Antitrust Outline- Professor Ross

ANTITRUST OUTLINE-FALL 1993 Professor Ross by: Ross E. Kimbarovsky OBJECTIVES AND ORIGINS OF ANTITRUST LAW -Antitrust policy serves four broad aims: 1) the attainment of desirable economic performance by individual firms and ultimately by the economy as a whole -efficiency in the use of resources -progress -stability in output and performance -an equitable distribution of income 2) the achievement and maintenance of competitive processes in the market-regulated sector of the economy as an end itself 3) the prescription of a standard of business conduct, a code of fair competition 4) and the prevention of an undue growth of big business, viewed broadly in terms of the distribution of power in the society at large -Under '2 of the Sherman Act: 1) need to be a monopolist in some part of interstate commerce 2) have to do something to be a monopolist (monopolize) -monopolizing is a general intent offense -intent is not an issue in '2 in MARKET STRUCTURE AND MONOPOLY POWER PURPOSE OF PROSCRIBING MONOPOLIZATION -There are three types of industries 1) atomistic industries, in which many small sellers are competitive 2) oligopolistic industries (oligopolies), in which a few large sellers are in competition 3) monopolistic industries (monopolies), in which a single seller supplies the entire output going to the market -'2 of the Sherman Act says "every person who shall monopolize...any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony." -U.S. v. Aluminum Co. of America (page 157) FACTS: Defendant controlled 90% of U.S. sales of virgin aluminum ingot for many years. It had achieved its dominance prior to 1912 using many anticompetitive acts, including acquisition of the exclusive license for an important patent, the purchase of covenants from electric power companies that prevented them from selling power to rivals, and the exclusion of foreign companies from the United States by agreeing not to sell in certain foreign countries. HELD: Alcoa violated section 2. But, Hand's opinion is inconsistent. At one point, he says that deliberately conducting business as a monopolist is sufficient -- no additional improper conduct is necessary. Elsewhere, he recognized that this "no fault" construction is at odds with the language of the Sherman Act. Hand said that a defendant that had a monopoly thrust upon it would not be guilty of a section 2 violation. But, Hand also claimed that a firm could obtain monopoly power and not violate section 2 if it gained the power because of "superior skill, foresight and industry." Alcoa was guilty of monopolizing because with "a persistent determination to maintain control" of the aluminum market, Alcoa "effectively anticipated and forestalled all competition" by "doubling and redoubling its capacity before others entered the field" in order that it could "always anticipate increases in the demand for ingot and be prepared to supply them." Thus, Alcoa could not fall within the exception to '2 for monopolists "who do not seek, but cannot avoid, the control of a market." This holding probably applied second test, as opposed to the third test. his -Court look at 3 things to determine if you have market power: 1) profits (not a good indicator because company could be inefficient) 2) conduct (is the defendant behaving in a way that a monopolist would behave and in a way that someone who is in a competitive market would not behave?) 3) structure (if have large share of relevant market (geographic and product markets.) -Berkey Photo, Inc. v. Eastman Kodak Co. (page 170) HELD: This decision abandoned Hand's second view. A "willfulness" test is necessarily based on "considerations of fairness and the need to preserve proper economic incentives." Therefore, a firm that actively seeks to gain or maintain power by "purely competitive means" does not violate '2, even though it cannot be said that monopoly power has been "thrust upon" that firm. This decision established that a '2 plaintiff must prove both that the defendant's conduct was anticompetitive and also that condemning the defendant's conduct will not unduly deter desirable business behavior. Here, Kodak, a monopolist of cameras and film products, did not illegally refuse to disclose new innovations to its rivals prior to releasing them on the market. '2 clearly does not require monopolists to make predisclosures of its inventions in all contexts. Although Berkey forcefully argued that Kodak had special obligations to disclose, lest Kodak's film monopoly be used to gain an advantage in the camera market, the court held that it could not discern workable guidelines for imposing liability for nondisclosure, and it was inappropriate to allow courts and juries to engage in retrospective review of a monopolist's strategic decisions. Such a standard would chill competitive behavior. -Olympia Equipment Leasing Co. v. Western Union (page 173) HELD: A firm with lawful monopoly power has no general duty to help its competitors, whether by holding a price umbrella over their heads or by otherwise pulling its competitive punches. If a monopolist does extend a helping hand to new entrants and later withdraws it, as happened in this case, does not incur antitrust liability. -E.I. du Pont de Nemours & Co. (TiO2) (page 171 ) HELD: Federal Trade Commission permitted du Pont to exploit a temporary cost advantage over its rivals by expanding capacity, thereby increasing its own market share from 30% to 55%. The FTC expressly distinguished du Pont's conduct from that of a hypothetical monopolist who "was attempting solely to preserve its market power...to deter new entry or expansion by existing competitors." In FTC's opinion, antitrust laws should not be used to "block hard, aggressive competition that is solidly based on efficiencies and growth opportunities, even if monopoly is a possible result." The argument is that a monopolist will be the first to expand output only when the monopolist is the firm able to expand most efficiently. To prohibit such expansion will, from this perspective, inevitably result in less efficiency. Therefore, monopolists should be encouraged to expand because they expend fewer societal resources than others. Any subsequent reduction in output owing to monopoly power is highly speculative, and we have no way of predicting whether the loss society suffers from such a reduction would outweigh the gains it realizes from the monopolist's efficiency. -U.S. v. American Tobacco Co. (page 485) HELD: There is a '2 violation where the defendant had acquired monopoly power in the tobacco industry by blatantly illegal conduct. The company was formed by the merger of several rivals to end a price war. It further eliminated competition by giving other rivals a choice between joining the combination or being put out of business by price wars; dividing the world market with foreign concerns; acquiring the raw elements necessary to enter the market in order to prevent new entry by others; buying up plants and then closing them to reduce production; and obtaining unreasonably long covenants not to compete from former rivals whose companies had been acquired by the tobacco trust. MARKET DEFINITION THE CELLOPHANE TEST -U.S. v E.I. du Pont de Nemours & Co (Cellophane) (page 174) HELD: Cross elasticity of demand measures the degree to which consumers will switch from one product to another in the event that the price or quality of one of the items changes, while the other remains the same. A high elasticity of demand occurs where a small increase in the price of Product A will cause a large shift of patronage to Product B. The government alleged that du Pont was a monopolist, because it controlled 75% of the market for cellophane. The D countered that the relevant market was not cellophane but flexible wrapping material. If the D market definition were upheld, the '2 case would have been defeated because du Pont only had 17% of the broader market. The Court ruled for du Pont, holding that cellophane and other flexible wrapping material were in the same market because there was a high degree of cross-elasticity between those products. -the Cellophane fallacy is: simply because you have high crosselasticity you are in competition with another product. -In measuring cross-elasticity of demand, an initial question concerns WHICH consumers are the focus of the inquiry. -The Cellophane model is good for a court wishing to determine whether a merger or a new agreement will INCREASE the market power of the defendant(s). DOJ adopted this test in its 1984 merger guidelines, which suggest that the sellers of Product A and Product B belong in the same market if a oneyear increase of 5% in the price of Product A would induce so many consumers to shift to Product B that the manufacturers of Product A would find it unprofitable to continue the price increase. -The problem with this test is that it fails to account for the distinct possibility that an alleged monopolist's current prices ALREADY reflect monopoly power. -There are three factors for market determination: 1) use 2) price 3) quality -In U.S. v. Corn Products Refining (page 192), many years before Cellophane, Hand recognized that, because of consumer income and preferences, every monopolist faces some price level at which it will lose so many customers that further increases become unprofitable. The issue was whether "refined grits" competed with "brewers grits". Noting that there was no difference in the quality of the two products that would lead purchasers to prefer one over the other, Hand nevertheless found that the relevant market included only "refined grits" (where D had a large market share) because refined grits were less expensive to produce than brewers grits. Of course, the price advantage enjoyed by a monopolist of refined grits would allow it to raise prices only up to the level where any further increase would lead consumers to switch to brewers grits. At that price level, the crosselasticity of demand between the two products would be high. Hand concluded, "such a monopoly is therefore only a limited one, but within the limits [of the cost of production] it may be a true one." ALTERNATIVES TO CELLOPHANE -Professor Turner suggests that market definition analysis should examine the relation between costs and prices. In cases like Corn Products, where the defendant has lower costs than putative rivals that offer similar products at similar prices, the high-cost competitors should not be placed in the same market. Where the defendant has both higher prices and higher costs than its competitors, however, those rivals might be included in the same market. If consumers think of an expensive, high quality product as a substitute for an inexpensive item of inferior quality, none of the sellers of either product will be able to exploit the situation, and they should all be included in the market. -U.S. v. U.S. Steel Corp (page 486) HELD: No monopolization of the steel industry. U.S. Steel was formed by a merger of 180 separate firms in 1901, giving it over 80% of the market. When case was decided, market share declined to 50%. Government claimed that U.S. Steel had been formed illegally, was a monopoly, and continued to exercise leadership. Court found no violation because defendant was not currently a monopolist and was not currently conspiring with others. Court found that evidence of conspiracy to fix prices was proof that defendant was not a monopolist itself. Also, growth of defendant was natural. -This decision is not the present law. Today's courts would not be so quick to exonerate a firm that engages in price fixing and achieves enormous size through dubious means. -U.S. v. Grinnell (page 201) HELD: The offense of monopolization under '2 involves "the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident." The decision did not explain the meaning of the term "willful." Defendant acquired monopoly power by acquiring competitors and engaging in agreements to divide markets. Thus, Grinnell interprets '2 to prohibit a firm from improperly gaining or retaining monopoly power. It does not prohibit a monopolist from exercising power where such exercise does not affect the firm's ability to maintain power. Thus, for example, simply charging high prices would not violate '2 because such a straightforward exploitation of consumers does not entrench the monopolist's position--indeed, it may have the opposite effect, by attracting new entry. -The difference between Grinnell and du Pont is the following: if du Pont tried to exploit the tobacco companies' particular need for cellophane by charging them a higher price than that charged to butchers, butchers could simply order a large amount of cellophane, in excess of the amount they needed to wrap meat, and then resell it at a profit to tobacco companies. In contrast, Grinnell properly recognized that those with a special need for accredited alarm services constituted a separate market; services, unlike many goods, cannot be arbitraged because the purchaser of a service cannot easily "resell" the service to a third party. Thus, Grinnell could successfully engage in price discrimination, charging those with a particular need for their services a higher price than that charged other customers. GEOGRAPHIC MARKET DEFINITION -The real focus is on sellers, not cities, regions, or countries. -If foreign firms are permitted to import their goods freely and the supply of such goods is seemingly unlimited, a world market should be defined; in such cases, a D would need a huge share of worldwide sales to have monopoly power. If, on the other hand, tariffs or quotas are imposed, imports should have limited weight in defining the market. COMPETITOR COLLABORATION (HORIZONTAL RESTRAINTS) DEVELOPMENT OF THE PER SE RULE ON PRICE FIXING -Agreements among rivals to fix prices or reduce output are the principal means by which firms in non-monopolized markets can cause an inefficient allocation of societal resources. By raising prices, cartels force consumers to pay more for desired goods and services than would be necessary in a free marketplace. Cartels also limit the pricing freedom of individual entrepreneurs. Finally, cartels abuse the economic power they possess, to the detriment of the consumer and the ordinary citizen. THE FIRST CARTEL CASES -U.S. v. Trans-Missouri Freight Association (page 69) HELD: 18 railroads that controlled most of the traffic west of the Mississippi River met regularly to set the rates charged for transporting goods by rail. The D's argued that their prices were reasonable and that rate agreements were necessary to avoid ruinous competition in the railroad industry. Although Justice Peckham seemed to reject each of these contentions on the merits, the opinion's key holding was that the D's arguments about reasonableness were legally irrelevant, for "all contracts in restraint of trade" were prohibited by the literal language of '1. In so holding, he specifically and emphatically rejected the view that the Sherman Act meant to proscribe only those contracts that were void as unreasonable at common law. All restraints, reasonable or unreasonable, were illegal, he wrote. He then promptly contradicted himself, however, noting in the same opinion that a restrictive covenant ancillary to the sale of a business "might not be included" in the congressional ban on "every" restraint of trade. -U.S. v. Joint Traffic Association (page 73) HELD: A railroad cartel urged the Court to reconsider Trans Missouri's literalist interpretation of the Sherman Act. Responding to the defendant's argument that a literal construction was unreasonable, Peckham observed that non-competition covenants, mergers, and the designation by rivals of a joint selling agent would all be permissible under his reading of the Sherman Act because they did not "directly" restrain trade. -U.S. v. Addyston Pipe & Steel Co. (supplement) HELD: A cartel of pipe makers had allocated customers among themselves by designating one real bidder for each job and arranging for the others to submit phony high bids. D's sought to distinguish Trans-Missouri on the theory that railroads were subject to stricter governmental regulation and had a greater impact on the public interest than pipe sellers. The court held that Congress DID NOT intend '1 to literally prohibit every contract, but rather to make criminal and tortious the formation of contracts that were void as unreasonable restraints of trade at common law. The Court interpreted the common law to permit restraints of trade ancillary to a lawful purpose and reasonably necessary to accomplish that purpose. Contracts that satisfied this standard were lawful, but contracts that did not were prohibited by '1. Because the pipe cartel had no "main purpose" other than restraining trade, the Court concluded that the better view among the common law cases would void the agreement. -The problem with this cartel is that wealth is shifted from consumers to the big companies. -Taft here says it is reasonable if: 1) ancillary to a lawful contract AND 2) reasonably necessary to that contract -Chicago Board of Trade v. U.S. (page 245) HELD: Court upheld the Board's "Call Rule", whereby competing grain dealers agreed that any grain in transit to Chicago that was purchased after the end of the special afternoon "Call" session would be sold at the closing price. The Court found that '1 could not be read literally because EVERY contract restrains trade. The court held that the proper basis for distinguishing between lawful and unlawful contracts was not a "restraint", but instead required an evaluation as to whether the contract "unreasonably" restrained trade. The standard is: "whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition." The Court should fully inquire into the "facts peculiar to the business to which the restraint is applied" and the history, purpose, and effect of the restraint. D's intent is relevant only because it may shed light on the agreement's effect. A benign intent does not save an anticompetitive agreement. Rather, if the parties' motives are benign, it becomes somewhat more likely that the effect will be benign as well because the defendants' experience as actual participants in the marketplace will enable them to correctly predict the impact of their agreement. EVOLUTION OF THE PER SE/RULE OF REASON DISTINCTION -Appalachian Coals, Inc. v. U.S. (page 249) HELD: Court sustained a plan that created an exclusive selling agent for almost 200 coal mine owners. The industry was afflicted by distress sales of surplus coal, which was "injurious and destructive practice" that "demanded correction." Thus, the court held that sharply falling prices caused by distress sales of surplus inventory did not justify price fixing. -Market power is important to Appalachian Coals. -Courts have gone to the Addyston Pipe approach and reject the logic of the Appalachian Coals approach. What constitutes price fixing? -U.S. v. Socony-Vacuum Oil Co., Inc. (page 252) FACTS: Oil was freely sold in the marketplace, but it was customary to sell most oil under long-term contracts, which set prices based on a formula that relied heavily on the "spot market price" (the price at which oil was sold for immediate delivery to meet unexpected needs. The spot market price directly involved less than 5% of the total oil sales, but given the customary practices in the industry, it actually affected the contract price for 80% of the oil sold in the Midwest. The problem for the oil companies was that the spot market price was significantly affected by distress sales, which occurred when small independent refiners sold surplus oil for which they had no storage capacity. Because these distress sales caused periodic crashes in the spot market, the D's entered into an agreement to select one or more independent refiners as a "dancing partner" and to assume responsibility for purchasing the partner's excess oil supply. Under this agreement, the independents would not have to sell at desperation prices to get rid of their inventory, the spot market would not crash, and the price of oil sold under long-term contract would be stabilized. HELD: The agreement constituted price fixing. Any combination which tampers with price structures is engaged in an unlawful activity. Even though the members of the price-fixing group were in no position to control the market, to the extent that they raised, lowered, or stabilized prices they would be directly interfering with the free play of market forces. "Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se." -This decision effectively overrules Appalachian Coals. -Socony correctly recognized that the ease of evasion makes the area of horizontal restraints one where precisely drawn legal rules are not appropriate. Thus, horizontal agreements that "tamper" with prices are properly viewed with suspicion. THE MODERN CONFUSION -Broadcast Music (BMI) v. Columbia Broadcasting (page 269) FACTS: BMI and ASCAP represented competing composers and other holders of copyrighted musical works who jointly licensed their work to networks, radio stations, juke box operators, and other users of copyrighted music. Both BMI and ASCAP offered buyers a choice between purchasing a blanket license for all works within their repertoire or a program license allowing use of all their works on a specific program. Because the licenses were non exclusive, buyers could also secure copyrights by negotiating individually with composers. CBS challenged this, arguing that these licenses constituted per se illegal price fixing. HELD: The term "price fixing" was "a shorthand way of describing certain categories of business behavior to which the per se rule has been held applicable" The majority described this type of behavior as plainly anticompetitive. The Court held that no conspiracy can be condemned as per se illegal without a prior judicial determination that the restraint lacks "redeeming virtue." The Court must inquire whether "the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output." -While the standard set forth in BMI suggests that the P must initially demonstrate facial harm to competition, the Court's actual analysis appears to be more consistent with Addyston Pipe: (a) the P must show a horizontal agreement affecting price; (b) the court will then look to the D's justifications and will sustain restraints necessary to accomplish lawful purposes; and (c) integrating sales and copyright enforcement activities, providing a new product, and price agreements essential to supply of the new product all constitute lawful purposes. -The per se inquiry asks whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output. -The court offers 2 tests: 1) is there redeeming virtue? 2) does it tend to always restrict output? -Arizona v. Maricopa County Medical Society (page 283) HELD: The state was entitled to summary judgment against the D's, a group consisting of 70% of Phoenix doctors who had entered into an agreement setting the maximum prices to be charged for their services to patients with health insurance. The opinion is reminiscent of Chicago Board of Trade. First, Stevens explained that although the literal language of '1 prohibits every contract, the section should be interpreted to bar only unreasonable contracts because "Congress could not have intended" a literal reading. Second, he noted, determining reasonableness normally requires that the courts look at all the circumstances of the case. Third, because such an inquiry can be very costly, he observed that the courts will apply a conclusive presumption of unreasonableness "once experience with a particular kind of restraint enables the Court to predict with confidence that the rule of reason will condemn it." -Here, unlike in BMI, price fixing is not necessary for purpose of agreement. -Maricopa rejects every argument other than ancillary to justify the rule of reason to tamper with price. -Virginia Excelsior Mills, Inc. v. FTC (page 302) FACTS: Group of small producers of wood product found that competition among them was keen and they organized a corporate sales agency. The agency was the exclusive agent for each one of the producers. Orders were to be allocated among producers on the basis of their relative productive capacity, and the producers agreed not to increase that capacity. The contracts also contemplated that prices would be established by the Board of Directors of the sales corporation elected by the producer members. Prices after establishment of the joint sales agency were uniform, and increased across the board in response to rising costs. HELD: Price fixing through such an arrangement is a violation, per se, of '1 of the Sherman Act. Though the needs and problems of the producers, which stimulated the creation of the arrangement, may have seemed pressing, they cannot lend a cloak of legality to conduct which, whatever the supposed justification, the Act condemns...What contrary suggestion may be found in Appalachian Coals has not survived the strong and consistent course of subsequent decision. What sort of conduct is per se illegal and how should lower courts evaluate restraints not subject to per se condemnation? -NCAA v. Board of Regents of U of Oklahoma (page 304) FACTS: NCAA member schools sold the rights to televise their football games exclusively through NCAA contracts. Court found that the plan precluded member schools from conducting independent price negotiations and placed an artificial limit on output--the number of games shown each Saturday. Stevens noted that a horizontal arrangement that fixed prices and limited output would "ordinarily [be] condemned as a matter of law under an 'illegal per se approach'. Nevertheless, the Court rejected per se condemnation. Stevens argued that the critical factor "is that this case involves an industry in which horizontal restraints on competition are essential if the product is to be available at all. HELD: The Court proceeded along a path that has become known as a "structured rule of reason" that focuses on analyzing the defendants justification and the "fit" between these ends and the means chosen to achieve them. The Court rejected NCAA's key argument--that there was no evidence that the organization had market power. "The absence of proof of market power does not justify a naked restriction on price or output." But, defendant has the burden of showing "some competitive justification even in the absence of a detailed market analysis." The Court dismissed the D's attempt to analogize the case to BMI because, unlike price fixing ancillary to the issuance of a blanket license, the television plan was not necessary to produce college football. The Court also rejected the NCAA's claims that the plan was needed to protect the live gate attendance of non-televised games and to promote competitive balance among member schools. The Court scrutinized the factual record and found that the plan did not accomplish either of these objectives. In sum, Justice Stevens employed the rule of reason in an orderly manner to consider and reject, either in theory or on the facts of the case, each of the NCAA's efforts to justify its plan as necessary to some legitimate purpose. Thus, the plan was held to be an unreasonable restraint of trade in violation of '1. -THE FOLLOWING IS THE APPROACH TO ANALYZING THE CASE (EXCEPT FOR MEMBERS OF THE LEARNED PROFESSIONS): First, litigators should ask whether the agreement tampers with or stabilizes prices. If not, a rule of reason inquiry is required (cite Chicago Board of Trade). If so, "per se" analysis is triggered (cite Socony). Continuing with the per se analysis, the second step is to determine whether the agreement furthers any lawful purpose. If not, it is per se illegal, and the analysis ends (cite Catalano, and distinguish BMI as involving a lawful purpose). If so, the third step is to inquire whether the agreement is necessary to accomplish a lawful purpose. When an obvious less restrictive alternative makes it clear that the agreement is not necessary to a lawful purpose, the agreement is "per se illegal" and the inquiry ends (cite Maricopa). Where the question of necessity is less clear, the fourth step is to conduct a trial under the "rule of reason" label (cite NCAA). PROFESSIONS AND PRICE FIXING -National Society of Prof. Engineers v. U.S. (page 265) HELD: D asserted that agreement among engineers not to engage in competitive bidding was "reasonable." Specifically, the D's claimed that vigorous price competition in engineering services would lead to low-cost contracts that endangered the public safety. The Court treated this argument just as it had the oil companies' argument in Socony that vigorous price competition in the spot oil market would ruin the industry and harm the public interest--it rejected it out of hand. Thus, courts may not consider the defense that unrestricted competition for professional services is not in the public interest. The majority concluded that the only justification for the prohibition on competitive bidding challenged in that case would be one that showed how the competition." restraint had "a positive effect on -American Medical Association v. FTC (page 268) HELD: AMA had a "unique" role to play in ending deceptive advertising and oppressive solicitation practices. Because deception on the part of professionals, especially those who provide health care or legal services, may cause irreparable damage, and because the complexities of the profession give private groups greater expertise than can be marshalled by government regulators, the courts give rival professionals greater latitude in entering into horizontal agreements to regulate deception. -Vogel v. American Society of Appraisers (page 269) HELD: Appraisers agreed not to charge fees based on a percentage value of the property to be appraised. Such a fee structure, the society argued, would create a conflict of interest between the appraisers' desire for high fees and an accurate appraisal of the property's value. The 7th Circuit rejected a per se challenge to the agreement, even though the appraisers had "tempered with price." The reason was that the appraisers' rule, rather than restricting the use of appraisal services due to artificially high prices, may actually promote the use of such services. -This court would probably hold that requiring ads to be presented in an acceptable manner is not valid under U.S. antitrust laws. -FTC v. Indiana Federation of Dentists (page 422) HELD: Even after the government demonstrates that an agreement significantly restricts price competition, the D's will be allowed to put on their case and try to establish justifications for the agreement. Nevertheless, the Court condemned the dentists' agreement to refuse to comply with insurance companies; demands that they submit x-rays as a condition of reimbursement. The court's analysis paralleled Addyston Pipe: the FTC prevailed because it showed that the agreement posed a significant risk to price competition and was not ancillary to a lawful purpose. The Court's refusal to characterize the dentist's agreement as per se illegal amounted, in short, to professional courtesy. (the gist of the opinion is that as lawyers, we will give fellow professionals their full day in court, although the ultimate result will be no different than if the agreement were among tradespeople -- Prof. Ross). -This case demonstrated that the rule of reason analysis can be shortened, even when the D's conduct does not fall into the category of per se illegality. The FTC did not expressly find that the dentists' agreement had any impact on price, or that the D's held market power. Nevertheless, the Court sustained a finding of unreasonableness based on two key pieces of evidence presented by the FTC: economic theory and evidence concerning other markets. Economic theory suggested that consumers would be better off if the dentists were not permitted to conspire; those dentists who unilaterally refused to provide x-rays to insurers would be denied reimbursement and would lose patients to those willing to cooperate with the insurance companies. Evidence from other markets where the FTC knew competition was working showed that rival dentists, anxious to offer insurance coverage for their patients, cooperated with insurance companies in submitting x-rays. TRADE ASSOCIATIONS AND INFORMATION DISSEMINATION -American Column & Lumber Co. v. U.S. (page 325) HELD: This information exchange both facilitated agreement and detected cheating. The trade association's "manager of statistics" constantly exhorted the D lumber companies to cut output, and each company reported estimates of its own future production, certainly creating a climate conducive to agreement. Each company submitted reports to the trade association that disclosed price cuts and identified specific buyers, thus hindering any attempt to cheat on the cartel. In addition, exclusive use of F.O.B. mill pricing and standardized grading facilitated agreement because agreeing on a price is easiest when firms sell standardized products. When transportation cost and varying product quality are introduced, firms will have different perceptions of their own self interest and agreement becomes more difficult. For example, lumber companies can more readily agree on the FOB mill price for objectively rated "grade A" oak than on FOB mill and delivered prices for subjectively rated "top quality" oak. The court condemned this information exchange. -Maple Flooring Mfg. Association v. U.S. (page 336) HELD: Court upheld an information exchange among flooring producers. Court properly distinguished its prior precedents because D's had not exchanged immediate and detailed info about specific sales, but D's had exchanged info that included data about average costs and freight rates from Cadillac, Michigan to 6,000 destinations. The Court sustained this exchange although info about average costs tends to standardize pricing and facilitate agreement. Similarly, freight info tended to encourage delivered base point pricing, which can both facilitate agreement and raise prices by permitting price discrimination. Court held that info could not be exchanged where the "necessary tendency" was to destroy price competition, but sustained the flooring manufacturers' info exchange anyway because the "ultimate result of their efforts may be to stabilize prices or limit production through a better understanding of economic laws and a more general ability to conform to them." -Cement Mfg. Protective Association v. U.S. (page 337) HELD: No violation here. Members submitted to the association a monthly statement of their production shipments and stocks on hand, and semi-monthly statements of their shipments. These were distributed to members without charge or comment, each member thus receiving full info as to the available supply of cement and by whom it was held. This was done to avoid abuses when customers obtained more cement sometimes and they would hold on to it until there was a shortage in the industry. Buyers were thus prevented from obtaining greater supplies than they were entitled to receive under these onesided agreements. Extensive credit info, including detailed reports concerning delinquent accounts was also exchanged. A freight book, involving a basing point system, was distributed to members. -Sugar Institute v. U.S. (page 338) HELD: Court prohibited a number of practices that facilitated maintenance of publicly announced prices. These included standardizing sales by agreeing not to vertically integrate and simplifying the terms of sale that each rival needed to match by agreeing not to offer quantity discounts or long-term contracts. -Vitrified China Association (page 340) HELD: There was no intent to establish or fix in any manner the price at which hotel ware was to be sold; nor did any uniformity or fixed relationship in prices result. There is no indication that the revision of basic lists was a first step toward a price fixing arrangement or that it could grow into such an arrangement. The members' "cooperative action in revising their basic lists, which, if carried on as a part of a price-fixing plan, would constitute illegal tampering with their price structures, under the circumstances of this case does not constitute price fixing or a combination in unreasonable restraint of trade." The Current Rule of Reason: -U.S. v. Container Corporation of America (page 341) HELD: Court condemned an agreement among rival box makers to disclose the specific prices they quoted to potential buyers. The Court concluded that this type of information had led to price matching rather than price cutting, and that continued entry into the market suggested the existence of monopoly profits and collusion. -U.S. v. U.S. Gypsum Co. (page 348) HELD: The standard for governing info exchanges is: they are evaluated under the rule of reason, with the structure of the industry featured as the most prominent factor to be considered. In addition, exchanges of specific types of information that "have the greatest potential for generating anticompetitive effects"--that is, those that most clearly facilitate price coordination or deter cheating--will be condemned even in industries where collusion may be unlikely. Price concessions by oligopolists generally yield competitive advantages only if secrecy can be maintained; when the terms of the concession are made publicly known, other competitors are likely to follow and any advantage to the initiator is lost in the process. The principal holding here was that '1 imposes different standards of liability in civil and criminal cases. While proof of intent is unnecessary in a civil suit, a defendant cannot be convicted of a criminal violation of '1 unless the government proves that the conduct was undertaken with knowledge of its probably consequences and had an anticompetitive effect. -In sum, a rule of reason analysis governs agreements among competitors to exchange information about their businesses. Although sharing highly sensitive info (i.e. identification of specific buyers, projections of future production plans) is usually condemned because it is so likely to reduce price competition, the exchange of other information in a competitive market may actually foster competition by providing sellers and buyers with better information. On the other hand, the exchange of almost any information can significantly facilitate price agreements in an oligopolistic industry prone to collusion. Thus, the courts examine the structure of the market to determine whether, on balance, an exchange of information is likely to promote vigorous competition or facilitate express or tacit collusion. DIVISION OF TERRITORIES -Cartels can suppress competition by means other than agreements to fix, raise, or lower prices: they can divide customers among themselves, and agree not to compete for the patronage of those allocated to their rivals. Specific customers can be allocated to specific sellers; alternatively, customers can be allocated by the time of year when the purchase is made. The most common type of customer allocation, however, is a territorial division of the market whereby each carteleer reserves a particular geographics area for itself. Whatever their form, market division schemes have the effect of allowing each firm to set its price without the threat of rivalry from its co-conspirators. -National Assoc. of Window Glass Mfg. v. U.S. (page 352) HELD: Court upheld an agreement among makers of hand-blown glass to operate only during half the year. Pricefixing cartels may agree to lower prices, or may eventually become ineffective altogether, when more efficient members of the cartel seek to establish a lower price than their less efficient conspirators. In contrast, a market division scheme allows each firm free reign within its designated area and thus permits inefficient firms to pass on their higher costs to their unfortunate customers. For example, the agreement in this case allowed less efficient glass makers to stay in business; without the agreement, these firms would have faced more competition for scarce labor, and ultimately would have lost out to their more efficient rivals. -Justice Holmes found in this case that the glass manufacturers' agreement met his personal standard of reasonableness. However, the decision is strange in that each of the other competing goals of antitrust dictates the exact opposite result. Allowing inefficient firms to operate leads to a misallocation of society's resources; the firms will necessarily charge higher prices than their more efficient counterparts, and consumers will therefore be exploited; and important decisions about where laborers work are determined not by the impersonal hand of the market but by the discretionary power of the defendant trade association. Moreover, there was no suggestion that the glass manufacturers' agreement was necessary to avoid a monopolistic or oligopolistic industry that would make consumers worse off. This case demonstrates how the rule of reason allows for unarticulated judicial decisionmaking in the guise of antitrust analysis. -Timken Roller Bearing Co. v. U.S. (page 354) HELD: This case involved a U.S. company, a related British corporation, and a jointly owned French subsidiary, who agreed to avoid competing among themselves in those three countries. The D's argued that their agreement was ancillary to the lawful purpose of protecting their shared trademark. The Court held that regardless of the purpose or overbreadth of the agreement, the evolving doctrine condemning pricefixing restraints as illegal per se "plainly establishes that agreements providing for an aggregation of trade restraints such as those existing in this case are illegal under the Act." -U.S. v. Sealy, Inc. (page 356) HELD: Government charged that Sealy had violated Section 1 by conspiring with its licensees to fix prices at which the licensees' customers could resell bedding products bearing the Sealy name and to allocate exclusive territories among the manufacturers. The court held that the "territorial arrangements must be regarded as the creature of horizontal action by the licensees. It would violate reality to treat them as equivalent to territorial limitations imposed by a manufacturer upon independent dealers as incident to the sale of a trademarked product. Sealy is an instrumentality of the licensees for purposes of the horizontal territorial allocation. It is not the principal." The Court declared the territorial restraints unlawful, because "they gave to each licensee an enclave in which it could and did zealously and effectively maintain resale prices, free from the danger of outside incursions." -U.S. v. Topco Associates, Inc. (page 357) HELD: Court condemned an agreement among competing grocers that effectively allocated territories for the use the Topco label, a jointly produced private label for items like canned goods and paper products. The Topco agreement essentially allowed any member to veto the sale of Topco products by other members within 100 miles of its store. The agreement here is a horizontal agreement. Court characterized the agreement as a "naked restraint of trade with no purpose except stifling competition." The principal justification for limiting competition among Topco members was that such competition might inhibit members from aggressively promoting the Topco brand in their areas for fear that another member would "free-ride" on their advertising and take away their customers. -Topco is still good law, but we just don't know exactly what type of test is to be used. -General Leaseways v. Nat'l Truck Leasing Ass(page 368) HELD: D's were competing companies that lease and repair trucks. Their agreement required each company to operate only within a designated territory, but then to perform emergency service on trucks leased by the other signatories to the agreement that happened to break down in its territory; the other company would then reimburse the firm doing the repair work. Posner relied on the language of BMI that suggested that the per se rule is limited to "facially" anticompetitive conduct. Posner found the D's conduct in this case more egregious than that at isue in Topco and thus sustained a preliminary injunction against the territorial limitation. He suggested that a territorial scheme might have been justified in Topco in order to prevent one grocer from freeriding off the promotional investment made by another grocer in a particular territory. He distinguished General Leaseways, however, because the repair work at issue there was a service for which each firm could, and did, easily receive reimbursement from its rivals. Thus, Posner properly condemned the territorial allocation as illegal per se because it was clearly broader than necessary to achieve the legitimate purpose of of creating a nationwide system of truck repairs. -Polk Brothers, Inc. v. Forest City Enterprises (page 373) HELD: A home appliance store and a lumber/hardware store agreed to share a single building in suburban Chicago. Because they sold complimentary items, they hoped to attract more customers to the location then either could attract alone. Polk would not have entered into the promise but for Forest Park's agreement not to sell home appliances in competition with Polk. In applying Addyston Pipe, the court permitted the agreement. Without mentioning Topco, the court relied on NCAA for the proposition that per se analysis is not appropriate "when cooperation contributes to productivity through integration of efforts" (i.e. when rivals are combining for some lawful purpose. The court further suggested that the rule of reason requires courts to distinguish between "naked" and "ancillary" restraints. The opinion adds a significant clarification to Addyston Pipe by insisting that the propriety of the contracts' broader purpose, to which the challenged restraint is ancillary, must be evaluated as of the time the agreement was made. -If defendants really can show that a territorial market division is necessary to produce or distribute a new or improved product, the Court is likely to, and should, distinguish Topco so as to limit "per se" condemnation to overbroad restraints. -Palmer v. BRG of Georgia, Inc. (supplement) HELD: HBJ and BRG had previously competed in the Georgia market; under their allocation agreement, BRG received that market, while HBJ received the remainder of the U.S. Each agreed not to compete in the other's territories. Such agreements are anticompetitive regardless of whether the parties split a market within which both do business or whether they merely reserve one market for one and another for the other. Thus, the 1980 agreement between HBJ and BRG was unlawful on its face. CONCERTED REFUSALS TO DEAL -Fashion Originators' Guild of Amer. (FOGA) v. FTC (page 397) HELD: Here, among the many respects in which the Guild's plan runs contrary to the policy of the Sherman Act are these: it narrows the outlets to which garment and textile manufacturers can sell and the sources from which retailers can buy; subjects all retailers and manufacturers who decline to comply with the Guild's program to an organized boycott; takes away the freedom of action of members by requiring each to reveal to the Guild the intimate details of their individual affairs; and has both as its necessary tendency and as its purpose and effect the direct suppression of competition from the sale of unregistered textiles and copied designs. It is not relevant that there is not a complete monopoly here, as it is sufficient if it merely ends that way. -Klor's, Inc. v. Broadway-Hale Stores, Inc. (page 401) HELD: Broadway-Hale, a large San Francisco department store, secured the agreement of a host of appliance manufacturers to boycott Klor's, a small rival that operated next door to Broadway's then-prime downtown location. Broadway's defense was that the large number of competing retail stores selling appliances made it impossible for the boycott to decrease competition, and that the dispute was thus a "purely private quarrel" of no concern to the antitrust laws. On this basis, the trial court granted the defense motion for SJ. The Supreme Court reversed, holding that the concerted exclusion was illegal without regard to its particular effect on competition in a defined market (per se). -In Wholesale Grocery v. Dieter's Gourmet Foods, a suit by a food retailer, boycotted by several suppliers each acting independently at the behest of another food retailer, was dismissed on grounds that any concerted action was between the complaining retailer and each supplier rather than a horizontal agreement among suppliers; such "refusals should be treated as vertical restraints, and will be subject to ruleof-reason analysis unless the refusals are price related...or are designed to enforce underlying restrictions that would otherwise be subject to per se analysis." -Since the NCAA decision, it has been clear that horizontal restraints on competition within sports leagues will not be treated under per se rules. Within those leagues, some collaboration is essential to produce balanced competition and thus justifications for restraints will be examined under a rule of reason. -Radiant Burners, Inc. v. Peoples Gas Light & Coke (page 410) HELD: Agreement among gas companies to sell natural gas only to customers using boilers approved by the American Gas Association was per se illegal. If there are legitimate reasons why individual gas companies may not wish to sell to customers using nonapproved equipment, each company can make this decision independently; and agreement is not necessary to achieve that lawful purpose. Pipe supports this result.) (Addyston -Structural Laminates v. Douglas Fir Plywood Ass. (page 412) HELD: Association set up a standard for members to use as a sign of approval for the member's products (i.e. grade a lumber, etc.) The court held that mere adoption of a standard which discriminates between products cannot be a per se violation particularly where, as here, the standard is the product of Congressionally sanctioned scheme. The court went on to find that the P had failed to show that the quality standard that adversely affected P's business was either unreasonable or done with an evil intent, although the court recognized that some of defendant's members were competitors of P and had a real economic motive in opposing widespread use of P's product. -Northwest Wholesale Stationers v. Pacific Stationary & Printing (page 413) HELD: The doctrine condemning group boycotts as per se illegal does not apply to concerted refusals to grant access to a joint venture. P here was excluded from membership in a purchasing coop, and alleged that the exclusion constituted a per se illegal boycott. Court found two things absent in this case: prior cases harmed competition by "either directly denying or persuading or coercing suppliers or customers to deny relationships the competitors need in the competitive struggle." Also, prior cases precluded per se condemnation when the venture puts forth "plausible arguments that [the challenged conduct was intended to enhance overall efficiency and make markets more competitive. The court did reaffirm Sliver's holding, that absent special congressional sanction, rivals' exclusion of a competitor would be per se illegal when the rivals' joint venture was dominant or when the exclusion would put the P at a "severe competitive disadvantage." -Rothery Storage and Van Co. v. Atlas Van Lines (page 430) HELD: This case involved a JV formed by competing household goods van lines to operate under a common trademark (Atlas), to create a centralized system for setting rates and efficiently routing trucks back and forth throughout the country, to set uniform standards, and to advertise nationally. Controversy concerned an agreement whereby each firm promised not to compete with the Atlas venture by independently offering household goods transportation services, and to exclude from the JV firms who violated this rule. Bork conceded that the challenged restriction was literally a group boycott, however, the court rejected the P, using a two step approach. First, Bork argued that "the challenged restraint is ancillary to the economic integration of Atlas and its agents so that the rule of per se illegality does not apply." Second, the restraint passed muster under the rule of reason "since Atlas' market share is far too small for the restraint to threaten competition or to have been intended to do so." -Bork argued that once an agreement is shown to be ancillary, reviewing courts should immediately proceed to the rule of reason analysis and uphold the agreement if the D's do not have market power. JOINT VENTURES -One difference between a JV and a cartel is that a JV involves the integration of resources and a cartel does not. -Another difference is that it is an integration to create new, productive capacity. -U.S. v. Terminal Railroad Association (page 438) HELD: This case involved a JV whose creation reduced competition. Under the guidance of leading robber baron Jay Gould, ownership of the three bridges by which trains could cross the Mississippi River between St. Louis, Missouri and East St. Louis, Illinois was consolidated into one JV formed by the dominant railroads. The JV proceeded to abuse its power to the disadvantage of nonmember railroads, by acts such as fixing prices and charging discriminatory tariffs. The Supreme Court refused to break up the venture and instead ordered that all comers be given fair access, subject to ICC oversight. The Court thus preserved the economies of scale of the venture while limiting monopolistic exploitation. Where such a regulatory regime is not readily available, however, the courts must choose: they can regulate the industry on a semi-permanent basis; or they can dissolve the joint venture and restore competition. The last option will usually be preferable. -General Motors Corp (page 303) HELD: JV between GM and Toyota to manufacture subcompact cars in U.S. at GM plant. JV was 50/50. GM stood first in sales in U.S. with 44% and Toyota was fourth. In subcompact cars, Ford was first with 19% and Toyota second with 16% and GM third with 14%. Duration of JV was to be 12 years (see further facts.) FTC saw three significant procompetitive effects resulting from the JV: (1) it would allow introduction into the U.S. of a new small car, an addition to competition that was unlikely to be achieved by Toyota alone because Voluntary Restrictive Agreements instituted by the Japanese government put a ceiling on the number of imports per year from Japan to the U.S.; (2) the JV car could be produced efficiently and therefore would cost consumers less; and (3) the JV offered an opportunity for GM to learn about more efficient Japanese manufacturing and management techniques. -Associated Press v. U.S. (page 440) HELD: Member newspapers agreed to share stories with each other. Gov't attacked the limits on access to the venture, whereby the partners were allowed to veto their rivals' membership. Court struck down this restriction on membership because it gave members a competitive advantage. The language in the opinion suggests a per se analysis, finding that the restrictions "on their face, and without regard to their past effect, constitute restraints of trade." However, the decision was more like a rule of reason approach. Citing Standard Oil, the court expressly distinguished cases where the venture did not possess economic power, noting that an exclusive storysharing agreement between two small newspapers would be permissible. AP membership controlled 83% of daily newspaper circulation and rivals could thus be denied equality of economic opportunity because of a rival's veto, without regard to the applicant's "individual enterprise and sagacity." (decision was a plurality here.) -Tyson's Corner Regional Shopping Center (page 446) HELD: FTC challenged an agreement between a shopping center development and its anchor department store tenants that gave the department stores a complete veto over the other tenants. FTC struck down the tenant veto provisions as unnecessary to a lawful purpose. Reasonable restrictions on other tenants that might be necessary to maintain the center's attractiveness would be permissible. But a veto was inherently likely to deter smaller stores from vigorously competing with the major lessees. This case is an example of "collateral restraints." Just as Addyston Pipe sustained restraints that are ancillary to a lawful purpose and necessary to bring about that purpose, Tyson's struck down restraints that are not ancillary and necessary to a lawful purpose. RESEARCH JOINT VENTURES -Joint Research and Development ventures are subject to a rule of reason and rarely challenged as an unreasonable restraint of trade because of powerful business justifications. See page 447 of book. -Berkey Photo, Inc. v. Eastman Kodak Co. (page 454) HELD: Court found Kodak and GE guilty of conspiring to restrain trade when Kodak, the market leader in cameras, agreed to work with GE, a light-bulb manufacturer, to develop a new light bulb compatible with Kodak cameras only if GE would withhold the product for several years. The court's holding reflects an implicit empirical prediction that the threat of antitrust liability would most likely have meant either that Kodak would have proceeded forthwith in exploring new technologies with GE, or that GE would have taken its business elsewhere. In either case, consumers would receive the benefits of competition -- new technologies brought to the market as quickly as possible. As it was, consumers had to wait until marketing specialists at Kodak determined that a previously developed technology had outlived its usefulness. -National Cooperative Research Act (NCRA) clarifies antitrust law's treatment of R&D JV's and is intended to avoid deterring lawful ventures due to unwarranted fears of liability. Act codified existing law providing that JV's are not per se illegal, and provided legislative history in guiding the courts to apply the rule of reason approach. -Legislative history suggests that JV's are probably legal if There are approximately five domestic or international firms or ventures with the ability and incentive to perform similar research. -Firms that coop with one another in a venture are less likely to compete vigorously in the finished product market. Thus, a court might be skeptical of an automotive R&D venture between Ford and GM, where the benefits of coop would be achieved if each of the American giants formed a separate venture with foreign competitors with smaller domestic market shares. -Whether or not the NCRA applies, agreements among venturers that have the effect of forestalling innovation will be deemed illegal. PRICE LEADERSHIP AND CONSCIOUS PARALLELISM -Oligopoly theory demonstrates that firms in markets with few sellers can keep prices above the competitive level without an express agreement among rivals to fix prices. In industries with few sellers and little threat of new entry, no firm has an incentive to cut prices in order to attract more business. -Interstate Circuit, Inc. v. U.S. (page 500) HELD: Distributors licensed their films to exhibitors, which operated the movie theaters. At the same time, exhibitors tended to feature either first or second run films. Although there was no direct evidence of an agreement, Interstate Circuit, a first run exhibitor, was found guilty of conspiring with six major distributors to require second run exhibitors to raise their prices and limit their showing of double features. The Supreme Court affirmed the conviction, recognizing that evidence of a conspiracy is rarely provided directly and may be shown by circumstantial evidence. Five factors influenced the S.Ct: First, distributors engaged in parallel conduct: each required second run exhibitors to raise prices and limit the number of double features. Second, each distributor was made aware that Interstate Circuit was asking all distributors to impose these limits on second run theaters. Third, each distributor was unlikely to have engaged in this conduct without some assurance that all the others would do likewise. Fourth, there was no credible explanation, other than conspiracy, why the distributors would all have imposed these restrictions. Finally, the conduct was a sharp deviation from "traditional business patterns." -Ultimately, proof of conspiracy requires evidence that the D's conducted themselves in a manner consistent with the way they would act if they were in fact conspiring, and, most important, inconsistent with the way they would act if they were competing against each other. -Conscious parallelism is insufficient to prove a conspiracy because while parallel conduct is consistent with cartel behavior it is also consistent with competition. Indeed, in a perfectly competitive market, all firms will sell at the identical price. Thus, some evidence inconsistent with independent competitive behavior is required. -Theatre Enterp. v. Paramount Film Distributing (page 507) HELD: D motion picture distributors uniformly refused to grant a first run license to the P, a suburban exhibitor. D persuaded the jury that they had each reached this decision independently because it was more profitable to show first run films in downtown theaters. Their conduct was thus consistent with the way they would act if they were competing. -Discussion on delivered pricing and other practices is found on page 520 (by Steven Salop). -Matsushita Electric Indust. v. Zenith Radio Corp. (page 514) HELD: P argued that the Court could infer the presence of predatory pricing conspiracy from ev that the D had: (1) conspired to raise prices in Japan; (2) conspired to fix prices in U.S. at nonpredatory levels; (3) conspired to limit retail competition in Japanese televisions in the U.S.; and (4) actually lowered prices in the U.S. below their agreed-upon levels. Supreme Court held for D. Court held that P must present evidence that "tends to exclude the possibility" that the Ds' conduct was independent -in other words, evidence inconsistent with the way the defendants would act if they were conspiring. The fact that the Japanese market was oligopolistic and that the defendants conspired on other terms did not necessarily mean that they conspired to engage in predatory pricing. The fact that each had excess capacity suggested that they would want to compete vigorously with the P, but did not necessarily mean that they would compete predatorily. Similarly, the fact that the D cheated on a minimum price-fixing cartel was just as consistent with competition as it was with conspiratorial predation. The Court set up the following standard for SJ in antitrust conspiracy cases: "if the factual context renders P's claim implausible - if the claim is one that simply makes no economic sense -- P must come forward with more persuasive evidence to support their claim than would otherwise be necessary. -Boise Cascade Corp. v. FTC (page 525) HELD: Court held that FTC must prove that the parallel use of base point pricing "actually had the effect of fixing or stabilizing prices" in order to establish an unfair method of competition. FTC challenged southern plywood mfgs' parallel practice of quoting only a delivered price that included its mill price plus an amount equal to the rail freight from Portland, Oregon. If the respondents were ordered offer FOB mill pricing, they might decide to maintain high list prices for closer customers and forego the opportunity to compete for more distant patrons. Under these circumstances, base point pricing actually helps consumers: the closer customers would be exploited under either type of pricing, but at least distant customers would get some competition under a base point scheme. On the other hand, ordering the respondents to offer FOB mill pricing would benefit consumers where the FTC could show that the respondents would probably respond by lowering list prices in order to compete for distant patrons. to -Among the disadvantages of base pricing: a company pays same price regardless of whether they get it local or far away; base point pricing can lead to inefficient transportation practices; causes economic inefficient incentives for plant location by buyers and sellers. -The court found that the pricing scheme at issue in this case was not anti-consumer because southern buyers "frequently expressed a preference for receiving quotations in terms of West Coast freight." This may have been true because in the short run, buyers prefer the benefits of easily comparable prices. -Ethyl Covp. v. FTC (page 535) HELD: Court rejected any antitrust liability for parallel use of facilitating practices, even under the FTC Acts's ban on unfair methods of competition. FTC had found four oligopolists that produced leaded antiknock compounds violated '5 by the parallel use of four facilitating practices. In addition to the use of delivered prices, each firm included a "Most favored nation" clause in contracts with customers, promising to extend to each customer any discount given to any other buyer; promised to advise buyers of price changes within 30 days in advance; and adopted a policy of publicly announcing all price changes in advance. Court sharply limited the FTC's authority under '5. Absent an actual violation of the Sherman and Clayton Act, the court held, the Commission must find that the conduct at issue was collusive, coercive, predatory, or exclusionary, or that it was done with an anticompetitive purpose or for no legitimate purpose. VERTICAL RESTRAINTS -For introduction to vertical restraints, see note on page 572. RESALE PRICE MAINTENANCE -Vertical restraints take a number of forms. Resale price maintenance (or vertical price fixing) involves agreements between a manufacturer and its retailers that fix the minimum price at which retailers will sell the manufacturer's product. Other agreements are classified generally as non-price restraints and include various restrictions on the retailer's ability to sell a product to customers other than those designated by the manufacturer. For example, exclusive territorial agreements permit the retailer to sell only to customers within a designated geographics area. Location clauses permit the retailer to sell to any customer but only from a retail outlet in a designated area. Profit pass-over clause permits a retailer to compete for all business; however, where sales are made outside its designated primary area of responsibility, the retailer must compensate the dealer in whose area the sale was made for a pro rata share of the promotional, warranty, or other local investments that the designated has made. -Dr. Miles Medical Co. v. John D. Park & Sons Co. (page 576) HELD: Park, a leading discounter of medicines, challenged Dr. Miles' elaborate contract system that made it difficult for Park to obtain Dr. Miles' products. Preliminarily, the Court rejected Dr. Miles' claim that its wholesalers and retailers were its consignment agents. The Court found that the consignment agency agreements were really sham transactions, and that the wholesalers and retailers were not truly agents of Dr. Miles. On the merits, the Court noted that an agreement among the retailers to fix the price of Dr. Miles' products would clearly have been illegal. Also, beneficiaries of the resale price fixing were the retailers, rather than Dr. Miles' consumers. Court held that resale price maintenance was per se illegal. -If there is a genuine agency or consignment arrangement, that is not resale price maintenance. -It would probably be "per se" illegal for competing firms to agree not to advertise any discount. -Why is the resale price maintenance rule wrong? 1) facilitates oligopoly pricing or cartel at the mfg. level because it becomes easier to detect cheating. 2) it can hurt consumers if the resale price plan comes from the bottom-up instead of top-down. 3) harms infra-marginal consumers. (people who like the product but do not want to pay the higher price for something extra they do not want.) 4) the freedom of traders to be able to set their own price is restricted. CUSTOMER/TERRITORIAL RESTRAINTS -White Motor Co. v. U.S. (page 597) HELD: Govn't challenged White Motor's scheme of assigning specific dealers the exclusive right to sell its trucks within a specified geographics territory, reserving to itself the exclusive right to sell to governmental entities. The court held for White Motor, arguing that horizontal restraint decisions reflected an empirical assumption that agreements among competitors have no purpose but to harm competition. In contrast, vertical arrangements are not inherently illegitimate. Rather, a vertical territorial limitation "may or may not" have purposes other than stifling competition. The majority therefore took a cautious approach. The Court opined that non price restraints "may be too dangerous to sanction or they may be allowable protections against aggressive competitors or the only practical means a small company has for breaking into or staying in business." Because "we need to know more than we do about the actual impact of these arrangements on competition," the majority held, these restraints should be more carefully evaluated under the rule of reason. -U.S. v. Arnold, Schwinn & Co. (page 598) HELD: Govn't argued that D's system was unreasonable because, inter alia, it allowed Schwinn to stifle intrabrand competition by effectively preventing discount retailers from obtaining its product. Intrabrand competition was particularly important, the govn't argued, because Schwinn was perceived as the "Cadillac" of the industry. Court held that nonprice vertical restraints are per se illegal when title has passed to the retailer. However, when the goods have legitimately been consigned to the retailer and title remains with the manufacturer, there is no restraint on alienation and the restrictions were to be evaluated under the rule of reason. -Continental T.V. Inc v. GTE Sylvania, Inc. HELD: This case overruled Schwinn. Court that non-price vertical restraints, had sufficient potential to promote (page 599) first decided in the abstract, interbrand competition that they deserved careful analysis on a case-by-case basis. Sylvania's share of tv sales declined to as low as one or two percent when it began to include location clauses in its distribution agreements. The restriction seemed to be having the desirable, pro competitive impact of increasing sales of Sylvania products and allowing Sylvania to compete more effectively against the larger mfg. It was thus apparent to the Court that vertical restrictions should not be treated the same as their horizontal counterparts: they could simultaneously decrease intrabrand competition between Sylvania retailers and retailers of other brands. Thus a balancing of the harms and benefits was required. -Some disadvantages of vertical restraints: First, where a market features highly differentiated products with strong brand loyalty, the lack of intrabrand competition can lead to higher prices because dealers do not compete with one another for the patronage of brand-loyal consumers and have no incentive to pressure the manufacturer to lower prices so as to increase sales. Second, where products are sold through retailers that carry several brands, the lack of intrabrand competition can lead retailers to "steer" consumers toward brands whose profit margin is higher. The potential for this consumer deception is significantly reduced if costumers can purchase the same brand from several retail outlets. Third, brand loyal consumers may be forced to pay for unwanted retail services when intrabrand competition is reduced. In the absence of vertical restraints, other dealers will forego the unwanted services and the accompanying price increase. -Some advantages of vertical restraints: By reducing or eliminating competition from free riders, vertical restraints encourage retailers both to aggressively promote the manufacturer's product and to provide point-ofsale service (such as quality warranty repair service or knowledgeable sales representatives.) Both of these benefits enable the manufacturer to compete more effectively against its rivals. -Valley Liquors, Inc. v. Renfield Importers, Ltd. (page 753) HELD: Posner explained the rationale for using a market power "screen" to summarily dispose of vertical restraint cases under the rule of reason. Because it is difficult to balance the harm that a restricted distribution scheme causes to intrabrand competition, he noted many courts have held that "the balance tips in the defendant's favor it the plaintiff fails to show that the defendant has significant market power." Thus, this case restates the principal announced in Silvania, that balancing may be unnecessary "because of the ability of consumers to substitute a different brand of the same product." -Here, you would need to show that mfg. did not have legitimate reasons to do it on its own in order to prove illegality. But, to prove illegality, you also need to show that defendant has market power. -The problem with Valley Liquors is that consumers purchasing from firms in oligopolistic industries, or from mfg that produce a differentiated product with significant brand loyalty, may be subject to exploitation because, respectively, the price level of other brands will also remain above the competitive level or consumer brand preferences make other products less attractive substitutes. Hopefully, the Court in such cases would find that D possessed market power in such cases. If instead, as Valley Liquors suggested, the court defines market power as a firm's unilateral power to raise prices, the market power "screen" will result in the premature dismissal of otherwise meritorious claims. IMPLEMENTING RESTRAINTS THROUGH REFUSALS TO DEAL -First question is: is there an agreement? -Second question: If yes, is it price fixing agreement or nonprice restraint? -U.S. v. Colgate & Co. (page 627) HELD: A manufacturer could lawfully announce a suggested resale price and then refuse to deal with those who failed to comply. Court thought that such behavior did not constitute an agreement. In cases involving pure horizontal conduct, the courts have held that an agreement can be inferred when one firm fixes its price and announces its intent to maintain that price as long as its rivals do likewise, and its rivals consistently follow the same pricing patter. Similarly, govn't alleged Colgate followed the same practice. Court said that the Sherman Act "does not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal. And, of course, he may announce in advance the circumstances under which he will refuse to sell. -U.S. v. Parke, Davis & Co. (page 628) HELD: Court refused to apply Colgate and instead found a '1 violation, reasoning that the Parke, Davis scheme "plainly exceeded the limitations of the Colgate doctrine and under [earlier precedents] effected arrangements which violated the Sherman Act." In addition to publicly threatening to terminate sales to discount retailers, Parke, Davis announced that it would terminate any wholesaler that refused to help enforce the scheme, it received assurances from a large drug store chain that the chain would abide by Parke, Davis' prices, and it visited various retailers to assure each that their rivals would be cooperating in maintaining resale prices. -Monsanto Co. v. Spray-Rite Service Corp. (page 642) HELD: This case resurrected Colgate. Spray-Rite, a familyrun discount distributor, bought agricultural chemicals in large quantities and sold at a low margin. Monsanto, which manufactured corn and soybean herbicides in competition with other firms, declined to renew Spray-Rite's distributorship. Jury found that the termination was part of a conspiracy between Monsanto and its other distributors to maintain retail prices. Seventh Circuit affirmed, based on evidence that a number of competing Monsanto retailers had complained about Spray-Rite's pricecutting and testimony of a Monsanto official that Spray-Rite was terminated because of those complaints. Supreme Court rejected this ruling, opting instead to fully protect the manufacturer's prerogatives under Colgate to impose non-price restraints on its dealer. Court held that a "manufacturer can announce its resale prices in advance and refuse to deal with those who fail to comply. And a distributor is free to acquiesce in the manufacturer's demand in order to avoid termination." BUT, Court affirmed the jury verdict, despite the above. Evidence, the court held, showed more than a mere termination in response to dealer complaints. First, Monsanto had invited and secured assurance of future price adherence from several other distributors, which was plainly illegal under earlier precedents. Second, the jury could reasonably have inferred a conspiracy from the concededly "ambiguous" evidence of a distributor's newsletter, which could be read to indicate that competing retailers had agreed not to discount and that Monsanto had promised not to discount in its own retail sales. Third, and most perplexing, the Court indicated in a footnote that an agreement could be inferred from the fact that Monsanto's threat to terminate the plaintiff came during the shipping season, when herbicide was scarce and Monsanto "was able to use supply as a lever to force compliance." -Monsanto explained that an agreement requires a "common scheme" and a "unity of purpose." (i.e., In Garment District, a court held that where a complaining dealer seeks to terminate its rival because of price competition, and the manufacturer knuckles under in order to preserve the complaining distributor's business, there is no agreement because each defendant is acting from a different purpose. -Monsanto thus encourages manufacturers to use their wholesalers and retailers to monitor and report the pricing activities of potential discounters, even though Parke, Davis suggested that a manufacturer that involved its wholesalers in monitoring retail prices would forfeit Colgate's protection. In effect, then, Monsanto created a special evidentiary rule expanding the Colgate privilege in order to encourage dealers and manufacturers to communicate about non-price restraints. REDEFINING RESALE PRICE FIXING -Business Electronics Corp. v. Sharp Electronics (page 651) HELD: Sharp, a manufacturer of office products, terminated the P following complaints from Hartwell, the P's retail competitor. Expressly finding that Dr. Miles needed to be narrowed and vertical restraints should be encouraged, the court held here that even if a plaintiff overcomes Monsanto and proves that the manufacturer and complaining dealer agreed to terminate the plaintiff because of price cutting, Dr. Miles does not apply absent evidence of a further agreement that the complaining retailer will maintain the suggested resale prices. Thus, even if a discounter is able to overcome the reinvigorated Colgate hurdle, Sharp makes it much more difficult to avoid the daunting task of winning under the rule of reason. -This reasoning seems unpersuasive. Any agreement between a manufacturer and a complaining dealer to terminate a discount retailer BECAUSE OF PRICE CUTTING (as in Sharp) inherently involves an implied agreement that the complaining dealer will maintain its higher prices following the termination. Why else would the dealer have complained? Why else would the manufacturer have agreed to terminate the discounter? LIMITATIONS ON THE EXERCISE OF MARKET POWER BY A SINGLE FIRM PREDATORY PRICING -The key to predation is: the sacrifice of short-term profit in expectation of recoupment of future monopoly profits. -Barry Wright Corp. v. ITT Grinnell Corp. (page 673) HELD: Grinnel received a special discounted price when it purchased specialized equipment used in nuclear power plants from its co-defendant, Pacific Scientific. Parties agreed that Pacific had lawfully obtained a monopoly in the manufacture of this equipment; Barry Wright (Pacific's rival) argued that the discount to Grinnell reflected an unlawful maintenance of power through predatory pricing. In light of the district court's finding that the price covered all the costs of production, the First Circuit concluded that the conduct was lawful. Where the defendant is pricing at or above its own ATC, the only rivals who cannot stay in the market are those who are less efficient (i.e. whose costs are higher). As the court noted, regulating the "proper" price above the level of the defendant's ATC would lead to severe administrative difficulties. Moreover, any rule that exposed a defendant to liability for pricing above ATC to liability would deter desirable discounting by established firms. -Fixed costs are costs you have regardless of what you produce. -Variable costs: costs that vary with changes in output (i.e. materials, fuel, labor directly used to produce the product, clerks, custodial help, use-depreciation, repair and maintenance, license fees per unit.) -Average variable cost: the sum of all variable costs divided by output. -Marginal costs: the incremental to total cost that results from producing an additional increment of output. It is a function solely of variable costs, since fixed costs, by definition, are costs unaffected by changes in output. Marginal cost usually decreases over low levels of output and increases as production approaches plant capacity. -Total cost: the sum of fixed cost and total variable cost. -Average cost (full cost): total cost divided by output. -Virtually all costs are variable when a firm, operating at capacity, plans to double its output by constructing new plants and purchasing new equipment. -Brooke Group v. Brown & Williamson Tobacco (supplement) HELD: Liggett contended that Brown & Williamson cut prices on generic cigarettes below cost and offered discriminatory volume rebates to wholesalers to force Liggett to raise its own generic cigarette prices and introduce oligopoly pricing in the economy segment. Liggett claimed that B & W's discriminatory volume rebates were integral to a scheme of predatory pricing, in with B & W reduced its net prices for generic cigarettes below average variable cost. Court held that the evidence would not support a finding that B & W alleged scheme was likely to result in oligopolistic price coordination and sustained supracompetitive pricing in the generic segment of the national cigarette market. Without this, B & W had no reasonable prospect of recouping its predatory losses and could not inflict the injury to competition the antitrust laws prohibit. LEAVE SPACE -In proving predatory pricing, two elements must be proven: 1) P must prove that the prices complained of are below an appropriate measure of its rival's costs. 2) P must demonstrate that the competitor had a reasonable prospect, or, under '2 of the Sherman Act, a dangerous cost probability, of recouping its investment in belowprices. TYING ARRANGEMENTS -Clayton Act, Section 3 appears on page 694 of book. -United Shoe Machinery Corp. v. U.S. (page 694) HELD: D imposed a number of restrictions on its lessees' right to use its machines in conjunction with complementary machines obtained from rival machinery companies. For example, a shoe manufacturer was not permitted to use a United Shoe machine if the manufacturer used a rival company's machine for certain other operations on the same shoes; United Shoe retained the right to cancel the lease or to charge higher fees if a lessee used certain machines from other sources; and rental rates included a royalty on all shoes made by the manufacturer, whether or not they were produced on United Shoe machines. Supreme Court held that '3 of Clayton Act invalidated these restrictions because "While the clauses enjoined do not contain specific agreements not to use the machinery of a competitor of the lessor, the practical effect of these drastic provisions is to prevent such use." -International Salt Co. v. U.S. (page 695) HELD: Court held that '1 was violated by the defendant's insistence that purchasers of its patented machines for inserting salt into canned goods also buy its salt. Surely, there were so many other uses for salt that International could not possible have monopolized the salt market. Moreover, International's contracts specifically allowed buyers to purchase the salt elsewhere if they found a better price, thus suggesting that the tied sale would not increase International's profits. Court held that it was illegal to "foreclose competitors from any substantial market.) The Court believed that salt sellers should compete on the merits, and that one company should not be disadvantaged because it did not also happen to be selling a desirable second product. -Northern Pacific Railway v. U.S. (page 700) HELD: D had received millions of acres of land to facilitate its construction of a railroad from Lake Superior to Puget Sound. It sold or leased the farmland, often including "preferential routing" clauses that required farmers to ship their products over its railroad, unless another railroad offered a better deal. In condemning the tied sale, the Court expressly objected to the denial of freedom of choice for consumers. -A policy focused on efficiency would not be concerned that consumers were forced to buy a product from one seller, as long as they were not paying a monopoly price. This case reflects instead Madisonian concerns about discretionary power. -Jefferson Parish Hospital District NO. 2 v. Hyde (page 706) HELD: An anesthesiologist challenged East Jefferson Hospital's practice of requiring all surgery patients at the hospital to use Roux and Associates for anesthetic services. The Court held that tied sales are unlawful when they exclude rivals or increase entry barriers. If others can not offer the tying product, the defendant obtains a monopoly in both the tied and the tying products, thus excluding those who sell only in the tied market. Moreover, entry becomes more difficult because any potential rival must sell in both markets in order to compete. Court found no illegality here, however, because rival anesthesiologists could practice in a number of other New Orleans hospitals. -Hyde establishes 5 elements to prove a "per se illegal tie." 1) tie must affect not an insubstantial amount of commerce 2) must be coersion 3) issue of separate product 4) economic power. Does the company have economic power? If no, maybe there is no harm. 5) is it justified? -Mozart Co. v. Mercedez-Benz of North America (page 724) HELD: Mercedes could lawfully insist that its dealers purchase only authorized repair parts because monitoring compliance with quality standards was expensive. In this way, Mercedes could protect consumer expectations that its licensed dealers would maintain a high level of quality. -Kodak v. Image Technical Services, Inc. (supplement) Kodak tied the sale of replacement parts of its photocopying machines to repair and maintenance services for those machines, thus excluding independent service firms from the market. It argued that its policy could not harm consumers because any effort to raise price or lower quality in parts or services would result in a loss of customers to its rivals in the photocopying equipment market. The Court instead found that many consumers--like the hypothetical Cubs fan--would not accurately anticipate the long-term cost of replacement parts and servicing when making the initial purchase of equipment. These consumers are subject to later exploitation when they need follow-up goods or services and must turn to Kodak. The finding that Kodak's tied sale hid the true cost of services from consumers is also significant because the Court's judgment was based on evidence of actual consumer behavior, rather than economic theory. The dissent argued that "a rational consumer considering the purchase of Kodak equipment will inevitably factor into his purchasing decision the expected cost of aftermarket support." The majority, however, credited evidence that many consumers could not accurately ascertain the long-term costs of aftermarket support, as well as the fact that many purchasing entities use different departments to purchases initial equipment and subsequent services. HELD: REFUSAL TO DEAL BY A MONOPOLIST -These are illegal in 2 circumstances: 1) if done with the purpose to monopolize 2) illegal if there is a demonstrated anti-competitive effect: a) increased entry barriers b) evasion of rate regulation c) facilitates ability for price discrimination (profit from selling to two different customers is different.) -Eastman Kodak Co. v. Southern Photo Co. (page 740) HELD: Kodak attempted to buy a photo stock house, but after it was unsuccessful, shop alleged Kodak refused to sell it supplies at the normal dealers' discount (in furtherance of Kodak's purpose to monopolize in violation of '1 and '2 of Sherman Act.) Supreme Court found that even though there was no direct evidence that Kodak's refusal to sell to plaintiff was in pursuance of a purpose to monopolize, the evidence disclosed circumstances which would support a reasonable inference that Kodak's refusal was pursuant to such a plan. The jury's finding on this issue was conclusive and the judgment for the P was affirmed. -Lorain Journal Co. v. U.S. (page 741) HELD: Newspaper refused to accept advertising from merchants who also advertised on a radio station. Newspaper had monopoly in town. Court held that the conduct was an attempt to monopolize interstate commerce. Forced boycott of radio station violated '2. -FTC v. Raymond Bros.-Clark Co. (page 744) HELD: One wholesaler wanted mfg to either discontinue using another wholesaler or give the first jobber's profit on sales to the second one. Mfg. refused and fist wholesaler discontinued further purchases from manufacturer. Supreme Court held that first wholesaler was not a monopolist and had acted unilaterally. In threatening to withdraw and then withdrawing its trade from Snider, the first wholesaler was exercising its lawful right to deal with whomever it chose--leaving it to the manufacturer to decide which customer it desired to retain. -A.H. Cox & Co. v. Star Machinery Co. (page 746) HELD: Star persuaded mfg to let it market its products exclusively, although Cox held the right previously. Court held that there was no horizontality at the mfg. level since R.O. Products, in deciding to switch from Cox to Star, engaged in no concerted action with the other mfg's. As to the attempt charge, the result of the behavior challenged by Cox was simply to replace one distributor with another in marketing a particular mfg's line of products. Where each distributor has only one line, it is particularly appropriate to recognize the right of a distributor to initiate changes; otherwise a weak distributor could continue ineffective promotion of a good brand, while a strong distributor could be forced to continue representing a mfg with whom it has poor relations. -Otter Tail Power Co. v. U.S. (page 747) HELD: Otter Tail has "a strategic dominance in the transmission of power in most of its service area" and it used this dominance to foreclose potential entrants into the retail arena from obtaining electric power from outside sources of supply. Use of monopoly power to "destroy threatened competition" is a violation of the "attempt to monopolize" clause of '2 of the Sherman Act. There were no engineering factors that prevented Otter Tail from selling power at wholesale to those towns that wanted municipal plants nor wheeling the power. Otter tails refusal to sell at wholesale or to wheel were solely to prevent municipal power systems from eroding its monopolistic position. -Paschall v. The Kansas City Star Co. (page 748) HELD: Star company refused to sell its newspapers at wholesale to independent contract carriers. Court held that there is nothing unlawful about the mere possession of monopoly power. Nor is it unlawful per se for a monopolist to unilaterally refuse to deal with a former distributor or to vertically integrate. However, a monopolist may be subject to antitrust liability if it misuses its monopoly power to accomplish a vertical integration and a refusal to deal that results in unreasonable anticompetitive effects. Each case must be resolved on its own particular facts. In this case appellees have failed to prove that any anticompetitive effects that might result from Star Co.'s vertical integration and refusal to deal are unreasonable. EXCLUSIVE SELLING/DEALING CONTRACTS -Text Of Section 3 of Clayton Act appears on page 694. -Section 3 requires the P to present evidence that the probable effect of the contract will be to decrease competition. This section applies only to sales, leases, or contracts of sale, and only covers "goods, wares, merchandise, machinery, supplies, or other commodities." Those who wish to challenge transactions not falling within the scope of '3 must claim that the exclusive dealing arrangement constitutes a restraint of trade in violation of '1 of the Sherman act. The two standards are similar, since in both you must prove probable competition- lessening effect. -The law today is rule of reason and you look at foreclosure. -Standard Fashion Co. v. Magrane-Houston Co. (page 757) HELD: Supreme Court prohibited a garment manufacturer that enjoyed a 40% market share from engaging in exclusive dealing because many small towns were large enough to support only one retailer. -Standard Oil Co. of California v. U.S. (page 760) HELD: '3 was violated whenever exclusive dealing foreclosed a significant dollar volume of commerce. Regardless of the effect on competitive rivalry or the ability of firms to compete, the Court held it illegal to contractually tie up a large amount of business. -Tampa Electric Co. v. Nashville Coal Co. (page 773) HELD: Effectively overruled Standard Oil. This case sets the general standard: exclusive contracts are unlawful where they significantly foreclose the opportunity for rivals to enter or remain in the market. A key factor in applying this standard is what percentage of the relevant market the exclusive dealing contract forecloses to others. Court upheld a requirements contract that obligated Tampa Electric to buy all the coal it needed for one of its generating stations from Nashville Coal because Tampa Electric's purchases pre-empted less than 1% of the coal market. -FTC v. Brown Shoe Co. (page 783) HELD: Supreme Court unanimously held that FTC has the discretion to find an unfair method of competition in violation of '5 of the FTC ACT on evidence skimpier than that necessary to prove a violation of '1 of the Sherman Act or '3 of the Clayton Act. Although the only evidence described in the Court's opinion that supported the FTC's conclusion was that Brown was the country's second largest shoe manufacturer and had effectively required franchisees to limit their trade with other shoe manufacturers, the Court held that the FTC acted within its authority under '5 to stop a violation in its incipiency. MONOPOLY CONDUCT -U.S. v. Griffith (page 791) HELD: Supreme Court held that so-called "leveraging" of monopoly power from one market to another was unlawful conduct under '2. The D, which owned the only movie theater in a number of small towns, packaged licenses for these theaters with licenses for its theaters in other, competitive markets. Thus, movie distributors who wished to show their movies in the "closed" towns were also required to give the defendant exclusive rights to show the movies in its theaters in the "open" or competitive markets. Court adopted Alcoa's reasoning that specific intent is not an element of '2; otherwise, sophisticated firms might monopolize with impunity. -Union Leader Corp. v. Newspapers of New England (page 796) HELD: Active but fair competition is permissible, even if done with the intent and effect of acquiring monopoly power. Court condemned soliciting of customers not to deal with rivals, and providing secret rebates to community leaders who were publicly advocating switching patronage to the defendant. -This case did not address whether classic predatory pricing-pricing below average variable cost--is lawful. If the goal is to promote a fair fight and encourage equally efficient challengers to take on the incumbent, however, such pricing should be unlawful. -SCM Corp. v. Xerox Corp. (page 804) HELD: SCM sued Xerox for refusing to license patents for the manufacture and sale of plain-paper copiers. Court held for Xerox. While an acquisition by a dominant competitor in a market of a patent affording monopoly power in the same market would violate '2, that rule does not apply where the acquisition occurs prior to the commercialization of the patented art and prior to the time that the art had led to the existence of the relevant market itself. Xerox contributed substantially to development of copier by investing R & D not only after the agreement but also a decade before the agreement. Party from whom Xerox purchased the patent was not a potential competitor. Under these circumstances, to impose antitrust liability upon Xerox would severely trample upon the incentives provided by the patent laws and thus undermine the patent system. -Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (page 809) HELD: Operator of one of Aspen's ski slopes sued its sole and dominant rival, which operated the area's other three slopes, for cancelling a cooperative arrangement that allowed skiers to purchase tickets that could be used on any of the four slopes. Court found that the conduct was inefficient and predatory and violated '2. Three facts were key: D participated in cooperative arrangements in other ski areas where it did not possess monopoly power; its prior participation at Aspen appeared to be profitable; and it offered no plausible justification for cancelling the arrangement at Aspen. -Efficiency or inefficiency of a monopolists's conduct can be demonstrated by : 1) evidence describing how markets function elsewhere 2) D's inability to explain its conduct. ESSENTIAL FACILITIES: TESTIMONY -Alaska Airlines v. United Airlines (supplement) HELD: Alaska Air claimed United denied it access to Appollo and SABRE reservation systems. They based their claim on the "essential facilities" doctrine, which imposes liability when one firm which controls an essential facility, denies a second firm reasonable access to a product or service that the second firm must obtain in order to compete with the first. Court held that the facilities merely gave United leverage over competitors, but did not give United power to eliminate competition. At most, United gained a monetary profit at their rivals' expense. This is not enough for a '2 violation. Court implicitly imposed the "dangerous probability of success" element on the attempted monopolization claim. -Town of Concord, Mass. v. Boston Edison Co. (supplement) HELD: Edison increased wholesale prices but kept retail prices same. First circuit held that price squeezes do not constitute '2 violations in the regulated industry context. Court conceded that a price squeeze that allows a monopolist to extend its power into a second market has two important anticompetitive effects: it raises entry barriers by forcing new firms to compete with the monopolist in two markets rather than one; and it deprives the market of non-price competition and pressures for innovation. But, the Court gave three reasons suggesting caution before courts aggressively condemn price squeezes: the monopolist might be more efficient and innovative than its rivals; consumers will benefit if the victim of the price squeeze is itself a monopolist; and a court cannot effectively determine, without engaging in rate-setting price regulation, whether a given set of wholesale and retail prices constitutes an unlawful price squeeze. Further reasons were also given. First, court noted that P, which enjoyed a legal monopoly in retail distribution within its municipal limits, was unlikely to be driven into bankruptcy given its stable customer base, even if it was put at some competitive disadvantage vis-a-vis customers who were free to choose their plant locations. Second, imposition of antitrust liability for price squeezes will encourage utilities seeking wholesale rate increases to ask for retail rate increases as well; third, judicial second-guessing of rates set by government agencies would be an administrative nightmare and would discourage innovative types of rate proceedings. Finally, FERC (Federal Energy Regulatory Commission) is required to consider price squeeze claims and can condemn unreasonable squeezes. ATTEMPT TO MONOPOLIZE -Walker Process Equip. v. Food Mach. & Chemical (page 839) HELD: Food Machinery sued Walker Process for infringing its patent on a highly specialized piece of sewage treatment equipment. Walker Process denied the infringement and counterclaimed that the patent was invalid. After discovery, Food Machinery moved to dismiss its complaint because the patent had expired, but Walker amended its counterclaim to allege a '2 violation, alleging that Food Machinery had knowingly misrepresented key facts to the Patent Office. Court agreed that patent fraud could form the basis of an attempt offense, but remanded for a factual hearing on the question whether the acquisition of the patent would, in fact, have given Food Machinery monopoly power. Court noted that operators of sewage treatment systems might find that alternative products were perfectly satisfactory substitutes for the product made by the parties, in which case the patent would not have conferred monopoly power. -Spectrum Sports v. McQuillan (supplement) HELD: Mfg. wanted distributor to cease a particular product line in order to retain exclusive rights to distribute another line. Distributor refused and mfg cut off the distributor altogether. Court held that mfg may not be liable for attempted monopolization under '2 of the Sherman Act absent proof of a dangerous probability that they would monopolize a particular market and specific intent to monopolize. In this case, the trial instructions allowed the jury to infer specific intent and dangerous probability of success from the defendant's predatory conduct, without any proof of the relevant market or of a realistic probability that the defendants could achieve monopoly power in that market. MERGERS: HORIZONTAL MERGERS MARKET DEFINITION -U.S. v. Philadelphia National Bank (page 862) HELD: Court sought to avoid the need for a detailed inquiry into the history of each industry by setting forth an alternative rule of presumptive illegality: "A merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms that market is so inherently likely to lessen competition substantially that it must be enjoined the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects. Without attempting to specify the smallest market share which would still be considered to threaten undue concentration, we are clear that 30% presents that threat. [merger here involved 2nd and 3rd largest commercial banks in Philadelphia.] D's claimed that merger would allow them to move to suburbs, thereby creating efficiencies. Court observed that each firm could accomplish the same result through internal growth, and expressed a clear preference for internal expansion over merger. Court also held that '7 did not allow a substantial in in lessening of competition in one market in order to permit the merging firms to compete in a second market. -U.S. v. Aluminum Co. of America (page 875) HELD: D's post merger market share approached the 30% mark, but it would have been difficult to find that the merger met Philadelphia Natl Bank's second requirement for presumptive illegality--a significant increase in concentration-because one of the merging firm's market share was so small (Alcoa had a 27.8% share in one market, Rome Cable 1.3%). Rather, in finding the merger unlawful, the Court emphasized that the market was concentrated (nine firms controlled 95.7% of the market; the HHI was 2354) and that the small firm was a particularly aggressive and independent rival, despite its small market share. -U.S. v. Continental Can Co. (page 876) HELD: The merger of a leading can company and a leading bottle manufacturer lessened competition in a market defined as all glass and metal containers. Noting the dynamic competition over time between these two types of containers, the Court properly rejected arguments that cans and bottles were not competitive. But, the court decided not to include other potentially competitive container products, like plastic, based on the conclusory (wrong) assertion that glass and can submarkets would exist in any broader market. But how does that exclude plastic? DOJ alleged that where two industries are both concentrated and some inter-industry competition exists, mergers between leading firms should be prohibited because of their dampening effect on potential inter-industry competition. Court bought this. -U.S. v. Pabst Brewing Co. (page 878) HELD: Court found that D's acquisition of Blatz Brewing substantially lessened competition in three different geographics markets, including a national market where the firms' combined market share was 4.49%, because the merger was part of a significant trend of acquisitions that were transforming the beer industry from one characterized by many independent local and regional firms to one dominated by a few large national firms. MERGERS: FEDERAL GUIDELINES -Guide to Section 2 of the Federal Guidelines: I. Does the merger increase the likelihood of "coordinate interaction?" A. Necessary elements for coordinated interaction 1. Can remaining firms reach agreement on terms of rivalry? 2. Can any "cheating" be detected? 3. Can others "punish" the cheating firm by price cuts or other means? B. Factors affecting coordinated interaction 1. availability of information about rivals' pricing 2. whether firms produce fungible or differentiated products 3. use of similar or different pricing/marketing practices 4. other characteristics of buyers and sellers (i.e. larger buyers, infrequent sales, maverick firms in the market.) II. Does the merger increase the ability of the merging parties to unilaterally lessen competition? A. Differentiated products B. Monopoly pricing -Under guidelines, mergers that either significantly increase concentration in moderately concentrated markets or modestly increase concentration in heavily concentrated markets raise significant competitive concerns that warrant careful scrutiny, and mergers are presumptively illegal when they significantly increase concentration in heavily concentrated markets. -Evaluation of a merger's competitive effect should focus on two principal harms caused by anticompetitive mergers: 1) that they facilitate the ability of the firms remaining in the market to engage in coordinated interaction, including tacit or express collusion -Will the firms be able to detect those who "cheat" on any such agreement and retaliate against them? 2) that they increase the economic power unilaterally exercised by the merging firms. -The government evaluates a proposed market definition by asking whether all the firms in the market could profitably raise prices by 5% for one year--a "small but significant and nontransitory" increase in price (or SSNIP)--without losing too much business to other firms. If the answer is yes, then the market is a valid product and geographic market because outside firms are not in effective competition. If the answer is no, the market definition is not accurate and must be expanded because the other firms that customers would begin patronizing are true rivals and must be considered in determining market shares. -Firms are considered part of the relevant market if they would respond to a SSNIP by entering the market within one year and could do so without incurring significant expenditures that could not be recovered when they left the market ("sunk costs"). On the other hand, firms that would have to incur these significant costs in order to enter, but whose entry is nonetheless likely to deter anticompetitive behavior among the existing firms in the market, are excluded from the market, but their existence is analyzed separately as part of the general consideration of entry barriers. -Concentration is not a factor in the DOJ analysis (as opposed to how concentration is viewed under case law). MERGERS: HISTORY OF '7 -Legislative history of '7 suggests that two tests are to be applied: whether the merger substantially lessened competition or tended to create a monopoly. Such effects could be perceived through findings that a whole or material part of the competitive activity of an anterprise, which had been a substantial factor in competition, had been eliminated; that the relative size of the acquiring corporation had increased to such a point that its advantage over competitors threatened to be "decisive"; that an "undue" number of competing enterprises had been eliminated; or that buyers and sellers in the relevant market had established relationships depriving their rivals of a fair opportunity to compete. -U.S. v. Von's Grocery Co. (page 879) HELD: U.S. challenged acquisition of 12th largest supermarket chain in L.A. by the fourth largest chain. Court wrote that Congress sought to preserve competition among many small businesses by arresting a trend toward concentration in its incipiency before that trend developed to the point that a market was left in the grip of a few big companies. Thus, where concentration is gaining momentum in a market, we must be alert to carry out Congress' intent to protect competition against ever increasing concentration through mergers. Here, number of supermarkets in LA decreased from 5, 365 to 3, 818. merger would have resulted in a 8.9% share of the market, and the merger was prohibited. The -U.S. v. General Dynamics Corp. (page 881) HELD: Court established that a company's acquisition of a non-failing firm can withstand '7 challenge, even if Philadelphia National Bank's standard of presumptive illegality seems to be met, where the defendant directly refutes the government's prima facia case. Gov't introduced statistical ev showing that the acquisition gave the merged firm a combined market share of 23.2% in Illinois and 12.4% in a larger geographic market known as the Eastern Interior Coal Province. Court held that the evidence demonstrated not only that the coal industry was concentrated among a small number of leading producers, but that the trend had been toward increasing concentration. Court held for D because they had demonstrated that the gov't statistical ev did not reflect market realities. Coal mining firms tended to enter into long term contracts with major electric utility market prima companies. As a result, General Dynamics owned few uncommitted coal reserves. Were prices to go up in the industry, United Electric (the acquired firm) had so few uncommitted reserves that it could not possibly respond as a competitive force. The majority therefore held that the correct measure of competitive strength was the amount of one's uncommitted reserves; thus, United Electric's share would have been too small to make out a facia '7 case. -U.S. v. Waste Management (page 902) HELD: Court held that ease of entry must be considered in determining whether a merger lessens competition. Evidence of easy entry truly refutes the govt's prima facie case: the presumption that two firms with large market shares could combine to exercise economic power is clearly incorrect when other firms are likely to enter the market should competition be lessened. The key question, however, is what constitutes entry barriers. Here, combined market share was 48.8% but merger was approved because entry barriers were small. There were no physical barriers: purchasing of truck for waste disposal. -Where the government proves a prima facie case, the defendant should have the burden of showing that entry is sufficiently easy, and is sufficiently recognized as easy by others, that the merged firm and its remaining rivals are unlikely to attempt to lessen competition. This shifting of the burden is consistent with General Dynamic's view that statistics are sufficient to allow the government to establish a prima facie case, but that the defendant may show that these statistics are unreliable. -FTC v. Elders Grain, Inc. (page 907) HELD: Court held that D bears the burden of clearly refuting the government's statistical case. Here, Court sustained a preliminary injunction barring the merger of two of the six industrial dry corn suppliers. First, the court observed that the buyers in this market were few, large, and sophisticated, perhaps implying that they could take care of themselves. But, the court ignored this statement. Court noted that '7 requires a prediction about competition, and "doubts are to be resolved against the transaction"; the characteristics of the D's buyers therefore merits consideration only when the govt's prima facie case is marginal (moderately moderate increases in greater the market confidence the court has that create or increase market that excess capacity in the that might refute the prima facie this factor is irrelevant, may lead to aggressive price symptom of cartelization rather it. concentrated markets, concentration). The concentration, the more the merger is likely to power. Court also said market was a factor case. But, court said since excess capacity cutting or may be a than a cure for