshall wrote the dissent in Container Corp and the majority in TOPCO: a) Why he rejects rule of reason approach (Lurie agrees with this): (1) AT laws should be based on conduct, not someone’s (an individual judge’s) evaluation of ultimate impact/effect. (2) Business Reliance Concerns (a) Very difficult to counsel a client if you do not know what answer is. (b) If legality or illegality is ultimately going to turn on what some court decides several years later, how is any business purpose going to conduct his business. (3) Reasonable minds differ: reasonable minds are going to view the same evidence differently. (4) Remember if you guess wrong, you are liable for mandatory treble damages and reasonable attorney fees. ??? How do you define whether case is vertical or horizontal market division? a) 2 ways to determine: (1) ??? Horizontal if . . and vertical if a buyer seller relationship (a) Applied: this is horizontal (2) Horizontal if effects interbrand competition but vertical if effects intrabrand competition. (a) Applied: this is vertical Court will not entertain, in a horizontal market division case, the notion that the elimination of intra-brand competition enhanced inter-brand competition, and thus overall promoted competition in market place. Big Question: should this be refereed to as horizontal market division case (as Court treated it) or a vertical market division (as Court refused to treat it)?
a)

2)

10-08-01
3)

4)

Background: (1) Horizontal price fixing is per se unlawful b/c effect = elimination of competition among competitors (not necessary to prove restraint of trade). (2) Vertical price fixing is per se unlawful b/c leads to same effect as horizontal price fixing (Dr. Miles). (3) Horizontal market divisions are per se unlawful b/c same effect as horizontal price fixing – elimination of competition among competitors.

49

b)

??? Vertical market territorial divisions could have different effect than horizontal market divisions
(1)

Compare market division by Coke (does not eliminate all competition b/c retailers carry more than one brand) and market division among supermarkets in area (no competition with respect to any of the brands or the products that supermarkets carry) If retailer carried only one brand, then there might be same impact D’s argue that elimination of intra-brand competition has a pro-competition effect on enhances competition with that other brands ??? ??? Case - White Motor Co. v. US (US 1964) – Douglas - p382: (a) Facts: D restricted competition among its retailers, argued that elimination of intra-brand competition enhanced inter-brand competition, and thus overall promoted competition in market place. Govt took per se approach to this case. Trial court granted govt’s motion for summary judgment. Ds appealed. (b) Held: for D but CT said it did not know enough to determine whether per se or not. (c) Reason: Douglas, for majority, did not completely buy D’s argument but said CT was willing to entertain the argument:  “we do not know enough of the business stuff out of which these arrangements emerged to know whether they stifle or promote competition – we need to know more about them.”  CT reversed the granting of summary judgment – CT did not say in White Motor that vertical territorial arrangements should be examined under rule reason – CT merely said it did not know enough at that time to determine whether vertical territorial arrangements should be examined under rule reason or per se approach. CT viewed Sealy as horizontal market division b/c of ownership - p254. This issue will come up later in Continental TV v. Sylvania (US 1977) – p495.

(2) (3)

(4)

(5) (6)

6.

Lurie’s Summary:
a.

Horizontal price fixing is per se unlawful. 1) To get around this rule, CT char issue NOT as price fixing. Vertical price fixing. 1) ??? Definition: 2) RULE: per se unlawful
50

b.

3) 4)

Rationale: effect of VPF was same as HPF arrangement Exceptions in “resale price maintenance area” where CT unwilling to say it is per se unlawful: a) Consignment arrangement: sale was unilateral on part of manu to ultimate consumer by means of agents. (1) So far as cases we have looked at to this point – this may change later – valid consignment agmt is not violation of s1 of SA (not b/c there is no restraint of trade) but b/c there is no contact, combo or conspiracy.

c.

Do these things fall under Vertical Price Fixing? 1) Colgate scenario is OK b/c this is unilateral conduct 2) CT unwilling to apply SA in area of state competition – Parker: may shield state activity – states cannot shield private action but state OK if it does the action. 3) Advocacy for anti-competitive legislation - Noerr-Pennington doctrine: a) Not a violation for competitors to get together to seek favorable legislation that is anti-competitive. 4) Boycotts or concerted refusals to deal a) We may make distinctions later b/w these 2 labels but not now. b) Action among class competitors seeking to eliminate another class of competition that they faced was per se unlawful. a) Even if conduct they are seeking to eliminate is tortuous illegal conduct – cannot be an extra governmental entity.

51

B.

MONOPOLIZATION:
1.

Generally
a.

Section 2 of SA prohibits 4 things:
1) 2) 3) 4)

Monopolization by a single entity (we will focus on this one). ??? Conspiracies to monopolize Attempts to monopolize

b.

Thus, very important to determine what are elements of this offense
1) 2) 3)

B/c one may be a monopolist without being in violation of s2 of SA One may be guilty of monopolization without possessing a monopoly. Because s2 aimed at “monopolization,” not necessarily “monopoly,” we have to define terms very accurately:
a) b)

Monopoly: a single producer of product. Monopoly power: power to control price [or exclude competition] (courts’ definition) – Lurie says more important part is power to control price Monopolization: what is outlawed by s2 – requires 2 elements: (1) Possession or acquisition of MONOPOLY POWER in relevant market  Monopoly power has to be defined within the relevant market in which the D possesses the power to control price.  Relevant markets have 2 dimensions  Product dimension  Geographic dimension  When we talk about relevant markets, we are really talking about a fraction – see class notes 10-08-01 (2) Some CONDUCT that enables D to either acquire or maintain that monopoly power.  Deliberate conduct aimed at excluding others (either kicking out or keeping out).

c)

c. d.

Go through X-Y chart for Monopolization: see notes 10-08-01 ??? Objections to Monopolization 1) Lose some consumer surplus and prod
52

10-10-01
2.

Case - US v. Aluminum Co. of America (ALCOA) – (CA2 1945) L. Hand – p255:
a. b.

Court: while it is CA2 decision, it is for all intents and purposes a CT decision. Facts: ALCOA had many subsidiaries, engaged in practices that lead it to enter into decree with govt in 1912 to stop certain practices. Held: for govt - D violated s2. Reason:
1)

c. d.

Section 2 Analysis:
a)

Possession or acquisition of MONOPOLY POWER in relevant market (1) What constitutes the possession of monopoly power here? How is power to control price of aluminum determined here? (2) RULE: if you have a sufficient percentage share of the relevant market controlled by D, courts will assume you have the power to control price. (a) Where does Hand get the principle that 33% is not enough, 64% is doubtful and 90% is enough? He makes it up – no citation – p258. (b) Percentage share of market = surrogate for issue of whether D has power to control price of product in relevant market. (c) B/c ct cannot figure out whether D has control, use market share and assumption. (3) Determining market share fraction is arbitrary, subject to manipulation. (a) Ultimate outcome will turn on definition of RM:  Determination of RM is a matter of argmt as to what products you include in the denominator  Depend on final judges who view the matter  Parties can alter outcome of case by deciding what is relevant market. Some CONDUCT that enabled D to either acquire or maintain that monopoly power (1) Assume first element of s2 is met. (2) Conduct - 1912 Consent Decree: (a) Terms: ALCOA entered into consent decree with govt in 1912 – the decree found violation of s1 b/c ALCOA’s contracts with electricity producers required producers not to sell electricity to competitors (only purpose was to disadvantage competitors). (b) This might have colored Hand’s view of ALCOA but legally this conduct is irrelevant.
53

b)

(3)

Conduct = stockpiling supplies to create demand. (a) REBUTTABLE PRESUMPTION RULE: possession of monopoly power creates a rebuttable presumption of violation of s2 unless D can meet “thrust upon”/”passive beneficiary” exception – p264, 265 (b) Hand says intent is irrelevant. (c) What Hand is saying is bad just seems like good business – but he is saying that is enough.

2)

CT found that ALCOA had monopoly power and engaged in conduct (b/c did not meet exceptions). Remember that Marshall, in TOPCO, said courts did not have ability to assess these things.

3)

e.

Notes: 1) MONOPOLY POWER: whether or not monopoly power exists rests entirely upon a “game” of fiddling with the numbers – “relevant” market is easily manipulated. 2) CONDUCT: there is rebuttable presumption 3) Impact on Microsoft: wasn’t there sufficient precedent for Judge Jackson’s finding that Micro monopolized in violation of s2 and may also have violated s1.

3.

International Side of Alcoa Case – p270.

Lurie did not discuss.
4.

CT Affirms Judge Hand – The American Tobacco Case – p270.

Lurie did not discuss.
5.

CT Refines Its Test for Monopolization – US v. Griffinth – p272.

Lurie did not discuss. 10-12-01
6.

Case - US v. United Shoe Machinery Co. (D. Mass. 1953) – Wyzanski - p273:
a.

Facts: D manufactured shoe machinery – leased it to shoe makers and provided repair service on it. Held: for govt – D violated s2 of SA.
54

b.

c.

Reason:
1) 2)

MONOPOLY POWER: met b/c they have sufficient percentage of RM. CONDUCT: focus of this case
a)

At what point does mere possession of monopoly power become engagement of monopolization? What is bad about free repair service? (1) In this industry, that behavior (that may be OK otherwise), may have created barriers to entry by competitors – leads to exclusionary effect – p276. (2) Example: (a) Company A sells cars and provides free repair service. Mr. X has repair service but no one comes b/c Company A provides it free, so he closes his shop. Company B tries to open car shop but only to sell cars, not provide repair service. He cannot sell cars b/c there are no independent repair services - Company B will not be able to sell cars if customers need repair services – Company B cannot enter business just to manu and sell cars, have to also provide repair services and this might be too expensive, prohibitive to entry – Provision of repair services acts as barrier to entry. What is so bad about leases? (1) No second hand market arises – no repair market arises - p276. Aren’t these practices just good business? (1) CT says no evil motive required – “honestly industrial” - p277 ??? 3 approaches to s2 violations (citing CT precedent):
(1)

b)

c)

d)

e)

If violate s1 of SA, violate s2: (a) Narrow approach. (b) Definition: if a firm has acquired or maintained a power to exclude others as a result of using an unreasonable restraint of trade in violation of s1 of SA, then firm has violated s2 as well – p278. Douglas’ approach from Griffith – p278. (a) Middle approach. (b) Definition: a firm has monopolized in violation of s2 if it . . .  Has the power to exclude competition; AND  Has exercised it, or has the purpose of exercising it. (c) Lurie says that court here changes the character of Douglas’ opinion in Griffith

(2)

55





Lurie tells us about Douglas’ inconsistent stmt in Griffith: possession of monopoly power is itself condemned under s2 provided it is coupled with . . . Lurie points out that it is inconsistent to say something itself is in violation provided it is not by itself.

(3)

Alcoa
(a) (b)

Broad approach. Definition: mere possession of monopoly power raises rebuttable presumption of monopolization unless D shows he did not seek monopoly power (that it was thrust upon him, could not avoid it).  It will be difficult for D in this case to meet this exception.

f)

“Concentrations of power, no matter how beneficently they appear to have acted, nor what advantages they seem to possess, are inherently dangerous” - p281. (1) Court seems to be suggesting that bigness in and of itself is bad.

d.

Notes:
1)

Weight of this opinion: this opinion carries more weight than mere district court opinion b/c CT has endorsed it. Extremely dangerous for company to possess or acquire monopoly power a) Why? b/c it is easy, for ct that is inclined to do so (this is why philosophy of judges is so crucial), to find D has monopolized in violation of s2 of SA. b) Example: given these cases, easy to find Microsoft violated s2. If resolution of second element (conduct) is easy, it makes resolution of first element (monopoly power) very important

2)

3)

7.

Case - US v. E. I. DuPont De Nemours & Co – (US 1956) - Reed – p287.
a.

General Background: 1) If resolution of second element (conduct) is easy, it makes resolution of first element (monopoly power) very important. 2) Definition of RM will control whether or not there is monopoly power. 3) ALCOA shows one can play games with RM. Facts 1) D produced 75% of “cellophane” sold in US 2) Cellophane = less than 20% of all “flexible packaging materials” 3) Cross-elasticity.
56

b.

c.

Held: for D – no s2 violation b/c D not have monopoly power in RM b/c relevant product market is “flexible packaging materials” (b/c are all good substitutes for “cellophane”). Reason:
1)

d.

MONOPOLY POWER:
a)

If RM is “flexible packaging materials” market, then D not have monopoly power: (1) b/c D cannot control price of cellophane b/c competes with other “flexible packaging materials”. (2) Cellophane = less than 20% of all “flexible packaging materials” If RM is “cellophane” market, then D does have monopoly power. Test – look at cross-elasticity of demand: whether one can control price depends on whether there are reasonable close substitutes – substitutes to which consumers can turn if the alleged monopolist raises his price – cross-elasticity of demand - p287-88. ??? Factors to look at in determining cross-elasticity:
(1)

b) c)

d)

Have to look at end use of product: (a) Lurie asks is “cellophane” really in same market as “aluminum foil”? (b) For some uses the two may be perfectly good subs for each other; for other uses, the two are not substitutes at all - thus, may want to look at something besides substitutability. (c) Examples:  Aluminum foil is not a substitute for cellophane at all at the fresh meat counter at supermarket.  Cellophane is not a substitute for aluminum for frozen oven dinners Have to look at infrastructure changes: (a) Milk example - will the dairy that packages the milk readily shift from glass to paper due to a change in prices. (b) You not only have to look at substitutability but also at how easy it is for producer or seller to switch from glass to paper (change machinery). (c) The more difficult it is to shift, the less likely the product is a good substitute. Applied here (a) No cross-elasticity of men’s shoes, women’s shoes and children’s shoes but does mean there is no market (Lurie used this to show that sometimes cross-elasticity does not work to define a market).
57

(2)

(3)

e) 2) e.

See highlights – p290-91

CONDUCT: we do not really get into this element in this case.

CJ Warren Dissent: 1) Agree as to law but clear disagreement as to whether or not these products make up same market – this is why philosophy, attitude, opinions of judges are so important – p295. 2) Denies cross-elasticity: a) Dissenters point to extraordinarily high price of cellophane: (1) “buyers . . . would have bought cellophane in increasing amounts . . . if close substitutes were available from at one-seventh to one cellophane’s price” p296. b) Lurie suggests that the significant price difference (b/w cellophane and other products in allegedly RM) shows these are not good substitutes. Notes
1) 2)

f.

There is significant criticism of cross-elasticity test – no accurate measure. Other examples:  Coke raises prices, if purchases willing to shift to Pepsi, then they are close substitutes, then Coke cannot control price.  Coffee – is tea a close substitute for coffee?

8.

Tailoring a Market Definition – The Grinnell Case – p300:

Lurie did not discuss.
9.

Unilateral Refusal to Deal as Section 2 Offense – the Lorain Journal and Otter Tail Cases – p301:

Lurie did not discuss.
10.

Attempted Exclusion By a Patent Holder – A look at the Walker Process Case – p302:

Lurie did not discuss. 10-15-01
11.

Case - Utah Pie Co. v. Continental Baking Co. – (US 1967) – White - p303:
58

a.

Facts 1) Seems like odd place for this case b/c this is really a Robinson-Patman Act case. 2) Predatory behavior/pricing is relevant not only to s2 monopolization cases but also s2 Clayton Act price discrimination case a) Definition: conduct aimed at destroying competitors – a way to do this is to charge prices below cost. b) See chart in hand notes (from 10-12-01). c) Geographic Price Discrimination – primarily line injury - see chart in hand notes from 10-15-01:
A B Company 1 charges high price in Territory A and low price in Territory B.

??? Problem in prove primary line injury is that injury must be result of discrimination in price (difference in price) - have to show that price discrimination and not simply the lower price that causes the injury. (2) Theory to address this problem: (a) Assume that high price in territory A subsidizes and makes possible the low price in territory B. (b) To win, one must show that lower price that is being charged is a predatory price. (c) If it is below cost, one can assume that this is a predatory price (d) Difficult to identify below cost pricing from:  accounting standpoint (no firms make a single profit and there are usually common costs with other products) and  economic standpoint (how to distinguish Marginal Cost [MC] from Average Cost [AC]).
(1)

b. c.

Held: for P – D violated of s2 of CA. Reason:
1)

Problems: a) Difficult to determine if anything was wrong b/c P was not driven out of business.
59

b)

Can usually establish direct costs but hard to establish overhead costs (b/c these are usually shared with other products).

2)

Factors indicating predatory pricing: a) If the price is less than direct cost + allocation for overhead cost, indicates predatory – p308 b) Anytime there is behavior that may be called “reprehensible,” this is bad indication for violation of SA – example is what Pet did – sent spy in to competitor – p307. c) Pet is sustaining losses as result of its pricing at this time b/c Pet is selling below cost to drive competitor out of business, or to force competitor to raise prices. d) Entry forestalling price. e) See chart on hand notes for 10-15-01 f) Less effective competitive force – p308 Principles – p309: a) Sellers may not sell like goods to different purchasers at different prices if the result may be to injure competition in either the sellers or the buyers’ market unless such discriminations are justified as permitted by SA. CT does not find any of Ds’ arguments persuasive: a) Market for frozen pies was growing throughout this time b) P did not go out of business CT’s new approach: Act reaches price discrimination that erodes competition as much as it does price discrimination that is intended to have immediate destructive impact – p310.

3)

4)

5)

d.

Stewart Dissent: 1) Majority has fallen into error of reading Robinson-Patman Act as protecting competitors, instead of competition - p310 a) This is commonly echoed sentiment b) Lurie says courts use this stmt incorrectly at times – says to watch for this sentence and see whether it makes sense in the context in which it appears. c) This stmt is true in certain situations: each competitors has a one % market share, and one competitor was driven out, there will no impact on competition. d) This stmt may not be true b/c act must be concerned with competitors b/c without competitors there is no competition. Notes: 1) Very controversial case. 2) Most commentators do not like Robinson-Patman Act b/c it is inefficient b/c it perpetuates small businesses at cost of consumer. 3) Represented the extent to which CT will go to find a violation of CA – shows mood of CT at time.
60

e.

4)

Need some exclusionary conduct to meet CONDUCT element of s2 of SA: predatory conduct/pricing will suffice to establish the conduct element.

12.

A Note on Identifying Predatory Pricing

Lurie did not discuss.
13.

A Note on the Idea Of Shared Monopoly

Lurie did not discuss.

61

C.

VERTICAL ARRANGEMENTS PERCEIVED AS EXCLUSIONARY

10-17-01  Generally
a.

Vertical arrangements: involve agreements, arrangements b/w firms that are not competitors but rather are at different levels in the distribution process. 1) Less direct effect: the theoretical impact on competition is less direct. 2) Kinds of vertical price fixing: a) Exclusive Dealing b) Tying Arrangements 3) Rationale for finding these unlawful: courts believe these arrangements have an exclusionary effect that helps firms obtain or maintain monopoly power. Ds Argument: that such arrangements have a pro-competitive effect. Relevant AT provisions: both s1 of SA and s3 of CA come into play in these cases.

b. c.

1.

Tying Arrangements:
a.

Tying Arrangements Generally:
1)

Definition: in order to buy item A, also have to buy item B. a) To prove an unlawful tying arrangement, there must be 2 separate products (tying product and tied product) – some of the cases deal with whether this is 1 or 2 products. b) Examples: (1) Is hotdog 1 or 2 products? Is car 1 or many products? (2) P brought suit against Ford b/c if you bought a Ford and did not buy a radio from Ford, it did not come with the knock-out dashboard – shows how this can be tricky issue of determining what products are. Test for unlawful tying arrangement: whenever seller has sufficient power in the market for the tying product to appreciably restrain trade in the market for the tied product AND a not insubstantial amount of interstate commerce is affected. a) P must prove that tying arrangement: (1) Has the effect of a tendency toward creation of monopoly OR a tendency toward substantial lessening of competition in some line of commerce; AND (2) A not insubstantial amount of interstate commerce is affected. Three ways to reach: a) s1 of SA as a restraint of trade.
62

2)

3)

b) c)

s3 of CA is aimed specifically at tying arrangements. FTC under s5 as unfair method of competition. (1) ??? When can FTC bring actions? (2) Broader scope: FTC may go after activities that violate spirit but not letter of s3 of CA under s5 of FTCA.

4)

Usually considered “bad” b/c they have 2 effects: a) Force buyers to buy product that they do not want. b) Take business away from competitors who are unable to impose same kind of tying arrangement. How does a tying arrangement work to advantage of company that imposes it? a) ??? It is NOT possible to make more money by tying 2 products together than by selling them separately. (1) Hypo: only 1 vendor sells hotdogs and rolls but 2 vendors sell rolls. (2) This does not hurt the consumer: (a) Does it hurt the consumer? Will consumer have to pay more to buy hotdog and roll from vendor? (b) Many say yes b/c that vendor has a monopoly. (c) Others say NO b/c hotdog/roll vendor cannot get more by tying the 2 together than he could by exploiting his monopoly for hotdogs (Lurie agrees with this view). (d) See hand notes for 10-17-01

5)

2.

Tying Arrangement Hypo with Proposal #1:
a.

Facts: LiquidAire Corp produces industrial gases, one of products is O2 – no patent. Spends lots of $ in R&D for new uses for its products. It developed new superior, desirable waste-water and sewage treatment process which utilizes oxygen and obtains a patent on the process. They want to license industrial firms and municipalities to use their process. Goal is to sell O2 that will be used with utilization of patented process. Sales dept of corp wants to be sure than any licensees will buy all the O2 they need from company – come up with 3 proposals – Proposal #1 - Nominal monthly royalty and specific provision that says licensee must purchase all O2 from corp as long as price does not exceed price of O2 elsewhere. ??? Held: 1) Probably be a violation of s3 of CA. 2) What about s1 of SA? 3) What about FTC? Reason 2) Is the mere existence of a tying arrangement unlawful? 3) Is this violation of s1 of SA? 4) Is this violation of s3 of CA? UNCLEAR
63

b.

c.

5)

Test Applied: Is this violation of s5 of FTCA?
a)

3.

Tying Arrangement Hypo with Proposal #2 & #3:
a.

Facts: LiquidAire Corp produces industrial gases, one of products is O2 – no patent. Spends lots of $ in R&D for new uses for its products. It developed new waste-water and sewage treatment process which utilizes oxygen and obtains a patent on the process. They want to license industrial firms and municipalities to use their process. Goal is to sell O2 that will be used with utilization of patented process. Sales dept of corp wants to be sure than any licensees will buy all O2 that they need from company – come up with 3 proposals – Proposal #2 - substantial monthly royalty not extend beyond life of patent with no requirement that O2 be purchased from corp. Allow licensee a dollar for dollar credit to be used against royalty for every dollar’s worth of O2 that licensee buys from corp. Held: probably a violation of s3. Reason 1) Is this violation of s1 of SA? 2) Is this violation of s3 of CA? MAYBE – b/c same result as Proposal 1. a) D’s argument: this is not a tie b/c no requirement. b) BUT can argue that result is same as Proposal 1: consumer will buy from LiquidAire since offer is too good to refuse. (1) If consumer wants process and you are charging competitive price for O2, same result is achieved as Proposal 1. 3) Is this violation of s5 of FTCA?

b. c.

4.

Tying Arrangement Hypo with Proposal #4:
a.

Facts: LiquidAire Corp produces industrial gases, one of products is O2 – no patent. Spends lots of $ in R&D for new uses for its products. It developed new waste-water and sewage treatment process which utilizes oxygen and obtains a patent on the process. They want to license industrial firms and municipalities to use their process. Goal is to sell O2 that will be used with utilization of patented process. Sales dept of corp wants to be sure than any licensees will but all O2 that they need from company – come up with 4 proposals – Proposal #4 – if consumer buys a certain quantity of O2 from LiquidAire, corp will give consumer a free license to use its patented process. Held Reason 1) Problem b/c this proposal still achieves same result as first proposal.
64

b. c.

But if you say no, then you are saying SA and CA prohibit corps from giving something away for free (this seem illogical). a) When you own something (patent), can’t you put conditions on its use? 3) ??? Maybe go back to Proposal 1 – maybe it is not unlawful. 4) Problem: corp is using its legal monopoly in process to establish an illegal monopoly in O2 – no b/c corp will only get a monopoly in O2 used for this process. 5) There are other processes/ways to treat waste water and sewage
2) 5.

Case - International Salt Co. v. US (US 1947) – Jackson - p316:
a.

Facts: 1) D has patent on machine, in order to lease the machine, consumer had to buy salt they would need from D. 2) D admitted the tying arrangement. 3) Govt moved for summary jdgmt. 4) District Court granted summary jdgmt. 5) D argue this should be rule of reason case not per se. ??? Held: for govt – CT applies ____ approach to find that this arrangement violates s1 of SA and s3 of CA Reason: 1) For competitor to get the business, competitor had to go below D’s price; for D to get the business, D only had to meet competitor’s price. a) Provision was similar to hypo – could buy salt elsewhere if cheaper. . 2) CT seems to be saying tying arrangements are per se unlawful. a) ??? This seems to be different from what Lurie was saying - we will come back to this.

b.

c.

6.

A Note on Why a Firm Might or Might Not Want to Engage in Tying – p320.
a.

Most common reason = gives the manufacturer the ability to charge more to larger users of the machine than to lesser users. Quality control argument.

b.

7.

Exclusive Dealing:
a.

Distinguish Exclusive Distributorship: 1) Exclusive Distributorship: manu says to retailer/distributor “you will be my exclusive distributor” – we will not be talking about this now.
65

2)

Exclusive Dealing: manu says to retailer/distributor “you will sell my product but not competing products from other manufacturers.”

10-19-01
b.

??? Test for Exclusive Dealing: it is unlawful under s3 for a seller to make a sale on the condition that the purchaser or lessee shall not use the goods of a competitor where the effect of such a sale may be to substantially lessen competition or tend to create a monopoly in any line of commerce. 1) Elements: a) Existence of sale or K with exclusive dealing provision; AND b) Effect may substantially lessen competition or tend to create a monopoly. (1) Qualifying clause of s3 (aka effects clause) is satisfied by proof that competition has been foreclosed in a substantial share of the line of commerce affected. (a) P need only prove quantitative substantial foreclosure to competitors see p328.
(2)

One would think this clause indicated that rule of reason should apply but CT has read it otherwise.

c.

Case - Standard Oil Co. of CA v. US (US 1949) – Frankfurter – p322:
1)

Facts: a) Exclusive dealing arrangement: basically D was trying to get rid of split pump stations by requiring its purchasers to not sell gas from any other manufacturer. b) Govt alleges violations of s1 of SA and s3 of CA.

2)

Issue: a) Whether or not govt has to prove that competition has actually been lessened by this arrangement (rule of reason approach) or whether govt only needs to prove that a substantial amount of commerce is affected (per se approach). b) See actual language on p324. Held: for govt – CT applies per se rule (although it should be applying rule of reason) to find that exclusive dealing K here violated s3 of SA. Reason:
a)

3)

4)

Clayton Act – what does s3 require:
66

(1)

TEXT of s3 of CA: “It shall be unlawful for any person engaged in commerce . . . to lease or make a sale or contract for the sale of goods, wares, merchandise, machinery, supplies, or other commodities . . . on the condition . . . that the lessee or purchaser . . . shall not use or deal in the goods . . . of a competitor . . . of the seller, where the effect of such lease [or] sale . . . may be to substantially lessen competition or tend to create a monopoly in any line of commerce” – p323. (a) Requirements:  Existence of tying arrangement  Prohibited effect  This seems to act as qualifying clause – thus, indicating that this cannot be a per se rule BUT CT has read otherwise. (b) CT seems to be saying mere existence of tying arrangement is enough. “Commodities” means goods, wares, merchandise, machinery, supplies, or other commodities. Clayton Act was intended to require a lesser showing than s1 of SA: (a) Meant govt could prohibit action b4 it reached the restraint of trade stage. (b) But now, CT seems to have applied this lesser standard to s1 of SA violations too.

(2)

(3)

b)

CT will treat Exclusive Dealing Arrangements Differently than Tying Arrangements: (1) Why? (a) B/c tying arrangements can only have bad purpose whereas exclusive dealing agmts may be of economic benefit to buyer, seller and consumer public. (2) Under Int’l Salt, CT said tying arrangements were per se unlawful. CT does not have judicial competence (1) CT says it is competent to figure out quantitative substantiality but NOT qualitative substantiality (impact on competition). (2) Echoes TOPCO opinion. Is CT taking a Per Se or Rule of Reason Approach?
(1) (2)

c)

d)

CT seems to say this is not per se rule since you have to look at effect. BUT then CT seems to lean back toward per se with the “quantitative substantiality” language and with “not insubstantial” double negative.
(a)

Quantitative substantiality:  Definition:
67



Foreclosure of sufficient amount of market to competitors such that a “substantial lessening of competition” is an automatic result – p323.  Compare to qualitative substantiality: CT cannot do this analysis. What this means in application:  The mere existence of tying arrangement is per se unlawful b/c it is naturally going to have the proscribed effect.  All that has to be estb to meet “effects” element is prove of quantitative substantial foreclosure to competitors - see p328.


(b)

Not insubstantial:  Why the double negative? Why doesn’t CT just say substantial”?  Does this mean that all you have to show is something a bit more than a de minimus share? Evidence that competitive activity has not actually declined is inconclusive: b/c purpose of s3 of CA was to act as preemptive strike b4 competition effected.

(c)

e)

RULE Applied: (1) Here, D’s use of exclusive dealing arrangements shows that competition has been foreclosed in a substantial share of the line of commerce affected, and thus D violated s3 of CA.

5)

Douglas Dissent: a) Very odd to have a dissent by Douglas who usually found everything unlawful. b) This is actually consistent. (1) Sees danger flowing from a too rigid approach (2) Douglas did not like bigness, preferred small independent business. (3) If he saw that result of CT opinion would be elimination of small businesses, he would take a rule of reason approach. (4) See Douglas’ prediction – major oil companies would vertically integrate and own everything.

Jackson Dissent: Lurie did not discuss.
6) d.

Case – Tampa Electric Co. (D/Buyer) v. Nashville Coal Co. (P/Seller) (US 1961) - p332: 1) Facts: parties entered into 20-year requirements K for supply of coal. P (seller – party that is inflicting the harm) argued that agmt was illegal b/c would foreclose to competitors a “substantial” market – wanted substantial view in quantitative terms. 2) Issue: was this agmt legal?
68

Held: for D – this is valid agreement - no substantial foreclosure when look at relevant market qualitatively. 4) Reason: a) Wanted an appraisal of relevant market in qualitative sense. b) CT deviated from quantitative substantiality. 5) Notes: a) Is this inconsistent? No – b/c look at who is P (seller) and who is D (buyer) in this case. Lurie says that if Buyer was seeking to get out of K, CT probably would have let it. b) Consequence: raise doubts as to continuing validity of quantitative substantiality in cases of this kind – raised the possibility that qualitatively substantiality may be proper test. c) Lesson = qualitative substantiality is NOT dead.
3) 8.

The Single Product Problem:

Lurie did not discuss.
9.

A Note on Single-Product Problems in Franchising

Lurie did not discuss.
10.

Case - Northern Pacific Railway Co. v. US (US 1958) – Black p338
a.

Facts 1) US govt gave land to RR - RR includes preferential routing clause in its leases to landowners. a) ??? What kind of agreement is this – exclusive dealing? Tying? 2) Govt alleges violation of s1 of SA. Held: for govt – CT applies per se approach to find tying arrangement here violated s1 of SA. Reason
1)

b.

c.

Govt has to use s1 here b/c it cannot satisfy the “commodity” requirement of s3. a) Less is required for s3 of CA than s1 SA b) CA is incipiency statute – govt can try to stop anti-competitive activity b4 it ripens into a restraint of trade. Frequent Quotations in AT law both in pro-AT era and in anti-AT era:
69

2)

“SA was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress . . . . [T]he policy unequivocally laid down by the Act is competition” – p339. b) This stmt shows how philo and predisposition of CT affects outcome. (1) CT seems to be taking allocative efficiency approach – p339.
a) 3)

Some practices are PER SE unlawful: a) Examples of PER SE unlawful practices: (1) Price fixing (2) Division of markets (3) Group boycotts (4) Tying arrangements (5) Exception – exchange of info among competitors, trade associations sharing info (but even here Douglas tried to get this to be per se unlawful). b) Marshall’s stmt is hogwash: this shows why Marshall’s stmt that majority of AT things are governed by rule of reason is “hogwash.” CT defines tying arrangements – p340: a) Definition: an agmt by a party to sell 1 product but only on condition that buyer also purchase a different product, or at least agrees that he will not buy that product from any other supplier. b) Lurie says CT adopts a CONFUSING version of the per se approach here: (1) CT says tying arrangements are unreasonable (thus, unlawful) “in and of themselves” (which would indicate per se) but then CT adds a sufficient power qualification (which would indicate rule of reason) c) This is a different understanding of “per se” than what we have in price fixing context. CT is leaning toward meaning of “per se” as we understand it in other contexts: ??? CT says mere existence of tying arrangement meets the “effects” element: a) Mere fact that D did it (tying arrangement) proves that they could do it – thus, meets sufficient power element - p340. (1) Shows that you do not need much to show a tying arrangement violates SA or CA – need to prove power but mere fact that they did it will show they had the power. b) This seems illogical: what is point of effects clause if all you need is existence? ??? Why isn’t this exclusive dealing?

4)

5) 6)

7) d.

Harlan Dissent
70

Lurie did not discuss.
11.

Case – US v. Loew’s Inc. (US 1962) – Goldberg – p346:
a. b.

Facts: block booking requirements for movies. Held: for govt – unclear what approach CT applies to find that tying arrangement here violated s1 of SA Reason:
1) 2)

c.

Govt used s1 here b/c could not meet s3 of CA. Tying arrangements are unlawful b/c: a) Force buyers to give up substitutes for the tied product. b) Destroy free access of competing suppliers of the tied product to the consuming market. Test for when tying arrangements = ILLEGAL: when D has sufficient econ power with respect to tying product to appreciably restrain free competition in the market for the tied product. a) The existence of sufficient econ power can be inferred or presumed in certain circumstance: (1) If tying product is highly desirable to consumers, sufficient economic power is inferred. (2) If tying product is highly unique, sufficient economic power is inferred. (3) If tying product is patented or copyrighted, sufficient economic power is presumed. b) Courts do not need to embark on full factual inquiry in this case – illegality can be presumed - p348 n13. c) Sufficient economic power does not require a showing of monopoly power under s2 of SA - p348

3)

d.

Notes 1) CT has diminished significance and importance of qualifying clause (“effects clause”) of s3 of CA: a) Result = no difference in the burden of proof b/w s1 of SA and s3 of CA: thus, CT has made lesser burden of s3 of CA cases applicable in s1 of SA cases. 2) ??? CT seems to be saying there are # of ways to meet “sufficient economic power” test. 3) I am very confused about how these cases effect the general s1 cases – are they limited to tying arrangement cases under s1?

10-22-01
71

12.

A Note on the Issue of End Product Royalties – p351.

Lurie did not discuss.
13.

Case - Fortner Enterprises, Inc. v. US Steel Corp – (US 1969) – Black - p352:
a.

Facts 1) D gave P loan to buy and develop land on the condition that P buy US Steel homes. 2) P’s allegation: sued under s3 of CA as unlawful tying agmt. a) Lurie says if you do not like the deal, do you sign it? b) Lurie says this is example of P not doing well in deal, so sought treble damages to cover his loses. 3) Dis ct granted summ jdgmt for D b/c said P failed to estb elements for per se illegality. 4) Court of Appeals affirmed. Held: rev’d – for P - grant of summary jdgmt to D was inappropriate - P should have chance to prove his case at trial. Reason
1)

b.

c.

Difficult here to determine what constituted the tying and tied products: a) Tying product = financing b) Tied product = houses c) D’s argued that this was NOT a tying arrangement but a single product – just sale on credit. (1) Isn’t this just a single product? CT seems to get around this usually intraenterprise conspiracy theory. (2) CT said there were 2 separate products b/c: (a) Financing that D loaned to P was not equal to purchase price of houses; AND  Lurie says amount of credit or financing (whether limited to cost or price of houses) is irrelevant. (b) Internal structure of US Steel (Lurie says this should not have been considered) (3) Merchant is operating in 2 separate markets: (a) The credit market (b) The product that you are buying market. (4) Example: imagine a time when economy is bad – thus, most people who are buying products are doing so through credit. (a) Thus, store that is able to offer credit to customers will do better than store that is not able to offer credit.
72

(b)

Consumer may be willing to pay higher price if he can get credit than if he cannot.

2)

Absurd hypo is not so absurd: a) Now common for people to obtain credit for buying purchases separate from the credit (Visa, MC). Generally, credit market is not problematic b/c no seller has power in the credit market: difficult to be a monopolist over credit. ??? Is CT taking a per se or rule of reason approach? a) Lower courts treated this case as per se case but this CT did not – p354: (1) If you can’t make out case under per se approach, you may still be able to make it under rule of reason (“thorough economic analysis”). (2) Odd b/c per se usually used b/c rule of reason is too difficult. (3) Now CT is saying per se rule is conclusive presumption that there is a restraint of trade. Generally, to prove violation of s1 of SA, govt or P must prove either anti-comp purpose OR anti-competitive effect. Rules for Tying Arrangements: a) How much is enough? $200,000 is “substantial” b) P should have opportunity to at least try to prove that D had sufficient econ power in market for tying product . . .See highlights on p354-56

3)

4)

5)

6)

d. e.

White/Harlan Dissent: Subsequent History: 1 2 3 dis ct D P P CA D D P CT P D

f.

Notes 1) ??? What is lesson of this case? 2) ??? This case shows CT’s evolution in tying arrangement context: a) Initially per se was enough. b) CT moved very close to true per se rule (sufficient econ power if product is patented, other presumptions) c) Now, CT is retreating from that approach.

14.

A Note on Some Procedural Issues Suggested by Fortner – p362.
73

Lurie did not discuss.
15.

A Postscript on Fortner – p363.
a.

Ultimate holding was for D in 1977.

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D.

DEALING WITH DEALERS
1.

Resale Price Maintenance:
a.

Hypo – analogous to Klor’s, Inc. v. Broadway Hale Stores (US 1959) – Black – p365: 1) Facts: a) Real facts: electronic appliances - appliance dealer sues D, alleging a concerted refusal to deal b) Back to the Drug Manu Hypo from earlier: (1) Drug manu will not deal with pharmacists who fill prescription with generic equivalent but charges the prescription price and labels the container with the name of the prescription drug (thus, we have clear trademark infringement and frauding of public). P is cut off by a number of manu and thus, sues, alleging concerted refusal to deal
2) 3)

Issue: whether P has to allege an injury to public as part of s1 violation of SA. Held: for P – CT applies per se (b/c this is group boycott case) to find that D’s conduct violated s1 of SA. Reason:
a)

4)

CT’s denies D’s motion for summ jdgmt: (1) D argues that P has failed to state cause of action (b/c P failed to show any injury to public from D’s conduct). (2) What does P have to show? Does P have to show injury to public or injury to himself? Group boycotts are per se unlawful. P does NOT have to allege an injury to public as part of s1 violation of SA. CT distinguishes this case from others: (1) It would be lawful for: (a) A single trader to refuse to deal with another. (b) For a manufacturer and dealer to agree to an exclusive distributorship

b) c) d)

75

(2)

The conduct here is illegal b/c it: (a) Takes from P its freedom to buy products in open competitive market (b) Drives P out of business as a dealer in D’s products (c) Deprives manufacturers and distributors of their freedom to sell to P at same prices and conditions made available to D. (d) Forbids them from selling to P on any terms whatsoever.

5)

Notes: a) ??? What is lesson of this case? b) Unresolved issues (1) ??? What is unusual about this case – P is suing a competitor (D) for refusing to deal with P but P never tried to buy from D. (2) Did D go to each of the manufacturers and said to them “P was a free rider, and if you continue to sell to him, I will stop buying from you” (3) What if D said to each of manu what Colgate said to each of its retailers “our policy is to refuse to buy from appliance manufacturers who sell to discounters”. (4) Overlooked in this case – we do not know why the manufacturers refuse to deal with Klor’s or whether the manufacturers had to agree with each other. c) New Hypo: (1) Suppose Klor’s was bait and switch seller – would CT have reached same result? We do not know b/c we do not know what their defense would have been. (2) Bait and switch selling is unlawful accord to FTC:

10-24-01
b.

Case - US v. Parke, Davis & Co. (US 1960) – Brennan – p368:
1)

Facts: policy not to sell to . . . a) D trying to use Colgate-like resale price maintenance agmt b) District Court held for D b/c this was unilateral conduct like Colgate. c) But CT finds this case different from Colgate: D here said they would not sell to wholesalers who sold to retailers who sold below D’s set retail prices. Held: for govt - D violated s1 of SA. Reason: a) CT’s View of Colgate-Dr. Miles Rule – p371-72: (1) How to reconcile Dr. Miles and Colgate: see rule on p371-72. (a) It is lawful for a manu to indicate his resale price policy and to refuse to deal with those who do not follow it. (b) It is an unlawful combo for a manu to enter into an agmt – whether express or implied – with customers that binds them to observe the resale price policy. (2) CT restricts holding of Colgate:
76

2) 3)

Old: manu can have a resale price policy (not matter who policy aimed at – wholesalers and retailers) and can refuse to deal without violate SA. (b) Now: manu can announce resale price policy and refuse to deal with retailers who refuse to adhere to them but cannot use any other means [i.e., like tell dealer what his policy is] to effect adherence - manu cannot take affirmative action to induce adherence b/c customer’s acquiescence is not matter of free choice.
(a) b)

Why this case is different from Colgate? (1) CT says D here went beyond D in Colgate b/c it coerced the wholesalers to aid in enforcement of D’s resale price policy – p373. (a) CT finds a combo:  CT calls the conduct here a “combination” even though wholesalers were coerced too.  Shows that first element of SA (combo) can be satisfied through non-consensual conduct (i.e., one can be liable for having created a combination in violation of first element of SA even if one of the parties to the combination is coerced). (2) Lurie says facts in Colgate and Parke Davis are same but CT is just treating them differently.

4)

Harlan Dissent: a) Says CT, has in effect, overruled Colgate. b) Only reason CT did not expressly overrule Colgate is that govt did not ask CT to overrule Colgate. Notes:
a)

5)

RULE (as later explained by CT) – p377: supplier/seller may not use coercion on its retail outlets to achieve resale price maintenance – type of coercive device is irrelevant. What good is Colgate? In every case that reach CT after Colgate, CT found the D had gone beyond Colgate permits. Brennan’s Views: (1) At time of this case, Brennan was in same mold as Douglas – would have like to overrule Colgate Lesson: this case shows that we can satisfy first element of SA (K, combo, conspiracy) through non-consensual conduct (i.e., coercion). (1) ??? Implications of this holding on intra-enterprise rules: (2) One can be liable for having created a combination even if one of the parties to the combination is coerced. (3) Lurie uses robbery hypo analogy – does V conspire with robber
77

b)

c)

d)

e)

Lurie says this opinion is problematic b/c it is illogical b/c this conduct does not seem to meet text of s1 of SA

c.

Case - Simpson v. Union Oil Co. of CA (US 1964) - Douglas – p375:
1)

Facts: a) D entered into consignment arrangements with its dealers – trying to control retail price of gas – Simpson (P) wanted to cut prices – as a result, D terminated him as a dealer – Simpson said termination of his lease violated s1 of SA – D said there was no K, combo or conspiracy, no resale b/c this was lease arrangement. b) District Court found for D. c) Court of Appeals found for D. ??? Held: for P – CT applies ____________ approach to find that D violated s1 of SA. Reason:
a)

2)

3)

Supplier may not use coercion on its retail outlets to achieve resale price maintenance – it does not matter what the coercive device is (citing Parke Davis) – p377. CT has to distinguish GE – p378: (1) CT decides to limit GE to patented products and with no real explanation for distinguishing the 2 cases – p378. (a) What about “patented or otherwise” language? CT seems to ignore. (2) What is legal? (a) Owner of article may send it to a dealer who may in turn undertake to sell it only at a price determined by owner.

b)

78

(3)

What is illegal? (a) It is illegal for manu to use a consignment arrangement to cover vast gasoline distribution system, fixing prices through many retail outlets AT laws prevent calling the consignment an agency. (b) Reason for illegality: b/c then D could avoid end result of Socony merely by clever manipulation of words, rather than by substantive differences.  ??? Lurie asks whether Douglas makes a mistake when he cites to Socony b/c Socony was horizontal price fixing agmt  Should he have cited to Dr. Miles?  Lurie says no: b/c Douglas was worried about horizontal price fixing b/c this was big problem in gas industry.  CT worried that if it legitimized consignment, then all major oil companies would adopt it and that would eliminate competition at retail level.

4) 5)

Stewart Dissent: wants rule of reason Notes: a) This case called into question GE’s consignment process: GE finally abandoned its consignment arrangement for the sale of light bulbs. b) Still unresolved whether holding of GE is still valid: it is clear that it is inconsistent with Simpson.

2.

Territorial Allocation
a.

Rule Review 1) Horizontal price fixing is per se unlawful. 2) Vertical price fixing is per se unlawful. 3) Horizontal territorial market division is per se unlawful. 4) Vertical territorial market division??? Case - White Motor Co. v. US (US 1963) – Douglas - p382:
1)

b.

Facts: a) Vertical territorial market division case b) Govt moved for summary jdgmt c) D wanted chance to show that this was not illegal, in fact it promoted interbrand competition. Held: CT remands the case to the lower court and says the applicable rule of law should be designed after trial. Reason:
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2)

3)

a)

CT withhold judgment : says “we just don’t know enough to decide whether they should be per se or not per se” (1) Douglas wanted a trial to explore IMPACT/EFFECT of these agmts (b/c Douglas likes to protect small business – afraid of vertical integration – will not hold something unlawful if doing so will lead to vertical integration) CT is NOT saying that vertical territorial market division agmts should be subject to rule of reason. (1) Unfortunately, people have viewed this case to say that vertical territorial market division is governed by the rule of reason. Focus is on both purpose and effect.

b)

c) 4)

Brennan Concur: considering the argument about interbrand and intrabrand competition. Clark Dissent: says this is clearly violation of SA. Notes:
a) b)

5) 6)

TOPCO comes after this case.

This case shows that the philosophy of a majority of CT at any given time is so important to the outcome.

c. d.

A Note on General Motors – p390. And Then There Was US v. Arnold Schwinn & Co. (US 1967) - Fortas - p391: Issue: whether vertical territorial market divisions were per se illegal? Held: Screwy holding – Lurie says this holding does not make a lot of sense. a) Where manu sells product to retailer or distributor, territorial restrictions are per se unlawful b) Where manu use consignment agmts (like GE), territorial restrictions are subject to rule of reason. 3) Postscript: overruled in Continental T.V., Inc. v. GTE Sylvania Inc. (US 1977).
1) 2)

10-26-01
e.

Case - Albrecht v. Herald Co. (US 1968) - White – p393.
1)

Facts: a) D allocated territories and imposed a resale price maintenance system. b) D’s newspaper was distributed thru independent newspaper distributors (Albrecht was one of these independent newspapers distributors) - Albrecht decided to increase the charge to his customers by 10 cents a month - D said no, P dropped it, then pushed it back up - D hired telephone solicitation co (Milne) to ask P’s customers if they wanted to receive the paper for less and made
80

arrangements with another distributor (Kroner) to buy the route, and terminated Albrecht as a distributor. c) This is a private action: P alleged vertical price fixing in violation of s1 of SA: must show (1) K, combo or conspiracy (2) within restraint of trade and (3) must show that K, combo caused injury to P - hard for P to allege combo that caused his injury. d) District court found for D.
2) 3)

Held: for P – CT applies _________ approach to find a violation of s1 of SA. Reason:
a)

CT says combo is b/w D and Milne and Kroner (1) Lurie says this is unusual b/c: (a) CT says allegation of combo b/w D and P’s customers is not frivolous:  P argued that combo was b/w D and P’s customers, Milne and Kroner.  Although CT does address issue of whether there was combo b/w D and P’s customers, it says claim is NOT frivolous – p395. (b) Milne and Kroner are not competitors:  Usually when we talk about price fixing, we mean agmt b/w competitors – these people had nothing to do with what made this conduct unlawful. D argues that by giving routes to distributors, it create a monopoly so it wanted to set prices to protect public from price gauging. (1) CT rejects this argmt – p396: (a) B/c says Court of Appeals was wrong to assume that vertical territorial restrictions were lawful. (b) Indicates that territorial distribution may violate SA. D argues that this is not minimum resale price fixing but maximum resale price fixing. (1) CT rejects and says both max and min price fixing are per ser illegal b/c cripple freedom of traders and restrain their ability to sell in accordance with their own judgment – p395-96. ??? Where is injury to P: (1) Problematic for P in this case: hard to prove injury to him. (2) Possibilities: (a) Loss of value in paper route when he sold it. (b) Lost profits during time he could not charge 10 cents more. (3) RULE: it is NOT an AT injury to be hurt by having to compete.

b)

c)

d)

4)

Douglas Concur:
81

This is a rule of reason case: (1) Why would Douglas, usually a per se judge, call this rule of reason? (a) B/c here, Douglas is concerned with vertical integration (may hurt small, independent businesses). b) Recall White Motor where Douglas reserved judgment on whether vertical territorial arrangements were per se illegal: (1) Says CT has still not decided whether vertical territorial arrangements are illegal – still has not gotten info on impact/effect.
a) 5)

Harlan Dissent: does not think max price fixing has same impact as minimum price fixing. Stewart Dissent. Notes: a) Lesson: this case shows that at the time of this case, CT viewed vertical territorial restrictions as invalid: (1) ??? Are they per se invalid? (2) ??? Is this a rule or is this still an open question? b) D could have avoided by vertical integrating and having its own distribution channels. c) ??? But there is no public injury here – how does CT respond to this? (1) Concerned about independent business man and his freedom to make his own decisions.

6) 7)

3.

Price Discrimination:
a.

Background on Robinson Patman Act (RPA): 1) RPA amended s2 of CA: can refer to it as s2 RPA or s2 CA. 2) Emergence of Chain Stores: a) Example: “sell to me a large quantity at lower price than you charge to my competitors and I will get the business and make the sale.” b) Congress concerned about impact on small businesses – unable to compete with chain stores when chain stores got lower prices – Congress amended s2 of CA by adoption of RPA What RPA did:
1)

b.

Section 2(a): a) Extended s2 to reach Secondary/Buyer Line Discrimination: (1) Old: s2 of CA only dealt with Primary Line Price Discrimination: (a) ??? Primary Line Price Discrimination: (2) New: extended s2 to reach Secondary/Buyer Line Price Discrimination:
82

??? Secondary/Buyer Line Price Discrimination: seller’s practices harm competition b/w seller’s customers. b) Altered defense for quantity discounts: (1) Old: there is a defense for quantity discounts (2) New: there is a defense for quantity discounts but only if there is cost justification for quantity purchase: (a) Seller has to point to cost savings to itself to justify the lower price to the customer who buys in quantity. c) ??? Even though statute says knowingly, it is not required – Congress messed up in drafting.
(a) 2) 3)

Section 2(b): defense for lowering of price in good faith to . . . Section 2(c): a) Rarely used b) Designed to eliminate Dummy Brokerage: (1) Dummy Brokerage: where supermarkets set up their own brokerages, and collect the commission for sale to itself. (2) Congress wanted to prevent this b/c it was really a discount. Section 2(d) and Section 2(e): a) General Rule: both provisions require that whatever is provided be provided on proportionally equal terms to all competitors. (1) Even though wording is not same, CT will treat them virtually identically. b) Key difference b/ 2(d) and 2(e): (1) Whether manu is providing something to retailer/distributor; OR (2) Whether retailer/distributor is providing something for benefit of manu. c) Illustrations of differences: (1) Manu of cosmetics provides display cases and sales personnel = “providing something” (2) Ice cream manu furnishes freezers to supermarket = “providing something” (3) Manu may pay retailer to include manu’s products in its ads. Section 2(f): a) Concern . . .may produce price discrimination that would violate 2(a) – impose on buyer a price b) General Requirements: generally, there must be a 2(a) violation on part of seller for there to be a 2(f) violation by the buyer. c) Lying Buyer Exception: (1) If we have a lying buyer who lies to seller (about receiving lower price from competitor of seller) – and then seller, in good faith, meets lower price, there will be no 2(a) violation b/c of defense under 2(b) but there is still a 2(f) violation b/c lying buyer should not be able to get off free.

10-29-01
4)

5)

c.

Case - FTC v. Morton Salt Co. (US 1948) – Black - p408:
83

1)

Facts: a) D provides quantity discounts for table salt. b) FTC held this violated 2(a) of CA c) Court of Appeals reversed ??? Held: for FTC – CT applies ________??? approach to find that quantity discounts here violate 2(a) and there is no cost justification defense. Reason:
a)

2)

3)

General Principles on Quantity Discounts: (1) Quantity discount must be cost-justified. (2) In 99% of cases, sellers cannot show that it is cost justified. (3) FTC is hostile to cost-justification defense. D argued that there is no discrimination b/c the quantity discounts are available to everyone on equal terms. (1) CT rejects this b/c, as practical matter, only a few purchases will be able to take advantage of the quantity discounts. D cannot provide a cost justification. CT is concerned about small businesses.

b)

c) d) 4)

Notes a) Many economists say this is inefficient: (1) Response: this statute expresses a congressional policy to favor small business even though it may not be an efficient situation.

d.

A Note on Some Other Important RPA Cases

Lurie did not discuss.
e.

Should We Be Upset About Price Discrimination?

Lurie did not discuss.

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E.

MERGERS
1.

Generally
a.

Definitions:
1)

Corporate acquisition: a) Corporate STOCK acquisition: if A Corp buys all of B Corp’s stock then B Corp becomes a wholly owned subsidiary of A Corp. (1) Consequence: (remember Cooperweld), can no longer have an “agmt” b/w these 2 b/c they are a single entity. b) Corporate ASSET acquisition: if A Corp buys all assets of B Corp, B Corp does not become a wholly owned subsidiary – only thing that changes is what is owned. (1) ??? Consequence: Corporate merger: A Corp and B Corp merge and one remains and one goes out of existence. Corporate consolidation: A Corp and B Corp merge and both go out of existence and a new corp is formed (C Corp)

2)

3)

b.

Impact of Definitions on Application of AT Laws: 1) Usually it does not matter whether something is acquisition, merger or consolidation but sometimes it is extremely important. 2) Lurie will use merger and acquisition interchangeably unless it matters. Three General Types or Mergers and Acquisitions (these distinctions are important):
1)

c.

Horizontal merger or acquisition: transaction is b/w parties competitors are merging (e.g., Ford and GM) Vertical merger or acquisition: transaction is b/w parties that stand in buyer-seller relationship to each other (e.g., merger b/w flour company and bread baker). Conglomerate merger or acquisition: neither competitive relationship b/w parties or seller-buyer relationship b/w parties a) Product extension merger: b/w companies where they produce or sell related products (e.g., manu of toothpaste acquires manu of toothbrushes).

2)

3)

85

Market extension merger: b/w companies which produce same product but are not competitors b/c in different geographic regions (e.g., beer producer in Southeastern PA merges with beer producers in Western PA). c) Diversification or pure merger: b/w companies where there is no relationship (e.g., producer of laundry detergent acquires company that produces encyclopedias)
b) d.

11-02-01
2.

History of s7 of CA: 1) Original s7 was aimed at horizontal mergers and acquisitions where they were stock acquisitions where effect of acquisition was to eliminate competition b/w acquiring and acquired companies. 2) Section 7 Amended: add provision bringing asset acquisitions within s7, broadens s7 to reach other kinds of mergers and acquisitions in addition to horizontal mergers and acquisitions 3) Congress used strange language to accomplish this goal - “corp subject to juris of FTC”: a) If it is an asset acquisition, then corp has to be subject to juris of FTC. b) If it is a stock acquisition, then corp not have to be subject to juris of FTC. c) Banks are not subject to FTC’s juris. – led to serious problem in Philadelphia National Bank case – how to characterize statutory consolidation – is it asset acquisition or stock acquisition.

Questions

See questions on Problem Set on Mergers and Acquisitions
3.

An Introductory Note on US v. Columbia Steel (US 1948) – p418:
a.

Facts: 1) This case occurred before 1950 amendment to s7 of CA. Issue: whether statutory language should be read to prohibit functionally similar but formally different kinds of consolidations Held: vertical integration does not violate s7 of CA or SA. Notes 1) Shows that CT was hostile to enforcement of AT laws.

b.

c. d.

11-05-01
4.

Case – Brown Shoe Co., Inc. v. US (US 1962) – CJ Warren – p419:
86

 a.

USE this case to outline the law on amended s7 Facts 1) Kinney Co. and Brown Shoe Com. wanted to merge. 2) This is the first case that comes to CT under amended s7 3) Merger involved had both horizontal and vertical merger aspects. Held: for govt – CT finds that both vertical and horizontal aspects of merger here violate amended s7 of CA. Reason:
1)

b.

c.

CT’s understanding of original s7 of CA – p422: a) Limited to stock acquisition b) Limited to horizontal merger or acquisition Reasons for 1950 amendments to s7 of CA: a) Theme = Congressional fear of rising tide of economic concentration in the American economy (this theme continues until 1972) – p423 b) 8 Reasons – p423-24: (1) Congress wanted to plug the loophole and reach assets acquisitions. (2) Congress wanted s7 to apply to vertical arrangements. (3) Congress has power to stop potentially unlawful mergers when in incipiency. (4) Congress adopted a more lenient standard of proof that SA allegations required. (5) Congress wanted to protect competition, not competitors – Congress thus, recognizes that some mergers are OK, even beneficial. (6) Congress did not adopt any specific test for measuring relevant markets. (7) Effect of merger should be viewed functionally, in context of its particular industry. (8) Mergers with a probable anti-competitive effect were to be proscribed by the act - Congress concern was with probabilities, not certainties. Analysis of Vertical Merger:
a)

2)

3)

Definition – p425: economic arrangements b/w companies standing in a supplier-customer relationship. (1) Primary Vice of Vertical Merger = foreclosure of markets to competitors – “clog on competition.” (2) Reflects tying arrangement rules. Relevant Geographic Market here = the nation – p426. Relevant Product Markets here = men’s, women’s, children’s shoes:
87

b) c)

(1)

Test = “reasonable interchangeability of use or the cross-elasticity of demand between the product itself and the substitutes for it (a) Initially, this echoes s2 monopolization test: the test for relevant mkt under amended s7 of CA sounds same as test for relevant market under s2 of SA for monopolization. (b) But CT will use a different standard when dealing with mergers and acquisitions that standard for monopolization  Sub-mkts: “However, within this broad market, well-defined submarkets may exist which, in themselves, constitute product market for AT purposes”  Have to examine effects of merger in each such economically significant sub-market to determine if there is a reasonable probability that the merger will substantially lessen competition.  What = “economically significant sub-market”?  Suggests this CT would have decided Dupont Cellophane case differently – would have looked at cellophane as its own sub-mkt.  Boundaries of relevant mkt must be drawn with sufficient breadth to include the competing products of each of the merging companies and to recognize competition, where in fact, competition exists.  Remember this principle and see if CT follows it in Philadelphia National Bank case.

d)

Effect of Vertical Merger here = substantially lessen competition:
(1)

Evil of vertical mergers is distinguished from evil of horizontal mergers. Evil in vertical case = market foreclosure. (a) CT trying to determine what amount of market foreclosure is necessary to violate amended s7 of CA (b) CT is leaning toward a per se approach – but does not get there Factors: (a) Size of the market share foreclosed is key factor but seldom determinative – p426.  Two extremes: monopoly (then clearly violate s7 b/c violations s2 of SA) and de minimus proportions (then not violate s7).  “In b/w cases”: like case here, size of market foreclosure is not decisive factor. (b) In the “in b/w” cases = CT should look at nature and purpose of arrangement – p427. (c) What is really going on here?
88

(2)

(3)





Lurie said CT is rationalizing the result that it wants to reach so has to minimize the usual emphasis on size of mkt foreclosure (b/c foreclosure in this case is pretty small (only 7.2%)). Lurie says CT trying to move in direction of per se approach – want to require very little in way of adverse impact on competition (CT cannot come out and say this but this is what it is doing – does this by talking about “trend toward concentration”)

(4)

APPLIED: the vertical aspect of the merger here is a violation of s7 of CA. (a) In this industry, no merger b/w manu and an independent retailer could involve a larger potential market foreclosure – analogous to tying arrangement ??? Lurie says “trend toward concentration” is NOT same as “trend toward vertical integration”: (a) “trend toward concentration”: probably a violation of amended s7). (b) “trend toward vertical integration”: unclear whether this is a violation of amended s7. (c) Lurie says CT is deceptive b/c District Court did not really a find a trend toward concentration – District Court only found a trend toward vertical integration – CT trying to suggest that District Court did find (“The District Court’s findings . . . convince us that . . .) a trend toward concentration.

(5)

4)

Analysis of Horizontal Merger – p428:
a)

Definition: an economic arrangement b/w companies performing similar functions in the production or sale of comparable goods or services. Relevant Geographic Markets = cities with population exceeding 10,000 and their environs in which both Brown and Kinney retailed shoes through their own outlets: (1) Must correspond to commercial realities of the industry and be economically significant – p429. (2) Can be whole nation or one metropolitan area. Relevant Product Market: = men’s, women’s and children’s’ shoes: Effect of horizontal merger: (1) Factors: (a) Market share. (b) Congress’ decision to protect smaller, independent businesses even when inefficient – p431 (c) History of tendency toward concentration in industry – p432
89

b)

c) d)

d. e.

Harlan Concur: would only look at vertical arrangement – not horizontal arrangement. Notes: 1) If CT did not find this vertical acquisition to be unlawful, then CT would not find any others b/c this merger is b/w the big guys. 2) This case shows CT’s hostility to mergers and acquisitions 3) CT going in the direction of declaring mergers per se unlawful but CT never completely does this.

5.

A Note On Vertical Integration – US v. E.I. Du Pont de Nemours (US 1957) – p436.
a.

Facts:
1) 2)

Vertical arrangement: supplier acquiring an interest in a customer. Statistics a) In 1917, DuPont “acquired” 23% of GM stock. b) GM supplied almost 50% of automobile mkt. c) DuPont was not supplying all of GM’s needs for automobile finishes and fabrics. d) But, even if GM supplied almost 50% of automobile mkt and DuPont supplied all of GM’s needs for automobile finishes and fabrics, could Dupont have reached a monopoly – best it could have reached would be 50% and CT said 54% was doubtful – yet CT buys it under tendency toward monopoly. e) Thus, this indicates that “substantial lessening of competition” standard in s7 would be satisfied by less than 50%. Government challenged that “acquisition” (holding, ownership, retention) as violation of unamended (pre-1950) s7 of CA: a) Govt had to get around the fact that CT said unamended s7 did not to apply to vertical arrangements (b/c of “lessening of competition b/w acquiring and acquired companies” language). b) Govt used “effect being a tendency toward the creation of a monopoly” to get around this problem. (1) This language could conceivably apply to a vertical arrangements. (2) CT accepted this language to find that this “acquisition or retention” was within original s7 of CA.

3)

b.

Issue 1) Was this acquisition or merely retention of GM stock? Held: for govt – CT found the retention violated unamended 7 b/c its effect tended toward the creation of a monopoly. Reason:
90

c.

d.

1)

CT gave very little discussion of the relevant market in this case. a) Relevant product mkt = automobile finishes and fabrics [only automobile paint (not all paint), automobile fabrics (not sofa fabric)]. Backwards Sweep Doctrine: a) At what point in time should CT look at effects? (1) CT can look at anti-competitive effects at time of acquisition (2) CT can look at anti-competitive effects at time of trial (a) Lurie says under this approach no acquisition or merger would ever be safe or secure. (b) Lurie says present CT would never buy in to this approach.

2)

e.

Notes: 1) CT composition changed b/w DuPont cellophane case (1956) and this case (1957). a) Both involve aspects of monopolization. b) Relevant mkt = flexible packaging industry c) Lurie suggests that the difference b/w cellophane and piece of foil is greater than difference b/w fabric for car and fabric for sofa.

6.

A Note on the Failing Company Doctrine – p437:
a.

Original Articulation of Failing Company Doctrine:
1)

Rule: If A Corp acquires a company that is about to go out of business (b/c market share = 0) and thus, the acquisition does not tend substantially to lessen competition, then there is no violation of amended s7. a) Do you have to show that acquired company would have gone out of business but for acquisition? Rationale: CT says this benefits the public. a) Lurie says this is just dicta.

2)

b.

Present Articulation (Mis-articulation) of Failing Company Doctrine:
1)

Rule: even if there is going to be a substantial lessening of competition, if the acquired company is a failing company, then no violation of s7. Lurie’s View: a) Sys everyone has misinterpreted this doctrine. b) Says CT did not take a “lesser of 2 evils” approach.

2)

c.

??? CT is hostile to this approach: 1) CT had reduced use of failing company doctrine to nothing by this time:
91

2)

Party that wants to invoke this defense, has to prove all the requirements: Requirement accord to CT in Citizen Publishing Co. v. US (US 1969): only available purchaser. a) Lurie says there is always another available purchaser – p473. b) Lurie says you can always reorganize - p438.
a)

11-07-01
7.

Case – US v. Philadelphia National Bank (US 1963) – Brennan – p438:
a.

Facts: 1) Lurie says this is funny case to do now b/c banking industry is SO different today 2) This is horizontal merger. a) Evil of horizontal merger = elimination of competition b/w two banks. b) Evidence: effect is determined by look at mkt share that will be controlled by banks after the merger. Issue: does s7 apply at all to a statutory consolidation? Held: YES – amended s7 of CA applies to bank mergers, acquisitions and consolidations. Reason
1)

b. c.

d.

Does amended s7 of CA apply here? a) Odd Text in Amendment: “no corp subject to juris of FTC shall acquire assets of another corp.” b) Banks not subject to FTC juris:. (1) How does CT get around lack of FTC juris over banks? (a) Since the purpose of amendment to s7 was to fill a loophole, CT says it will not read statute to create a new loophole. (2) ??? Result: the only time amended s7 does not apply is when there is an asset acquisition by corp not subject to FTC. What is relevant product market? Commercial banking. a) Commercial banking defined: includes checking accounts (at time of this case, only banks could offer checking accounts), savings accounts, loans, trust services. b) Lurie suggests the product mkt is artificial b/c if included other financial institutions in relevant mkt, this would be a much smaller share. (1) What is significance of having 100% of the loans? (2) What is significance of demand deposition? (3) Lurie says this just lets the CT play games with #s. What is relevant geographic market? 4 county region
92

2)

3)

a)

Rule: (1) CT’s new test for determining geographic mkt: “proper question to be asked in this case is not where the parties to the merger do business or even where they compete, but where, within the area of competitive overlap, the effect of the merger on competition will be direct and immediate” – p443 (2) Lurie says this is “wonderful” – he means the test makes no sense and gives no guidance. Applied: (1) 4 county region: (a) Remember at this time, banks could only branch into counties adjacent to their home branch. (2) Lurie suggest the geographic mkt is artificial b/c if included other financial institutions on the county borders, this would be a much larger mkt and these Ds would have a much smaller share – see drawing on p439 (3) This characterization of the relevant geographic mkt allows CT to determine that the mkt share that the two Ds would control after the merger = 30% .

b)

4)

Effect
a)

CT lays down its philosophy on mergers and acquisitions and says courts should SIMPLIFY the test of illegality under s7 in “certain cases”: (1) Basically, CT is saying that in “certain cases,” courts can ignore everything that is important in deciding if merger is unlawful. (a) Actual language: “The intense congressional concern with the trend toward concentration warrants dispensing, in certain cases, with elaborate proof of mkt structure, mkt behavior or probably anti-competitive effects” – p444. (2) Lurie suggests CT is moving very close to establishing a rule of per se illegality: (a) CT is creating a rebuttable presumption of illegality for mergers and acquisitions (b) Burden is on merging parties to show clear evidence that the merger is not likely to have such an anticompetitive effect. Rationale for its philosophy: (1) Business people need to be able to rely on the law and be able to assess legality of merger agmt with some predictability. (2) If courts do too much analysis, they will create enforcement problems and subvert congressional intent. CT applies simplified test of illegality and concludes that 30% is enough to violate s7 – p445.
93

b)

c)

5)

CT Rejects Ds’ Countervailing Power Argmt – p446: a) Ds argue that they need to merger to be able to compete with larger NY banks. b) CT rejects: says it will not look at anything other than concentration and mkt share. Government’s case relied on “statistical evidence” – p440 a) This language will be important in later cases.

6)

e. f. g.

Harlan’s Dissent Goldberg Memo: Notes 1) CT takes almost per se approach 2) This case is example of Warren CT’s philosophy on mergers and acquisitions generally. 3) What constitutes “certain cases”? CT applied this “simplified test” case to every case that followed even though it said it would only apply in certain cases. 4) Before this case, govt had to use s1 of SA to go after banks in these kind of cases.

8.

Two Small But Vigorous Competitors – A Note On Von’s Grocery – p450:
a.

Von’s Grocery shows how far CT would go to stop potential for anti-competitive effect in incipiency. Harlan’s criticisms: the only consistency in antitrust cases was that govt always wins.

b.

11-07-01 and 11-09-01
9.

Case - US v. Penn-Olin Chemical Co. (US 1964) – Clark – p451:
a.

Facts: 1) Joint venture scenario: 2 parties form a new corp. 2) Neither parent corp competed in the same line of business or in the same geographic area before the joint venture. Issues – p451: 1) Does s7 apply where 2 corps form a third corp to engage in a new enterprise? Yes. 2) If yes, is there a s1 or s7 violation in this case? Remand to district court to determine Held:
94

b.

c.

Yes - s7 applies where 2 corps form a third corp to engage in a new enterprise. CT remands to district court to determine if there either one of the parties could have entered while the other one stayed outside. 3) Holding favors the govt.
1) 2) d.

Reason:
1)

Potential Competition Theory:
a) b)

VERY IMPORTANT TO UNDERSTAND THIS RULE: b/c outside mkt firms exercise a pro-competitive influence on inside mkt firms, the elimination of the outside mkt firm lessens competition within the mkt. (1) Result: the elimination of the outside mkt firm lessens competition within the mkt. (2) Rationale: outside mkt firms are exercising a pro-competitive influence on inside mkt firms (a) In mkts which are concentrated (very few players) – concentrated mkts tend to behave like oligopolies and monopolies (outputs lower, prices higher) – but where you have a concentrated mkt, the firms within mkt are alert to fact that there may be firms outside the mkt threatening to enter, thus lead firms in mkt to behave more competitively that they ordinary would to prevent other outside firms from entering the mkt (inside mkt firms behave as if outside mkt firm was already in the mkt) – thus outside mkt firm exerts an influence on this mkt even though not in mkt – thus, the elimination of the outside mkt firm lessens competition within the mkt. ??? ANALYIS UNDER POTENTIAL COMPETITOR DOCTRINE:
(1)

c)

Requirements for analysis: (a) Only applies where there are concentrated mkts. (b) ??? Only applies in joint ventures. Identify relevant product and geographic mkts Examine effect on relevant mkt - look at relevant mkt before and after joint venture, merger, acquisition: (a) Always looking for a potential adverse impact on the relevant mkt. (b) Applied here:


(2) (3)

Before Joint Venture: Inside Mkt Firms Outside Mkt Firms
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3


2

After Joint Venture: Inside Mkt Firms 4 Outside Mkt Firms 0

d)

Rests on assumption that there is limited # of potential competitors: thus, elimination of 1 or 2 of them will lessen competition.

2)

Applied:
a)

D’s argmt: s7 does not apply b/c new corp was not a corp engaged in commerce b4 being created b/c it did not even exist. (1) CT rejects: says that whole point was to create a corp that would be engaged in commerce. CT rejects District court’s application of the rule: (1) Said this will only potentially lessen competition if both parent corps were going to come into this mkt but for the joint venture. Inside Mkt Firms 5 Outside Mkt Firms 0

b)

c)

CT’s application of the rule - says this is wrong test to apply – p457: (1) CT said this will potentially lessen competition if one of them had entered and the other one remained outside the mkt exerting influence. (2) 5 on inside and 1 on outside is better than 5 on inside and 0 outside. (3) By coming in as joint venture, they eliminate two potential competitions and only had one enter (4) Neither corp will compete with new entity, nor will they compete with each other. (5) ??? CT says 4-1 (sum = 5) would have been better than 4-0 (sum = 4) b/c it is better to have 5 firms than 4 firms. Inside Mkt Firms 4 Inside Mkt Firms 4 Outside Mkt Firms 1 Outside Mkt Firms 0

e.

Douglas Dissent:

96

1) 2) f. g.

Douglas agrees with majority that this conduct is unlawful but says this is easy case. Douglas says this is like horizontal mkt division which would be per se unlawful.

Harlan Dissent: does not think this was a violation of s7. Notes
1)

Distinction b/w Actual Potential Competitor and Perceived Potential Competitor: a) Actual potential competitor: a firm really considering entering the mkt. b) Perceived potential competitor: a firm that has no interest in entering the mkt but which inside mkt firms think is a likely competitor (and thus, affects inside mkt firms’ behavior). c) Significance of Distinction: evidence which tends to show that a firm is not really going to enter the mkt is inconclusive b/c inside mkt firms’ perception may alter their behavior. ??? Where is adverse effect on competition? ??? Does this mean ALL joint ventures will be illegal? When won’t they be illegal?

2) 3)

10.

Competition for the Market – The El Paso Gas Case – p462:

Lurie did not discuss.
11.

Section 7 and Conglomerate Mergers: Continental Can and Rome Cable – p463:
a.

These cases show extent to which court was willing to go to find mergers and acquisitions unlawful. CT is just using numerology to reach the desired result.

b.

11-09-01
12.

Case - FTC v. P&G Co. (US 1967) – Douglas – p466:
a.

Facts: 1) P&G acquired the assets of Clorox. 2) This was a conglomerate merger or acquisition (neither competitive relationship b/w parties or seller-buyer relationship b/w parties) - product extension merger (b/w companies where they produce or sell related products (e.g., manu of toothpaste acquires manu of toothbrushes). 3) FTC brought s7 action against parties.
97

FTC determined that all liquid bleach is identical. FTC found against D b/c – p468. Court of Appeals reversed FTC’s order b/c no evidence that P&G would enter this mkt unless it could acquire someone in mkt already. 7) Mkt Facts: a) Clorox, thru advertising, created impression that its brand was superior. b) Clorox had dominant share of liquid bleach throughout the country. c) P&G made laundry detergents. d) Liquid bleach was a related b
4) 5) 6) b. c.

Held: for FTC – CT finds a violation of s7 here. Reason
1) 2) 3)

Relevant product mkt = liquid bleach industry. Relevant geographic mkt = the nation. Effect Analysis: a) 2 anticompetitive effects of this merger can be easily seen - p469. (1) Entrenchment: (a) Giant in the land of the pygmies. (b) The substitution of the powerful acquiring firm for the smaller, but already dominant, firm may substantially reduce the competitive structure of the industry by raising entry barriers and by dissuading the smaller firms from aggressively competing. (2) Potential Competitor: (a) The acquisition eliminates the potential competition of the acquiring firm. (b) This merger violates s7 b/c it had the effect of eliminating P&G has a potential competitor. CT says Court of Appeals relied heavily on post-acquisition evidence. CT’s philosophy – incipiency. Possible economies cannot be used as a defense to illegality – p470: says Congress chose to favor competition – CT cites to Brown Shoe. Perceived potential competitor: fact that a firm has no interest in entering the mkt does not remove it as a potential competitor.

4) 5) 6)

7)

d. e.

Harlan Dissent: Lurie did not talk about this. Notes
98

1)

Toe-hold/foot-hold acquisition may not violate s7: if P&G had acquired a small firm in the mkt, that might have been legal – here P&G bought the dominant firm in the mkt.

13.

??? A Note on Reciprocity – the Consolidated Foods Case – p478:
a. b. c. d.

See drawing Definition: use reciprocity to protect or enhance ones sales at expense of competitors. You buy from firms A and B or I will not buy from you. CT in this cases bought into notion that potential for reciprocity could be a basis for invalidating a merger or acquisition under s7. 1) Rationale: creates potential to lessen competition b/c there is unfair leverage/influence. Post-Merger Evidence Cannot be Given Conclusive Weight: CT said will not give post acquisition too much weight b/c otherwise D will lay low until safe and then engage in anti-competitive. HYPO: 1) X owns Trucking Co. 2) X also owns Stationary Co. 3) Trucking Co. buys stationary from Stationary Co. 4) Stationary Co. needs to ship its product through trucking companies. 5) X has leverage to say “you (Trucking Co.) buy your stationary supplies from me or I will use another trucking company.”

e.

f.

14.

A Note on Efficiencies as an AT Matter – p479:

Lurie did not go over.
15.

The Highpoint of Potential Competition: The Falstaff Brewing Case – p481: CT accepts perceived potential competitor concept. CT does not address this theory: can have lessening of competition when merger had no impact on competition other than there would be less competition than there would be if firm that acquired another firm had entered de novo. c. Lurie says present CT would not accept this idea.
a. b.

99

100

CHAPTER 4 – THE MODERN DEVELOPMENT OF ANTITRUST LAW – SINCE 1974: 11-12-01


CHANGE IN CT’S COMPOSITION LEADS TO A CHANGE IN CT’S APPROACH TO AT LAWS:
1. 2.

Per se analysis starts to give way to rule of reason analysis. Is there really any difference? Economic analysis starts to become part of AT analysis

A.

THE TRANSITION CASES:
1.

Case – US v. General Dynamics Corp. (US 1974) – Stewart – p486:
 a.

This case represents major change in CT’s AT philosophy. Facts: Material Facts: a) D was a producer/supplier of coal and other materials. b) D corp acquired the stock of another coal producer corp 2) Background: a) Prior to this case, CT had gotten as close as it could to a per se approach to mergers. b) Govt thought it would easily win this case – it relied on statistical evidence that in the past had worked. c) Stewart, the author, was usually a dissenter in the earlier cases. 3) Govt alleged violation of s7 of CA b/c of acquisition of stock. 4) Real issue on appeal: had district court selected appropriate relevant mkts – CT does not even look at this.
1)

b. c.

Held: for D. Reason:
1) 2)

??? What approach does CT apply? CT found that acquired company had no uncommitted coal reserves, thus, acquired company is a competitive zero – thus, adding the acquired company to the acquiring company, adds nothing to acquiring company’s position.
101

3)

CT acknowledges that earlier cases relying on same type of statistical evidence that govt presents here resulted in SA violations – nevertheless, the CT rejects statistical evidence – p488 CT makes failing company into lesser of 2 evils defense: a) Govt argued this was a failing company defense and thus requires that D must meet elements for estb a valid defense under failing company doctrine – p491. b) In all likelihood, the facts of this case would have failed failing company defense – accord to Lurie. c) CT rejects this and says this is NOT a failing company situation. d) CT takes a “lesser of 2 evils” approach to failing company defense: (1) Lurie says this was not CT’s approach when it adopted the defense in the International Shoe case – “lesser of 2 evils” language was just dicta. (2) Lurie says that thus, even if there is an anticompetitive impact, it is ok as long as there is a failing company.

4)

d. e.

Douglas Dissent: Lurie did not go over. Notes: 1) Shows CT will no longer accept a statistical case. 2) Complete reverse of philosophy of CT re: AT enforcement. 3) CT will look at evidence at time of trial: all of this evidence re: acquired company’s position was as of time of trial (despite the fact that at time of acquisition the acquired company had uncommitted coal reserves). a) ??? Remember that in other cases, CJ Warren in DuPont- GM case ??? - this comes back to haunt the CT.

2.

Qualifying the Potential Competition Doctrine – the Marine Bancorporation Case – p494:

Lurie did not go over this.
3.

Case – Continental T.V., Inc. v. GTE Sylvania Inc. (US 1977) – Powell – p495:
a.

Facts: 1) Location clause in distribution K: Sylvania tells its retailers that they cannot sell Sylvania products at any location not designated by Sylvania. 2) Products were sold to distributors for resale. 3) ??? When Sylvania and retailers disagreed, Sylvania fired retailer 4) District court followed per se approach and found for P.
102

5)

CA9 reversed, concluding Schwinn was distinguishable: location clauses did not have to follow per se approach set down in Schwinn b/c they do not have same adverse competitive effect as vertical territorial provision in Schwinn – instead should follow rule of reason.

b. c. d.

Issue: are location clauses a violation of s1 of SA? Held: applied rule of reason and held for D. Reason:
1)

Precedent: a) This case seems analogous to White Motor (where Douglas said we do not know enough about vertical territorial restrictions to say whether per se illegal or not). b) Schwinn: vertical territorial restrictions are per se unlawful if the product has been sold to the distributor/retailer but will be examined under rule of reason if there is consignment agmt. (1) Many commentators thought this distinction was ridiculous. CT says location clauses are not sufficiently distinguishably from territorial restrictions – p498. Will CT continue to make distinction b/w sale transactions and non-sale transactions? CT discusses rationale for per se rules: a) Lurie says CT is dishonest here. b) There were no “demanding standards” in Northern Pacific – p500 – Lurie asks what demanding standards? CT accepts idea that vertical restrictions can have pro-competitive effects on interbrand competition: a) “The mkt impact of vertical restrictions is complex b/c of their potential for simultaneous . . .” – p500: (1) This is argmt that was raised and rejected (b/c courts not capable of weighing and balancing competition) in TOPCO. (2) This is dishonest b/c there is no “potential” – there is real elimination of intrabrand competition. (3) Thus only question is whether there is any potential stimulation of competition for interbrand competition. b) CT says “interbrand competition” is the “primary concern of AT law” – p500, n16.

2)

3)

4)

5)

103

Lurie doubts validity of this stmt: points to Dr. Miles, White Motor, Schwinn (which were all about intrabrand competition), all of the vertical cases are talking about intrabrand competition, s2 of CA. (2) Now all subsequent cases cite to this case for this proposition – now this is taken as true. c) CT says vertical restrictions promote (not just “potential”) interbrand competition by allowing the manu to achieve certain efficiencies in the distribution of his products. These redeeming values are implicit in every decision sustaining vertical restrictions under the rule of reason – p501 (1) Lurie totally attacks this – see note on p501.
(1) 6)

Although CT does not expressly say this, Lurie says CT says what is good for GM is good for the country (manufacturer’s interest = public’s interest): a) See real language – p501. b) CT cites Comanor (who is opposed to vertical restrictions) in support of proposition that – but Lurie says he would not have supported what CT was doing here. CT concludes that sale, non-sale transaction from Schwinn is not sufficient to justify application of per se rule in some cases and rule of reason in others – p502: a) CT says it finds no persuasive support to extend the per se rule – but Lurie says no one is asking for extension, just asking CT not to overrule it. CT says there is scholarly and judicial authority support for economic utility of vertical restrictions – p502. Thus, CT overrules Schwinn – p503. a) But some vertical restrictions might be per se unlawful b) What is analysis: go through rule of reason analysis to see whether conduct should be per se unlawful. c) Lurie asks how do you know whether a particular application of vertical restrictions is subject to per se or rule of reason approach. d) Lurie says CT gives NO GUIDANCE on burden of proof – what has to proved and who has to prove it. e) Do we begin with a presumption? f) Lurie says courts do not have any way to weigh it. g) Thus, winner or loser will depend on who has burden of proof. CT says it is now returning to rule of reason that governed vertical restrictions b4 Schwinn – p503. a) Lurie asks - did rule of reason apply prior to Schwinn? CT says it has traditionally applied rule of reason to all s1 of SA cases – p503.

7)

8)

9)

10)

11)

104

Lurie says this stmt is not true: majority of the categories of offenses under s1 were subject to per se approach – only one category of offenses under s1 was subject to rule of reason (and Container Corp placed even this in doubt). b) CT is turning things around.
a) e.

Notes: 1) ??? Bottom-line: rule of reason analysis will usually apply in vertical mkt divisions cases. 2) Accord to Lurie, this is one of the most deceptive opinions in AT field written by CT. 3) Accord to Lurie, this case represents judicial repeal of AT laws.

4.

Case – Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. (US 1977) – Marshall - p506:
a.

Facts: 1) Brunswick (D) was buying bowling alleys that could not pay bills. 2) Pueblo-Bowl (P) competed with alleys that D was buying. 3) P filed AT action against D. 4) District court jury found for P – awarded damages. 5) CA reversed and remanded. Issue: whether AT damages are available where the sole injury alleged is that competitors were continued in business, thereby denying P an anticipate increase in mkt shares - p508. Held: for D on damages issue but P can still seek injunctive relief. Reason:
1)

b.

c. d.

RULE on what must P prove to recover treble damages on account of s7 violation:
a) b)

To recover damages, P must prove antitrust injury Antitrust Injury Defined – 509-510: (1) Positive Definition: (a) Injury of the type the antitrust laws were intended to prevent and that flows from they which makes Ds’ acts unlawful. (b) Injury should reflect the anticompetitive effect either:  of the violation; OR  of anticompetitive acts made possible by the violation. (c) Antitrust injury = the type of loss that the claimed violations would be likely to cause. (2) Antitrust injury is more than:
105

A showing that a violation of s7 occurred b/c that only estb that an injury MAY result. (b) A showing injury casually linked to an illegal presence in the mkt.
(a) 2) e.

Rule Applied: P did not show antitrust injury here.

Notes: 1) Did Brunswick effect the # of private cases that were brought?

5.

The Problem of “Passing On” Defense – p512:
a.

CT Rejects the “Passing On” Defense: 1) ??? What is the “passing on” defense? a) The immediate purchaser can sue . . . . 2) ??? Shifting CT Philosophies: Burger CT takes something from Warren CT to justify something that is 180 degrees from earlier court’s view. Only 1st purchaser has standing to sue under antitrust laws. 1) Rationale: a) No end to litigation b) Great risk of inconsistent recoveries. Effect of these cases: eliminated many suits by consumers, including those filed as class actions.

b.

c.

6.

A Note on Some Other Standing Issues – p514:

Lurie did not cover. 11-14-01
B.

THE PER SE V. RULE OF REASON DEBATE CONTINUES IN SECTION 1 CASES:


Open Question = what other situations will merit rule of reason treatment and how will rule of reason analysis apply? Horizontal Price Fixing:
a.

1.

CT Trends 1) In modern era, CT not as willing to see violations when Ds = large corporations.
106

In modern era, CT is more willing to find violations when Ds = groups of individuals. 3) Reasons: a) In early days of SA, govt used s1 of SA against EEs involved in union activity but then labor laws came along. b) These cases involve individuals who act in much same way that employees of unions act – they organized for their own best interests. c) If these individuals were union employees, their activities would have been legal.
2) b.

Case - NSPE v. US (US 1978) – Stevens – p516:
1)

Facts: a) Ethical guideline: NSPE prohibited competitive bidding by its members. (1) NSPE thought it was unethical and not in public interest to have professional engineers quote prices to prospective clients – client should select engineer on basis of background and reputation and not price – p517. b) Rationale: price competition is not in public interest given this profession b/c of public safety concerns. c) Govt alleges violation of s1 of SA: d) NSPE admits guideline and asks CT to take a rule of reason approach and find the guidelines not “unreasonable.” Held: for govt. a) ??? Does CT apply a rule of reason or per se approach? CT seems to analyze it under both approaches. Reason:
a)

2)

3)

What can courts look at when applying rule of reason?
(1)

Test = whether the challenged contract/act has an unreasonably restrictive impact on competitive conditions? Whether challenged contract/act promotes competition or suppresses it? (a) Test is from Standard Oil. (b) Courts can look at nothing else. (c) Courts can look at 2 categories to determine reasonableness of impact:  Nature or character of the contracts.  Surrounding circumstances giving rise to inference or presumption that the contracts were intended to restrain trade or enhance prices. (d) *** Lurie says watch to see if CT remains true to this. What courts CANNOT consider in applying rule of reason: (a) Rule of reason analysis does not mean courts can consider any argument that a certain restraint is reasonable – rule of reason analysis focuses
107

(2)

(b) (c)

(d)

(e)

directly on the challenged restraint’s impact on competitive conditions – p518. Courts cannot inquire into the reasonableness of the prices set by private agreement (citing Addyston). Courts cannot consider the fact that due to the special characteristics of a particular industry, a monopolistic arrangement may better promote trade and commerce than competition (citing TransMissouri Freight Assn.). Courts cannot consider whether a policy favoring competition is in the public interest or in the interest of the members of an industry – Congress already made this decision. Courts cannot consider a defense based on the assumption that competition itself is unreasonable (i.e., public safety defense here).

b)

2 Categories of AT Analysis – p519:
(1)

Per Se: agreements whose nature and necessary effect are so plainly anticompetitive that no elaborate study of the industry is need to estb their illegality. Rule of Reason: agreements whose competitive effect can only be evaluated analyzing the facts peculiar to the business, the history of the restraint, and the reasons why it was imposed.

(2)

c)

??? What does CT mean by “while this is not price fixing, as such”? (1) Full quote: “While this is not price fixing as such, no elaborate industry analysis is required to demonstrate the anticompetitive character of such an agreement” – p519-520 (2) CT says guideline = absolute ban on competitive bidding. (3) “On its face, this agreement restrains trade within the meaning of s1 of SA” CT Rejects D’s Public Safety/Interest Argmt – p521: (1) Judiciary cannot indirectly protect the public against harm by conferring monopoly privileges on the manufacturers. (2) Rule of reason does not support a defense based on the assumption that competition itself is unreasonable.

d)

4)

Blackmun Concur:

Lurie did not discuss.
5)

CJ Burger Concur/Dissent:

Lurie did not discuss.
c.

Case – BMI v. CBS, Inc. (US 1979) – White – p523:
108

1)

See Editor’s Comment about this case – p523.
a)

Editor says “this case makes clear that the rule of reason could be applied to uphold even some horizontal price fixing agreements that at least in principle would have previously been per se illegal – p523. (1) But is this case really about horizontal price fixing? Lurie says this is not a price fixing case – this is an appropriate case for application of rule of reason (1) Salad Bar Analogy (a) Not count individual prices of produce within the salad. (b) Does this mean that sellers of various produce items to restaurants have agreed to fix prices? Lurie says no. (2) Lurie uses salad bar analogy to show that there is no price fixing here, that there is nothing anti-competitive about this case – thus, Lurie disagrees with Casebook Editor’s comment as to what this case indicated. Lurie says there is no generic name for the type of conduct in this case.

b)

c) 2)

Facts: a) ASCAP and BMI issue blanket licenses to CBS. (1) Only people who could grant a blanket license = BMI or ASCAP independent composers could not grant a blanket license. b) CBS sues, alleging: (1) Unlawful monopolies (2) Blanket license is illegal price fixing (3) Blanket license is unlawful tying arrangement (4) Blanket license is concerted refusal to deal (5) Blanket license is misuse of copyright. Issue: whether the issuance by Ds of blanket licenses at fees negotiated by them is price fixing per se unlawful under the AT laws. Held: remand for consideration under rule of reason – favors D. Reason:
a)

3)

4) 5)

“Price fixing is a short hand way of describing certain categories of business behavior to which the per se rule has been held applicable” – p526. “Consequently, as we recognized in TOPCO, it is only after considerable experience with certain business relationships that courts classify them as per violations” – 526.
109

b)

(1)

Lurie says this is nonsense – it was wrong the first time it was said and it continues to be wrong but now CT is repeating it.

c)

CT says per se approach not apply here b/c no apparent that this practice threatens the central nervous system of the economy – p530.

6)

Stevens Dissent: would find this practice unlawful under rule of reason analysis.

Lurie did not discuss.
7)

Notes a) ??? What is lesson of this case? b) ??? Did some commentators think this case abolished the per se rule?

d.

Case - Catalano v. Target Sales (US 1980) – Per Curiam - p537:
1)

Facts: a) Wholesalers agreed to eliminate their practice of extending retailers credit without interest for up to the 30 days permitted by law. b) Retailers sued, alleging violation of s1 of SA. c) Wholesalers admitted agreement but argued that they still competed vigorously on price, agreement made mkt more competitive b/c opened it up for new firms. Issue: whether an agmt to eliminate credit was per se unlawful. Held: this is per se unlawful Reason: a) CT adheres to principle that credit is part of price. b) Thus, agreements re: how to deal with credit are = to agreement re: price. c) Thus, per se unlawful. Notes: a) Reasserts per se rule

2) 3) 4)

5)

11-16-01
e.

Case – Arizona v. Maricopa County Medical Society (US 1982) – Stevens – p538:
1)

Facts: a) Agreement: agreement among physicians, in competition with each other, as to the maximum amount they will accept from insurance company as full payment for services. b) Industry: (1) How does individual physician compete with HMO?
110

No bargaining power with insurance company unless get together with other physicians in area. (b) Physician, without forming group practice, had developed a way to bargain collectively with insurance companies. (c) This would have been legal if the doctors had been members of a labor union. c) Arizona alleged violation of s1 of SA for price fixing. (1) Who is NOT complaining: neither insurance companies, doctors nor patients not complaining. (2) What is state of Arizona complaining? B/c it has to make medical payments. d) Procedural history: (1) In District Court, Arizona motioned for partial summary judgment on issue of liability. (2) District Court refused to enter partial summary judgment for Arizona – Arizona appealed to CA9. (3) CA9 affirmed District Court’s order refusing to enter partial summary judgment for Arizona – case to continue
(a) 2)

Issue: whether s1 of SA has been violated by agreements among competing physicians setting the maximum fees that they may claim in full payment for health services provided to policyholders of specified insurance plans – p538 Held: for Arizona - this is per se unlawful horizontal price fixing. Reason:
a)

3) 4)

CT says “we have not wavered in our enforcement of the per se rule against price fixing” – p540. (1) CT seems to be saying that there is a conclusive presumption that if it is price fixing – not a rebuttable presumption - then it is per se unlawful. (2) Think about the truth of this stmts in both previous and later cases: Is CT true to this stmt in later cases? In previous cases, has CT been true to this stmt? CT rejects D’s argument that the per se rule should not apply b/c these agreements are horizontal and fix maximum prices (rather than minimum prices) – p540. (1) Govt argues that this isn’t really a “maximum” but it is a minimum. (2) Think about these stmts in later cases. CT rejects D’s argument that the per se rule should not apply b/c the judiciary has little AT experience in the HC industry – p541. (1) B/c this argument contradicts Socony. (2) B/c this argument ignores rationale underlying per se approach:
111

b)

c)

Rationale of per se rules = to avoid the necessity for an incredibly complicated and prolonged economic analysis of the entire history of the industry involved, as well as related industries, etc. (3) BUT this seems at odds with CT’s stmt in BMI (a) In BMI CT said it is only after considerable experience with certain business relationships that courts classify them as per violations but CT does not acknowledge the inconsistency.
(a) d)

CT rejects D’s argument that the per se rule should not apply b/c their agreement has procompetitive justifications – p541. (1) CT says D misunderstands per se approach. (2) The anticompetitive potential inherent in all price-fixing agreements justifies their facial invalidation even if pro-competitive justifications are offered for some. CT rejects D’s argument that this case is like BMI case – p543. (1) B/c the fee arrangements in this case fit squarely into the horizontal pricefixing mold. (2) Here the agreement is among independent competitors – unlike BMI. Rationales for per se approach generally and in this case – p543: (1) Economic prediction (2) Judicial convenience (3) Business certainty (4) Recognition of respective roles of judiciary and Congress in regulating the economy. B/c these are not members of union but individuals, CT treats them like individual competitors who formed an agreement.

e)

f)

g)

5)

Powell Dissent:

Lurie did not discuss.
6)

Notes: a) CT here is echoing Douglas’ opinion in Socony. b) What is going on?

f.

A Note on Other Problems of AT Law and Health Care – p548.

Lurie did not discuss
g.

Case – NCAA v. Board of Regents of the Univ. of OK (US 1984) - Stevens – p550:

112

1)

Facts: a) P allege violations of s1 of SA b/c D placed restrictions on televising of football games. b) Lower courts apply per se rule: (1) District Court held: sounds like illegal per se price fixing. (a) NCAA fixed the price for particular telecasts; (b) Its exclusive network contracts were tantamount to a group boycott of all other potential broadcasters and its threat of sanctions against its own members constituted a threatened boycott of potential competitors; (c) Its plan placed an artificial limit on the production of televised college football. (2) CA held: illegal per se price fixing. Held: CT applies rule of reason analysis and finds that NCAA (D) violated s1 of SA. Reason:
a)

2) 3)

D’s arguments: (1) TV policies protected gate attendance of its members; AND (2) TV policies tended to preserve a competitive balance among the football programs of the various schools. CT applies rule of reason and finds against D – see p554: (1) The practices here share characteristics of restraints CT has previously held unreasonable – p554. (2) BUT, CT says it would be inappropriate to apply per se approach here – p554. (a) WHY? b/c this case involves an industry where horizontal restraints on competition are essential if the product is to be available at all. (b) What the NCAA markets in this case is competition itself – contests b/w competing institutions.  Lurie says this is bogus – product is televised football.
(3)

b)

So CT applies rule of reason approach: (a) CT restates test under rule of reason (or per se) - whether the challenged contract/act has an unreasonably restrictive impact on competitive conditions (citing NSPE). (b) Applied: anticompetitive effects are apparent and include:  Individual competitors lose freedom to compete.  Price is higher and output is lower than they would otherwise be.  Price and output are NOT responsive to consumer preference.

c)

CT rejects (for 2 reasons) D’s argument that its TV policy cannot have anticompetitive effect b/c it does not have market power – p557
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Legal: as matter of law, the absence of proof of mkt power does not justify a naked restriction on price or output (citing NSPE). (2) Factual: D does have mkt power.
(1) d)

CT rejects D’s argument that its needs the TV policies to maintain the integrity of football as a distinct and attractive product – p559. (1) CT says all D is really concerned about is that the product will not prove sufficiently attractive to draw live attendance when faced with competition from televised games. CT rejects (in part) D’s argument that its policies are justified by its interest in maintaining a competitive balance among amateur athletic teams – p560: (1) B/c more games would be televised in free mkt than under the NCAA plan – p561. See chart - p560.

e)

f) 4)

White Dissent:

Lurie did not discuss.
5)

Notes:
a) b)

What can D try to prove under a rule of reason analysis? What is CT really doing? (1) Lurie says this is per se case being sold as rule of reason case. (2) Rule of reason can be applied in “twinkling of eye” – p557, n30 - does this mean it is really per se? This is first case in modern era explicitly to apply a rule of reason analysis, yet find the practice violated s1: (1) In no other situation where rule of reason was applied did CT find a violation – p565. This case leads to the development of “Quick Look” Rule of Reason Analysis - p565. (1) Lurie thinks quick look is nonsense. CT keeps switching when and how to apply per se rules.

c)

d)

e) h.

Price Fixing in the Public Interest – Universities’ Joint Determination of Need for Scholarship Aid – p568.
114

Lurie did not discuss.
2.

Group Boycotts by Competitors
a.

Case – Northwest (NW) Wholesale Stationers, Inc. v. Pacific Stationary & Printing Co. (US 1985) – Brennan – p570:
1)

Facts: a) D voted to expel P from cooperative buying organization (of retailers) and no reason was offered for expulsion. b) NW operated as a retailer and as a wholesaler (in competition with cooperative buying association). c) Similar to Eastern States Lumber Association. d) District Court applied rule of reason analysis and held for D. e) CA9 applied per se rule and held for P. Issue: whether D’s decision to expel P should fall within per se category? Held: for D – remands to lower court to apply rule of reason. Reason:
a)

2) 3) 4)

CT restates theme that “every commercial transaction restrains trade” – p572 Lurie disagrees. Distinguish Silver case: (1) Holding of Silver: (a) Silver was terminated as member of NYSE. (b) CT trying to reconcile immunity conferred by SEC statutes (selfregulation) with AT laws. (c) Brought due process into the analysis. (d) To expel someone, regulatory commissions must provide due process. (e) If no due process, then AT laws violated. (2) This case is different b/c there is no due process requirement in AT laws alone – due process only comes into the picture when there is statutorily granted immunity for self-regulation. (a) “If the challenged concerted activity of D’s members would amount to a per se violation of s1 of SA, no amount of procedural protection would save it. If the challenged action would not amount to a violation of s1, no lack of procedural protections would convert it into a per se violation because the AT laws did not themselves impose on joint ventures a requirement of [due] process” – p573.

b)

115

c)

Real issue in this case is whether the decision to expel P constituted a group boycott or a concerted refusal to deal (thus, mandating per se invalidation) – p573.
(1)

Indications that something = group boycott and thus is per se unlawful: (a) “Joint efforts by a firm or firms to disadvantage competitors by either directly denying or persuading or coercing suppliers or customers to deny relationships the competitors need in the competitive struggle.” (b) Cut off access to a supply, facility or mkt necessary to enable the boycotted firm to compete. (c) Boycotting firms possess a dominant mkt position in the relevant mkt. (d) Practices were not justified by plausible arguments that they were intended to enhance overall efficiency. CT is not looking at mere existence of association but at act of expulsion to determine whether per se treatment is appropriate. ??? New Test: absent a showing that the cooperative possesses mkt power or exclusive access to an element essential to effective competition, courts should apply rule of reason – p574. (a) A P seeking application of the per se rule (in case of expulsion from cooperative) must show that the challenged activity falls into a category (either mkt power or exclusive access) likely to have a predominantly anticompetitive effect. Test Applied: (a) Here, we do not know why P was expelled. (b) Thus, per se rule is not proper here.

(2)

(3)

(4)

5)

a) b) b.

Notes: ??? How is TOPCO relevant? ??? What are we supposed to get from this case?

A Note on the Concept of Market Power – p576.

Lurie did not discuss.
1) 2) 3) c.

There is still no agreement on what = mkt power. Most agree that mkt power need not rise to the level of monopoly power. ??? How and when do courts use mkt power analysis?

Case – Rothery Storage & Van Co. v. Atlas Van Lines, Inc. (D.C. Cir. 1986) – Bork – p577:
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1)

Facts: a) P is trying to take advantage of cooperative aspects but not pay for it (1) Free rider problem: analogous to attorney office sharing hypo. b) D says hit the road. c) P alleges violation of s1 of SA. Held: applies rule of reason - for D. Reason: a) Bork says Sealy and TOPCO are effectively overruled – is he right? (1) Lurie says this is NOT true – Sealy and TOPCO are still good law.

2) 3)

11-19-01
d.

A Note on Boycotts and Standards Setting – p586.

Lurie did not discuss.
e.

Boycotts as a Form of Protest – p587.
1)

CT’s position with regard to rule of reason and per se in different settings: a) CT takes a rule of reason approach to cases involving large corps while it takes a per se approach to cases involving individuals/associations of professionals. (1) Kind of conduct being taken by professional that would be legal if they were members of labor union. (2) Harsh treatment of individuals (who really do not have power) and lenient treatment of corps (that do have power) tells us about philosophy that is governing CT decisions in this era. b) Major enforcement agencies have adopted same approach – enforcement is more against individuals or groups of individuals rather than large corps. Case – FTC v. Indiana Federation of Dentists (US 1986) – p588: a) Facts: deprive of X-rays. FTC applies rule of reason approach. CT seems to say rule of reason approach was proper. b) Held: for FTC – D violated s1 of SA. c) Reason: (1) There was evidence that dentists agreed (conduct). (2) But there was no evidence that agreement had anticompetitive effect. d) Notes: (1) Lurie says even though CT says it applied rule of reason approach, it really applied per se approach b/c there was no evidence proving the agreement had an anticompetitive effect. Case – FTC v. Superior Court Trial Lawyers’ Association (US 1990) – Stevens - p588: a) Facts: Lurie says you can view this as EE-ER relationship. Fees were unreasonably low. Ds went on strike. Govt agreed to increase the fees. FTC alleged price fixing.
117

2)

3)

Held: for FTC – applied per se approach to find violation of s1 of SA. Reason: (1) CT says justification for per se rules in rooted in administrative convenience. (a) Older courts used to reject this as a justification – shows judges pick and chose among different justifications. d) Notes
b) c) (1) Lurie says these D are not competitors, thus cannot fix prices. f.

Joint Ventures in Networked Industries as Essential Facilities – p590.

Lurie did not discuss.
3.

Horizontal Market Division
a.

Case – Jay Palmer v. BRG of Georgia, Inc. (US 1990) – Per Curiam – p592:
1)

Facts: a) Bar review course sellers agree to divide the market geographically. b) District Court held agreement was lawful. c) ??? Court of Appeals agreed b/c per se unlawful horizontal price fixing required an explicit agreement on prices to be charged – p593. (1) If CT affirms this decision, they are agreeing with this stmt. (2) If they reverse, they are disagreeing with this stmt. Issue: whether agreement violated s1 of SA. Held: for FTC – CT applies per se approach to find Ds violated s1 of SA application of per se rule does not require an explicit agmt on prices. a) Odd procedural posture: CT grants petition for writ of cert – CT has not heard argument yet – and reversed without hearing argument – CT deciding this case on the petition Reason: a) Application of per se rule does not require an explicit agmt on prices – p593 b) When there is horizontal mkt division, it does not matter whether the Ds have previously competed or not – p593. c) CT cites to TOPCO – p593: suggests Bork was wrong about Sealy and TOPCO being overruled. d) CT says agreement here was “unlawful on its face”: shows per se – p594.

2) 3)

4)

4.

Dealing with Dealers
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a.

Case – Monsanto Co. v. Spray-Rite Service Corp. (US 1984) – Powell – p595:
1)

Facts: a) P alleged that D conspired to fix resale prices of Monsanto herbicides. b) P = discount store – selling below “suggested” retail price. c) District court told jury that D’s conduct was per se unlawful if it was in furtherance of a conspiracy to fix prices - jury found for P – p596. d) Court of Appeals affirmed on basis that “proof of termination following competitor complaints is sufficient to support an inference of concerted action” – p596. e) We will infer an agreement whenever there are dealer complaints and termination. Issue: what is standard of proof required to find vertical price fixing? Held: for P – CT applies different standard. Reason:
a)

2) 3) 4)

Proof required to show vertical price fixing: the AT plaintiff must present evidence that tends to exclude the possibility of independent action by the manufacturer and distributor – there must be direct or circumstantial evidence that reasonably tends to prove that the manufacturer and others had a conscious commitment to a common scheme designed to achieve an unlawful objective – p598, 599. (1) CT rejects stmt by Court of Appeals (Court of Appeals said “proof of termination following competitor complaints is sufficient to support an inference of concerted action”) – p596.
CT distinguishes b/w concerted and independent action: (1) Focus in this cases is on first element of s1 of SA – is this unilateral or concerted conduct?

b)

c)

CT distinguishes b/w concerted action to set prices (per se) and concerted action on non-price restrictions (rule of reason). ??? Big Issue in this case - what is manufacturer to do? ??? Note footnote 53 – govt wants CT to reconsider per se illegality of resale price maintenance. Remember Albrecht case – what goes hand in hand – CT will not entertain that question at this time. Rule Applied: there is enough evidence here to find for P.

d) e)

f)

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5) 6)

Brennan Concur: wants to overrule Dr. Miles. Notes: a) Vertical price fixing is per se unlawful b/c effect is same as if retailers horizontally combined to estb the price – Dr. Miles.
b) c) Intrabrand competition – calls into question footnote in GTE Sylvania (stating primary concern of AT laws is interbrand competition). CT is concerned about eroding Colgate (Lurie says they are bringing it back to life and are going to protect it).

b.

More on Proof of Agreement – p601.

Lurie did not discuss.
c.

The Continuing Debate About the Economics of Vertical Restraints – p604.

Lurie did not discuss.
d.

Facts: Go back to p593 - didn’t CT already reject this notion? District court (thru jury) for P. Court of Appeals reverses b/c it says jury instructions were in error – says “vertical restraint is per se illegal under s1 only if there is express or implied agreement to set resale prices at some level, though not a specific one.” –p606. Held: Reason: CT agrees with Court of Appeals here – it is not enough if you have agreement b/w manu and distributor to terminate discount distributor - illegal only if there is agreement on specific price or price level. How does CT get there: CT says “scope of per se illegality should be NARROW in the context of vertical restraints” ??? Lurie says CT is being deceptive - not talking about extending rule – CT is reversing its decision – CT is not facing this issue for the first time – it has already dealt with it and gone back and forth - Sylvania overruled Schwinn – isn’t it odd that CT is referring Interbrand competition is primary concern of AT law – this really gets Lurie mad b/c there is no support for this proposition – what about all vertical restriction case up to this point. Rule of per se illegality not needed to protect intrabrand competition – p608 Lurie disagrees with this – says intrabrand competition is just as important as interbrand. New approach – p609. Protect doctrine of Sylvania White & Stevens Dissent:
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Case – Business Electronics Corp. v. Sharp Electronics Corp. (US 1988) – Scalia – p606:

“If respondent had been represented by 3 dealers . . . .an obvious violation of the Sherman Act” – p615. Wants to focus on intrabrand competition – get full quote – says D has burden to prove that elimination of intrabrand competition will improve interbrand competition - p615. What CT did: P must demonstrate harm to both inter and intrabrand competition – Lurie says this burden is impossible to meet. Stevens wrote Professional Engineers. 11-26-01 Notes P now has to prove clear harm to interbrand competition – no way to prove this accord to Lurie
It was easy to prove harm to intrabrand competition – terminated dealers are harmed.

There is no weighing, no balance in this new approach. New approach by CT: Lurie says majority was taking position that agmt b/w manu and distributor to terminate another distributor for price cutting was not unlawful per se unless there was an agmt b/w favored distributor and manu that estb prices either specifically or at some level. This is at odds with earlier CT decisions saying no need to have specific price agmt – p593. Trend in CT’s approach to per se rule: moving away from saying certain conduct is per se unlawful – This started with GTE Sylvania where CT took a position that was expressly rejected in TOPCO (elimination of intrabrand competition could enhance interbrand competition). Again, in Monsanto, CT backs up

e.

????

Lurie’s Analysis of Inter-Intra Theory:

P2

P1

MC for Dist

MC D MR Q2 Q1

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Argument: by giving distributor a competition free package, distributor will have incentive to promote this manu’s product over another manu’s product – distributor will spend money to promote this product – added costs will push MC curve up – which would seem to suggest product is more valuable to customers, shift demand curve to the right – thus, increases consumer surplus.

MC2 MC1 D2

D1 Q2 Q1 Q3

Lurie says you can criticize this notion – does not buy idea – b/c Lurie does not think D2 will be parallel to D1 – product differentiation information – what will really happen is that slope of the D curve will change – it will not just move over in parallel fashion – increase slope of demand curve and thus are NOT enhancing competition (see Commoner). But CT seems to believe you can enhance interbrand competition by eliminating intrabrand competition – b/c interbrand competition is main focus of AT laws (Lurie puts out this was wrong when it was initially said).
f.

Maximum Price Fixing – p618.

Lurie did not discuss.
g.

Case – State Oil Co. v. Khan (US 1997) – O’Connor – p619:
1) 2) 3)

Facts: Issue: whether D’s conduct constitutes a per se violation of the SA? Held: for D – CT says vertical maximum price fixing agreements are subject to rule of reason.
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4)

Reason: a) CT overrules Albrecht. (1) CT adopts Harlan’s dissent in Albrecht that max vertical price fixing does not bring about same result as min vertical price fixing. b) CT’s view of Albrecht rationale: (1) “fear that vertical max price fixing could allow suppliers to discriminate against certain dealers, restrict the services that dealers could afford to offer customers, or disguise min price fixing schemes” - p621. (2) Lurie says this is not true – CT in Albrecht did not rely on these things. (3) See 4 rationales on p623. (4) Remember almost every time rule of reason is applied, conduct is found to be not unlawful. c) CT’s rationale: (1) CT relies on idea that primary purpose of AT laws is to protect interbrand competition. (2) Vertical max price fixing will not cause same harm as min price fixing: people who want to set a max price are different than those who want to set min prices – p622. d) CT is NOT holding that vertical max price fixing is per se lawful: just saying it should be evaluated under rule of reason. Notes:

5) h. i.

Developments in Territorial Allocation Since GTE Sylvania – p626. Vertical Group Boycotts – NYNEX v. Discon – p627.

5.

Pulling the Section 1 Cases Together
a. b.

Can the Modern Cases Be Reconciled? Some Efforts to Do So – p628. Case - California Dental Assn. v. FTC (US 1999) – Souter – p631:
1)

Facts: a) Dentist association prohibited “deceptive” advertising by dentists. CDA said burden is on dentist to estb that advertising is not deceptive. b) FTC found that although prohibition was aimed at deceptive advertising, it was being applied in such a manner that all price info was being viewed by association as “deceptive.” c) ALJ held for FTC. d) Lower courts applied “quick look” rule of reason approach. Held: remand - error for Court of Appeals to apply quick look rule of reason analysis – need full blown rule of reason analysis here.
123

2)

3)

Issue: whether a quick look sufficed to justify finding that certain advertising restrictions adopted by the D violated the AT laws. Reason: a) CT looks at origin of quick look rule of reason analysis – p635. b) CT says we only look at the impact on competition. c) No categorical line b/w per se Notes: a) Lurie says result = unless you perform full rule of reason inquiry, you never know whether you have done enough to satisfy the higher courts on appeal Lurie says this is an unworkable standard. b) Suppose 2 dealers had agreed to complain to manufacturer – or 1 dealer complained to more than one manufacturer – is this per se violation of s1?

4)

5)

c.

Antitrust Guidelines for Collaborations Among Competitors (2000) – p644.

Lurie did not discuss.

C. THE CONTINUING CONCERN ABOUT EXCLUSIONARY CONDUCT:

11-28-01
1.

Monopolization:
a.

Case – Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (US 1985) – Stevens – p647:
1)

Facts: a) One of the oddest AT cases to come before CT. b) Different owners of different mountains – owner of 3 mountains stopped joint 4-resort ticket. c) P sued under s2 of SA. d) Jury found for P. e) District court judge’s instruction to jury – p652. (1) Does D have to have a “legitimate business reason” to refuse to cooperate with a rival? (2) What is a “legitimate business reason”? f) D does not dispute that it had monopoly power on appeal to CT. (1) If you were the attorney for the D, what would you argue re: monopoly power – argue that D did not have monopoly power:
124

Argue that geographic mkt should be destination ski resorts across the country, not just Aspen. (b) Argue that D did not have monopoly power b/c did not have power to control price in competing ski destinations. (2) Lesson: do not concede a defensible position.
(a) 2)

Issue: whether that finding is erroneous as a matter of law b/c it rests on an assumption that a firm with monopoly power has a duty to cooperate with its smaller rivals in a marketing arrangement in order to avoid violating s2 of SA – p648. Held: for P – evidence is adequate to show violation of s2 of SA. Reason: a) D argues that even a firm with monopoly power has no duty to cooperate with a competitor, that a violation of s2 cannot be estb without evidence of substantial exclusionary conduct, and that none of its activities can be characterized as exclusionary – p653. (1) This seems problematic b/c cooperation b/w competitors might constitute a violation of s1 of SA. (2) CT agrees with D that there is no duty to engage in joint marketing programs. (3) But this case does not rest on any such duty. (4) However, CT says fact that a firm declines to engage in joint marketing program may be evidence of exclusionary conduct.
b)

3) 4)

There were no valid business reasons for the refusal – p655: (1) CT says to determine whether D engaged in exclusionary conduct, courts should look at effect on the P and on consumers. (2) Seems inconsistent. Why does P need this multi-area ticket? What is real conduct here that CT found illegal? (1) Conduct that D engaged in when P tried to compensate for fact that they were kicked out of joint ticket – D refused to sell tickets to P for its multiticket packet – this conduct served no purpose other than to make life difficult for the P.

c) d)

5)

Notes: a) Moral of story: if you possess monopoly power, your have to be awfully careful about your conduct. Once you concede monopoly power, you are halfway there – be careful. b) Hypo: (1) Hypo: large metro area, one major newspaper, paper provides home delivery. Delivery is done by an independent distributor. A new person comes along
125

and wants to start up a newspaper. Wants to have home delivery but small, will be expensive to have a distribution system. New guy goes to independent newspaper and says he will pay him to deliver the little paper as well. What will independent distributor do? He will deliver both. (2) Hypo: large metro area, one major newspaper, paper provides home delivery. . A new person comes along and wants to start up a newspaper. Wants to have home delivery but small, will be expensive to have a distribution system. New guy goes to big newspaper and says he will pay him to deliver the little paper as well. Big newspaper says no – do they need a legitimate business reason – is mere fact that little guy is competitor should be reason enough? (3) When newspaper is in both markets – publication and distribution – if it behaves other than how an independent distributor would behave – is it doing something exclusionary? Is it tying 2 different products?

b.

A Note on Attempted Monopolization – The Spectrum Sports Case - p688.
 1) 2) 3) 4)

See notes in Black Letter law Exclusionary conduct Specific intent to monopolize Dangerous probability of success Proof of relevant market

2.

Tying and Exclusive Dealing in the Current Period:

11-30-01
a.

Case – Jefferson Parish Hospital District No. 2 v. Hyde (US 1984) – Stevens p690.
1)

Facts: P is anesthesiologist who wants to be able to practice in this hospital but hospital has exclusive K with a different anesthesiologist firm. a) Equivalent to ACME saying it does not want to carry Kellogg’s’ cereal. Issue: a) Are tying arrangements subject to per se rule? NO. b) Is the conduct here a violation of s1 under rule of reason? NO Held: for D – CT applies rule of reason. Reason this arrangement is not an illegal Tying Arrangement:
126

2)

3) 4)

a) b)

s3 of CA not apply here b/c product here is not “commodity”. CT’s historical treatment of tying arrangements: (1) CT was moving in direction of saying tying arrangements were per se unlawful – CT never expressly said they were per se but it got very close – tying arrangements are unlawful whenever . . . . Lurie says CT is RIGHT to get rid of per se language in tying arrangement cases. Lurie says CT is WRONG to focus on impact on consumer as the evil against which the prohibition on tying arrangements is aimed. (1) Lurie says CT should really be focusing on impact on other competitors. (2) Evil of vertical arrangements = foreclosure of markets to competitors (impact on consumer is secondary). (3) See p692. Is this 1 or 2 products? CT says 2. (1) Tying product: hospital services. (2) Tied product: anesthesiologist. CT finds that D did not have sufficient power in market for tying product. (1) CT concludes that Jefferson parish is not appropriate relevant geographic market.

c)

d)

e)

f)

5)

??? Reason this is arrangement is not an illegal Exclusive Dealing Arrangement: a) Who is the manufacturer? Who is the distributor? Notes:
a)

6)

Growing trend toward rule of reason: the case shows us that CT is moving in direction of making things all rule of reason cases rather than per se cases. (1) What is still per se unlawful? (a) Horizontal price fixing still per se unlawful. Lurie’s Law: you can do anything you want unless it is prohibited or someone else has a superior right to do it. CHANGE IN LAW re: how much of an impact on commerce is required to find a tying arrangement unlawful: (1) Old (also known as precedent): “a not insubstantial amount of commerce” – indicate only need an impact on a de minimus volume of commerce.

b)

c)

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(2)

Now: “We have refused to condemn tying arrangements unless a substantial volume of commerce is foreclosed” – this seems to require a lot more – p693.

3.

The Titanic Struggle Over Alleged Exclusionary Behavior:
a.

Background:
1)

Govt and Micro reached consent settlement – judge would not agree to settlement – D.C. Cir. removed first judge and gave case to Judge Jackson. a) Non-bundling provision but integrated product exception. b) Govt argued that Micro had violated non-bundling provision; Micro argued that this was an integrated product. Judge Jackson issued his opinion – class for structural remedy - makes comments to press. D.C. Cir. removes Jackson and disagrees with him about remedy and give case to new judge. a) Means that you can only have a conduct based remedy. Bush administration is less AT enforcement-minded – govt now reaching an agreement with Micro – Lurie says the new conduct-focused remedy/settlement is a joke – Micro has won! What about the states’ attorneys general

2)

3)

4)

5) b. c.

Case – US v. Microsoft Corp. (D.C. Cir. 1998) – p729: Case – US v. Microsoft Corp. (D.D.C. 2000) – p741: 1) Read his findings of fact – Lurie says this is a wonderful example of proper AT fact finding. 2) Jackson not only thinks Micro was behaving unlawfully but that Micro was bad.

128

Remedy = thinks only a structural remedy would have any effect on D – thus, he said Micro should be split into 2 corporate entities: (1) operating system; and (2) browser. 4) D.C. Cir.: disagree with Jackson’s remedy.
3)

129

D.

MERGER REVIEW – ANTITRUST AS AN ADMINISTRATIVE PROCESS:
1.

Get info off virtual classroom re: administration and enforcement of AT laws. a. Under “Course Documents.” b. 2-4 questions from this material Enforcement Generally:

2.

Govt Enforcement (federal govt): 2 enforcement agencies who handle almost all AT enforcement. Dept of Justice FTC Private Enforcement (includes states, municipalities, non-federal govt agencies, private individuals) Suits for damages or injunction relief. Substantive provisions s1: K, constraint – elements? s2: monopolization – relevant mkt (product and geographic – cross-elasticity/substitutability) elements? s3: we will not be tested on this. CA s2: price discrimination (amended by RPA) s3: exclusive dealing and tying – relevant mkt - jurisdictional requirements and elements? s7: anti-merger provision – distinguish b/w FTC and justice department re: asset acquisitions. S8: we will not be tested on this. FTC and Justice Dept have concurrent juris. FTC Act s5: outlaws unfair methods of competition – any conduct that would violate s1 or s2 = “unfair methods of competition” FTC does not have juris to directly enforce s1 or s2. Dept of Justice has no juris to enforce for violations of s5 of FTC Act Private parties have no juris to sue for violations of s5 of FTC Act To encourage private enforcement, Congress provided some incentives: Allows for treble damages/reasonable attorneys fees. If govt is successful in AT action against a D, a private party may use that govt action as prima facie evidence of the violation – then all private party needs to prove is harm and amount of harm. s1 and s2 are criminal provision – can be enforced criminally, civilly or both – b/c of different proof standards, D can be found not guilty criminally but liable civilly.

130

FTC cannot institute a criminal case – only an administrative case – to enforce s5 of FTCA or s2, s3, s7 of CA. FTC has very broad power of investigation – largest of any federal govt agency. Justice Dept’s power is not as broad as FTC’s but still pretty broad. If govt’s investigation indicates law has been violated, Justice Dept If it is criminal action, D can plead guilty, not guilty, nolo contender – if matter is settled by consent, then consent decree cannot be used by private litigant in his action (avoids rule above letting private litigant use judgment from govt case in his own case) – private litigant can use nolo contendo. ??? Is settling the same as pleading guilty. Judge has to conclude that consent decree is in public interest. s4 (procedural) of CA provides for treble damages. Even an ultimate consumer can bring suit for treble damages. Municipal govt, local govt – anyone injured in their proprietary capacity. Old rule: federal govt limited to single damages; current rule: fed govt may now bring treble damages actions when injured in its proprietary capacity Actions by foreign govt: foreign countries do NOT constitute persons for treble damages purposes – thus, foreign govt limited to single damages. SOL for treble damages – s4B: 4 year SOL. Tolling provision: SOL will be tolled in case of govt action that is occurring until 1 year after conclusion of govt action. FTC actions cannot be used by private litigants when enforcing s5 of FTCA – unclear whether private litigant can use FTC enforcement of CA in its own case. s16 (procedural) of CA provides for injunctive relief for private parties P can bring private action under s7 of CA but will probably lose. Defenses to AT actions: Immunity Defense: For regulated industries. State Action Doctrine– p816-18 Municipalities do not enjoy sovereign immunity. Local Government AT Act: lets municipalities get off free. “Passing On” Defense:
131

D overcharged (as result of mono or price fixing) – D would argue that P (retailer) was not really hurt b/c P had passed the costs on to the ultimate consumer. Old rule under Warren: CT rejected this defense – said immediate purchaser may bring damages action even if they passed it on to consumer (Hanover Shoe) – seemed to indicate both immediate purchaser and ultimate consumer could sue. Current rule: have to be a direct/immediate purchaser to sue – ultimate consumer cannot sue (Illinois Brick). CT not willing to accept. In pare delecto defense: You the P are the other party to the unlawful agreement – the other co-conspirator Current rule: CT held in pare dilecto defense was not applicable b/c only person who would bring suit was the other party – and this is not equal fault – unequal bargaining power. CT not willing to accept. Fortner No “AT Injury” Defense: Brunswick: CT held that P could not prevail in a damages case unless P was asserting an “AT injury.” Cargill-Monfort of Colorado, Inc. (US 1986) – Brennan – p771 Does this defense apply in an injunction case? CT said even in injunction cases, P has to show “AT injury.” Very common defense – CT seems willing to accept.

3. 4.

Case – Cargill, Inc. v. Monfort of Colorado, Inc (US 1986) – Brennan – p771. ??? Herfindahl-Hirschman Index – p778:

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Lurie’s Advice on How to Organize for Exam Do not forget to fill in the exam # in the box on scan-tron sheet. Generally, your first guess is the best one. Assume Lurie has given us enough info to answer the question. If there is an ambiguity, write it on a separate sheet of paper with my exam # on it and try and answer each of the alternatives. Do not answer questions on basis of trends that we see – answer all questions on basis of current law today. If CT has not specifically overruled a case (even if they would if the case comes before them next week), it is still good law – current law. What are substantive statutory provisions? SA s1: K, constraint – elements? s2: monopolization – relevant mkt (product and geographic – cross-elasticity/substitutability) elements? CA s2: price discrimination (amended by RPA) s3: exclusive dealing and tying – relevant mkt - jurisdictional requirements and elements? s7: anti-merger provision – distinguish b/w FTC and justice department re: asset acquisitions. FTC s5: FTC cannot enforce s1 or s2 directly.

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HORIZONTAL PRICE FIXING Rule: horizontal price fixing is per se illegal. Courts now more willing to find violations when Ds = group of professionals than when D = group of businesses. Section: s1 of SA Restraint Type: horizontal Approach: per se illegal Evil: price fixing agreements are inherently anti-competitive - eliminates price competition b/w competitors. Elements/Requirements: Existence of K, combination or conspiracy (or agreement). No need to prove restraint of trade – this is presumed. No need to prove that D had mkt power – it is irrelevant (see FN in Socony). Defenses: Argue that D’s conduct is not “price fixing” – characterization is crucial - try to fit it into Chicago Board (US 1918) or Appal Coals v. US (US 1933): Parker defense – state action: state or its officers or agents can price fix. Noerr-Pennington Doctrine: Sample Cases: Trans-Missouri (US 1897): CT applies clear per se approach. Joint-Traffic (US 1898): CT seems to back down – back to rule of reason Addyston Pipe (CA6 1898 adopted by CT): this seems to be origin of per se rule. Chicago Board (US 1918): CT applies ROR but refuses to label conduct here “price fixing.” Trenton Potteries (US 1927): reaffirms per se illegality of price fixing agreements. Socony-Vacuum (US 1940): Douglas, for CT, adopts broad definition of what = “price fixing.” NSPE v. US (US 1978): for govt – but unclear what approach CT applies. Catalano (US 1980): reaffirms per se – agreement to eliminate credit is per se illegal (credit = price). Maricopa County (US 1982): setting of maximum fees is per se unlawful price fixing.

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HORIZONTAL TERRITORIAL MARKET DIVISION Rule: Section: s1 of SA Restraint Type: horizontal Approach: per se illegal. Evil: elimination of competition among competitors (same effect as horizontal price fixing) Elements/Requirements: Defenses: Sample Cases: Timkin v. US (US 1951): for govt – CT applies per se approach. US v. TOPCO (US 1972): for govt – CT applies per se approach (Lurie says this is NOT really a horizontal territorial market division case even though CT treats it as such) – Ds argue this is vertical territorial market division case and that restricting intrabrand competition increases interbrand competition. Palmer v. BRG (US 1990): for FTC – CT applies per se approach – reaffirms vitality of TOPCO.

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HORIZONTAL - GROUP BOYCOTTS Rule: concerted refusals are subject to per se illegality in violation of s1 of SA. Section: s1 of SA Restraint Type: horizontal, non-price ??? Approach: per se illegal If there is no market power, the ROR applies. Evil: Elements/Requirements: Existence of agreement to refuse to deal or boycott. Defenses: Colgate unilateral conduct defense. Parker state action defense ??? Due process requirements – like Silver Sample Cases: Eastern States Retail Lumber (US 1914): Klor’s FOGA v. FTC (US 1941): ??? NW Retail Stationers v. Pacific Stationary (US 1985): for D – remands to lower court to apply rule of reason – this is very similar to Eastern States but CT comes out differently – does CT reach this result by saying that is not a group boycott – see p121N for new test. Superior Trial Lawyers *Refusals to deal are often evidence of other AT violations.

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HORIZONTAL – CONCERTED REFUSALS TO DEAL See boycotts ??? Are there any differences? Rule: Section: Restraint Type: Approach: Evil: Elements/Requirements: Defenses: Sample Cases:

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HORIZONTAL - MONOPOLIZATION Rule: If you possess monopoly power, be careful. ??? The possession of monopoly power creates a rebuttable presumption that D has violated s2 of SA unless D can meet exceptions – is this still the rule? 3 approaches to s2 of SA violations – p57N, also see B. Know specific terms – p54N. Section: s2 of SA (s1 violation by a firm with monopoly power is also a s2 violation). Restraint Type: horizontal Approach: rule of reason Evil: monopolization – bad social costs. Elements/Requirements: Possession of monopoly power [power to control price] in relevant market (>70% is usually sufficient) Exclusionary conduct (i.e., predatory pricing, price discrimination, patent abuse, tying agreements, refusal to deal, essential facilities doctrine, free service agreements, leases) Key factor = determination of relevant product and geographic markets (very malleable) If resolution of second element is easy, resolution of first element becomes crucial. Defenses: No monopoly power in relevant market (or natural monopoly) - argue about relevant market. No exclusionary conduct. No AT injury Sample Cases: Northern Securities (US 1904): D’s conduct violated s1 of SA (no CA yet) Standard Oil Co. of NJ (US 1911): CT applies rule of reason and finds for govt. US v. US Steel Corp (US 1920): for D – CT retreating from strong enforcement of AT laws. US v. ALCOA (US 1945): for govt – CT applied rule of reason. US v. United Shoe (D. Mass. 1953): free service agreement may meet exclusionary conduct requirement – court seems to be suggesting that bigness alone is bad. US v. E.I. DuPont (US 1956): for D – note CT’s discussion of cellophane and its relevant market. Utah Pie v. Continental Baking (US 1967): for P – example of predatory pricingGrinnell (US 1966) Aspen Skiing Co. v. Aspen (US 1985): for P – there is violation of s2 of SA – competitor has no duty to cooperate with other competitors -

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HORIZTONAL – ATTEMPT TO MONOPOLIZE Rule: see black letter Section: s2 of SA Restraint Type: horizontal, non-price Approach: rule of reason Evil: bad social costs Elements/Requirements: 3 elements See p116B. Defenses: Sample Cases:

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HORIZONTAL MERGERS See mergers and acquisitions problem set. Example: transaction is b/w 2 competitors (companies performing similar functions in the production or sale of comparable goods/services). ??? Does whether it is a corporate acquisition, a corporate merger or a corporate consolidation matter? Rule: a horizontal merger may violation s7 of the CA if it will substantially lessen competition or tend to create a monopoly. ??? Section: s7 of CA Restraint Type: horizontal, non-price Approach: rule of reason – CT initially leaned toward per se approach then backed off. Evil: elimination of competition b/w 2 competitors - collusion which could lead to increased price and reduced output. Elements/Requirements: Balance efficiencies and danger of collusion. Evidence: Market concentration Market share: effect is determined by look at market share that will be controlled by banks after merger. Congress’ decision to protect small businesses even if inefficient. History of tendency toward concentration in the industry. Test for determining relevant geographic market – p96N ??? Potential Competition Theory – how does this fit into merger analysis? ??? CT will look at evidence at time of trial. Defenses: Failing company defense – p227B, p95N. Sample Cases: Brown Shoe v. US (US 1962): horizontal aspects of merger violate s7 - CT leaning toward per se test for illegality of mergers. US v. Phila Nat’l Bank (US 1963): for govt – s7 applies to statutory consolidations – CT leaning toward per se test for illegality of mergers – 30% of market share is enough to violate s7. Von’s Grocery : shows how far Warren CT would go to stop merger in incipiency. US v. Penn-Olin (US 1964): CT applies s7 to joint ventures and discusses potential competition theory. US v. General Dynamics (US 1974): for D – CT taking rule of reason approach to mergers – CT rejects statistical evidence.

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HORIZONTAL – INFO SHARING Rule: competitor price info exchanges should be governed by the rule of reason – Section: s1 of SA Restraint Type: horizontal, price. Approach: rule of reason Evil: Elements/Requirements: Purpose of agreement Effect on market price If not evidence re: purpose and effect, look at time of price info exchanged – when info exchange is in re: to future prices, almost always find a violation of s1 - past prices probably OK - present prices is risky. High market concentration Specificity of info collected Defenses: No purpose to fix prices No effect on prices Sample Cases: American Column v. US (US 1921): for govt applying ROR. Maple Flooring v. US (US 1925): for D applying ROR Sugar Institute v. US (1936): for govt applying ROR. US v. Container Corp (US 1969): for govt but unclear what approach CT applies- seems to say that agreements stabilizing prices violate SA.

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HORIZONTAL – PREDATORY PRICING Is this part of monopolization? Rule: Section: s2 of CA, s2 of SA Restraint Type: horizontal Approach: Evil: indicator of exclusionary conduct under monopolization. Elements/Requirements: Factors indicating predatory pricing – p62N Defenses: Sample Cases: Utah Pie

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HORIZONTAL – PRICE DISCRIMINATION Does this fit in somewhere else’s? Rule: illegal for seller to discriminate on basis of price b/w different purchasers of commodities of like grade and quality where effect is to substantially lessen competition or tend to create monopoly. RPA designed to protect small businesses. RPA sometimes conflicts with s1 of SA. Primary line pricing Secondary line pricing Section: s2 of CA (RPA) ??? Restraint Type: horizontal Approach: rule of reason Evil: Elements/Requirements: To sue seller: D must be “engaged” in interstate commerce There must be a sale of commodities “Like grade and quality” P must prove competitive injury to himself (only required in private P litigation). To sue buyer: Buyer cannot be sued unless seller is also in violation Defenses – p256B: Cost justification defense Good faith meeting competition defense Sample Cases: FTC v. Morton Salt (US 1948): for FTC – what approach?

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VERTICAL – RESALE PRICE MAINTENANCE - MINIMUM Rule: the setting of minimum resale prices violates s1 of SA (like vertical price fixing). Section: s1 pf SA Restraint Type: vertical ??? Approach: per se illegal. Evil: Interferes with retailer’s freedom to set prices Same effect as horizontal price fixing agreements (this is debatable) Elements/Requirements: Agreement b/w manufacturers and retailers Market power and D’s motive are irrelevant. ??? What proof is required to show vertical price fixing – does P or govt need to show a specific agreement to fix prices - see p124N. ??? Defenses: Colgate unilateral conduct exception: manufacturer can announce and refuse to sell when opportunity arises but that is it. Consignment sales (risk of non-sale stays with manufacturer). Patent defense Standard Oil (Indiana) v. US defense: when there are legitimately conflicting claims over a patent, a settlement by agreement, rather than litigation, is not precluded by SA. Sample Cases: Dr. Miles (US 1911): Colgate (US 1919): US v. GE Co. (1926): for D applying ROR – sets up consignment defense - this case now in question by Simpson. Simpson v. Union Oil (US 1964): for P – manufacturer may not use “coercion” – CT limits GE to patented product. Klor’s v. Broadway (US 1959): for P – CT applies per se approach. Parke Davis (US 1960): for govt – limits Colgate – lets first element of s1 be satisfied by nonconsensual conduct. Monsanto v. Spray-Rite (US 1984): for P – CT applies per se rule - seems to heighten “agreement” requirement. Business Electronics v. Sharp Electronics (US 1988):

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VERTICAL – RESALE PRICE MAINTENANCE – MAXIMUM Rule: Section: Restraint Type: vertical Approach: rule of reason Evil: Elements/Requirements: Defenses: Sample Cases: Albrecht : represented old rule that applied per se approach. Khan : represents current rule of reason approach.

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VERTICAL TERRITORIAL MARKET DIVISION Rule: Old rule: courts seemed to be leaning toward per se. Example of vertical non-price restraint ??? Section: Restraint Type: rule of reason Are vertical restrictions ever subject to per se? Approach: vertical, non-price Evil: ??? Elements/Requirements: Courts usually find for Ds in these cases once matter is characterized as “non-price” restraint. ??? Market power Defenses: Restrictions on intrabrand competition increase interbrand competition. Sample Cases: TOPCO White Motor Co. v. US (US 1964): vertical territorial market division case – remanded b/c CT could not determine whether it should be subject to per se or rule of reason. US v. Schwinn (US 1967): mixes the law all up – overruled later. Albrecht v. Herald (US 1968): for P – CT finds violation of s1 of SA – cases seems to indicate CT thought vertical territorial market divisions were per se invalid but this changes later. Continental TV v. GTE Sylvania (US 1977): for D – rule of reason – CT accepts idea that restriction of intrabrand competition might increase interbrand competition – interbrand competition is primary purpose of AT laws - overrules Schwinn

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VERTICAL – MERGER/INTERGRATION Example: transaction b/w parties that stand in buyer-seller relationship to each other Rule: see p128B - rarely an AT violation but courts have dealt with harshly b/c worry about domino theory. Section: s1 of SA (if not meet jurisdictional requirements of s7 of CA) s7 of CA Restraint Type: vertical Approach: rule of reason - CT initially leaned toward a per se approach but then backed off. Evil: foreclosure of markets to competitors Elements/Requirements: Test for relevant product market – reasonable interchangeability of use or the cross-elasticity of demand b/w the product itself and the substitutes for it (different than monopolization relevant market – courts can look at “economically significant sub-markets”). Relevant geographic market ??? Evidence? Size of market share foreclose (but not a determinative factor in in-b/w cases) ??? At what point in time should courts look at effects? ??? Potential Competition Theory – how does this fit into merger analysis? Defenses: Failing Company Defense - p227B, p95N Sample Cases: Brown Shoe v. US (US 1962): for govt – CT seems close to applying per se to find s7 of CA violation. US v. E.I. DuPont (US 1957): for govt – D’s retention of GM stock violated unamended s7 b/c its effect was tended to create monopoly. US v. Penn-Olin (US 1964): CT applies s7 to joint ventures and discusses potential competition theory. P&G Falstaff : highpoint of potential competition theory US v. General Dynamics (US 1974): for D – CT taking rule of reason approach to mergers.

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VERTICAL – EXCLUSIVE DEALING Example: Manufacturer says to retailer “You will sell my product but not competing products from other manufacturers.” Rule: It is unlawful for seller to make a sale on the condition that the purchaser or lessee shall not use the goods of a competitor where the effect of such sale may be to substantially lessen competition or tend to create a monopoly in a line of commerce. Section: s1 of SA, s3 of CA, s5 of FTCA Restraint Type: vertical, non-price ??? Approach: per se (although language of RPA indicates rule of reason should apply). Evil: market foreclosure Elements/Requirements: Existence of sale or K with exclusive dealing provision; AND Substantial lessening or monopoly tendency effect (satisfied if P proves quantitative foreclosure of substantial share of market). Quantitative substantiality Qualitative substantiality Look at % of market foreclosed – if it is >15%, apply rule of reason approach. Defenses: Possible competitive benefits (unlike tying arrangements) Sample Cases: Standard Oil v. US (US 1949): quantitative substantiality test Tampa Electric (US 1961): qualitative substantiality test

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VERTICAL – TYING ARRANGMENTS ??? Rule: A tying arrangement is unlawful if (1) a seller has sufficient market power in the market for the tying product to appreciably restrain trade in the market for the tied product; (2) a non-insubstantial amount of commerce is affected; AND (3) the arrangement has the tendency to create a monopoly or substantially lessen competition in some line of commerce (is this same as first requirement). Section: s1 of SA (if jurisdictional requirements of CA not met), s3 of CA, s5 of FTCA (broad) Restraint Type: vertical ??? Approach: per se illegal (different type of per se rule). Evil: creates barriers to entry, doubles monopoly profits, force buyers to buy product they do not want. Elements/Requirements: 2 distinct products (tying and tied) Provision that says product1 (tying product) cannot be obtained unless product2 (tied product) is also purchased. D possesses sufficient economic power (not as high a showing as monopoly power) in the market for tying product to appreciably restrain competition in market for tied product (sufficient market power can be presumed if tying product is highly desirable, highly unique, patented or copyrighted). A not insubstantial amount of commerce is affected. ??? Now – no difference in burden of proof required for s1 of SA as opposed to s3 of CA cases. Defenses: Single product Quality control Sample Cases: ??? International Salt Co. v. US (US 1947): for govt – what approach is CT applying? Northern Pacific RR v. US (US 1958): for govt – CT applies per se approach but this is under s1 of SA b/c no “commodity.” US v. Loew’s (US 1962): for govt but unclear what approach CT applies. Fortner v. US Steel (US 1969): for P – CT says P should have chance to prove case at trial.

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VERTICAL – NON-PRICE RESTRAINTS Rule: Section: Restraint Type: Approach: Evil: Elements/Requirements: Defenses: Sample Cases:

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JOINT VENTURES Rule: Illegal if threat to competition is substantial Legal if threat to competition is NOT substantial. ??? Section: s1 of SA ??? Restraint Type: Approach: rule of reason Evil: JVs can lead to price fixing, collusion by territorial market division or concerted refusals to deal. Elements/Requirements: Balancing economies (scale, distribution, avoid free rider) with potential for anticompetitive effect. Defenses: R&D JV is usually OK. Sample Cases: US v. Penn-Olin Appal Coals TOPCO

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CONGLOMERATE MERGERS Example: neither a competitive relationship nor a buyer-seller relationship. Product extension merger Market extension merger Rule: ??? Section: s7 of CA ??? Restraint Type: Approach: Evil: Elements/Requirements: Defenses: Toe-hold acquisition may be OK. Sample Cases: FTC v. P&G Co. (US 1967): for FTC – violation of s7 of CA – anticompetitive effects = entrenchment and elimination of potential competitor.

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Per Se Approach v. Rule of Reason Approach See p21N, p112N. Rationale for per se approach: see p116N, 117N.

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