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ANTITRUST LAW OUTLINE Prof.

Eleanor Fox Fall 2006

1 INTRODUCTION
I.

INTRODUCTION
A. goals/values of antitrust 1. major goal: to prohibit transactions that will make things worse for consumers (not so interventionist to be proactively trying to create a market that is best for consumers) a) note: AT isnt about protecting competitors from competition 2. desire to have a better distribution of wealth vis--vis anti-monopolistic aspects? 3. efficient use of resources dont want to allow companies to gain while shrinking the size of the pie (i.e., not gaining by good business practices, but by cheating) B. three major historical turning points in US antitrust 1. Industrial Revolution brought about the first antitrust laws a) led to better communication, transport of goods, etc. regional businesses suddenly found themselves in competition with distant businesses b) competitors wanted to quell competition, so they came together into cartels creation of the trust form, which arose in all major industries c) huge aggregations of wealth/power within the trusts d) concerns re aggregations of power exploitation of the ordinary person economically, politically, etc. 2. Hitler/WWII shock of observing how fascist govts used big enterprise to carry out their designs; big enterprise came to work lockstep with Hitler a) hugely dangerous politically high concentration of economic power could play into the hands of a despot this led to strengthening of merger laws (1950) 3. globalization impact starting around 1980 a) barriers to entry had become much lower as a result of trade agreements that lowered tariffs, etc., and now US companies besieged by robust competition from abroad b) led to rethinking of laws in general many groups began to argue that US law was too handicapping of US business great drive to cut back law, let business do what it had to do to be competitive in the global market c) loosening took place not in the wording of statutes (which were very broad), but also in those enforcing the laws (judges, commissioners, etc.) d) US AT law is now much more relaxed than it used to be with the exception being hard-core cartels

II. MAJOR STATUTES AND LAWS A. main federal AT laws 1. Sherman Act (1890) a) 1 prohibits agreements/conspiracies in restraint of trade b) 2 prohibits monopolization, attempts to monopolize, and conspiracies to monopolize 2. Clayton Act (1914) a) 3 prohibits potentially anticompetitive acquisitions, exclusive dealings, tie-ins, and interlocking directorates b) 4 establishes standing under the Clayton Act c) 7 prohibits anticompetitive mergers note: doesnt apply to persons purchasing such stock solely for investment, and doesnt prevent a corp from forming a subsidiary 3. Federal Trade Commission Act (1914) a) 5 prohibits unfair methods of competition and unfair/deceptive acts/practices
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b) FTC admin agency, cant sue criminally, but can sue civilly when a case is brought under FTC Act, only injunctions are awarded, no fines FTC Bureau of Competition recommends which cases to bring; case is heard before an ALJ; ruling may be appealed to the FTC, then the fed app court 4. Robinson-Patman Act (1936) a) prohibits price discrimination in the sale of goods when it harms competition b) exceptions are made where the discriminatory low price is cost-justified or necessary to meet competition, and it doesnt hurt competition c) note: price discrimination can implicate Sherman 2, esp. if there is predatory pricing 5. Celler-Kefauver Amendment (1950) amended 7 of Clayton Act a) prohibits potentially anticompetitive mergers and acquisitions 6. Hart-Scott-Rodino Act (1976) a) requires pre-merger notification (to both DoJ and FTC) and waiting period B. state laws 1. almost all states have versions of Sherman Act, merger laws about 90% of these are interpreted as the fed laws are interpreted 2. note: we dont have a strong law of preemption in antitrust states can apply their own laws even in areas that have a lot of spillover into interstate commerce (even where the center of gravity of the transactions is interstate commerce) C. regulatory laws that spillover into antitrust 1. most regulated industries allow AT laws to operate even when their regulations are operating a) even when regulatory regime is paramount, theres usually a process where theyll hear from AT enforcers re certain mergers, etc. D. interplay b/t intellectual property law and antitrust law 1. e.g., Microsoft 2. interesting emerging issues of which area of law is paramount in such conflicts III. ENFORCEMENT OF ANTITRUST LAW A. in federal govt, two major AT enforcers 1. DoJ Antitrust Division (part of the executive branch) a) only the DoJ AD can bring a criminal antitrust action b) note: very high fines and jail time for criminal violations of Sherman Act also note: doesnt say whats criminal or civil; has just become practice that DoJ will only prosecute as criminal matters cartel activity that is so evil 2. Federal Trade Commission (admin agency, not part of the executive) a) enforces 5 of FTC Act; interpreted in line with what Sherman Act prohibits b) note: 5 can be enforced against all of the same conduct of 1 or 2 of Sherman Act question is whether it can be enforced against more conduct 3. overlapping jurisdiction b/t these two fed enforcers a) explicitly overlapping jurisdiction in 7 of Clayton Act b) can both enforce R-P Act (though they dont like to enforce this, given philosophy that price discrim is just part of competition) c) under HSR, jurisdiction over merger practice is given to both enforcers this is the only area where theres contentious overlap b/t the enforcers parties have to file with both enforcers; FTC and DoJ are supposed to confer and then decide which will enforce; 1% of the time, they squabble over it B. private party enforcement 1. parties can get injunctions, and treble damages a) judgment for govt is prima facie evidence of violation in a private suit against same b) 2. standing to sue has been cut back quite a lot by the cts must show that they are in the line of antitrust injury (injured by that which made the conduct illegal under the AT law) a) direct purchaser suing for price fixing is exactly in the line of standing, but there are many cases where its not clear that is suing for AT injury
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note: indirect purchasers cannot sue (Illinois Brick rule) exception: narrow cases where indirect purchaser is party to an ag that doesnt present the complex problems of tracing, may be allowed to prove passed-on overcharges b) five material factors to consider in the standing analysis harm was direct rather than remote harm was an AT injury (or inextricably intertwined with it) intent to harm or those of s class prospect that standing will lead to duplicative recovery or difficult questions of apportionment of damages prospect that standing will leave significant violations undetected/unremedied C. state enforcement, via the state Attorneys General 1. can bring action on behalf of residents of their state for violations of fed AT law; can also, of course, bring actions to enforce state AT law 2. relief for harm to states general economy cant sue for damages, but can sue for injunctions IV. EVOLUTION OF THE LAW OF ANTITRUST A. Trans-Missouri (US 1897) (p.12) first case to construe 1 Sherman 1. question of what in restraint of trade means a) args: only Ks that imposed unreasonable restraints of trade are prohibited by 1; justification of ruinous competition; claim that prices charged were reasonable 2. holding: ALL contracts in naked restraint of trade are prohibited a) note: ancillary restraints are permissible; but these Ks were naked restraints b) reasonableness isnt an element of the analysis, b/c its too difficult to define emergence of the per se rule c) rejected the ruinous competition defense free trader doctrine 3. White dissent: 1 doesnt call for a blanket prohibition; first articulation of the Rule of Reason concern that freedom to contract and freedom of trade may be compromised by not considering the issue of reasonableness B. Addyston Pipe (6th Cir 1898) (p.18) Taft; naked vs. ancillary restraints 1. naked restraints (only purpose is to exclude competitors) are illegal per se; but ancillary restraints may be legal (provisions that the K may be enjoyed) 2. examples of permissible ancillary restraints a) by the seller of property/business, not to compete w/buyer in a way that reduces its value b) by a retiring partner not to compete w/the firm c) by a partnership binding a partner not to interfere w/the business of the firm d) by the buyer of property not to use it in competition w/business retained by the seller e) by an assistant, servant, or agent not to compete w/a former employer 3. public policy considerations these covenants must be reasonably necessary to a) the enjoyment by the buyer; or b) to the legitimate end of the existing partnership; or c) to the prevention of injury to the seller from use by the buyer of the thing that was sold; or d) to protect from danger of loss to the employers business due to an employees use of confidential info 4. note: monopolization, regardless of duration or intent, is discouraged in the public policy embodied in the common law C. Northern Securities (US 1904) (p.29) Harlan; per se rule 1. reflects the moralistic approach of the Roosevelt administration and concern for competitors 2. holding: articulates the tenets of early Sherman Act cases a) every combination or conspiracy that would extinguish competition is illegal b) natural effect of competition is to increase commerce and any agreement that prevents this play of competition restrains instead of promotes competition and commerce c) it is only essential to show that a restraint, by its necessary operation, would tend to restrain trade
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d) constl guarantee of liberty of K doesnt prevent Cong from prescribing the rule of free competition for those engaged in interstate and international commerce D. Standard Oil (US 1911) (p.41) White; Rule of Reason analysis 1. reflects the functional approach of the Taft administration; SC considered the case from the point of view of both consumers and excluded competitors 2. holding: unreasonable restraints of trade are illegal; must apply Rule of Reason a) Sherman Act was intended to evolve with changing economic realities; lack of express defn requires judicial application to specific facts not all contracts, combinations, and conspiracies will amount to a 1 violation b) Rule of Reason reasonableness standard for 1 must consider s intent, by looking at the purpose and effect of actions taken focus on effects, since its hard to determine actual intent 3. Harlan partial dissent purpose of Sherman Act was to prevent high concentration of wealth among the few; all restraints of trade should be prohibited, not just unreasonable ones E. aftermath of Standard Oil 1. note that Trans-Missouri (per se analysis) is still applied where price fixing is at issue, since price-fixing is per se illegal 2. dispute b/t White and Harlan is parallel to that b/t Scalia and Douglas a) White/Scalia suggest that the market will work to protect the ints of the public b) Harlan/Douglas believe that AT laws are intended to protect public from self-interested individuals/corporations 3. Wilsons legislative record Clayton Act and FTC Act meant to limit judicial discretion under the Rule of Reason 4. US Steel Corp (US 1920) rejects arg that size and productive power should be equated to power to raise prices no presumption of avarice (bad intent) V. ANTITRUST ECONOMICS A. different theories of antitrust economics 1. central concern of AT is the failure of competition; goals of competition law: a) bring price down to cost b) efficiency c) disperse resources d) limit private power e) provide ease of access to markets f) remove market impediments so that the market can work efficiently 2. classical economists the price of every product is determined by the amount of the labor needed for its production; no govt intervention is needed since competition will determine prices 3. neoclassicists producers will maximize profit, consumers will be concerned w/maximization of utility; law of demand applies: as the price of a product increases, demand will diminish 4. industrial organization economics structure of an industry influences the conduct of the firms 5. marginal revenue increase of total revenue yielded by the sale of an additional unit of the product a) note: a monopolist will try to make its marginal cost and marginal revenue be equal B. history: changing attitudes toward antitrust law 1. pre-1980 enforcement concerned with protecting small companies and ensuring access to markets; sought to prevent concentration and producing mergers; believed that concentration would lead to poor performance 2. 1980 shift to viewing competition policy from the consumer perspective; AT should let business do what it wants, should never intervene unless an actor was lessening output or unnecessarily raising prices 3. post-1980 Chicago School efficiency is the paramount purpose of the AT laws; best deal for consumers isnt necessarily the cheapest, consumers may choose higher quality or higher priced configurations; govt should only intervene when actors are welfare-reducing 4. post-1990 post-Chicago School accepts Chicago School premise that output limitations are a primary concern, but doesnt agree that markets always work well
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a) output can be limited in ways more harmful to consumers b) there may be harms outside of consumer welfare and output limitations that AT should be concerned with may impose costs on rivals C. international approaches to antitrust law 1. most countries dont limit their enforcement to consumer benefit also consider: a) competitors and a desire to level the playing field, preserve balance of power b) notions of fairness c) desire to preserve economic oppty d) fairness vs. exploitation and coercion and market integration D. graphs, demand curves, and monopolists 1. in a monopoly situation, a firm has market power (power to raise prices significantly and profitably) a) incentive to produce less and charge more, create scarcity b) monopolist still has to figure out profit-maximizing price even a monopolist can charge too much (at some point, ppl wont want or be able to buy product at that price) 2. monopoly output (QM) is significantly lower than competitive output (QC) see handwritten graphs, p.61 a) QC would be based on where the efficient cost meets the demand curve; QM is based on where the marginal costs (profit-maximizing costs) of monopolist meet demand curve 3. cost to public welfare too few resources were allocated to this market a) from efficiency viewpoint, should have had devoted much more resources to the market (rectangle created by efficient cost meeting QC); but only the monopolists resources (smaller rectangle created by efficient cost meeting QM) were allocated b) from allocative econ point of view, AT is about trying to prevent such misallocations 4. why arent we worried about monopolists surplus revenue (rectangle above the resources devoted in the monopolists world)? a) welfare triangle is a dead loss no-win situation, given the scarcity created b) the rectangle is a surplus money going from consumers to monopolists pocket minimalist view is just the triangle, trying to prevent the pie from shrinking US AT is concerned about consumer welfare, though, so rectangle is impt c) note: if the trans does create market power, it usually hurts both consumer welfare as well as general public welfare, so this debate is something of a nonstarter

2 CARTELS AND CONDUCT AKIN TO CARTELS


I.

OVERVIEW: GENERAL ANALYSIS FOR CARTELS


A. cartels = per se illegal, even though not always price-raising and output-limiting 1. cartels usually exist where competitor conduct is price-fixing (US per se rule); market division (EU); allocation of quotas; allocation of customers; standard-setting conspiracies; naked boycotts; vertical minimum resale price maintenance agreements B. naked vs. ancillary restraints 1. naked restraints object is to restrain trade among competitors a) may have secondary purposes (e.g., a public interest such as reduction of rate variability) often used as a shield for naked restraints 2. ancillary restraints subject to Rule of Reason; byproducts of legit relationships C. how to identify a cartel in the absence of a concrete agreement 1. what is a cartel-like arrangement? a) why did the firm engage in apparent cartel or price-raising behavior? make a better product? joint venture? block competitors? cartelize? b) it is easier for cartels to form where there are fewer firms, industry standards (fewer additional terms for potential cartelists to agree upon), and barriers to entry 2. conditions necessary for cartelization
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a) must include all significant producers or buyers b) barriers must exist to keep non-members out of market or ensure that they cant expand c) must have means for administering the cartel fixing the right price determine profit-maximizing price for cartel (a) are the members are this price? have they excluded low-cost firms? publication of the fixed profit-maximizing price to the members mechanism to detect and punish cheaters 3. market factors in the cartel definition things to consider in identifying cartel-like behavior a) availability of key info re market conditions b) individual competitors c) firm and product heterogeneity d) pricing or marketing practices typically employed by firm in the market e) characteristics of buyers and sellers f) characteristics of typical transactions g) previous collusion in another geographic market h) note: common standards may be desirable for markets and for the public good when is standard-setting a conspiracy against the public? when is it a good business effort to improve efficiency in the market? when is it a business effort to improve efficiency, but with anticomp effect? when is it a business effort for the public in, but with uncertain comp effect? D. characterization cases whether the agreement is price-fixing or something else requires further study under Rule of Reason; facts must be sufficient to garner per se rule 1. conduct isnt prohibited unless it is output-limiting and price-raising 2. only pro-competitive effects can offset anticompetitive acts E. Rule of Reason structured inquiry 1. analyze purpose, market power, and effect on output and price a) must determine whether the restraints are reasonable in light of their actual effects on the market and any pro-competitive justifications b) must show actual adverse effect on competition in relevant market c) can provide pro-competitive effects/justifications d) can rebut by showing that the same pro-competitive effects can be achieved by less restrictive means 2. quick v. longer looks depends on how easy it is to characterize the observed behavior (i.e., strongly anticompetitive conduct or weak justifications) II. EVOLUTION OF THE LAW REHABILITATION OF TRANS-MISSOURI, DISTINGUISHING NON-CARTELS A. Chicago Board of Trade (US 1918) (p.81) 1. Chicago Bd of Trade sold grain bidding and selling system, bd regulating the price; at close of trading every day, bd put into effect the Call Rule (if youre going to trade after hours, must trade at the price that was the last price established during Call) a) DoJ argued that this was illegal per se, relying on cases like Trans-Missouri and Addyston Pipe; didnt bring any evidence of purpose or effect b) s wanted to offer evidence about purpose/effect; DCt didnt let that evidence in 2. holding: not illegal per se, purpose/effect evidence from s should have been allowed a) test of illegality is whether the restraint is a mere regulation of competition vs. suppression/destruction of competition b) here, bds rule doesnt suppress competition in any way 3. note: today, were much more specific in deciding whether per se rule applies a) today, want to see if firms have market power; whether by the agreement theyre getting efficiencies, whether theyre responding to the market, etc. B. Appalachian Coals (US 1933) (p.82) 1. context: Depression; demand was severely decreased; much more supply than demand

a) problems of fraud in coal market: producers would give it to multiple agents, making it look like there was even more coal on the market, thus further depressing the price pyramiding b) so coal producers came together with a plan to set a reasonable price 2. holding: not per se illegal; then did analysis under Rule of Reason a) question of whether the agreement promotes interests of competition, or whether it was an unreasonable restraint on trade b) here, given state of the market, it was impossible for s to impose undue restraint on trade, definitely not an unreasonable restraint 3. ct didnt want to hold it an illegal cartel (crisis circs), called it a joint venture instead a) today, though, we would call this a cartel dont trust competitors to set prices C. Socony (US 1940) (p.85) 1. context: oil crisis; state laws with production quotas, but producers brought illegal oil onto market on a regular basis a) industry got together, formulated dancing partners plan big producers (didnt have pressures to dump everything on market, since they had big warehouses to store oil) would buy oil from small producers, to take excess oil off their hands; would buy excess oil at fair market price 2. holding: this is clearly a cartel (ag to prevent flooding the market = ag to get around the market) a) there is no crisis defense in US law dangerous slippery slope; and you dont ever want competitors to be setting the prices 3. rule cartel agreements that affect the market through naked restraints such as price-fixing are per se illegal dont have to define the market, do power analysis, etc. a) rejects reasonableness as an inquiry in application of per se rule b) govt doesnt have to prove market power, effect, or that the conspiracy was carried out per se rule is a clear one in order to boost its deterrent effect the agreement itself is the illegal conduct and once you have an agreement among competitors to fix prices, thats all you need no justifications will be heard or have to be rebutted III. CHARACTERIZATION CASES ((per se illegal, quick look analysis, full Rule of Reason analysis)) A. introduction to characterization cases AT law after Socony 1. Soconys per se illegal rule against cartels is still the law of the land question, though, is the scope of the application of the per se rule a) cases to follow refined the scope of the per se rule against price-fixing, clarified the scope of defenses to agreements that have anticompetitive effects B. Natl Society of Professional Engineers (US 1978) (p.93) quick look to get to per se rule 1. NSPE has bylaws, all members have to agree to the bylaws so no question about existence of agreement; question of characterization of agreement a) bylaws set rules for fees schedules ethics rules prohibiting competitive bidding by members (prohibited price competition among members) 2. this isnt price-fixing on its face ct gives a quick look at s justifications to determine what rule to apply a) ct will apply quick look analysis in cases where per se condemnation is inappropriate (e.g., not clearly price-fixing), but where no elaborate industry analysis is required to demonstrate the anticompetitive character of an inherently suspect restraint 3. s arg about how to view this agreement: incentive to prevent poor quality work a) safety and ethics problems if engineers have to compete against each other on price, would cut corners in order to meet the costs b) s arent trying to characterize the agreement as not anticompetitive s are saying that yes, this is anticompetitive, but its necessary and reasonable 4. ct response to this arg: cant make arg under Rule of Reason that competition itself is unreasonable so even under Rule of Reason analysis, this would be illegal a) only possible justifications for anticompetitive behavior are pro-competitive ones here, possible increase in public good doesnt enhance competition
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C. BMI (US 1979) (p.98) 1. BMI and ASCAP give out licenses for use of musical compositions in TV shows; issue blanket licenses to its users; CBS wants a per use license instead; sues BMI, claiming price-fixing agreement among the composers (since composers arent competing against each other, benefiting from the pooling arrangement with BMI/ASCAP) a) without the pooling arrangement, there would be competition b/t composers, and lesser known compositions would cost much less to license 2. question in this case when exactly to apply the per se rule a) formulation of when something comes within the per se rule (see p.101, under C) it must be the case that the practice facially appears to be one that always or almost always tends to restrict competition and decrease output, rather than one designed to increase economic efficiency and render markets more, rather than less, competitive if something is clear and naked price-fixing, then per se rule will apply but something is more ambiguous, ct will hear story and apply Rule of Reason 3. BMIs story in this case arg that they were creating efficiencies a) without the pooling arrangements, market would work much less well s werent trying to fix prices, just trying to make market work more efficiently b) note: here, BMI was actually creating the market before, without the pooled funnel, there was no way for most of these compositions to reach the market of licensees 4. holding: remanded, for Rule of Reason analysis a) SC moving away from rigid per se and not per se boxes, to more of a continuum D. Catalano (US 1980) (p.103) using quick look to get to per se rule 1. beer retailers allegation of conspiracy to eliminate short-term trade credit formerly granted on beer purchases in violation of Sherman Act a) agreement between wholesalers, in order to eliminate competition among themselves, that they would sell to retailers only if payment were made in advance or upon delivery 2. question of if this is price-fixing ct took a quick look a) before the ag, s had competed against each other w/r/t trade credit; after ag, s all refused to extend any credit at all clearly elimination of one form of competition b) s arguments: will raise prices, induce others to come into the market; ag performed an informing function (more accurate understanding of the terms offered by all parties in the industry) these are true of all price-fixing agreements! also, can only justify anticompetitive behavior with pro-competitive effects very bad argument, to note that your ag will raise prices 3. holding: setting an element of price (here, credit terms) is price-fixing per se illegal E. Maricopa (US 1982) (p.105) 1. doctors agree to sponsor certain insurance plans; agree not to bill more to patient than that which insurance will cover; also agree to a maximum price for each procedure a) note: before Maricopa, it had been held that competitor price-fixing is per se illegal, whether it was maximum or minimum prices we dont trust competitors to really be setting a lid on prices theyre probably using this maximum price language as a front for setting a higher price than what theyd been charging earlier competitors will make it a maximum that is really attractive to them (we dont ever trust competitors to set any prices) 2. holding: this is per se illegal a) s story of acting in public interest, keeping healthcare costs down this isnt procompetitive, so it doesnt work as a justification b) maximum price-fixing is illegal per se F. NCAA (US 1984) (p.111) 1. NCAA plan for televised games, limiting number of appearances in order to reduce adverse effects of televised games on live game attendance a) horizontal restraint, limitation on output, precludes price negotiation 2. holding: not per se illegal this industry requires such restraints in order to produce the product
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a) escape valve from per se rule where theres an industry practice or rationale that warrants some form of horizontal restraints if the product is to be produced at all b) so this case must be decided under full Rule of Reason analysis G. SCTL (US 1990) (p.115) 1. trial lawyers getting a pittance for representing criminal s; refused to work unless they got a higher salary (boycott, picketing, etc.); assn did get a salary raise 2. holding: this boycott was a price-fixing cartel, and illegal per se a) boycott of basically all the competitors in this area, to raise prices classic price cartel b) per se rule still exists more than a rule of administrative efficiency, it reflects recognition that certain cartel-like arrangements have a potentially negative impact H. Cal Dental (US 1999) (p.117) 1. professional rules of ethics, prohibiting advertising of across-the-board discounts, promotional statements about price levels, claims about quality/superiority of dentists services; discouraged solicitation; imposed disclosure requirements for advertising of discounts a) precedents: Goldfarb, holding that prof assns arent exempt from AT laws; Bates, prof ethical rule against advertising wasnt illegal under AT since there was no combination, though illegal under const given commercial rt of free speech to advertise truthfully) 2. holding: restrictions could have pro-competitive effects, so at the very least, greater market analysis needed a) ct went to great lengths to find potential pro-competitive effects 3. Breyer dissent would have found the price restraints as illegal under the quick look analysis, but the non-price restraints as worthy of full Rule of Reason analysis a) note: this is very much the way cts analyze things in non-professional cases; in prof assn cases, we have a more lenient analysis 4. bottom line: continuum of analysis, from per se illegal quick look full Rule of Reason a) note: not a trichotomy, but a gradated continuum I. Polygram (The Three Tenors) (FTC 2003) (p.123) affd, DC Cir 2005 (Update, p.2) 1. Three Tenors had three very famous concerts (1990, 1994, and 1998), recordings of which were very popular; PolyGram sponsored first recording, Warner sponsored the second; just before the third, PG and W formed joint venture to produce third recording a) joint venture decided to have a moratorium on discounting and advertising of the first two recordings b) story: prevention of free-riding PG was concerned that W would use the new advertising (for the 3rd recording) to sell its old recording, and vice versa 2. analytical framework laid out by DC Cir: If, based upon economic learning and the experience of the market, it is obvious that a restraint of trade likely impairs competition, then the restraint is presumed unlawful and, in order to avoid liability, the defendant must either identify some reason the restraint is unlikely to harm consumers or identify some competitive benefit that plausibly offsets the apparent or anticipated harm. a) ct felt that it was an obvious restraint, looked at s free-riding justification and decided that it wasnt good enough, so held the agreement illegal b) rationale: yes, PG and W were in a joint venture for #3, but it was really as competitors that they made the agreement about #1 and #2 fact that it was a joint venture opened up the inquiry a little ct wanted to make sure its analysis was right, so it took a quick look J. Dagher (US 2006) (Update, p.8) 1. Texaco and Shell set up a joint venture in one area; as they were setting up the joint venture, separately as competitors, they decided that the joint venture would charge the same price for the brands kept the brands separate, but charged the same price 2. analytical framework: where its immediately obvious that the economic impact will harm competition, that theres nothing pro-competitive in its favor, then its illegal per se a) price-fixing agreements b/t competitors are illegal per se b) defn of quick look analysis applied to activities that are so plainly anticompetitive that courts need undertake only a cursory examination before imposing AT liability
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c) there arent really any categories anymore hardcore cartels are per se illegal, but for almost everything else, ct will view actions as part of a continuum if something is closer to the per se side, theres a strong presumption against the legality of the action 3. here: price-fixing by independent competitors, so per se illegal a) note: if its a joint venture (already set up, etc.) making a decision on a product being offered by the joint venture, then thats fine joint venture has to be able to set prices on the products it offers so if in Polygram, PG and W had set up joint venture for all three recordings, then the advertising decision would have been fine IV. STATE ACTION, POLITICAL ACTION EXEMPTION FROM 1 A. Parker (US 1943) (p.126) genesis of the state action defense 1. there was a crisis of too many raisins being produced; state govt wanted farmers to get together in a program whereby farmers would put all raisins together in pool, those running the pool would eliminate 20% from the market, some 30% could be sold on the market, and the rest would be subject to govt stabilization program a) challenged by an efficient farmer (couldnt sell as many raisins as he normally could); sued the state official, sought an injunction against the govt program b) question of whether this action against the state official could stand 2. holding: a state official isnt a person as covered by the Sherman Act a) policy reason for exempting state action from Sherman Act separation of powers, political process is the place to challenge such state action states need to be able to regulate in public int implicit is the idea that states should be allowed to have cartels if they deem it to be in the best int of public B. Noerr (US 1961) (p.130) 1. a deal was before the governor to allow truckers to have heavier weights on state roads; RRs got together (didnt want truckers to be taking their business away), petitioned governor to veto a) also ran a big (deceptive) ad campaign against the bill b) sole purpose of petition and ad campaign was to stave off competition from truckers 2. holding: RRs had a right to immunity a) 1st A right to petition, and to jointly petition anticompetitive intent is irrelevant 3. resulting Noerr-Pennington doctrine competitors have the right to petition for govt action that provides exemption from fed antitrust laws a) available as a defense even if obtained through illegal means AT laws regulate business, not politics b) sham test immunity isnt available if petition is a mere sham: objectively baseless, and conceals an attempt to interfere directly with competition through govt process rather than outcome of process (e.g., seeking to impose costs on competitors, thus chilling application process) C. Indian Head (US 1988) (p.132) 1. question: application of Noerr to standard-setting by trade assn whose model codes were routinely adopted by the states a) s, alarmed by threat of competition from s emerging tech, collectively agreed to pack the assn meeting with ppl to vote against inclusion of s conduit 2. holding Noerr immunity doesnt apply a) standard-setting took place in context of a private association; no actual state authority delegated to the association b) immunity might still apply if the exclusion was incidental to a valid effort to influence govtal action here, efforts to influence assns stds was the most effective way to lobby but its not a blanket test of most effective would expand immunity to cartels, bribery, etc.
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Noerr immunity of anticompetitive activity intended to influence the govt depends not only on its impact, but also on the context and nature of the activity D. SCTL (US 1990) (p.139) dealing with s state action justifications 1. Noerr defense doesnt apply s werent lobbying govt to get restraint on trade a) here, they were causing harm to market, in order to get govt to raise prices getting state action by harming market, rather than lobbying govt to get state action b) also note: lawyers here were commercial agents boycott wasnt pure political speech; s were ppl in the stream of commerce hoping to get more as result of price increase 2. holding: cannot restrain trade in attempt to garner govt action V. PROVING A CARTEL HOW TO PROVE AGREEMENT FOR 1 A. background: up until now, have been assuming existence of an agreement but this isnt always easy 1. usually has to be a showing based on circumstantial evidence a) fewness of firms in the market, and barriers to entry impt, and favorable, but not sufficient to prove an agreement 2. note: cts have gotten stricter on SJ (question of if can get past pleading stage) B. Interstate Circuit (US 1939) (p.144) the rimless wheel agreement 1. ODonnell owns all 1st-run theaters; price of 2d-run movies getting very low; OD writes a letter to each of 8 movie companies, telling them that he wont charge the established price for 1st-run movies unless they all agree to not let 2d-run movies go below a certain price, and to not allow double-billing with the 1st run movies a) separate letters to each company, but each letter has the names of all 8 firms on it b) essentially, all 8 come back to OD and agree to his terms 2. question of whether there was horizontal conspiracy as between the 8 companies important, since vertical agreements arent as bad a) rimless wheel we have spokes coming out from the hub (OD), but no express rim connecting the 8 firms 3. holding: inferred existence of the rim (i.e., the agreement) from circumstantial evidence a) conscious parallelism the 8 firms knew what the others were doing b) agreement wouldnt have been economical w/o horizontal agreement wouldnt be profitable for individual companies to independently decide to raise prices to supracompetitive levels, b/c competitors would just undercut 4. note: Matsushita tightened up this area of law, re proof necessary for an agreement C. Theatre Enterprises (US 1954) (p.148) 1. theater built in Baltimore, cant get a first-run film went to distributors with good-faith offers, cant get anyone to agree; sued distributors, saying they must have conspired to exclude him a) arg: would have been against their economic interest to refuse his offer, unless they had been acting in concert 2. holding: rational economic motive for found made more sense for a downtown theater to have an exclusive agreement on a first-run movie a) distributors would make more money on movies being first-run in major downtown theater; agreement that wanted would have precluded that sound economic decision b) powerful argument for if such a case came up today, would have SJ for D. Matsushita (US 1986) (p.151) 1. over 1950s-1970s, Japanese electronics makers were selling very good TV sets at much lower price than US competitors, were wiping out most of US TV industry US competitors alleged conspiracy to charge low prices to get rid of American competitors and take over the market a) J firms had 5-firm agreement each firm would sell to no more than 5 buyers in the US b) Japanese firms charged very high price in Japan, and very low price in US 2. standard of proof for a 1 agreement evidence must tend to exclude the possibility that the alleged conspirators acted independently a) fails if inferences of independent action are as strong as inferences of conspiracy b) s claim must also meet standard of economic rationality 3. as applied here insufficient evidence to prove a low-price conspiracy a) no rational econ motive for firms to engage in predatory pricing difficult to maintain
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barriers to entry werent high would be hard for firms to recoup investment when they decide to raise prices to monopoly levels (on price predation theory) b) more likely that s had a high-price conspiracy in Japan, which led to overproduction and sell-off outside that market, without pricing conspiracy in US commerce 4. modern application of this rule put high burden on , b/c low pricing is good for consumers a) cannot be an equally good inference for independent or lawful action b) requires clear evidence of conspiracy when economic theory is improbable c) want to encourage firms to charge low prices; easy to catch later violations (predation) d) large consequences if allegation of low-price conspiracy is false E. Wood pulp (EU 1993) (p.158) EU perspective on agreements and conscious parallelism 1. interdependence isnt illegal its possible to achieve a parallel result w/o agreement 2. ct imposed a very high burden on commission had to prove that the only plausible explanation was parallel conduct F. Merger Guidelines 2.11 (p.705) VI. EXTRATERRITORIALITY AND THE WORLD A. Alcoa effects doctrine Sherman Act applies to foreign actors if the anticompetitive act affects US commerce, and the effects are more than insubstantial ripples 1. modified Alcoa test requires that the foreign s conduct have a direct, substantial, and reasonably foreseeable effect on US commerce; cts should also balance foreign contacts and interests (exercise of foreign jurisdiction) against US contacts and interests 2. Hartford Fire Ins. Co. existence of foreign law that allowed a practice unlawful under US law didnt create a conflict of the sort that would require dismissal of case from US jurisdiction B. jurisdiction and enforcement Empagran 1. Export Trading Company Act a) a company may get a certificate of review exempting it from US antitrust laws w/r/t activities described in the certificate (must prove that their export activities will not lessen competition in the U.S. or substantially restrain the export of any competitor) 2. Foreign Trade Antitrust Improvement Act of 1982 a) Sherman Act and FTC Act dont apply to non-import U.S. trade or commerce w/foreign nations, unless the conduct has a direct, substantial and reasonably foreseeable effect on U.S. commerce or the export trade of a person engaged in such trade in the US, and such effect gives rise to a claim under the Sherman Act, other than this section b) AT laws dont apply where only foreign competitors or consumers are hurt 3. Empagran issue: whether FTAIA precludes actions unless shows that injuries arise from anticompetitive effects on US commerce; or is it enough that the anticompetitive effects give rise to a claim a) DC Cir (2003, p.169) allowed subject matter jurisdiction and standing for injuries suffered by a foreign in a foreign jurisdiction if there were parallel injuries in the US rationale: reciprocity; increased deterrence and efficient enforcement of US AT b) SC (2004, Update, p.12) reversed; no jurisdiction where significant foreign anticomp conduct with an adverse domestic effect and an independent foreign effect gives rise to the claim FTAIA excludes Sherman from preventing anticompetitive conduct if adverse foreign effect is independent of adverse domestic effect comity expansive rule would prevent foreign jurisdictions from enforcing their AT laws; cant conduct ad hoc analysis to extend jurisdiction b/c AT litigation is too complex Cong intended FTAIA to clarify, perhaps limit, but not expand Shermans scope US govt may have standing to recover on behalf of foreign competitors, uncertain 4. reading of FTAIA cut back reach of Sherman Act in matters involving foreign commerce, principally to protect US sellers from Sherman Act challenges for their activity abroad a) note: doesnt apply to imports imports still subject to Alcoa rule
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b) question of and gives rise to a claim under the Sherman Act that particular s claim must have been directly caused by effects of cartel in US must always prove that domestic effect caused the harm to the foreign c) in Empagran, tried to argue that interdependence of domestic and foreign markets was shown by fact that prices werent raised in US, and couldnt be raised elsewhere b/c of interdependence but ct said on remand that is not being directly injured has to be proximate cause b/t effect on US market and s injury

3 MONOPOLY AND DOMINANCE


I.

OVERVIEW ELEMENTS OF A 2 VIOLATION ((acts of monopolization))


A. market definition 1. start w/ smallest credible market; test it out with reasonably interchangeable alternatives a) demand side: where will buyer turn if seller raises price above cost elasticity of demand: %shift in quantity demanded caused by 1% change in price (a) if a 1% price rise will cause >1% shift in demand, then demand is elastic demand substitutability: consumers can substitute one product for another b) supply side: current/potential competitors to take advantage of prices raised above cost supply substitutability: companies can increase supplies c) additional considerations in market definition analysis geographic diversion: companies can shift where they send their products new entry: barriers to entry, level of initial costs, availability of slots for newcomers, etc. submarkets: where you have heterogeneous, highly differentiated products, each brand-name can constitute a separate submarket (i.e., intra-brand market) 2. Merger Guidelines: SSNIP if all firms were to raise their prices by 5-10%, what would buyers do? if a sufficient number of buyers would shift demand, merged firm wouldnt be able to hold the price increase; other products would be substitutes, thus should be included in the relevant market defn a) additional evidence to be considered in SSNIP test buyers shift or are considering shifting from one product to another sellers base decisions on prospect of buyer substitution influence of downstream competition faced by buyers in output market timing and cost of switching products b) uncommitted entrants are considered if responses are likely to occur w/o significant sunk costs of entry and exit and a significant impact is achieved in a timely period B. monopoly power in that market power to raise price above cost for a significant period of time 1. must prove monopoly share of market exact amount may depend on elasticity of pricing a) generally, at least 2/3rds of market is required, though cts have gone as low as 50% 2. avoid Cellophane fallacy (Posner) factor in pricing information as available; question of whether prices are charged at or above cost, or at super-competitive levels; discretion in applying the law a) may need monopoly pricing to find a violation (infer monopoly power) b) may find single anticompetitive effect sufficient (e.g., innovation blocked) 3. are there high or stable barriers to entry? a) not enough that firm has high market share if the barriers are low (see Microsoft) 4. burden to prove actual monopoly power a) if market is well-defined and there are insignificant barriers to entry, can draw inference from high market share; but can rebut C. anticompetitive acts was monopoly willfully acquired/maintained through anticompetitive acts? 1. purpose/intent can infer from anticompetitive action (i.e., dont need specific intent) 2. modern cases must act anticompetitively; action usually has no consumer value
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a) is using power rather than merit to block the path of less well-situated competitors? b) is using power to exploit a buyer or seller? c) does have such control over access to the process of competition itself that it can and does set arbitrary rules about who can participate and who is excluded? 3. anticompetitive activities include: raising rivals costs, acts that clearly dont benefit consumers, and those that only put roadblocks on competitors D. harm to competition remember, AT law protects competition (consumers), not competitors 1. harm to general market is sufficient for govt suits, but private suits require harm to consumers a) private party can rely on a finding for govt if he was directly harmed and has standing 2. AT doesnt protect competitors, but competitors ints may reflect consumer ints II. INTRODUCTION: POWER, STRUCTURE, MARKETS A. Alcoa (2d Cir 1945) (p.179) old rule, idea that structure influences conduct 1. Alcoa has 90% of aluminum ingot market; question of if it has monopolized the market 2. holding: yes, this is a monopoly a) if you have a large enough market share, youre likely to be in violation of 2 3. narrow exceptions monopoly could arise by force of accident (could be thrust upon the ) a) Hand includes skill and foresight in the thrust upon exception, but not much content to this part of the exception Alcoa doesnt get advantage of it b) Alcoa built new plants when it saw new demand Hand doesnt go so far as to call this an exclusionary act, but he also doesnt classify it as skill and foresight; it also plays heavily in his structural concerns analysis of monopolization 4. problems with the Alcoa rule a) sets up wrong incentives firms would be wary of competing too hard b) textual read of 2 doesnt say no monopolies, but rather no monopolization i.e., not no dominance, but rather no abuse of dominance implies that there must be more than structural monopoly to be in violation 5. cts have backed away from Alcoa rule dont want to make such a shambles of productive firms B. Cellophane (US 1956) (p.189) market definition 1. issue: whether cellophane is the proper market, or whether it should be flexible wrappings a) if its the smaller cellophane market, definitely has a monopoly share of the market 2. analysis a) interchangeability of use do cellophane buyers have reasonable alternatives? if so, these should be included in market, since alternatives tend to push price down to cost here: functional interchangeability physical characteristics, and interchangeable use by buyers b) cross-elasticity of demand when price goes up, do buyers shift to other products? can analyze historically, or through prediction here: responsiveness of sales of one product to price changes of the others 3. holding: defined market as flexible wrappings, inferred that didnt have monopoly power b/c there are substitutes that prevent it from raising prices to monopoly level 4. the Cellophane fallacy: in just looking at interchangeability of use and cross-elasticity of demand, ct failed to consider costs and whether is selling at a monopoly price a) there will always be factors to cap a monopolists price, doesnt mean there is no monopoly power; possible to make monopoly price look competitive w/other wrappings b) reasonable market substitutes establish limits of market, but hard to know if is pricing at a competitive or a monopoly price; may need discovery to prove monopoly price c) if can raise price and exploit consumers that would stay in the market, then that is the relevant market cross-elasticity of demand is a better means of determining the market III. MARKET DEFINITION THE MODERN VIEW A. the Cellophane test 1. reasonably interchangeable products (substitutability at current prices) should be included in the first-cut market hypothesis (outer limits of market)
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2. cross-elasticity of demand; reveals dynamics of market competition given s price 3. then ask if s price is a monopoly price a) direct evidence of supra-competitive profits from a distinctive product b) evidence of an elevated return on investment compared to an industry benchmark with similar characteristics including capital investment and risk c) evidence that s prices rose after a competitive force was removed 4. lastly, possible consideration today may be the pace of technological change (see Microsoft) B. Kodak/ITS (US 1992) (p.196) 1. had previously had relationships with independent svc companies to svc s machines; decided to take svcing businesses for itself, cutting out ISOs; ISOs sued, alleging monopolization of market for svcing Kodak equipment single-brand market defn a) question: can a single brand be a market? 2. relevant market is defined by choices available to consumers; single-brand market is possible b/c evidence showed that could exploit buyers in the aftermarket a) sophisticated vs. unsophisticated buyers preoccupation with the latter in this case b) single-brand markets are uncommon in antitrust; inferred in Kodak 3. Scalia dissent holder of a single-brand may not have market power in the inter-brand market a) every brand-holder for durable goods w/distinctive parts arguably has intra-brand market power in the aftermarket C. Microsoft (DC Cir 2001) (p.198) market defn portion of the Microsoft case 1. defined product market as Intel-based operating systems a) excluded Apple (MacOS), and non-PC based competitors (handhelds, etc.) evidence suggested very little price elasticity b/t these products b) excluded middleware as a potential customer its effects on the market wouldnt be reasonably foreseeable in a short period of time (2 years, acc. to Merger Guidelines) finds no contradiction in excluding middleware even though it forms basis of s 2 claim (suppress middleware as a threat to OS monopoly) market defn and anticompetitive conduct are separate analyses 2. question of if Msoft had market power structural analysis a) high and stable market share is evidence of monopoly power over 90% for a long period of time b) concedes that market share can be misleading also looks at structural barriers barriers to entry: apps programming most consumers want OS w/large number of programs; most programmers write for OS w/substantial consumer base high hurdle to overcome; threw out Msoft arg that the costs of barriers were borne by all participants, not just new entrants irrelevant c) profitability hard to prove; Msoft never raised issue or denied high profitability high market share + low profitability might suggest lack of monopoly power 3. alternative market power analysis offered by Msoft should be proved by direct evidence a) rejected, b/c structural analysis is capable of fulfilling its purpose in new economy b) investment into sunk costs (i.e., R&D) and sub-monopolist pricing is equivocal c) exclusionary conduct could only be rational w/knowledge of monopoly power D. European Union dominance 1. EU law prohibits abuse of dominant position 2. Hoffman-La Roche indicia (1979) (p.205) a) dominant position relates to a position of economic strength, which enables it to prevent effective competition being maintained in the relevant market b) cumulative factors substantial market share varies among markets, according to their structure relationship b/t market shares of and its competitors major factor in EU (i.e., firm with 50% and next competitor with half that = presumption of dominance) technological aspects lead over competitors highly developed sales network
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absence of potential competition IV. THE CONDUCT OFFENSE EXCLUSION A. Lorain Journal (US 1951) (p.207) the paradigm case for 2 violation (exclusion) 1. relatively small town in OH, with one major newspaper; radio station opens nearby and broadcasts into Lorain; all merchants in Lorain have to advertise in Lorain Journal; when radio station opens, LJ tells its customers that it wont carry their ads if they advertise on WEOL a) issue: was this an attempt to monopolize (can be analyzed under monopolization rubric) 2. holding: purpose and effect of act was to attempt to monopolize a) defense of right of refusal (i.e., no duty to deal) is unavailable here b/c cant exercise this right through monopolization or attempt to monopolize exception to the right of refusal exemption when monopolistic conduct has no benefit to consumers paradigm case, b/c no redeeming competitive qualities 3. question to keep in mind: would have done this if competition would have remained as vibrant afterwards? or was the only reason for the conduct the aim of harming competitors and (re)gaining monopoly power in the market? a) one test for 2 violation: sacrifice test is sacrificing something (profit, goodwill) to gain monopoly power? b) another test: no economic sense test wouldnt make economic sense for firm to act this way unless it believed conduct would garner them monopoly power B. evolution of the law the Grinnell principle 1. monopoly law poses a conundrum monopoly is perceived as the problem, but outlawing monopoly is also a problem a) monopoly pricing isnt per se illegal cts are ill-equipped to be price regulators b) economic theory: high prices will invite new competitors, who will break monopoly 2. US approach focus of the law is on conduct against actual and potential competitors (this theory has flourished even in the face of Chicago School focus on competition, not competitors) a) Grinnell principle (1996) formulation of 2 conditions for violation possession of monopoly power in the relevant market, and willful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident b) Trinko (2004) most modern view on monopolization mere possession of monopoly power and the concomitant charging of monopoly prices isnt unlawful is actually an impt element of free market system (induces new entry, innovation, and economic growth) possession of monopoly power wont be found unlawful unless it is accompanied by an element of anticompetitive conduct 3. EU approach a) no analog to Alcoa EC law is meant to regulate, not condemn, dominance b) EC is receptive to, not skeptical of, govtal regulation of economy c) European system never begrudged law to protect oppty, access and openness for competitors (freedom of trade is conceptualized as a component of free movement and overall European integration) C. essential facilities doctrine (subset of exclusionary conduct) 1. basic evolution of essential facilities doctrine a) Terminal RR (US 1912) (p.214) quintessential essential facilities case if a group of competitors acts together to create a facility that gives them a significant competitive advantage over excluded competitors, those competitors must give access to the excluded competitors on reasonable terms access must be essential for competitors to compete addresses market failure (exclusion raises competitors costs) that results from monopolization note: few cases fall under this doctrine cts dont want to determine reasonable rates/terms
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b) Otter Tail (US 1973) (p.214) had duty to provide power at wholesale prices attempt to monopolize thru use of monopoly power to destroy potential and actual competition AT law can be applied in regulatory environment (a) note: see Trinko for application of AT in face of a competing regulatory system; here, both could be followed simultaneously c) Official Airline Guides (2d Cir 1980) (p.215) found no duty to deal essential facility is a weak arg here b/c is engaged in a different line of commerce from that of air carriers market defn as commuter airline industry has no incentive to harm competition in industry rt of refusal absent perverse incentives (no intent to restrain competition or to enhance own monopoly, no coercive acts), retains rt to refuse to deal w/others 2. Aspen Skiing (US 1985) (p.218) invocation of the essential facilities doctrine a) past cooperation b/t companies operating ski slopes in Aspen, with all-Aspen passes sold; (larger company) decided to squeeze out , sold just 3-area pass (for its own slopes), wouldnt honor vouchers put out by ; caused share to steadily decline b) holding: 2 violation exclusionary conduct hurt consumers; no business reason or efficiency justification monopolist has no general duty to cooperate w/competitors, but where s refusal to deal is solely exclusionary (no valid business justification): violation c) test for exclusionary conduct attempt to exclude rivals on a basis other than efficiency gains predatory (a) e.g., is willing to forego profits in order to hurt , w/o efficiency justification (b) motive is inconsequential (see Olympia Equipment) lack of business justification may indicate probable anticompetitive effect consider impact on consumers (e.g., consumers prefer cooperative arrangement) was competition unnecessarily restricted? 3. Olympia Equipment (7th Cir 1986) (p.224) a) Western Union created Telex svc, leased machines; decided to focus on svc, not machines, so create market for firms to lease machines, and Olympia joined in; WU then changed its mind (inventory liquidating too slowly), and withdrew support svcs for leasing firms; O floundered, then sued WU for monopolizing market b) holding: withdrawal of svc isnt a violation no duty to help competitors enter the market might be violations under tort or contract, but not under AT c) distinguishes Aspen has alternatives to acquire the means to compete effectively monopolist may be guilty of violation if it refuses to cooperate with a competitor in circs where some cooperation is indispensable to effective competition 4. Trinko (US 2004) (p.228, p.788) a) Bell Atlantic was incumbent local phone service provider; then competition in the local phone market became feasible (and Cong passed 1996 Telecommunications Act to make it easier for competitors to enter local markets local incumbent must provide fair access to all entering competitors); BA didnt give such access (favored itself); s brought complaint to FTC under Telecoms Act, parties settled now, new (law office) is bringing suit against under AT laws various questions answered b) effect of regulatory scheme if reg scheme and AT laws can be applied concurrently and w/o conflict, then a violation of AT should stand; if the two conflict, then regulatory scheme (esp. if enacted after Sherman) should be presumed to trump the AT laws c) conduct violation
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mere possession of monopoly power and concomitant charging of monopoly prices isnt illegal; must be accompanied by element of anticompetitive conduct note: not only is it not illegal, but now recognized as an impt part of free market d) essential facilities doctrine (note: SC has never recognized or repudiated this doctrine) indispensable reqt for invoking the doctrine is the unavailability of access to the essential facility; where access exists, doctrine serves no purpose (a) note: this statement wipes out many past cases that were predicated on lack of sufficient access, rather than lack of any access at all reg scheme, where it exists, is an element of the essential facilities inquiry here, reg scheme was creating a whole new platform of access e) duty to deal fear that such a rule would induce competitors to form cartels, whether price-fixing or non-price-fixing; reg scheme may lessen this impact, but need a general rule in place to function in the absence of a reg scheme 2 doesnt obligate competitors to take on affirmative duties to assist each other just b/c possibility exists that there are more optimal means of doing business that will yield greater social gains (lower prices) 2 isnt concerned with impact on consumers (monopoly prices) unless that conduct is en route to monopolization 5. post-Trinko mere refusal to deal is almost always fine, even if is a monopoly firm a) Terminal RR is this still good law? cts today dont use language of fairness and equality; dont want litigation to be a deterrent to efficient policies b) what is left of Aspen Skiing if the acts are seriously exclusionary, which will likely raise rivals costs, and there is evidence that they will tend to increase monopoly power, and no pro-competitive justification, then has made its prima facie case, burden is shifted to V. THE CONDUCT OFFENSE PREDATORY PRICING, REBATES A. context the problem of price predation 1. Robinson-Patman Act prohibits price discrimination w/anticompetitive effect a) note: RPA requires reasonable probability of injury to competition; Sherman 2 requires dangerous probability of monopolization 2. RPA reads in terms of a seller, a disfavored buyer, and a favored buyer a) primary line competitive injury where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination b) not only prevents price discrim that lessens competition, but also price discrim that prevents competition with another person who grants/receives the discriminatory price makes it easier to prove price discrimination c) but note: SC read out the bolded lang in primary line cases big question for future is if ct will read it out of secondary line cases B. Utah Pie (US 1967) (p.230) 1. UP began to make frozen pies, based in Salt Lake City; other big baking companies like Continental began making frozen pies in their hometowns, and also selling in Salt Lake City but when selling in SLC, selling for a lot less than when they sell in their own hometowns a) evidence that Continentals sales were unprofitable, that Continental had sold at below its direct cost and overhead meant that it was out-of-pocket for even making the sale 2. holding: this was a harm to competition w/in the meaning of RPA a) finding of predatory intent (sales were unprofitable) b) harm to consumers inferred from the out-of-towners coming in and deteriorating the competitive structure of the frozen pie market in SLC 3. this case has been viewed as an anticompetitive case but its still out there C. TransAmerica/IBM (9th Cir 1983) (p.232)
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1. IBM developed a market for making peripheral attachments to IBMs mainframe; competitors (reverse-engineered) got very good; IBM, wanting to break these competitors, adopted low pricing strategy stole financials to see where competitors were weakest, and priced to go below competitors costs, almost squeezing them out a) DCt: applied Utah Pie: if company was pricing lower than its competitors and had oppty to squeeze competitors out, then thats a violation of RPA b) after DCt ruling, famous A&T article, arg that low pricing is an essential component of market, companies must be given a lot of leeway when engaging in low pricing basic rule: low pricing by individual firms ought always to be lawful unless it goes below marginal cost, or as a substitute, average variable costs rationale: that is making a profit on each additional product does so b/c it is efficient and shouldnt face antitrust liability; whereas a firm that loses money on each additional product is doing so presumably for anticompetitive purposes c) ct here doesnt adopt A&T test wholecloth, but gives some credence to it (can still have violation if you havent gone below marginal or average variable cost) 2. holding: must determine whether market has a tendency to allow to recoup lost profits a) test: to establish predatory pricing, bears burden to prove that the anticipated benefits of s price depended on its tendency to discipline or eliminate competition and thereby enhance the firms long-term ability to reap the benefits of monopoly power idea of recoupment evidence that was going low in order to boot out competitors, and had a very good chance of recouping its losses later when it gained power to raise prices to monopoly prices b) unlike in A&T test, it would still be possible for to make a predation case even if hasnt gone below marginal or average variable cost but would have to have very clear evidence of such recoupment plan and capabilities see handwritten continuum of burdens, p.235 D. Brooke Group (US 1993) (p.236) modern analysis 1. prerequisites for recovery under RPA and Sherman 2 a) must prove that the low prices are below an appropriate measure of its rivals cost relies on a prophylactic rule to say that can predatorily price as long as covering its cost; low prices are good for consumers b) must prove that there is a reasonable probability that will recoup its investment unsuccessful predation may encourage inefficient competition, but it is still procompetitive per se rule of Utah Pie created problems, b/c it might deter competition; dont want to chill legit price-cutting not clear that an oligopolist could ever be liable for price predation very difficult to coordinate low pricing strategy and recoup lost profits (free riders) would need to know: a) the extent and duration of the alleged predation; b) the relative financial strength of the predator and its intended victim; c) their respective incentives and will; and d) whether given the aggregate losses caused by the below-cost pricing, the intended target would likely succumb E. Le Pages v. 3M (3d Cir 2003) (p.242) question of whether rebates are low price competition 1. 3M offered bundled loyalty rebates on a product group, including its cheap private label tape (introduced as a fighting brand to kill Le Pages); all-or-nothing rebates on the group of products; never priced below its cost; Le Pages buyers dropped Le Pages in order to meet their targets; Le Pages sued under 2 2. holding: found for conduct was exclusionary, maintained s monopoly in violation of 2 a) ample evidence that used its market power over transparent tape to entrench its monopoly to the detriment of , its only serious competitor 3. dissent: no, rebates are price competition low pricing is legal unless prices are predatory within rule of Brooke Group 4. note: cert. denied by US SC a) US cts are split on this issue
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b) European cts generally condemn loyalty rebates by dominant firms as unfair and impeding normal price-based competition F. Weyerhaeuser (9th Cir 2005) (Update, p.17) predatory buying 1. Ross-Simmons and Weyerhaeuser operate sawmills in Pacific Northwest; RS claimed that W overpaid for its sawlogs, bought more than it needed, thus squeezing out RS, which couldnt pay so high a price, and forcing it out of the market a) RS didnt offer proof that W engaged in below-cost selling, or was likely to recoup losses b) DCt holding for didnt think Brooke Group predatory pricing rule should apply to such predatory buying VI. TECHNOLOGY, INFORMATION AND NETWORKS A. guiding principles what is an anticompetitive product change, vs. an innovation 1. usually not a violation unless its a strategic means of raising rivals cost by degrading product 2. network effects value of one product or svc increases to each user as more users come aboard a) tilts toward the establishment of a standard, either through valid or invalid means b) can magnify first entry and early lead advantages, and motivate efforts to increase market penetration, including exclusionary competitive strategies (e.g., Microsoft) 3. unique structural characteristics of new economy markets a) high innovation costs for info assets capable of appropriation mainly through IP b) resulting infeasibility of marginal cost pricing c) entry barriers based on IP and network externalities d) recurrence of complementary products with separate demand curves e) frequently forming and dissolving joint ventures 4. competing principles b/t AT law and IP rights a) EU perspective AT rules normally trump IP rights beyond their narrow essence b) US perspective both spheres must be construed harmoniously to advance efficiency and technological progress, and thus the interests of the consumers B. two competing visions on whether there is a duty to license 1. Kodak/ITS (9th Cir 1997) (p.245) a) application of the Data General rule may assert sole use of IP rts as a legit business justification for alleged exclusionary conduct, and jury may presume that this justification is legitimately pro-competitive b) presumption of legitimacy can be rebutted by evidence that the monopolist acquired the protection of IP laws in an unlawful manner, or that IP rts excuse is used as a pretext 2. CSU/Xerox (Fed Cir 2000) (p.248) declined to follow ITS a) w/r/t patents, subjective motivation is immaterial in absence of illegal tying, fraud in the PTO, or sham litigation, patent-holder may enforce tory rt to exclude others from use of patent, free from AT liability burden is on the patent infringement (i.e., the AT ) b) w/r/t copyrights (c) rts granted cant be used with impunity to extend power in the marketplace beyond what Cong intended, but it is a presumptively valid business justification for any immediate harm to consumers burden is firmly on the AT 3. considerations what is the scope of IP rights? a) is the IP rt an extension of monopoly power to ancillary markets, or is it limited to the primary market for which the product is patented or copyrighted? b) is there a sliding scale in which the application of AT becomes more relevant as the market becomes more ancillary to the purpose of the IP rt? c) should there be separate approaches to patent (process) and copyright (subject)? primary function of patent protection is to give incentives to market players, which is a function of AT as well; (c), on the other hand, is more of an abs rt C. international problems 1. South African competition law declares that a firm abuses its dominant position when it refuses to supply scarce goods to a competitor when economically feasible, unless the firm can show
20

technological, efficiency, or other pro-competitive gains that outweigh the anticompetitive effect of its conduct ((question of GSKs duty to license AIDS drug)) 2. EU Magill (1995): duty to license; circumvent IP rts b/c of consumer demand for such action VII.

MICROSOFT
A. Msoft bundled its browser with its operating system govt argued that this was a violation of the consent decree in the prior case against Msoft (settled) 1. DC Ct of App disagreed concerned that if they had voted in favor of govt, high tech companies might be discouraged from doing efficient things, when it might be technologically useful to bundle programs 2. investigation of the consent decree case helped build the big case, filed in 1997 B. note: lower ct dismissed monopoly leveraging claims 1. claim that used power in the OS market to gain a competitive advantage in the browser market, thus shifting significant share of browsers from Netscape to Msoft a) this was a mere leveraging claim dismissed 2. want the law to give room for pro-competitive benefits; worried that a rule that condemns such behavior will sweep into it a condemnation of pro-competitive, pro-innovation acts a) ability to distinguish leveraging that harms from leveraging that benefits consumers 3. if there is only harm to competitors and benefits to consumers, then there is no antitrust harm a) monopolist wouldnt exploit consumers by charging more for the bundle; already received monopoly rents from the OS monopoly (idea of only one monopoly price) 4. foreshadows Trinko (and in conflict with EU practice) AT is only concerned with consumer welfare; leveraging doesnt prove harm to consumers, only to competitors a) must show that there is some sort of monopoly pricing in the leveraged market (i.e., more than mere leveraging) C. primarily a monopoly maintenance case 1. govt was almost entirely victorious on its claims of acts done solely/primarily for the purpose of maintaining its monopoly power D. 2 principles, as laid out by this case 1. to be condemned as exclusionary, monopolists actions must have anticompetitive effect 2. must establish anticompetitive effect; private must establish antitrust injury 3. may proffer pro-competitive justification, which then shifts the burden to the to rebut 4. if not rebutted, ct may balance anti- and pro-competitive effects 5. intent is irrelevant 6. causation as b/t anticompetitive effect and monopolization doesnt have to be proven in determining 2 violation; impt in terms of remedy, though

4 MERGERS
** see p.52 of class notes for subject matter comparison of mergers to monopolies and cartels I.

INTRODUCTION
A. Celler-Kefauver Amendment to Clayton Act 7 prohibits potentially anticompetitive mergers (those whose effect may be to substantially lessen competition, or tend to create a monopoly) B. background: three categories of mergers 1. horizontal mergers focus of Merger Guidelines analysis is to prevent: a) coordinated effects (with fewer firms in the market, more likely to act together, even without an express agreement) b) unilateral effects (creation of single firm power en route to a monopoly) 2. vertical mergers if more efficient no longer considered anticompetitive, even if disadvantageous to smaller firms a) Guidelines prevent those that are exploitative to consumers by raising prices raises prices may facilitate cartelization exclusionary raises barriers to entry
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3. conglomerate mergers includes other types of mergers a) lessening of potential competition concerned about discouraging firms outside of the market that otherwise would come in and be competitive b) entrenchment no longer considered illegal; concern w/advantages to the merged firm over competitors; now seen as efficiency-producing and consumer benefit enhancements II. EVOLUTION OF MERGERS LAW A. Brown Shoe (US 1962) (p.285) 1. historical note: came down in a period where social policy and economics emphasized dangers of high concentration, had goal of stopping incipient trends toward concentration a) policy has shifted since then no longer as worried about high concentration as such b) but Brown Shoe is still cited for its mode of market defn (submarkets), and for admonition that AT protects competitions, not competitors 2. market defn outer boundaries of a product market are determined by the reasonable interchangeability of use, or the cross-elasticity of demand b/t products and its substitutes a) practical indicia of submarkets industry/public recognition of submarket as a separate economic entity; products peculiar characteristics and uses; unique production facilities; distinct customers; distinct prices; sensitivity to price changes; specialized vendors 3. geographic market defn must correspond to the commercial realities of the industry, and be economically significant a) direct competition in a fraction of the geo market doesnt avoid proscription by 7 B. Philadelphia National Bank (US 1963) (p.289) 1. PNB (2nd largest commercial bank in Philly) sought to acquire Girard (3rd largest); resulting bank would be the largest commercial bank in the area 2. PNB presumption where merger is of important competitors, and there is already concentration in the market (more than 30% share), and it increases concentration significantly (more than 33%), parties must make it clear how the merger will be pro-competitive a) shifts burden to to show that merger isnt anticompetitive 3. note: today, this is a harmless litigation presumption, if can come forward (General Dynamics) a) historically, the presumption came about from period of distrusting high concentration, structural analysis of monopolies, etc. b) today, were less concerned so this is just a litigation presumption, shifting burden onto to show pro-competitive justifications for the merger C. Citizen Publishing (US 1969) (p.295) failing firm defense 1. Citizen and Star (the only two daily newspapers in Tucson) entered into joint operating ag (joint sale of advertising, joint distribution of newspapers, pooling of profits) a) prior to ag, Citizen had major annual losses, owed money to its SHs, etc. 2. burden is on allegedly failing firm to bring evidence that shows that: a) resources of one company are so depleted and the prospect of rehabilitation so remote that it faced the grave possibility of business failure, and b) there is no other prospective purchaser 3. here: didnt meet this burden need evidence of real failure, contemplated liquidation, no competition as between the two companies D. General Dynamics (US 1974) (p.297) the turning of the tide; modern law 1. new majority on SC deferential to business interests, nonjudgmental about bigness and industrial concentration, demanding of s in their proof that a merger would harm competition a) in merger cases more concerned about competition, less about concentration 2. rejected flat application of PNB presumption i.e., approach of just stats, showing undue concentration, as prima facie case for violations a) allows to rebut PNB presumption by showing that stats are not a good proxy for harm b) other factors impacting the industry as a whole E. Marine Bancorporation (US 1974) (p.300) conglomerate mergers 1. NBC, subsid of Marine, was #2 bank in Washington state; NBC proposed to acquire WTB (#3 in Spokane); top 3 banks in Spokane held 42.1%, 31.6%, and 18.6% of deposits, respectively; NBC didnt operate in Spokane
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2. 7 encompasses the wings effect probability that the acquiring firm prompted procompetitive effects prior to merger, by being perceived by existing firms in that market as likely to enter de novo; elimination of such pro-competitive effects may render merger unlawful a) question in this case: whether potential-competition doctrine proscribes a market extension merger solely on the ground that such a merger eliminates the prospect for long-term deconcentration of an oligopolistic market that in theory might result if the acquiring firm were forbidden to enter except as a de novo competitor 3. two basic govt theories involved in this challenge a) actual entry effect but for merger, would have entered as a de novo competitor and stirred up competition; requires proof of: high concentration and oligopoly behavior in pre-existing market feasibility of alternate independent entry (financial capability, incentive, means) substantial likelihood that independent entry would result in pro-competitive effects b) potential competition edge effect by being perceived as a potential competitor, has effect of moderating incumbents pricing (wings effect); requirements: must currently exert a pro-competitive force on oligopoly behavior must be the most likely entrant, or one of very few barriers to entry must be high 4. holding: ct refused to assume that merger would lead to statewide bank oligopoly absent enough proof that this was likely to occur (insufficient govt pleadings) III. 1992 MERGER GUIDELINES (p.302, p.689) see class notes, p.54, for overview A. market definition and measurement 1. product market definition a) start with each product produced or sold by each merging firm, ask what would happen if a hypothetical monopolist of that product imposed a SSNIP, but everything else remained constant b) if the reduction in sales of product would be large enough to be unprofitable, then FTC will add the product that is the next-best substitute for the merging firms product c) considers the relevant product market to be the smallest group of products under this test 2. geographic market definition a) begin with the location of each merging firm, ask what would happen if a hypothetical monopolist of the relevant product imposed a SSNIP, everything else remaining constant b) if the reduction in sales of product at that location would be unprofitable, FTC will add the location from which production is the next-best substitute for production at the merging firms location 3. identification of firms that participate in the relevant market a) current producers/sellers: includes vertically integrated firms and sellers of reconditioned and recycled goods if firms would offer these goods in competition with other relevant products; any competitor that acts as a price constraint should be included b) uncommitted entrants: other firms not currently producing/selling the relevant product in the relevant area will be included if they would more accurately reflect probable supply responses to the monopolists price increase; includes firms with existing assets and new or existing firms that could enter the market w/o significant sunk cost of entry and exit 4. calculating market shares a) based on total sales or capacity currently devoted to the relevant market together w/that which likely would be devoted to the relevant market in response to a SSNIP b) usually can use prior years market share as a proxy B. concentration and market shares 1. HHI is calculated by summing the squares of the individual market shares of the participants a) monopolist HHI is 10,000 one firm, with 100% of market (100) 2 = 10000 b) ten equal-sized firms 10 firms, each with 10% of market HHI of 1000
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2. FTC considers both post-merger market concentration and the increase in concentration resulting from the merger (delta) a) easier way to figure out delta: multiply the percentage of each merging firm, and then multiply that by two [e.g., two 7% firms 7 x 7 = 49, x 2 = 98] 3. post-merger HHI below 1000 unconcentrated market a) unlikely to have adverse competitive effects, and requires no further analysis 4. post-merger HHI between 1000 and 1800 moderately concentrated a) if delta is less than 100, deemed unlikely to have adverse competitive effects b) delta of more than 100 potentially raises competitive concerns note: 100 as safe harbor is now considered too low, in practice 5. post-merger HHI greater than 1800 highly concentrated a) delta less than 50 is deemed unlikely to have adverse competitive effects b) delta of more than 50 potentially raises competitive concerns c) delta of more than 100 creates rebuttable presumption of anticompetitiveness note: this might not hold today, w/increased emphasis on efficiency C. potential adverse competitive effects of mergers 1. lessening of competition through coordinated action comprised of actions by a group of firms that are profitable for each only as a result of the accommodating reactions of the others a) includes tacit or express collusion; may or may not be lawful in and of itself b) factors to consider (similar to looking for a cartel): availability of key info re market conditions, transactions, and individual competitors (may be used to detect and punish cheaters) extent of firm and product heterogeneity pricing or market practices typically employed by firms in the market characteristics of buyers and sellers: concerned about oligopoly characteristics of typical transactions 2. lessening of competition through unilateral effect merging firms may find it profitable to alter behavior unilaterally following acquisition by elevating price and suppressing output a) market with differentiated products may diminish competition by enabling merged firm to profit by unilaterally raising price of one or both products above pre-merger level b) combined market share is >35% and data on product attributes and relative product appeal show that significant share of purchasers of one firms product regard the other as their 2nd choice market share data may be relied upon to demonstrate that there is a significant share of adversely affected consumers c) rival sellers merger isnt likely to lead to unilateral elevation of prices of differentiated products if, in response to such an effect, rival sellers would likely replace any localized competition lost by repositioning their product lines D. entry analysis timely, likely, sufficient 1. entry alternatives merger isnt likely to create or enhance market power or facilitate its exercise if entry is so easy that market participants (either collectively or unilaterally) cant profitably maintain a price increase above pre-merger levels a) entry of other firms squelching anticompetitive effects of mergers only counts against anticompetitive effect analysis if entry is timely, likely, and sufficient 2. timeliness only those committed entry alternatives that can be achieved within two years from initial planning to significant market impact 3. likelihood if it would be profitable at pre-merger prices, and entrant could secure such prices a) entry is unlikely if the minimal viable scale (the small average annual level of sales that the committed entrant must persistently achieve for profitability at pre-merger prices) is larger than the likely sales oppty available to entrants 4. sufficiency wouldnt be sufficient if, as a result of incumbent control, tangible and intangible assets required for entry arent adequately available E. efficiencies justifications that will be considered in mergers analysis
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1. merger-specific efficiencies: will consider only those efficiencies likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effect 2. merging firms must substantiate efficiency claims 3. when efficiencies matter when the likely adverse competitive effects, absent efficiencies, arent that great efficiencies almost never justify a merger to monopoly or near-monopoly F. failure and exiting assets another defense 1. failing firm defense a merger isnt likely to create or enhance market power or facilitate its exercise if the following circs are met (narrowly applied): a) allegedly failing firm would be unable to meet its financial obligations in near future; b) wouldnt be able to successfully reorganize under Chapter 11 of Bankruptcy Act; c) has made unsuccessful good-faith efforts to elicit reasonable alternative offers of acquisition of the assets of the failing firm that would both keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger; and d) absent the acquisition, the assets of the failing firm would exit the market 2. failing division defense similar requirements to failing firm: a) upon applying appropriate cost allocation rules, division must have a negative cash flow on an operating basis; b) absent acquisition, the assets of the division would exit the relevant market in the near future; and c) owner of the failing division must have complied with the competitively-preferable purchaser requirement under failing firms IV. OLIGOPOLISTIC MERGERS ((application of Merger Guidelines, modern law)) A. Hospital Corp. of America (7th Cir 1986) (p.309) 1. HCA in effect acquired several hospitals in the area; as result of the merger, in Chattanooga, HCA became second largest provider of hospital services in a highly concentrated market where the four largest firms together had a 91% market share compared to 79% before acquisitions a) FTC found that the merger was illegal, b/c it created/facilitated market power 2. holding: FTC decision was supported by substantial evidence a) ultimate issue is whether the challenged acquisition is likely to facilitate collusion acquisition of a competitor alone (or high concentration alone) has no economic significance in itself; concern is about anticompetitive effects 3. indicia making it more likely for firms to act more collaboratively rather than competitively a) fewer firms makes it easier for firms to coordinate b) high barriers to entry here, state regs; make it difficult for other firms (new entrants or existing competitors) to expand outputs in face of price increases c) demand inelasticity nature of the hospital industry d) no good alternatives available patients arent likely to go out of Chattanooga for svcs e) tradition of cooperation among these firms f) govt pressure on industry to reduce costs B. Baker Hughes (DC Cir 1990) (p.314) 1. firms producing highly specialized hydraulic equipment very small market to begin with 2. holding: this merger, which produced very high concentration, wasnt illegal a) stats as to market share were very unreliable equipment was seldom bought, so market shares shifted easily year to year b) very sophisticated buyers, who wouldnt stand for price raises if they can help it, and here they could help it bargaining power to demand that price doesnt go up c) barriers to entry werent high for foreign firms who could very easily enter US market if merged firm tries to raise prices, others will enter to compete C. Staples (DDC 1997) (p.316) 1. defined market as office supply superstores (mode of delivery of products) a) analyzed under Brown Shoe practical indicia of functional interchangeability, crosselasticity of demand, uniqueness, variable pricing, submarkets
25

D.

E.

F.

G.

H.

b) Cellophane reasonable alternatives (functional interchangeability) c) Guidelines: SSNIP test, what would happen if monopolist increased price by 5% d) note this narrow market defn made it hard for category killer dissent expressed concern about broader ramifications; majority stressed that this is case-specific, not to be construed as a broad endorsement of superstore submarkets 2. effects of proposed merger a) HHIs and market share would be huge prima facie case under PNB, but this is just a presumption; shifts burden to to prove that this isnt anticompetitive b) price effect assuming the correct market, evidence presented that merger would lead to price increases of up to 15%; didnt rebut this evidence 3. likelihood, ease of entry? hard or improbable; made the case harder for 4. efficiencies? evidence of efficiencies was improbable South African merger (2000) (p.317) 1. market definition doesnt include higher-end retail stores excluded from the relevant market a) no cross-elasticity (humorous example of low-end stores offering a free sheep as a promotional, and higher-end stores offering coffee table book on how to cook lamb) 2. therefore enjoined merger smaller market defn definitely impacts merger analysis Heinz (DDC 2000) (p.318) reversed, see below 1. in baby food market, Gerber was very strong; virtually every store that sold baby food had Gerber and one other brand; the other brand was either Heinz or Beech-Nut; H and BN proposed a merger merger would be from 3 to 2 firms in baby food market a) args pro-competitive, since merger would enable merged firm to better compete with Gerber, lowering prices; also arg that it would encourage innovation (new product line, creating incentive for Gerber to come up with a new product line) 2. ct denied motion for preliminary injunction against merger s had rebutted prima facie evidence, merger would be pro-competitive Heinz (DC Cir 2001) (p.322) reversed DDC opinion 1. very strong PNB presumption here, since its a merger to a duopoly (Gerber, and merged firm) a) arg that with just two firms in the market, high incentive toward coordination b) ct places a lot of weight on the PNB presumption must show structural market barriers to collusion in order to override the presumption 2. even if theres competition in the short run, the two remaining firms will likely start to coordinate in the long term a) given high barriers to entry, with no new ppl coming in youd expect in the long term for companies to fall into coordinated effects Airtours (EU 2002) (p.329) 1. market as defined by European Commn: is packaged holiday tours for relatively short haul trips 2. try to figure out whether merger of two of four firms in the market is likely to be price-raising and output-limiting a) Thomson had 27%, Thomas Cook 20%, Airtours 21% and First Choice 11% proposed merger b/t Airtours and First Choice, resulting in 32% b) theory of Commn after merger, theyll collaborate on output (tacit collusion) 3. requirements to prove likelihood of tacit collusion (anticompetitive effect) a) must have transparency in the market, so they have info on what the others are doing ability to monitor, keep others in line b) must have ability to keep firms from cheating must be able to detect and punish cheaters c) have to look to the response of ppl outside this shadow cartel must see what everyone else will do when this happens (e.g., is there a fringe, and what will they do to take up the slack?) 4. as to each of these points, ct held that Commn didnt make its case Arch Coal (DDC 2004) (Update, p.20) also a 4 to 3 merger 1. coal in the Southern Powder River Basin (SPRB) geographic market for certain coal operations
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I.

a) four significant firms; Arch is acquiring Triton 2. FTC theory of anticompetitive effects here is a slightly modified coordinated effects theory a) not quite as forthright; theory is that after the merger happens, theyll wait to see when demand increases; when demand increases, theyll hold back on supply more prospective than usual much harder for FTC to prove its cases 3. weaknesses in the FTC story why there isnt a coordinated effects scenario a) theres a strong fringe in this market companies are very small, but they can easily put more on the market; usually means they can put more on market at a competitive cost b) no way to discipline a cheater c) terms of ag would be difficult to communicate in this market (even though tacit ag only requires producers to adopt a uniform strategy consistent with less competition) d) one consideration in mergers analysis if merger serves to eliminate a maverick where you have a concentrated industry and a leader of the industry (stodgy old firm) acquires a maverick (is satisfied with different profit horizons, is lean and mean), then its a competitive problem to merge with it to eliminate it here, though, Triton was itself stodgy Oracle/PeopleSoft (ND Cal 2004) (Update, p.28) 1. govt sought injunction against Oracle-PeopleSoft merger; O and PS were #1 and #2 in sale of high-function software in the US, with SAP (German) as another competitor a) arg: product market should be narrow market of high-function software, of which only O, PS and SAP were producers; geographic market should be restricted to US 2. analysis of product market definition a) consumer preferences dont negate product interchangeability issues isnt what solutions consumers would prefer for data processing needs, but what they could do in event of an anticompetitive price increase by a post-merger Oracle b) evidence that customers were highly sophisticated, and thus had options outside of the software suites offered by O, PS and SAP c) holding: s havent met burden of establishing that relevant product market is limited to high-function software sold by O, PS and SAP 3. analysis of geographic market definition found that market was a global one a) geographic boundaries in which market participants effectively compete use of E-H test (defines geographic markets in terms of little shipped in from the outside and little shipped out from the inside) b) note: b/c s failed to prove relevant product/geographic markets by a preponderance of the evidence, not entitled to presumption of illegality under PNB or Merger Guidelines 4. anticompetitive effects a) no coordinated effects (products in relevant market arent homogeneous; no price transparency in this market) b) no unilateral effects s failed to prove that there are a significant number of consumers who regard O and PS as their first and second choices unilateral effects theory assumes that SAP wasnt a real competitor 5. s claimed efficiencies too vague and unreliable to rebut a showing of anticompetitive effects 6. holding: judgment against s

5 COLLABORATION AMONG COMPETITORS (OTHER THAN CARTELS)


I.

INTRODUCTION AND CONTEMPORARY CASES


A. continuum running from hardcore cartels to transactions that arent suspicious but may harm competition 1. different levels of scrutiny (per se illegal quick look full Rule of Reason) assigned 2. all kinds of quick looks ct in Cal Dental noted that the look should be meet to the occasion a) see Judge Ginsberg opinion in Polygram best represents the law on this question
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B. this section: applying the analysis to varying types of collaborations loose-knit (e.g., trade assns), and tight-knit (business integration; e.g., joint ventures and alliances) 1. the more integration there is, the more its likely that the combination might be achieving efficiency by integration (instead of collaborating in violation of 1) a) e.g., in BMI, ct said this agreement was integrated, even though it was integrated by K working as a unit to deliver something that would otherwise not be delivered 2. there are many loose agreements that are fine (e.g., in context of trade assn; some agreements to exchange information) a) but its much more likely to get efficiencies and good business purposes with tighter integration more likely that ags are ancillary to a legit joint venture (not a naked ag) C. Indiana Federation of Dentists (US 1986) (p.369) 1. dentist agreement to refuse to submit x-rays to dental insurers for use in benefit determinations; insurers cost-containment measures, limiting benefits to costs of least expensive yet adequate treatment; dentists viewed this as a threat to their professional independence and economic wellbeing; work rule, forbidding members to submit x-rays a) FTC holding: illegal conspiracy under Sherman Act 1 b) s justification action is in best ints of consumers, giving them better quality care 2. proper analysis quick look, this is a serious restraint, consumer choice problem a) ct listens to s story of consumer ints but rejects quality of care arguments b) only pro-competitive justifications can counter anticompetitive effects c) cant make arg that a restraint is necessary to prevent consumers from making unwise or dangerous choices D. Cal Dental, Polygram and Dagher revisited 1. some tension b/t Cal Dental and IN Federation advertising restrictions on price discounts a) holding in Cal Dental that such restrictions could have pro-competitive effects, so at the very least, greater market analysis was needed (ct seemed to make a special category for professional assn cases) b) note Breyer dissent in Cal Dental (which EF likes) would have found price restraints illegal under quick look, but given non-price restraints full Rule of Reason analysis 2. Ginsberg opinion in Polygram (Update, p.12) not a trichotomy, but a continuum a) rejected s challenge to FTC analysis ( argued that proof of actual anticompetitive effect was necessary in any non-per se analysis) no more line b/t RoR and per se b) FTC analysis: if it is obvious that a restraint on trade likely restrains competition, then its presumed illegal unless rebuts with pro-competitive justifications this trigger for such quick look analysis (as distinct from engaging in full Rule of Reason analysis) is okay rebuttable presumption of illegality arises from close family resemblance b/t the suspect practice and another practice that already stands convicted in the ct of consumer welfare c) s case rests solely on the plausibility of the competitive justification it offers 3. key fact in Dagher collaboration b/t Texaco and Shell while in process of setting up joint venture (i.e., not an act by the joint venture itself) a) s werent trusting the joint venture to make the decision; wanted the joint venture to be modulating the competition b/t the brands b) still, not per se illegal; at least, s have to show this was an ag of the joint venturers (not a setting of the joint venture) that was helping them to carry out coordinated effects in other markets would have been very difficult to show this E. Rothery (DC Cir 1986) (p.378) Bork analysis, interesting and useful 1. regulation shift, enabling independent moving companies to obtain their own interstate transportation authority; Atlas then put in clause in its Ks saying that as long as agents are working for Atlas, they cant compete with Atlas a) justification: prevention of free-rider problem 2. holding: found for see three main points below 3. only has 6% of market; can stop there and decide for
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a) impossible to believe that an ag to eliminate competition within a group of this size could produce any of the evils of monopoly 4. If it is clear that Atlas and its agents by eliminating competition among themselves are not attempting to restrict industry output, then their agreement must be designed to make the conduct of their business more effective. No third possibility suggests itself. a) its either raising price and limiting output, or pro-competitive b) this Bork paradigm is useful as a starting pt: theres at least a significant chance that if something isnt output-limiting, then its pro-competitive and efficient 5. justification of addressing free-rider problem a) has a rt to try to get rid of free-riders; cant possibly limit the output, given its market share, so ct must entertain possibility that restraint is pro-competitive b) Borks extreme case free-riding produces a deterioration of the systems efficiency because the things consumers desire are not provided in the amounts they are willing to pay for. In the extreme case, the system as a whole could collapse. F. Brown University (3d Cir 1993) (p.427) unusual: allows social welfare justifications 1. Ivy Leagues schools and MIT agree that where they overlap and accept a student that others in the agreement have accepted, they wont compete on financial aid grounds 2. this ct believed that some combination of pro-competitive and non-economic values can be considered in taking a quick look a) but this is the only case that has held thus; and this ct said this isnt the normal way to go b) pro-competitive justifications: no findings of lowered output or increased price (but note: this isnt dispositive in question of anticompetitive effect) c) social welfare justifications: here, they enhance consumer choices not paternalistic like NSPE or IN Federation specifically: improved quality of educational programs, increase consumer choice by making education more accessible to a greater number of students, promoted competition for students in areas other than price 3. these justifications led ct to apply full Rule of Reason analysis a) remanded to DCt to more fully investigate pro-competitive and noneconomic justifications proffered by s more than quick look necessary b) note: restraint survives RoR analysis only if its reasonably necessary to achieve the legitimate objectives proffered substantially less restrictive alternative test burden on to prove less restrictive alternatives II. CONCERTED REFUSALS TO DEAL; SELF-REGULATION; TRADE ASSOCIATIONS A. older cases on boycotts 1. Fashion Originators Guild (1941) (p.387) companies making textile designs into designer clothes; fought back against pirated designs by agreeing to boycott anyone who they discovered to be pirating a design, selling a pirated design, selling in a store that sold pirated designs a) defense: acting to protect their rts (unclear whether they had TM rts here) b) holding: naked competitor boycotts are illegal per se s had no right to take things into their own hands, re protecting their rts ganging up to prevent the output of something needed this was a naked boycott, so illegal per se (no proof of price increase or output limit needed) 2. Klors (1959) (p.388) little store selling electronic equipment, accused big store next to it of conspiring with GE and other providers in order to discriminate against it a) defense: is just one store, so isnt an AT problem (boycott isnt broad-scale enough) b) holding: this is a naked boycott, so illegal per se doesnt matter who the target is, as long as you have a horizontal agreement (all competitors agreeing to exclude ) c) note: this is a strange case, since its hard to imagine what harm to competition is being done ( is just one store; AT law doesnt protect competitors, but competition) 3. Silver (1963) (p.388) stock exchange case; NYSE given power to regulate members of the exchange; at one point, a notice went out prohibiting dealing with Silver, which effectively cut out and bankrupted Silver (communist)
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a) defense: was just one little guy, not an AT problem b) holding: in general, this kind of allegation would make a claim of illegality per se however, since NYSE said it was a regulated business, and there are lots of justifications for making various decisions SC thus decided not to call it per se illegal, allowed NYSE (regulated business) to bring forward its story but NYSE didnt give due process, didnt put its story out on the table so it doesnt have a story, and this is per se illegal 4. note: in earlier cases, being a target of an AT conspiracy was an AT problem a) unlike today, where were going to look at rights of consumers (traders dont have rts unless consumers are hurt or threatened) B. Northwest Wholesale Stationers (US 1985) (p.388) modern law on boycotts 1. stationery business in Pacific northwest; little retailers who formed a buying org (wholesalers) buy into it, get a piece of the wholesale; having the joint wholesale org, they save money a) Pacific integrated to become a wholesaler, was grandfathered into membership; then made a technical default (didnt comply with notification rules upon change of ownership); joint venture said P had defaulted, and kicked it out b) Pacific tried to rely on Silver, that this was per se illegal exclusion of a competitor, without oppty for a hearing, and on pretext 2. holding: not all cooperative acts involving a restraint or exclusion will share with per se illegal boycotts the likelihood of predominately anticompetitive consequences a) seeking application of per se rule must present a threshold case that the challenged activity falls into a category likely to have predominately anticompetitive consequences e.g., joint effort to disadvantage competitors by directly denying or coercing suppliers or customers to deny relationships the competitors need to compete w/o pro-competitive reasons b) mere allegation of a concerted refusal to deal doesnt suffice b/c not all concerted refusals to deal are primarily anticompetitive c) reversed and remanded; now has to allege and prove harm to competition 3. EF: in a case like this, always want to ask given that Pacific was excluded from this cooperative, what are its choices? a) is it something that handicaps it irrevocably? what can it do to maneuver around the restraint and be an efficient competitor on its own b) if it was too small to have advantages of efficiencies of scale, another thing it could do would be to form its own joint venture with other compatible companies if its free to form its own cooperative in order to take advantage of economies of scale, then theres no harm to competition III. EXCHANGES OF INFORMATION A. background discussion: isnt information good (i.e., pro-competitive)? what is the value of information? 1. proposition that information is good, lack of information is bad a) impt that ppl know the market information is one of the vital factors that companies need in order to decide what to provide, how much to provide, understand prices that the market will bear, what will constrain the price b) information is one of the most impt factors about markets and market competition 2. counter: information exchange leads to anticompetitive conduct a) might provide competitors with greater oppties to collude b) where its not an indication of a cartel (no indication of cartelization) theres a point at which a market structure can position the players for acting in lockstep and raising prices possible to get a state where competitors have so much info about each other, esp. where demand is elastic (same amt youd sell at higher or lower prices w/in a certain range) competitors find common int in raising the price, and info exchange may give them just what they need 3. two questions involved in analysis of information exchanges a) is the info exchange a cover for a cartel, underlying an ag to fix prices? monitoring and policing functions of a cartel
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when you see a very detailed exchange of very sensitive info, you do suspect that theres a real cartel, and this exchange is the tip of the iceberg b) even without it being a cartel (or a reflection of one of the elements of a cartel) is the info exchange itself anticompetitive (i.e., price-raising)? B. older cases, leading up to the rule of thumb on information exchanges 1. American Column (US 1921) (p.393) a) Open Competition Plan with members of an assn of hardwood manufacturers; purpose was to disseminate accurate knowledge of production and market conditions; plan was to bring harmony to this market b) holding: plan was illegal evidence indicating cartel-like behavior this intricate system of information exchange enabled assn to detect and punish cheaters character of info gathered and use made of it led irresistibly to the conclusion that they would necessarily result in a concerted effort to curtail production c) Holmes dissent knowledge is so important Sherman Act doesnt set itself against information itself market is robust not likely that these firms will be held in line by this ag d) Brandeis dissent very sympathetic to little guys having what they need to compete little guys needed knowledge about the market in order to be able to compete would probably know that theres no way they could hold back their production and raise price 2. Maple Flooring (US 1925) (p.399) a) here, companies, having learned from American Column, have plan to exchange info, but its all aggregated independent person collects all the info, aggregates all the cost figures, etc.; info was open to both buyers and sellers (very transparent) also note: this was all past information, didnt share anything about future plans b) holding: information exchange upheld as legal 3. rule of thumb a) information exchanges are fine as long as: through an independent third party; intricate, detailed info of anothers company should never be shown to other competitors or third parties; and information must always be past information b) if your industry is fragmented, and you meet the three prongs, then theres no problem but if your industry is highly concentrated with high barriers, and there are within that market incentives for firms to act in the same way info exchange itself has a good chance of causing prices to go up (a) this is exactly the kind of structure that leads to coordinated effects (b) info transparency at this point will likely lead to price increases C. Container (US 1969) (p.402) old rule 1. competitors fell into pattern of exchanging info would feel free to call each other and ask for the most recent prices charged a) these companies had about 90% of cardboard container market, but it was fragmented b) defenses: clearly isnt a cartel; and theres no agreement at all, even to exchange info 2. finding this was an agreement; question then became whether that ag harmed competition a) Price is too critical, too sensitive a control to allow it to be used even in an informal manner to restrain competition. b) exchange of price info, even in absence of ag to fix prices, violates 1 b/c the exchange of this type of info causes price uniformity D. Gypsum (US 1978) (p.407) modern case 1. Rule of Reason analysis for info exchanges shying away from per se rules, new age of AT a) as applied here, though, RoR analysis shows that this exchange was illegal b) less restrictive alternatives for price verification, given current transparency of market
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2. gets into the psychology of information exchanges ppl will only exchange information in order to keep prices higher; wont do it in order to compete a) exchange of price info among competitors carries with it the added potential for the development of concerted price-fixing arrangements 3. exchange of current price information has the greatest potential for anticompetitive effect, and though not analyzed as a per se rule, is generally found unlawful E. rules of thumb for exchanges of information 1. never have competitor-to-competitor personal exchanges about what prices are, were, or will be 2. general exchanges of info can be good (if you follow the three prongs), except in market that is highly concentrated with high barriers to entry in which case, dont do it at all IV. B2BS: BUSINESS-TO-BUSINESS ELECTRONIC MARKETPLACES A. companies began to think they could use internet groupings to get a lot of info, be able to execute transactions more cheaply what AT problems might arise? B. Covisint (EC 2001) (p.417) European Commn preparing itself for these new-economy issues 1. regulatory approval granted for creation of Covisint, a B2B marketplace joint venture, formed by major motor manufacturers a) intended to provide automotive industry with procurement, collaborative product development and supply chain management tools, and thereby reduce costs and improve efficiency in supply chain b) creating more transparency, helping to link more operators and to integrate markets c) could also create market efficiencies by reducing search and info costs and improving inventory management 2. potential concerns raised by B2B marketplaces like Covisint a) exchanges of info on, e.g., prices and quantities b) possibility of users getting together to restrict competition vis--vis their counterparts 3. EC analysis, under 1 analog Covisint doesnt currently restrict competition a) ags contain adequate provisions to allay potential competition concerns data protection via firewalls and security rules b) Covisint is open to all firms in the industry on a non-discrim basis, is based on open stds, and allows both SHs and other users to participate in other B2B exchanges

6 VERTICAL RESTRAINTS
** general analysis - vertical minimum resale price maintenance ags are per se illegal; dont include maximum RPMs o have to prove that there was no other explanation for the behavior, after Monsanto - vertical non-price restraints should be analyzed under Rule of Reason I.

RESALE PRICE MAINTENANCE


A. Dr. Miles (US 1911) (p.493) free trader doctrine 1. established network of distributors, had Ks establishing minimum resale prices a) justifications: trade secrets, and entitled to control prices of its own products 2. holding: RPM agreements are per se illegal a) restraint of trade to prohibit alienation seller cant hold strings, must let new owner do what he will (property right of alienation) note: this is irrelevant to AT law today b) preventing competition among dealers facilitating cartel among dealers by prohibiting intrabrand competition; competition among retailers would have driven down price though note: this is only true if was a monopolist; if market was competitive, not much latitude for retailers to raise price c) free trader doctrine traders (i.e., retailers) must have freedom to decide the price at which they will resell more than just a property concept a free trade, free competition concept
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3. Holmes dissent should be able to enjoin s discount pricing practices and run his business as he chooses; hurts s reputation for others to use his products as a loss leader a) concept of interbrand competition, vs. intrabrand competition Holmes focuses more on possibility of other brands competing and setting price of pills overall in the market B. Midcal (US 1980) (p.480) fair trade laws and state action 1. historical context: after Dr. Miles, states started passing fair trade laws, saying that firms can have Ks to bind distributors into a certain price raised federalism questions a) led to Miller-Tydings Amendment states may pass fair trade s; if companies follow fair trade s, and theres interbrand competition, then allowed to set such restraints didnt fully work, since not all firms signed fair trade Ks non-signers became discounters, kept pushing prices down b) so states began to have non-signer clauses if there are fair trade contracts in the state, of which retailers have notice, then non-signers must abide by the fair trade price c) Schwegmann Bros. v. Calvert Distillers Corp. (US 1951) (p.497) held for non-signer ; states cant tell companies to do certain conduct in violation of fed law, and immunize them from fed AT laws d) after Schwegmann, Cong enacted McGuire Acts, authorizing non-signer clauses e) rise of consumer movements in 1970s, pointing out artificially high prices caused by fair trade agreements Miller-Tydings and McGuire were repealed left open questions of state preemption, etc. 2. in Midcal: CA policy where it required (not just authorized) resale price maintenance a) federalism question of whether a state had power to mandate resale price maintenance, and to protect firms from fed AT law 3. holding: state may not do this a) cant order private price-fixing; can have a policy to replace competition with regulation, but cant allow private parties to fix the price and then immunize the parties 4. state action elements a) distinct state policy satisfied here b) state supervision not satisfied; private party therefore cant claim state action defense 5. note: puts the private party in a bind state saying it must create these price schedules; fed govt saying that it absolutely cant do this C. distinguishing b/t unilateral and by-agreement resale price maintenance; for now, RPM is illegal if done by agreement 1. Colgate (US 1919) (p.500) a) SC construed indictment to say that Colgate went to all of its distributors, said it wouldnt deal with them unless them sold at the price it was setting; when distributors didnt abide by the price set (charged a lower price), Colgate would cut them off b) holding: in the absence of monopoly, there is the right of manufacturer freely to exercise his own discretion as to parties with whom he will deal Colgate safe harbor as long as theres no actual agreement, theres no violation but over time, cts made this line thinner made it easier to find an agreement 2. Parke, Davis (US 1960) (p.501) a) PD made some 600 pharmaceutical products, marketed them nationally through drug wholesalers and retailers; made same type of price-setting arrangement as Colgate did here, PD wasnt satisfied with just a refusal to deal PD would go to those companies that advertised discounts and asked them to stop such advertising discounter Dart agreed to stop advertising if others agreed to stop advertising b) holding: PD crossed the line of Colgate this was an agreement advice of counsel even doing the simple Colgate refusal to deal is very dangerous, given the complexities of modern business almost inevitably, there will be some sort of agreement involved 3. Monsanto (US 1984) (p.503) a) background: other terminated distributor cases as precedent skeletal case, that that was a discounter, that full-pricers complained, and that then terminated s contract
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some cts said that this was a prima facie case; others said that had to come forward with evidence of an actual agreement to fix prices, pursuant to which had been terminated b) facts in Monsanto: M decided that it wanted to compete better, inter-brand, by having more highly educated and attentive distributors; Spray-Rite was one of its biggest distributors M had never criticized SR for not having such education/attention; but SR was discounting, and full-pricers complained, so M terminated contract with SR SR made more than skeletal case brought evidence of such a price-fixing ag c) holding: skeletal case isnt enough as a prima facie case must have evidence that tends to exclude the possibility that the manufacturer and non-terminated distributors were acting independently d) rationale: cannot logically infer that therefore there was an agreement to fix resale prices, pursuant to which was cut off want to keep open channels of info full-pricer complains to M, M takes a harder look at SR to see if SR is able to do its job while selling at this low price dont want to come too quickly to conclusion that there has been an agreement, b/c once you do, its per se illegal would chill firms in Ms position from doing what was necessary to get rid of poor performers II. CUSTOMER, TERRITORY, MAXIMUM PRICE RESTRAINTS A. old rule free trader doctrine (note: these two cases overruled) 1. Schwinn (US 1967) (p.509) later overruled by GTE Sylvania a) Schwinn was a major manufacturer of bicycles, sold about 75% of its bikes directly to retailers; told each of its distributors the territory within which they must stay; had authorized franchised retailers, and distributors could only sell to franchised retailers within their territories territorial restraints b) holding: territorial restraints were illegal per se very much about autonomy of distributors and retailers (free trader) says little about consumers assumes freedom of distributors is in line with the benefit to the consumers/competition 2. Albrecht (US 1968) (p.510) later overruled by State Oil v. Khan a) Herald company publishes dominant morning newspaper in St. Louis; tells distributors they may not sell over a certain price (maximum price restraint); Albrecht kept charging more than the maximum price restraint; Herald got mad, contracted with another distributor to solicit Albrechts customers; then eventually terminated Albrecht b) holding: minimum and maximum RPM ags are equally illegal again, all about autonomy of distributors c) rationale for holding maximum RPMs per se illegal manufacturer might be setting the price too low (predatory pricing) its the dealer who must be able to set the price at which it will sell its goods B. free trader to free rider 1. GTE Sylvania (US 1977) (p.512) territorial restraints a) Sylvania had a very small share of the TV market, wanted to do better, so it imposed territorial restraints on its dealers; less restrictive than in Schwinn, since there were usually multiple dealers in each location (unlike in Schwinn, where was trying to prevent all intrabrand competition) Continental (distributor) didnt like restraints, decided to go into another area; when S complained, C argued restraints were illegal under Schwinn b) holding: overruled Schwinn, said vertical non-price restraints should be analyzed under Rule of Reason looking at these facts (small market share, wanting to compete better in interbrand market) theres no way restraints could harm competition (a) so shouldnt have a per se rule here, given that non-price restraints wont always have obvious harm to competition
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c) vertical non-price restraints can help interbrand competition increase efficiencies sometimes, service competition is really impt if dealers get a little more money for the product (from the restraint), can use that for non-price competition inducing certain retailers to make investments of capital and labor assuring retailers that they can make such investments without fear of free riders in area all of this will help company compete in the interbrand market 2. Sharp (US 1988) (p.518) question of what constitutes a vertical price restraint a) Sharp appointed BE and Hartwell as distributors; BE was always discounting, H usually stayed with suggested resale prices; H kept complaining against BE, finally gave Sharp an ultimatum; Sharp then dismissed BE BE sued arg that it was a price-cutter, that Sharp and H had an ag to terminate BE pursuant to a price-fixing agreement b) holding: per se rule against vertical price restraints is applied only where theres an express agreement to set prices or price levels (specified or ascertainable price) Scalia is making a cartel point here when you have a clear price fixed, its different from just cutting off a price-cutter, because in the great number of cases, this very clear term will help facilitate a horizontal cartel (a) clearly fixed vertical price restraints will help cartelists to detect cheaters; would make cheating less likely in the first place (b) EF: hole in this arg is that you dont know how often there really is a horizontal cartel behind such vertical price restraints; and youd still want to dig to discover it (not apply per se rule on this basis) but bottom line: to extent that Dr. Miles is still the law, the per se rule against vertical price restraints requires an express ag to set prices or price levels 3. Toys R Us (7th Cir 2000) (p.524) limits of the free rider doctrine a) TRU found itself in intense competition with warehouse clubs; prevailed upon manufacturers to restrict sales such that warehouse clubs wouldnt get same toys or in the same packages as TRU; FTC found that TRU had imposed illegal vertical restraints on its suppliers and had coordinated a horizontal manufacturer conspiracy TRU argued that its vertical restraints were justified on free rider doctrine b) holding: this is a misunderstanding of the free rider doctrine AT law permits nonprice vertical restraints designed to facilitate provision of extra svcs, recognizing that this is in consumers interests here, free-riding story is inverted; TRUs int was in maximizing its own profits, not in keeping down suppliers costs (a) free-rider concept: ints of manufacturer and consumer are aligned, adverse to ints of retailers 4. Khan (US 1997) (p.526) overruled Albrecht (vertical maximum price restraints) a) supplier tells its gas stations they must resell at no more than X wants to compete by getting its prices down; gas station argues that maximum RPMs are illegal under Albrecht and that it has standing to sue since it was harmed by the anticompetitive action b) holding: overruled Albrecht dangers imagined by ct in Albrecht arent actually as bad as once feared insufficient econ justification for per se rule against maximum RPMs more likely to be output-increasing maximum RPM will be analyzed under Rule of Reason analysis c) Posner opinion (lower ct) basically an appeal for SC to overrule Albrecht; argued that RPMs, either maximum or minimum, are not on their face harmful, and therefore there shouldnt be a per se rule of illegality for either general AT analysis is guided by view that primary purpose of AT is to protect interbrand competition why then have a per se rule against RPMs? doesnt come up in Khan, since Q of minimum RPMs isnt before the ct C. NYNEX (US 1998) (p.530) regulatory fraud, cut off a competitor
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1. sold svcs to NYNEX (largest buyer of such svcs in NY); AT&T (competitor for this business) made a fraudulent deal with N (A bills N higher price for svcs, higher price passed on to customers, A and N would share gains) drove out of business a) alleged that this ag was a per se illegal boycott under Klors, and a conspiracy to monopolize in violation of 2 b) question: whether an AT ct considering an ag by a buyer to purchase goods from one supplier rather than another should (after examining buyers reasons or justifications) apply the per se rule if it finds no legit business reason for that purchasing decision 2. holding: no boycott-related per se rule applies here; must allege and prove harm to competition itself (i.e., not just to a single competitor) a) distinguishes Klors, which was a horizontal case; no per se rule applies against a vertical restraint unless it includes ag on price or price levels (Sharp) b) applying a per se rule here (where buyers decision, though not made for competitive reasons, composes part of regulatory fraud) would transform cases of business impropriety into treble damages under AT c) per se rule also would discourage firms from changing suppliers freedom to switch suppliers lies close to heart of the competitive process that AT seeks to encourage D. EU cases (notes cases, p.532-34) 1. hardcore prohibition against tight territorial restraints at member state lines a) EC refused to hear evidence of interbrand competition 2. context of EU objective of market integration amongst member states III. EXCLUSIONARY RESTRAINTS; TYING A. Clayton Act 3 prohibits tying arrangements, exclusive dealing, requirements contracts and reciprocity agreements where the effect may be to substantially lessen competition or tend to create a monopoly in any line of commerce 1. US cts have largely abandoned concern w/acts that are unfair but not price-raising (leveraging), yet some vestiges remain of old impulse to safeguard competitors oppties on the merits; such an impulse finds resonance in the competition laws of other countries B. overview of the law against tying arrangements 1. defn of tying firm sells product A and has market power in product A, and also sells product B, then tells buyers that if they want its product A, it must buy its product B a) old per se rule against tying arrangements b) modern law: qualified per se rule against tying arrangements firm has market power in the tying market tied product is distinct from the tying product firm is forcing tied product upon its buyers a not insignificant amount of commerce is tied up in the tie C. the economics of tying 1. for tied products, given fixed proportions, there is one obtainable price for the package; the allocation of price b/t tied and tying product doesnt influence the amount of the tied product that will be sold a) if this is the extent of the tie, then the tie doesnt increase the sellers monopoly returns b) metering: premium price charged for tied product will track demand for tying product and reflect only the monopoly price of already monopolized product (wouldnt effect tied market) 2. Bork monopolist in the tying market wouldnt be able to tie another product unless it gave some sort of incentive (i.e., reduction in price of monopolized product) sufficient to induce them to accept the reduction in their freedom to buy non-monopolized products from others a) counterarguments to Bork lack of information, transaction costs buyer may not be sophisticated and, w/o info or ability to circumvent transaction costs, will rely on facile arrangement w/monopolist w/o exploring alternative suppliers collective action problem buyers are unlikely to act together to forestall seller from exploiting monopoly in tying product
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passing on high likelihood that monopoly overcharge will be passed on to consumers 3. possible anticompetitive effects a) might result in a monopoly of the tied product, destroying suppliers that had invested in this market and were performing well b) might result in less competitive pressure to innovate or reduce costs in tied product market c) destroyed suppliers may have been the most likely entrants into tying product market, and the tie-in might have eliminated potential competition and raised barriers to entry in tying market D. early development of the law from per se rule to qualified per se rule 1. IBM (US 1936) (p.547) per se rule a) leased its tabulating machines on condition that lessees use only IBM-manufactured tabulating cards justifications of patent rts, and quality control rejection of s justifications: IBM didnt have IP rts; should provide specs to others if concerned about quality control b) anticompetitive reasons for tying metering: charge below cost for the tabulating machines and recoup losses by charging a premium for the cards; leads to heavy users to pay more for package of machine plus cards and light users pay less cartelizing: oligopoly may have agreed to only sell cards to its machine purchasers at a higher rate allows all to charge more 2. International Salt (US 1947) (p.548) qualified per se rule a) leased patented salt machines on condition that lessees bought the salt to be used in those machines from , with a few exceptions b) holding: didnt prove necessity of tie-in to protect goodwill in machines unreasonable per se to foreclose competitors from any substantial market c) application of qualified per se rule significant power in the tying product market (salt machines); second market (salt) is a distinct product, which was forced on buyers; $500 involved (note: weak amount-in-commerce requirement) 3. Northern Pacific (US 1958) (p.549) qualified per se rule a) RR had preferential contracts with buyers and lessees of its land, requiring them to ship all goods produced on the land on its RR, with some exceptions b) held: illegal per se qualified per se rule 4. EFs beef with the qualified per se rule really should look into the market for the tied product, and how much of that market is foreclosed by the tying arrangement a) e.g., in Intl Salt only a tiny percentage of the salt market was being foreclosed, since the vast majority of salt sales went to uses other than s salt machines so in reality, not very likely that competition was harmed b) EF: there are almost no circs where a tie will give you a monopoly in the tied market E. modern approach paring down the qualified per se rule 1. Jefferson Parish (US 1984) (p.552) a) exclusive K agreement b/t hospital and a firm of anesthesiologists every patient undergoing treatment at hospital must use svcs of anesthesiologist firm b) holding: not illegal per se under qualified per se rule, dont have to prove anticompetitive effects in the tied market, just have to show (1) power in the tying market, and (2) a tie that is forced and not involving an insignificant amount of money target of rule is exploitative tying; focus on market, not contractual arrangement ct finds no forcing; if patients dont like anesthesiologist firms svcs, can go to another hospital c) OConnor concur should be taken out of qualified per se rule, analyzed under RoR
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OConnors three-step RoR analysis (a) seller must have power in the tying-product market (b) must be a substantial threat that the tying seller will acquire market power in the tied-product market (c) must have a coherent econ basis for treating two products as distinct implication: qualified per se rule still stands, but all elements are taken seriously and must be proved by ; must show market power and forced arrangement 2. Kodak/ITS (US 1992) (p.560) a) market defn service and parts for service and parts to be considered two distinct products, there must be sufficient consumer demand so that it is efficient for firm to provide service separately from parts b) market power power in the tying product market arg: competition in the equipment market prevents market power in the service aftermarket (Scalia adopts this as substantive rule) holding: theory is based on a false dichotomy that there are only two prices that can be charged (a competitive price or a ruinous one) but there could easily be a middle, optimum price at which the increased revenues from the higher-priced sale of the tied product would more than compensate for lower revenues from the tying product sales c) Scalia dissent: would do away with per se illegality rule for tying cases applied to sellers behavior in its single-brand aftermarkets 3. Microsoft (DDC 2001) (p.569) applies qualified per se rule a) has appreciable economic power/market power in the tying product market market determination based on evidence of consumers perception of the products and the market b) two separate products problem with defining OS and browser as separate products; this may stifle innovation; must consider costs and benefits of putting two products together cant look at these facts from a product predation standpoint c) gives its customers no choice but to take tied product in order to obtain tying product d) arrangement affects a not insubstantial volume of interstate commerce put in terms of dollar volume so as not to be merely de minimus 4. Illinois Tool (US 2006) (Update, p.38) a) question of patents that protect tying products does patent presumptively confer market power, for purposes of tying arrangement analysis? past cases said yes; here, SC reverses and says no no such presumption of power must prove has power in tying market b) impt note: SC now rejects old theoretical basis for qualified per se rule against tying arrangements (that tying served no purpose except to fence out competitors) now no longer believes that assumption tying can serve other, good purposes while some tying arrangements are still unlawful (e.g., those that are the product of a true monopoly or a marketwide conspiracy), that conclusion must be supported by proof of power in the relevant market, not just a presumption 5. see class notes p.86 for number-crunching examples of ties, market shares, etc. a) see also class notes p.89 for market power analysis b) remember: if you dont qualify under qualified per se rule, you go under RoR F. note on one product vs. two products 1. Jefferson Parish are hospital svcs and anesthesiologist svcs one product or two? a) why this is important: first step of qualified per se rule is that they be two products if not two products, then you have to go to rule of reason b) test: whether there is separate demand for the two parts of the tie, whether its possible to provide them separately (supply side) here, ct seemed to be more focused on the supply side
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c) this is what OConnor takes issue with (thinks this is only one product, so no per se rule) no separate demand for anesthesiologist svcs alone: necessarily packaged with hospital svcs (functional integration, no one wants anesthesiologist svcs that wont go to a hospital) note: if we were analyzing under rule of reason, this one product vs. two product question wouldnt be at all necessary its only an issue b/c its part of the qualified per se rule OConnor thinks whole formulation is faulty 2. Eastman Kodak a) For service and parts to be considered two distinct products, there must be sufficient consumer demand so that it is efficient for a firm to provide service separately from parts (citing Jefferson Parish) b) a whole service industry has arisen, so it must be the case that these are two products 3. Microsoft a) rejects the static view of one vs. two products maybe its true that at the time of the tie-in they were two products, but this doesnt matter, b/c tech changes, etc. not a good idea to freeze yourself in time, looking just at supply side and there are significant efficiencies in a tech tie where you have a platform for software b) so here, didnt use qualified per se rule this is the one claim that remanded, b/c judge had applied qualified per se rule should get a second shot to prove that this mere tie harmed competition G. note on tying arrangements and complements (e.g., avionics and engines, in GE Honeywell hypos) 1. there are economists who will say that when there are complements being united, theres only one monopoly profit a) even if we were at 50% (which is really high), they would say that for an aircraft maker who needs both, theyre only willing to pay a certain amount for a package of both at a certain point, they just wont buy any more (would be out of business) b) GE could take its total monopoly profit (extra profits) on the engine, or on the avionics, or spread it over the two, but it doesnt matter theres only one monopoly profit c) note: counter school of thought tying and other such methods can help monopolists to better exploit, get monopoly profit at expense of consumer 2. had the first theory back when we first went through monopoly material basically what DCt did in Microsoft case (p.255-256) a) dismissed states leveraging claims against Microsoft as to operating systems and browsers, theres only one monopoly profit b) therefore, no extra monopoly profits to be made by advantages in browser market 3. if you believe this theory, youd have a virtually per se legal rule for vertical restraints and tying of complements H. bottom line: old qualified per se rule is clearly too rigid doesnt require proof of market power in the second market 1. rule could be revised by letting prove that it was unable to gain power in the second market 2. or, could be wiped out, replaced with full rule of reason a) and if must prove raising price and limiting output, will likely usually win IV. EXCLUSIVE DEALING AND REQUIREMENTS CONTRACTS A. background: contra tying ags, we always saw that exclusive dealing Ks could serve legit purposes 1. in this context, will always look at percentage of market foreclosed (even in older cases) a) efficiencies for buyers and sellers are more obvious b) note: just b/c a huge amount of market is affected in exclusive K (e.g., in Barry Wright) this still doesnt mean its illegal, there are other questions to ask 2. possible good stories behind exclusive dealing Ks a) for supplier: if it has to compete, it has to be doing it for a good business reason efficient to have an assured source of supply b) for stations (if it was their initiative) might want to be sure that their reqts will be fulfilled, want to get contractual obligation
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also: quality assurance reasons (e.g., in Barry Wright) 3. possible bad stories behind exclusive dealing Ks a) company trying to keep its scarce inputs away from competitors or potential competitors to disable them or prevent them from getting into the market at all e.g., old Alcoa case (old decree against bad acts) aluminum production needed a huge amount of water; Alcoa had exclusive Ks with all water sources that could supply plants (Ks: I will supply only you, no other aluminum plant) (a) if it creates barrier to entry, ties up all available sources, and doesnt need it all for itself must pay some sort of premium for it (b) telltale sign of illegality when someone overpays to keep something off the market so that competitors cant get it e.g., Dentsply (Update) only a certain number of distributors who were very good distributors, had special wherewithal to get to market; Dentsply (80%) had Ks with distributors, that distributors wouldnt take on product of competitors (a) ct: didnt need to tie up distributors for own efficiency; sole reason was so that competitors couldnt get efficient distributors to get to market b) have to look to see which market is being harmed in Alcoa market harmed was in aluminum (i.e., wasnt giving water companies more power; was protecting itself, giving itself more power in aluminum power) c) in all of these cases, there will either be a scarce input or a scarce outlet that is tied up scarce competitors need free access to market for input/output, or else wont be able to get into the market, or wont be able to compete efficiently/effectively story that it harms competition the agreement will usually be under the rubric of raising rivals costs 4. in most cases, exclusive dealing is fine usually for good business purpose a) a question to ask in analyzing an ED K if youre a competitor, and you dont like the fact that a competitor has an ED K, you want to ask what this firm could have done to maneuver around this constraint e.g., in Dentsply why couldnt competitors get their own good distributors? (a) ct ended up saying that there were no other available distributors, couldnt have been put online for a significant period of time e.g., in Microsoft arg that Netscape should try to find its own way to market B. older cases 1. Standard Stations (US 1949) (p.572) a) exclusive dealing Ks are not per se illegal go under Rule of Reason supplier may have clearer view of what and how to distribute buyer gets an assured source of supply its a vertical arrangement, so we presume efficiency b) holding: too much of market was tied up, so govt won see class notes, p.93 for analysis of these facts under modern law 2. Tampa Electric (US 1961) (p.575) a) analysis under Rule of Reason neither participant had market power; only 1% of market was foreclosed by the agreement C. modern cases 1. Barry Wright (1st Cir 1983) (p.577) a) different case, since were talking about such a concentrated market mechanical snubbers; Grinnell makes and installs nuclear plant pipe systems and buys more than 50% of all mechanical snubbers used; G has been buying from Pacific (only supplier); G wants competition among suppliers, so it tries to set up Barry Wright, agrees to give it lots of its business; but BW turns out not to be reliable G went back to P, made an exclusive ag with P; drove BW out of business b) holding: tying up market through exclusive dealings is often balanced by legit business rationales
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reflect view that producers will makes the most efficient arrangement in such contracts; mistakes will punish firm and not competition (competitors) whatever small inference there may be that the arrangement will foreclose the small number of other competitors out there can easily be dampened by fact that G really wants multiple sources, wants prices to go down 2. Microsoft (DDC 2001) (p.581) a) violations: agreements w/OEMs limiting their ability to remove IE from OS, to constrain OEMs ability to accommodate Netscape, and w/key ISPs to exclude Netscape b) defenses those that want Netscape can still access it, not totally excluded empirical issue about how much foreclosure is necessary to find a violation consumers benefit from innovations (leaves open question of no monopoly scenario) c) holding: exclusionary acts insufficient to constitute violation since less than 40% of market foreclosed note: not all cases say have to have 40% foreclosure: if makes out the case of total exclusion from a large segment of the market still important need to figure out if alternate routes still available may still be legal if the excluder had good business reasons for the exclusion raising rivals cost will not suffice 3. Dentsply (3d Cir 2005) (Update, p.41) a) manufacturer of false teeth, had about 80% of market; distribution Ks said that distributors couldnt add others tooth lines to product offerings b) app ct findings justification for exclusive Ks was pretext intent was to choke off competitors sufficient number of good distributors wasnt available to competitors (couldnt find any other way to market) (a) and direct distribution to retailers wasnt an effective option V. VERTICAL RESTRAINTS AND THE REST OF THE WORLD A. law of vertical restraints is perhaps the greatest area of divergence among jurisdictions 1. modern US law hesitates to interfere with restraints that are truly vertical (i.e., not supportive or reflective of a cartel) 2. EU vertical restraint law as impt complement to effort towards internal market integration a) vertical restraints that maintain or even reflect different prices for the same goods in different member states are especially condemned b) EU is more concerned with freedom of movement of goods and svcs across member state lines than with theoretical claims of s that discounters are free riders and will lessen incentives of full-pricers to invest in impt svcs B. global trade barriers 1. US in negotiations with Japan (famously impenetrable markets) threatening to sue over structural impediments that blocked foreign trade from entering Japanese markets 2. US used this policy platform to sue Pilkington (UK) for using expired IP rts to block US exporters of float glass from access to European and other markets a) also invoked in discussions re Fuji Films near-exclusive dealing Ks w/all major film distributors in Japan, allegedly foreclosing Kodak from penetrating Japanese market

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