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Chapter 38

Antitrust Lawand Promoting Competition

INTRODUCTION

The basis of antitrust legislation is a desire to foster competition. Antitrust legislation was initially created, and continues to be enforced, because of our belief that competition leads to lower prices, more product information, and a better distribution of wealth between consumers and producers.

To curb anticompetitive or unfair business practices, the federal government passed the Sherman Antitrust Act of 1890, the Clayton Act of 1914, the Federal Trade Commission Act of 1914, and other laws. This chapter discusses these statutes, focusing primarily on the Sherman Act and the Clayton Act.

CHAPTER OUTLINE

I. The Sherman Antitrust ActSince the fifteenth century in England, there have been common law actions intended to limit restraints of trade. The Sherman Act of 1890 grew out of this tradition.

ADDITIONAL BACKGROUND—

Federal Antitrust Legislation

Despite condemning anticompetitive agreements on the basis of public policy, the common law proved to be an ineffective means of protecting free competition. These shortcomings became acutely obvious during the latter half of the 1800s as a concentrated group of powerful individuals began to acquire unrivaled market power by combining competing firms under singular control.

After the Civil War ended, the nation renewed its drive westward. With the movement westward came the expansion of the railroads and the further integration of the economy. The growth of national markets also witnessed the efforts of a number of small companies to combine into large business organizations, many of which gained considerable market power. These later type of organizations became known as trusts, the most famous—or infamous—being John D. Rockefeller’s Standard Oil Trust. Participants transferred their stock to a trustee for trust certificates. The trustee made decisions fixing prices, controlling production, and determining the control of exclusive geographical markets for all trust members. As used by Standard Oil and

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2 UNIT SIX: GOVERNMENT REGULATION

others around the turn of the century, a trust was a device used to amass market power. Members could compete free from competition with other members. Also, a trust might wield such economic power that companies outside the trust could not compete effectively.

In some cases, an entire industry was dominated by a single organization. The public perception was that the trusts used their market power to drive small competitors out of business, leaving the trusts then free to raise prices virtually at will. Many states attempted to control these consequences by enacting statutes outlawing trusts (which is why all laws regulating economic competition today are referred to as antitrust laws). Congress initially dealt with the railroad monopolies by attempting regulation rather than an outright assault on monopoly power. The result was the Interstate Commerce Act of 1887.

Congress next attempted to deal with trusts in a direct, unified way by passing the Sherman Act in 1890. The Sherman Act, however, failed to end public concerns over monopolies. The United States Supreme Court initially construed the statute too narrowly to give it much effect and subsequently applied it so rigorously as to make the act unworkable. Lackluster enforcement also contributed to the public’s dissatisfaction. Concern over the trust problem continued to the point that it dominated the 1912 presidential election, and eventually, in 1914, led to enactment of the Clayton Act and the Federal Trade Commission Act, which proscribed specific acts and provided for more aggressive means of enforcement.

The Clayton Act (as amended by the Robinson-Patman Act in 1936 and the Celler-Kefauver Act of 1950) addressed specific acts that are considered to be anticompetitive. The Federal Trade Commission Act created the Federal Trade Commission and invested it with broad enforcement powers to prevent, as well as correct, business behavior broadly defined as unfair trade practices.

A. MAJOR PROVISIONS OF THE SHERMAN ACTSections 1 and 2 contain the main provisions.

• Section 1—“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal [and is a felony punishable by fine or imprisonment].”

• Section 2—“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony [and is similarly pun-ishable].”

B. DIFFERENCES BETWEEN SECTION 1 AND SECTION 2

• Section 1 requires two or more persons; one person alone can violate Section 2.

• Section 1 cases are often concerned with agreements that restrain trade; Section 2 cases deal with the structure of a monopoly.

• Both sections seek to curtail practices that result in undesired monopoly behavior, but Section 2 requires that a “threshold” or “necessary” amount of monopoly power already exist.

C. JURISDICTIONAL REQUIREMENTSAny activity that substantially affects commerce falls under the act, which also extends to U.S. nationals abroad who engage in activities that have an effect on U.S. foreign commerce.


CHAPTER 38: ANTITRUST LAW AND PROMOTING COMPETITION 3

II. Section 1 of the Sherman ActTrade restraints fall into two categories: horizontal and vertical. Those that are blatantly anticompetitive are per se violations; those that are not so blatant are analyzed under the rule of reason.

A. PER SE VIOLATIONS VERSUS THE RULE OF REASON

1. Why the Rule of Reason Was DevelopedIf the rule-of-reason had not developed, almost any business agreement could be held to violate the Sherman Act.

2. Factors Courts Consider under the Rule of ReasonFactors that a court might consider in a rule-of-reason analysis include—

• The purpose of an arrangement.• The powers of the parties.• The effect of the parties’ actions.• Whether a less restrictive means might have accomplished the same result.

B. HORIZONTAL RESTRAINTSHorizontal restraints result from concerted action by direct competitors.

1. Price FixingAn agreement among competitors to fix prices is unlawful per se. Price-fixing cartels are common, particularly among global enterprises.

2. Group BoycottsAn agreement by two or more sellers to refuse to deal with, or boycott, a particular person or firm is a group boycott, or joint refusal to deal, a per se violation.

3. Horizontal Market DivisionIt is a per se violation for competitors to divide up territories or customers.

4. Trade AssociationsGenerally, the rule of reason is applied to trade association actions. Like other anticompeti tive actions subject to the rule of reason, if a trade association practice that restrains trade benefits the association and the public, it may be deemed reasonable.

ENHANCING YOUR LECTURE—

CAN REALTOR ASSOCIATIONS

LIMIT LISTINGS ON THEIR WEB SITES? Like almost every other product, homes are now being sold via the Internet on hundreds of thousands of

Web sites. The most extensive listings of homes for sale, though, are found on the multiple listing services



(MLS) sites that are available for every locality in the United States. An MLS site is developed through a cooperative agreement by real estate brokers in a particular market area to pool information about the properties they have for sale. Today, the majority of residential real estate sales involve the use of MLS. Although MLS sites offer convenience by combining listings from many brokers, the sites have also raised antitrust concerns by restricting how certain brokers may use the sites. The Federal Trade Commission (FTC) and the U.S. Department of Justice have brought antitrust actions against both local real estate associations and the National Association of Realtors®, a national trade association for real estate brokers and agents, for attempting to restrict the use of MLS databases.

BOARDS OF REALTORS HAVE ATTEMPTED TO LIMIT LISTINGS ON THEIR WEB SITES.

In a given market area, the MLS listings are put together by the members of a local real estate association, typically called a Board of Realtors®, for the members’ exclusive use. In many areas, Boards of Realtors® have attempted to restrict the homes that can be listed on the official MLS Web site. In particular, the boards have tried to prevent discount brokers from listings the homes they have for sale.

The FTC’s Bureau of Competition filed a complaint for violation of antitrust laws against the Board of Realtors® in Austin, Texas, which had a rule prohibiting discount brokers from listing on its MLS site. After several months of negotiations, the FTC prevented the Austin board from adopting and enforcing “any rule that treats different types of real estate listing agreements differently.” The FTC is now pursuing similar negotiations in other cities including Cleveland, Columbus, Detroit, and Indianapolis.

THE NAR TRIES TO RESTRICT VIRTUAL BROKERS.

The National Association of Realtors (NAR) represents more than 1 million individual member brokers and their affiliated agents and sales associates. Its policies govern the conduct of its members throughout the United States. In the 1990s, many members of the NAR began to create password-protected Web sites through which prospective homebuyers could search the MLS database. The password would be given only to potential buyers who had registered as customers of the broker. The brokers who worked through these virtual office Web sites, or VOWs, came to be known as VOW-operating brokers. Because they had no need of a physical office, their operating expenses were lower than those of traditional brokers. Soon both Cendant and RE/MAX, the largest and second- largest U.S. real estate franchisors, respectively, expressed concern that VOW-operating brokers would put downward pressure on brokers’ commissions.

In response, the NAR developed a new policy for Web listings. The policy included an opt-out provision “that forbade any broker participating in a multiple listing service from conveying a listing to his or her customers via the Internet without the permission of the listing broker.” In other words, a traditional broker could prevent her or his listings in the MLS database from being displayed on the Web site of a VOW-operating broker.

THE U.S. DEPARTMENT OF JUSTICE ENTERS THE FRAY.

The Antitrust Division of the U.S. Department of Justice, however, contended that the opt-out policy was anticompetitive and harmful to consumers. When the Justice Department indicated that it would bring an antitrust action against the NAR, the association modified its policy and eliminated the selective opt-out provision aimed specifically at VOW-operating brokers. Nevertheless, the revised policy still allowed brokers to prevent their listings from being displayed on any competitor’s Web site. Thus, under the new policy, traditional brokers could still prevent VOW-operating brokers from providing the same MLS information via the Internet that traditional brokers could provide in person. The policy also permitted MLS sites to lower the quality of the data feed they provide brokers, thereby restraining brokers from using Internet-based features to



enhance the services they offer customers.

In response, the Justice Department filed a suit in federal district court against the NAR, assert ing that the association’s policies had violated Section 1 of the Sherman Act by preventing real estate brokers from offering better services as well as lower costs to online consumers. The department contends that the NAR’s policies constitute a “contract, combination, and conspiracy between NAR and its members which unreasonably restrains competition in brokerage service markets throughout the United States to the detriment of American consumers.” In 2006, finding that the Justice Department had shown sufficient evidence of anticompetitive effects to allow the suit to go forward, the court denied the NAR’s motion to dismiss the case.a.

FOR CRITICAL ANALYSIS

Why couldn’t discount brokers simply create their own Web sites to list the houses they have for sale?

a. United States v. National Association of Realtors, 2006 WL 3434263 (N.D. Ill. 2006).

C. VERTICAL RESTRAINTSVertical restraints arise from agreements between firms at different levels in the distribution process. Some are per se violations; some are judged under the rule of reason.

1. Territorial or Customer RestrictionsTo insulate dealers from direct competition with other dealers sell ing a manufacturer’s product, the manufacturer may institute territorial restrictions or attempt to ban wholesalers or retailers from reselling the product to certain classes of buyers.

a. May Have Legitimate PurposeA manufacturer may want dealers to share marketing and service costs proportionately, for example, instead of competing against each other to cut those costs.

b. Judged under Rule of ReasonThese restrictions are judged under the rule of reason.

2. Resale Price Maintenance AgreementsA resale price maintenance agreement, in which a manufacturer tells a retailer at what price the retailer can sell the manufacturer’s products, is considered subject to the rule of reason.

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Resale Price Maintenance Agreements

Cases considering resale price maintenance agreements include the following.

• Ozark Heartland Electronics, Inc. v. Radio Shack, A Division of Tandy Corp., 278 F.3d 759 (8th Cir. 2002) (there is no violation of the antitrust laws, which proscribe unreasonable price maintenance agreements, if the



plaintiff is merely the agent of the defendant, not a buyer and reseller of the defendant’s product).

• Chavez v. Whirlpool Corp., 93 Cal.App.4th 363, 113 Cal.Rptr.2d 175 (2 Dist. 2001) (there is no violation of state antitrust laws, which like their federal counterparts proscribe unreasonable price maintenance agreements, if a dishwasher manufacturer announces its resale prices in advance and refuses to deal with those who fail to comply).

III. Section 2 of the Sherman ActSection 2 proscribes monopolization and attempts to monopolize. A tactic that may be involved in either offense is predatory pricing—pricing below the cost of production to drive competitors out of business. The surviving firm can then price its products at high enough levels to earn monopoly profits.


Predatory PricingPredatory pricing refers to the systematic underpricing by a firm of its products—sometimes at levels

below the costs of producing those products—to wrest sales from competitors operating in the same market and, over time, drive those competitors out of business. Once the competitors have been eliminated, the surviving firm can then price its products at high enough levels so that it can earn monopoly profits. In any event, predatory pricing is widely regarded as a practice that accompanies the intent by a company to monopolize unlawfully a product market.

Many people believe that predatory pricing is a tool used by powerful companies that have the financial resources to continue selling their products at prices below those of their competitors. Yet it is often difficult to determine whether a company is selling products below cost. Moreover, it is not clear that predatory pricing is as prevalent as is commonly supposed. Due to the sheer cost of engaging in predatory pricing for a sustained period of time coupled with the lack of certainty about whether other firms will enter the market later once the firm raises its prices in an attempt to extract monopoly prices, a firm engaging in predatory pricing practices may not necessarily be able to recover its costs.

Although the United States Supreme Court has not heard many predatory pricing cases in recent years, it is possible that future cases before it may turn in large part on whether the firm is producing above or below its average variable costs (the Areeda and Turner Test). Leaving aside the question as to whether the av -erage variable cost per unit produced can be accurately calculated, a product price below the company’s average variable cost will be presumed to be illegal. This conclusion assumes, of course, that the criticisms made of the Areeda and Turner Test (that average variable cost is often a poor surrogate even assuming marginal cost is the proper benchmark for predation and that short-run marginal cost is not an appropriate benchmark for identifying predation) will not cause the test itself to be rendered irrelevant to predatory pricing issues altogether in the future.a

a. See Herbert Hovenkamp, Economics and Federal Antitrust Law. (St. Paul: West Publishing Company, 1985), pp. 175-79




State Predatory-Pricing LawsAll fifty states have adopted their own antitrust laws, many of which are nearly identical federal antitrust

statutes. For this reason, state courts often rely on the decisions of federal courts in interpreting and applying state antitrust laws. State courts vary in their interpretations, however, when there is a difference between federal and state statutes or policy. The following is a state predatory-pricing statute that is similar to those in about half of the states.

ARKANSAS CODE OF 1987 ANNOTATEDTITLE 4. BUSINESS AND COMMERCIAL LAW

SUBTITLE 6. BUSINESS PRACTICESCHAPTER 75. UNFAIR PRACTICES

SUBCHAPTER 2. UNFAIR PRACTICES ACT

4-75-201 Title.This subchapter shall be known and designated as the “Unfair Practices Act”.

4-75-202 Purpose.The General Assembly declares that the purpose of this subchapter is to safeguard the public against the creation or perpetuation of monopolies and to foster and encourage competition by prohibiting unfair and discriminatory practices by which fair and honest competition is destroyed or prevented.

4-75-203 Construction.This subchapter shall be literally construed so that its beneficial purposes may be subserved.

4-75-204 Penalties.Any person, firm, or corporation, whether as principal, agent, officer, or director, for himself, or itself, or for another person, or for any firm or corporation, or any corporation who or which shall violate any of the provisions of this subchapter is guilty of a misdemeanor for each single violation and upon conviction shall be punished by a fine of not less than one hundred dollars ($100) nor more than one thousand dollars ($1,000) or by imprisonment not exceeding six (6) months, or by both a fine and imprisonment in the discretion of the court.

4-75-205 Forfeiture of charter, rights, etc. -- Proceedings.(a) Upon the third violation of any of the provisions of this subchapter by any corporation, it shall be the duty of the Attorney General to institute proper suits or quo warranto proceedings in any court of competent jurisdiction for the forfeiture of its charter, rights, franchises, or privileges and powers exercised by the corporation, and to permanently enjoin it from transacting business in this state.

(b) If in such action the court finds that the corporation is violating or has violated any of the provi sions of this subchapter, it must enjoin the corporation from doing business in this state permanently or for such time as the court shall order, or must annul the charter or revoke the franchise of the corporation.



4-75-206 Contracts violating subchapter illegal.Any contract, express or implied, made by any person, firm, or corporation in violation of any of the provisions of this subchapter is declared to be an illegal contract and no recovery thereon shall be had.

4-75-207 Destruction of competition by price discrimination prohibited.(a) It shall be unlawful for any person, firm, or corporation doing business in the State of Arkansas and engaged in the production, manufacture, distribution, or sale of any commodity or product or of service or output of a service trade of general use or consumption or of the product or service of any public utility with the intent to destroy the competition of any regular established dealer in the commodity, product, or service, or to prevent the competition of any person, firm, private corporation, or municipal or other public corporation who or which in good faith intends and attempts to become a dealer to discriminate between different sections, communities, or cities or portions thereof, or between different locations in the sections, communities, cities, or portions thereof in this state, by sell ing or furnishing the commodity, product, or service at a lower rate in one section, community, or city or any portion thereof, or in one location in the section, community, or city or any portion thereof, than in another, after making allowance for difference, if any, in the grade, quality, or quantity and in the actual cost of transportation from the point of production, if a raw product or commodity, or from the point of manufacture, if a manufactured product or commodity.

(b) The inhibition of this section against locality discrimination shall include any scheme of special rebates, collateral contracts, or any device of any nature whereby such discrimination is, in substance or fact, effected in violation of the spirit and intent of this subchapter.

(c) This subchapter shall not be construed to prohibit the meeting in good faith of a competitive rate, or to prevent a reasonable classification of service by public utilities for the purpose of establishing rates.

4-75-208 Secret payments or allowance of rebates, refunds, etc. -- Penalty.(a) The secret payment or allowance of rebates, refunds, commissions, or unearned discounts, whether in the form of money or otherwise, or secretly extending to certain purchasers special services or privileges not extended to all purchasers purchasing upon like terms and conditions, to the injury of a competitor and where the payment or allowance tends to destroy competition, is an unfair trade practice.

(b) Any person, firm, partnership, corporation, or association resorting to such trade practice shall be deemed guilty of a misdemeanor and on conviction shall be subject to the penalties set out in § 4-75-204.

4-75-209 Sale at less than cost or with intent to injure competitors.(a)(1) It shall be unlawful for any person, partnership, firm, corporation, joint-stock company, or other association engaged in business within this state, to sell, offer for sale, or advertise for sale any article or product, or service or output of a service trade, at less than the cost thereof to the vendor, or to give, offer to give, or advertise the intent to give away any article or product, or service or output of a service trade, for the purpose of injuring competitors and destroying competition.

(2) Any person or entity so doing shall be guilty of a misdemeanor, and on conviction shall be subject to the penalties set out in § 4-75-204 for any such act.

(b)(1) The term “cost” as applied to production is defined as including the cost of raw materials, labor, and all overhead expenses of the producer; and, as applied to the distribution, “cost” shall mean the invoice or replacement cost, whichever is lower, of the article or product to the distributor and vendor plus the cost of doing business by the distributor and vendor.



(2) The “cost of doing business” or “overhead expense” is defined as all costs of doing business incurred in the conduct of the business and must include without limitation the following items of expense: labor, which includes salaries of executives and officers, rent, interest on borrowed capital, depreciation, selling cost, maintenance of equipment, delivery cost, credit losses, all types of licenses, taxes, insurance, and advertising.

(c) In establishing the cost of a given article or product to the distributor and vendor, the invoice cost of the article or product purchased at a forced, bankrupt, closeout sale, or other sale outside of the ordinary channels of trade may not be used as a basis for justifying a price lower than one based upon the replacement cost as of date of the sale of the article or product replaced through the ordinary channels of trade, unless:

(1) The article or product is kept separate from goods purchased in the ordinary channels of trade; and

(2) The article or product is advertised and sold as merchandise purchased at a forced, bankrupt, or closeout sale, or by means other than through the ordinary channels of trade, and the advertising states the conditions under which the goods were so purchased, and the quantity of the merchandise to be sold or offered for sale.

(d) In any injunction proceeding or in the prosecution of any person as officer, director, or agent, it shall be sufficient to allege and prove the unlawful intent of the person, firm, or corporation for whom or which he acts.

(e) Where a particular trade or industry of which the person, firm, or corporation complained against is a member has an established cost survey for the locality and vicinity in which the offense is committed, the cost survey shall be deemed competent evidence to be used in proving the costs of the per son, firm, or corporation complained against within the provisions of this subchapter.

(f) The provisions of this section shall not apply to any sale made:

(1) In closing out in good faith the owner’s stock or any part thereof for the purpose of discontinuing his trade in the stock or commodity, and, in the case of the sale of seasonal goods or to the bona fide sale of perishable goods, to prevent loss to the vendor by spoilage or depreciation, if notice is given to the public thereof;

(2) When the goods are damaged or deteriorated in quality, and notice is given to the public thereof;

(3) By an officer acting under the orders of any court;

(4) In an endeavor made in good faith to meet the legal prices of a competitor as herein defined selling the same article or product, or service or output of a service trade, in the same locality or trade area.

(g) Any person, firm, or corporation who performs work upon, renovates, alters, or improves any personal property belonging to another person, firm, or corporation shall be construed to be a vendor within the meaning of this subchapter.

4-75-210 Liability of directors, officers, agents, etc. -- Proof of unlawful intent.(a) Any person who, either as director, officer, or agent of any firm or corporation or as agent of any person violating the provisions of this subchapter, assists or aids, directly or indirectly, in the violation shall be responsible therefore equally with the person, firm, or corporation for whom or which he acts.



(b) In the prosecution of any person as officer, director, or agent, it shall be sufficient to allege and prove the unlawful intent of the person, firm, or corporation for whom or which he acts.

4-75-211 Remedies -- Witnesses and documents -- Immunity.(a) Any person, firm, private corporation, or municipal or other public corporation, or trade associa tion, may maintain an action to enjoin a continuance of any act or acts in violation of this subchapter and, if injured thereby, for the recovery of damages.

(b)(1) If, in such action, the court shall find that the defendant is violating or has violated any of the provisions of this subchapter, it shall enjoin the defendant from a continuance thereof.

(2) It shall not be necessary that actual damages to the plaintiff be alleged or proved.

(3) In addition to injunctive relief, the plaintiff in the action shall be entitled to recover from the de fendant three (3) times the amount of the actual damages, if any, sustained.

(c)(1) Any defendant in an action brought under the provisions of this section or any witness desired by the state may be required to testify under the provisions of §§ 16-43-211 and 16-43-701.

(2) In addition, the books and records of any such defendant may be brought into court and introduced, by reference, into evidence.

(3) However, no information so obtained may be used against the defendant as a basis for a misdemeanor prosecution under the provisions of §§ 4-75-204 and 4-75-207–4-75-210.

(d) The remedies prescribed in this subchapter are cumulative and in addition to the remedies prescribed in the Public Utilities Act, § 23-1-101 et seq., for discrimination by public utilities. If any conflict shall arise between this subchapter and the Public Utilities Act, § 23-1-101 et seq., the latter shall prevail.

A. MONOPOLIZATIONThere are two elements to a Section 2 violation—

• Possession of monopoly power in the relevant market.• Willful acquisition or maintenance of that power.

1. Defining Monopoly PowerMonopoly refers to control by a single entity. If a firm has sufficient market power to affect prices and output, it may be a monopoly even though it is not the sole seller in the market. To define a firm’s market power, courts look to its share of the relevant market.

2. Proving Monopoly Power

• Monopoly power may be proved by direct evidence that a firm used its market power to control prices or exclude competition.

• To prove monopoly power indirectly, a firm may be shown to have a dominant share of the relevant market. Courts also consider the barriers for competitors to enter that market.




A Monopolist Charging Lower Prices?The courts do not view the Sherman Act as protection for competitors from competitive practices. Instead,

the courts see the act as protection for consumers from monopolistic practices. The monopolistic practices that result once a company attains monopoly power consist chiefly of charging higher prices. Thus, when the conduct that a plaintiff complains of consists primarily of charging lower prices, the plaintiff may find it difficult to prove a violation of the Sherman Act. The plaintiff will lose the case if it appears unlikely that a company’s lower prices today indicate that the company will charge higher, monopolistic prices tomorrow. A company without monopoly power will not be able to recoup the losses sustained in charging lower prices by later raising prices. In that situation, the lower prices will only benefit, not harm, consumers.

3. Relevant MarketTo define a firm’s market power, courts look to its share of the relevant market, consisting of—

• A relevant product market.• A relevant geographic market.

a. Relevant Product MarketIn determining the relevant product market, the key issue is the degree of products’ in-terchangeability. Decisions on this issue can often be interpreted as arbitrary.

CASE SYNOPSIS—

Case 38.1: McWane, Inc. v. Federal Trade Commission

McWane, Inc., is the dominant producer of domestic ductile iron pipefittings. When Star Pipe Products entered the market, McWane told its distributors that unless they bought all of their domestic fittings from McWane, they would lose their rebates and be cut off from purchases for twelve weeks. The Federal Trade Commission (FTC) brought an action against McWane under Section 5 of the Federal Trade Commission Act. McWane's actions were found to constitute an illegal exclusive-dealing policy used to maintain McWane's monopoly power. The FTC ordered McWane to stop requiring exclusivity from distributors. McWane appealed.

The U.S. Court of Appeals for the Eleventh Circuit affirmed. The FTC’s “factual and economic conclusions—identifying the relevant product market for domestic fittings produced for domestic-only projects, finding that McWane had monopoly power in that market, and determining that McWane's exclusivity program harmed competition—are supported by substantial evidence in the record, * * * and their legal conclusions are supported by the governing law.”

..................................................................................................................................................

Notes and Questions

How might the imposition of McWane’s exclusive-dealing policy benefit consumers? McWane’s policy may have affected competition in its market, but its market consisted chiefly, if not entirely, of



contractors working on municipal, state, and federal waterworks projects. These contractors are often legally bound to use domestic pipefittings. Consumers may indirectly be affected by the prices for McWane’s fittings by the prices that the government pays for the contractor’s work. There could arguably be an indirect benefit if the government maintained closer oversight of the contractor’s bids and costs, and consequently attempted to deliver more cost-effective efficiencies in those deals.

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Monopolization

Cases including claims of monopolization include the following.

• PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101 (2d Cir. 2002) (in a cola syrup manufacturer’s suit against a competitor, alleging in part monopolization based on the defendant’s distributorship agreements with independent food service distributors (IFD) that prohibited the IFDs from delivering the plaintiff’s products to any of their customers, the competitor lacked market power to support the claim when it had only a 64-percent share of the total fountain syrup sales by the three largest suppliers).

• Tate v. Pacific Gas & Electric Co., 230 F.Supp.2d 1072 (N.D.Cal. 2002) (a natural gas utility had monopoly power in the market of supplying specialized natural gas technologies in its service area, for the purpose of antitrust claims asserted by the seller of portable gas liquefaction devices, even though the utility was not yet in the business of selling such devices, because the essence of the seller’s claim was that the utility had acted to protect its existing business and to clear the way for its future entry into the liquefied gas supply business).

• General Cigar Holdings, Inc. v. Altadis, S.A., 205 F.Supp.2d 1335 (S.D.Fla. 2002) (there was no dangerous probability that a Spanish cigar manufacturer would be successful in achieving a monopoly, for purposes of an attempted monopolization claim, where the manufacturer had only a 39-percent market share in the markets for cigars and non-Cuban premium cigars, and there were no barriers to entry in markets).

• Geneva Pharmaceuticals Technology Corp. v. Barr Laboratories, Inc., 201 F.Supp.2d 236 (S.D.N.Y. 2002) (a supplier of raw material for a drug manufacturer’s product lacked power in the relevant market, for purpose of the manufacturer’s monopolization claim, where the material was available from multiple sources and the manufacturer was not “locked-in” to dealing with the supplier).

ENHANCING YOUR LECTURE—

WHAT IS THE RELEVANT PRODUCT MARKET

FOR DOMAIN NAMES? Most attempts to measure monopoly power involve quantifying the degree of concentration in a relevant

market and/or the extent of a particular firm’s ability to control that market. Accordingly, defining the relevant



market is a necessary step in any monopolization case brought under Section 2 of the Sherman Act. Thus, when Stan Smith brought a monopolization case against Network Solutions, Inc. (NSI), a domain name registrar, for not allowing Smith and others to register for expired domain names, a threshold question before the court was the following: What is the relevant product market for domain names?

THE REGISTRY

At one time, NSI was the only registrar for domain names in this country. In 1998, however, the federal government opened domain name registration to competition and set up a nonprofit corporation, the Internet Corporation for Assigned Names and Numbers (ICANN), to oversee the distribution of domain names. At that time, NSI’s domain name registration service was divided into two separate units: a registrar and a registry (the Registry).a

The registrar unit continues to register domain names although it is now only one of eighty or so accredited registrars in operation. The Registry, in contrast, is the only entity of its kind. It main tains a centralized “WHOIS” database of all domain names using the “.com,” “.org,” and “.net” top level domains, regardless of whether the names have been registered by NSI or one of the other accredited registrars. The Registry’s WHOIS database allows all registrars to determine almost instantaneously which domain names are already registered and therefore unavailable to others. The public can also access the Registry’s WHOIS database.

At the time Smith brought his suit, the WHOIS database included approximately 163,000 expired domain names—names that had been registered but belonged to registrants who had failed to pay the required registration renewal fees. NSI’s policy was to give registrants a “grace period” of two to three months in which they could renew their expired registration. In the meantime, the names remained on the WHOIS database and were unavailable for others.

WHAT IS THE RELEVANT PRODUCT MARKET?

Smith claimed that by failing to make expired domain names available to himself and others, NSI had intentionally maintained an unlawful monopoly over expired domain names in violation of Section 2 of the Sherman Act. The court, however, concluded that the relevant product market was not expired domain names but all domain names—and NSI did not have monopoly power over all domain names. The court reasoned that “the relevant market includes those commodities or services that are reasonably interchangeable.” Because of the “virtually limitless” supply of domain names, said the court, “there will always be reasonable substitute names available for any given name kept out of circulation.”b

FOR CRITICAL ANALYSIS

Do you agree that the relevant market for domain names should include all domain names and not just those that have expired? Why or why not?

a. In 2000, NSI became a wholly owned subsidiary of VeriSign, Inc., and the Registry was subsequently renamed VeriSign Global Registry Services. Both NSI and VeriSign were defendants in this case.b. Smith v. Network Solutions, Inc., 135 F.Supp.2d 1159 (N.D.Ala. 2001).

b. Relevant Geographic Market



The geographic market is that section of the country within which a firm can increase its price a bit without attracting new sellers or without losing many customers to alternative suppliers outside that area.

4. The Intent RequirementThe acquisition of monopoly power is not an antitrust violation if it results from—

• Business acumen—good management and efficiency.• The development of a superior product.• An historic accident.

If a firm possesses market power as a result of some purposeful act to acquire or to maintain that power through anticompetitive means, it is a violation of Section 2.

5. Unilateral Refusals to DealRefusals to deal involve manufacturers who refuse to deal with retailers or dealers who cut prices to levels substantially below the manufacturers’ suggested retail prices. A refusal to deal is not a violation of Section 1, although it may violate Section 2, depending on the monopoly power of the firm refusing to deal and the anticompetitive effect on the market.

B. ATTEMPTS TO MONOPOLIZEThis offense may involve predatory pricing (defined above) or predatory bidding—the acquisition and use of monopsony power (market power on the buy side). This occurs when a buyer bids up the price of an input too high for competitors to pay, forcing them out of the market.

Cases involving attempts to monopolize require proof of—

• Anticompetitive conduct.• Intent to exclude competitors and garner monopoly power.• A dangerous probability of success—a serious threat of monopolization—which exists only when a

party has some degree of market power.

CASE SYNOPSIS—

Case 38.2: Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co.

Weyerhaeuser Co. owned six mills processing 65 percent of the red alder logs in the Pacific Northwest. Ross-Simmons Hardwood Lumber Co. operated a single competing mill. When the prices of the logs rose and those for the lumber fell, Ross-Simmons suffered heavy losses. Several million dollars in debt, the mill closed. Ross-Simmons filed a suit in a federal district court against Weyerhaeuser, alleging attempted monopolization under Section 2 of the Sherman Act. Ross-Simmons claimed that Weyerhaeuser used its dominant position in the market to bid up the prices of logs and prevent its competitors from being profitable. Weyerhaeuser argued that the test for predatory pricing applies to a claim of predatory bidding and that Ross-Simmons had not met this standard. From a judgment in the plaintiff’s favor, affirmed by the U.S. Court of Appeals for the Ninth Circuit, Weyerhaeuser appealed.

The United States Supreme Court vacated and remanded. The test that applies to a claim of predatory pricing also applies to a claim of predatory bidding. Both predatory pricing and predatory bidding involves a



company’s intentional use of pricing for an anticompetitive purpose. Both actions require a company to incur a short-term loss on the possibility of later making a “supracompetitive” profit. Because a “rational” firm is unlikely to “make this sacrifice,” both schemes are “rarely tried and even more rarely successful.” A failed scheme of either type can benefit consumers. A plaintiff alleging predatory bidding must prove that the defendant’s “bidding on the buy side caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs.” The plaintiff must also prove that “the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power.”

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Notes and Questions

How might a predatory-bidding scheme benefit consumers? The Court pointed out, “In the first stage of a predatory-bidding scheme, the predator’s high bidding will likely lead to its acquisition of more inputs. Usually, the acquisition of more inputs leads to the manufacture of more outputs. And increases in output generally result in lower prices to consumers.”.

How might a predatory-bidding scheme harm consumers? The Court noted, “Consumer benefit does not necessarily result . . . because the predator might not use its excess inputs to manufacture additional outputs. It might instead destroy the excess inputs. Also, if the same firms compete in the input and output markets, any increase in outputs by the predator could be offset by decreases in outputs from the predator’s struggling competitors.”

Why does a plaintiff alleging predatory bidding have to prove that the defendant’s “bidding on the buy side caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs”? Because without proof of a likely recoupment of the losses suffered to allegedly drive competitors out of the market, a strategy of predatory bidding would not make economic sense—it would involve a short-term loss that was not likely to be offset by a long-term gain.

IV. The Clayton ActThe Clayton Act targets specific practices that substantially reduce competition or could lead to monopoly power but are not clearly prohibited by the Sherman Act.

A. SECTION 2—PRICE DISCRIMINATIONPrice discrimination occurs when a seller charges different prices to competitive buyers.

1. Requirements

• The seller must be engaged in interstate commerce.• The goods must be of like grade or quality.• The goods must have been sold to two or more buyers.• The effect of the price discrimination must be to substantially lessen competition or create a

competitive injury.

2. Defenses

• Cost justification—a buyer’s purchases saved a seller costs in producing and selling goods.



• Meeting a competitor’s prices—when a lower price is charged temporarily and in good faith to meet another seller’s equally low price to the buyer’s competitor.

•Changing market conditions—changing conditions affected the market for or marketability of the goods.

B. SECTION 3—EXCLUSIONARY PRACTICESSellers or lessors cannot sell or lease on condition that the buyer or lessee not use or deal in goods of the seller or lessor’s competitor.

1. Exclusive-Dealing ContractsAn exclusive-dealing contract, like other anticompetitive agreements, is prohibited if it substantially lessens competition or tends to create a monopoly.

2. Tying ArrangementsThe legality of a tying arrangement depends on many factors, particularly the business purpose or effect of the arrangement. A tying arrangement that involves services must be attacked under Section 1 of the Sherman Act (because the Clayton Act has been held to cover only commodities). Once held illegal per se, such arrangements are now more likely to be subject to a rule-or-reason analysis.

CASE SYNOPSIS—

Case 38.3: Batson v. Live Nation Entertainment, Inc.

James Batson walked up to the box office of Live Nation Entertainment, Inc., at the Charter One Pavilion in Chicago, Illinois, and bought a non-refundable concert ticket. The price included a $9 parking fee. Batson did not have a car to park. He filed a suit in a federal district court against Live Nation. He argued that the bundled fee was unfair because consumers were forced to pay it or forego the concert. He asserted that this was an illegal tying arrangement. The court dismissed the suit. Batson appealed.

The U.S. Court of Appeals for the Seventh Circuit affirmed. “While we understand why a consumer who does not want parking would prefer to purchase a concert ticket unbundled from that benefit, there is no rule that requires everything to be sold on a fully unbundled basis.” The court could not identify a product market in which Live Nation had sufficient power to force consumers who wanted to attend a concert (the tying product) to buy “useless parking rights” (the tied product). Nor was there evidence that Live Nation's parking tie-in restrained competition for parking in Chicago.

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Notes and Questions

The seller’s practice of including the cost of a parking fee in the price of a concert ticket may not have been construed by the court as illegal in this case, but could it be perceived as unethical? Probably not, at least not without more than indicated by the facts in the Batson case. To be reasonably perceived as unethical, the practice of including the cost of a parking fee in the price of a concert ticket would likely have to be oppressive. This would require that the consumer have little alternative except to submit to



the practice. This does not occur if the consumer can avoid the practice by choosing an alternative. In the facts of this case, the buyer was not informed of the parking fee until after he bought his nonrefundable ticket. But he was told the price of the ticket at the time of its purchase and he paid that amount—and there was nothing unreasonably oppressive about the full price of the ticket.

Suppose that instead of noting on the ticket that the price included a parking fee, Live Nation had simply charged $9 more for the ticket and announced that there was “free” parking for all who needed it. Would the result have been different? Why or why not? It is not likely that the result would have been different in this case if instead of noting on the ticket that the price included a parking fee, Live Nation had simply charged $9 more for the ticket and announced that there was “free” parking for all who needed it. The court’s reasoning and its application of the governing principles to Batson’s claim indicate that a different strategy by the concert promoter to cover the cost of parking would not likely have changed the result.

And in fact, as the court notes in its opinion, it appears that Live Nation did later alter its pricing strategy. With respect to a $6 parking charge included in the price of a ticket to a show in New Jersey, Live Nation kept the fee but eliminated its notation on the ticket (and on its Web site).

C. SECTION 7—MERGERSA person or business organization cannot hold stock or assets in another business if the effect may be to substantially lessen competition.

1. Market ConcentrationA crucial consideration in merger cases is the market concentration of a product or business—its percentage market share among competitors in the relevant market. When a small number of companies control a large share of the market, the market is concentrated.


Market Concentration

In determining market concentration, the Federal Trade Commission and U.S. Department of Justice employ what is known as the Herfindahl-Hirschman Index (HHI). The HHI is computed by summing the squares of each of the percentage market shares of firms in the relevant market. For example, if there are four firms with shares of 30 percent, 30 percent, 20 percent, and 20 percent, respectively, then the HHI equals 2,600 (302 + 302 + 202 = 202 = 2,600).

If the pre-merger HHI is less than 1,000, then the market is not concentrated, and the merger will not likely be challenged. If the pre-merger HHI is between 1,000 and 1,800, the industry is moderately concentrated, and the merger will be challenged only if it increases the HHI by 100 points or more. If the HHI is greater than 1,800, the market is highly concentrated.

In a highly concentrated market, a merger that produces an increase in the HHI between 50 and 100 points raises significant competitive concerns. Mergers that produce an increase in the HHI of more than 100 points in a highly concentrated market are deemed likely to enhance market power.



2. Horizontal MergersWhether a merger between competitors is legal depends first on the market share of the new entity—anything with a resulting significant share will be presumed illegal. An entity is also analyzed on the basis of three other factors—

• The concentration in the relevant product market.• The market’s history of tending toward concentration.• Whether the purpose of the merger is to establish market power or restrict competition.

3. Vertical MergersIn determining a vertical merger’s legality, the FTC looks at such factors as—

• The definition of the relevant product in geographic markets.• Market concentration.• Barriers to entry into the market.• The apparent intent of the merging parties.


The Spark-Plug MarketIn the 1960s, spark plug manufacturers sold spark plugs to automobile manufacturers for about six cents

per plug, even when their costs were about eighteen cents per plug. The spark plug manufac turers recouped their losses in the aftermarket. An automobile required, during its useful life, about five replacement sets of plugs. By custom and practice, mechanics usually replaced plugs with others of the brand that the manufacturer had installed.

At the time, Ford Motor Co., Chrysler Corp., and General Motors Corp. (GMC) produced 90 percent of U.S. automobiles. Champion (50 percent), GMC (30 percent), and Autolite (15 percent) dominated the spark-plug market. Ford bought Autolite. Six years later, Champion’s share of the market was about 33 percent. The United States filed a suit against Ford in a federal district court, claiming that its Autolite acquisition violated Section 7. The court ordered Ford to divest itself of Autolite. Ford appealed.

In Ford Motor Co. v. United States, 405 U.S. 562, 92 S.Ct. 1142, 31 L.Ed.2d 492 (1972), the United States Supreme Court affirmed the lower court’s ruling. If the acquisition were allowed, the spark-plug industry would become as concentrated as the auto industry, and entry into the spark plug market by new firms would be impossible. “As a result of the acquisition of Autolite, the structure of the spark plug industry changed drastically. . . . Ford, which before the acquisition was the largest purchaser of spark plugs from the independent manufacturers, became a major manufacturer. The result was to foreclose to the remaining independent spark plug manufacturers the substantial segment of the market previously open to competitive selling.”

“Ford may well have been more useful as a potential than it would have been as a real producer” of spark plugs. How could Ford, as an outsider, have affected competition among spark plug manufacturers? Before Ford acquired Autolite, it had “a moderating influence” on spark plug manufacturers. “An interested firm on the outside has a twofold significance. It may someday go in and set the stage for noticeable deconcentration. While it merely stays near the edge, it is a deterrent to current competitors. This was Ford uniquely, as both a prime candidate to manufacture and the major customer of the dominant member of the



oligopoly.”

If Ford had chosen to manufacture its own spark plugs, rather than to acquire Autolite, would there have been a different effect on competition in the spark plug market? Would Ford’s decision to manufacture spark plugs itself have been illegal? The effect on competition in the spark plug market would have been much different if Ford had decided to manufacture its own plugs rather than to acquire Autolite. There was “the chance that Autolite would have been doomed to oblivion by defendant’s grass-roots entry . . . . Had Ford taken the internal-expansion route, there would have been no illegality; not, however, because the result necessarily would have been commendable, but simply because that course has not been proscribed.”

D. SECTION 8—INTERLOCKING DIRECTORATESIndividuals cannot serve as directors on the boards of two or more corporations at the same time if either has capital, surplus, or undivided profits aggregating more than certain threshold amounts that are adjusted by the FTC every year.

V. Enforcement and Exemptions

A. ENFORCEMENT BY FEDERAL AGENCIESThe U.S. Department of Justice (DOJ) prosecutes violations of the Sherman Act as either criminal or civil violations. The DOJ of the Federal Trade Commission (FTC) can enforce the Clayton Act only through civil proceedings (violations of the Clayton Act are not crimes). Remedies include divestiture and dissolution. The FTC also enforces the Federal Trade Commission Act.

B. ENFORCEMENT BY PRIVATE PARTIESA private party who has been injured by a violation of the Sherman Act or Clayton Act can sue for treble damages and attorneys’ fees. Private parties may also seek injunctions. Under the Sherman Act, a private party must show that—

• The violation caused or was a substantial factor in causing an injury.• The violation affected business activities protected by the antitrust laws.

C. EXEMPTIONS FROM ANTITRUST LAWSExemptions to antitrust enforcement are given to—

• Labor.• Agricultural associations.• Fisheries.• Insurance companies• Exporters.• Professional baseball.• Oil marketing.• Defense activities.• Small business firms’ cooperative research.• State actions.• Regulated industries.



• Businesspersons’ joint efforts to seek government action (exempted under the Noerr-Pennington doctrine).

VI. U.S. Antitrust Laws in the Global ContextPersons in foreign nations are subject to U.S. antitrust laws, as well as protected by those laws from illegal anticompetitive acts committed by U.S. citizens.

A. THE EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAWSAny conspiracy that has a substantial effect on U.S. commerce is within the reach of the Sherman Act, whether the violation occurs outside the United States and whether a foreign government or person commits it. Any per se violation automatically falls under U.S. jurisdiction.

B. THE APPLICATION OF FOREIGN ANTITRUST LAWSMany nations—including countries in Asia and Latin America—have laws that promote competition and prohibit trade restraints. U.S. firms may be subject to foreign antitrust laws if the firms’ conduct has a substantial effect on those entities’ commerce.

TEACHING SUGGESTIONS

1. Ask students to discuss whether they think there should be any restrictions on corporate mergers—absent evidence that the merging companies intend to use their market power to stifle competition unlawfully. If the ultimate viability of a firm is determined by its products and its productivity, does the size of the firm or the concentration of its particular industry make any difference?

2. Ask the class to discuss whether mergers, on the whole, have a positive or negative effect on the produc -tivity and efficiency of the national economy. Distinguish the different purposes of the mergers of the 1980s, the 1990s, and the 2000s. The current situation in the airline industry could be presented and discussed. The impact of the failure of a firm that was “too big to fail” might be considered in this context.

3. Do students think it is possible to acquire a monopoly position solely by virtue of hard work? If so, do they believe it is possible for the monopolist to remain uncorrupted, when, as the maxim says, “absolute power corrupts absolutely”?

4. A simple understanding of economics can make it easier to understand antitrust law. This might be a useful topic to explain before covering the chapter’s material in depth.

Cyberlaw Link

When a group sets uniform standards for others to use—in, for example, accessing the Internet, creating software, or designing Web pages—is this a violation of the antitrust laws? When evaluating mergers, monopolies, and markets, should an Internet-based firm be considered a competitor of a more traditional firm?

How does the Internet provide pro-competitive benefits without encouraging violations of the antitrust laws? The Internet provides opportunities for economically efficient methods of doing business,



such as rapid business-to-business connections for transactions that can eliminate a necessity for large inventories. The Internet can facilitate such methods without fostering antitrust violations by creating a competitive price environment.

DISCUSSION QUESTIONS

1. What is a monopoly? A monopoly is a market in which there is but a single seller. In legal terms, a monopoly may also describe a firm that, although not the sole seller in the market, can nonetheless substantially ignore rival firms in setting a selling price for its product or can in some way limit rivals from competing in the market. A monopolist, by virtue of its market power, has the ability to control the price of its products.

2. What factors contributed to the initial ineffectiveness of the Sherman Act when it was first enacted? The United States Supreme Court construed the statute too narrowly to give it much effect and subsequently applied it so rigorously so as to make the act unworkable. Lackluster enforcement also contributed to the public’s dissatisfaction.

3. What is price discrimination? Price discrimination occurs when sellers charge different buyers different prices for identical goods. Section 2 of the Clayton Act prohibits certain classes of price discrimination for reasons other than differences in production or transportation costs.

4. What is a horizontal restraint? A horizontal restraint is any agreement that in some way restrains competition between rival firms competing in the same market.

5. What is the difference between a per se violation and a violation that is analyzed using a rule of rea-son? Per se violations are found when firms make agreements to fix prices or restrict output that are blatantly anti-competitive in that they cannot be justified in terms of providing legitimate benefits to society. A rule of reason approach, however, is used in situations in which the anticompetitive aspects of the agreements are not so clear as with agreements between rivals that might actually increase social welfare by making information more readily available or by creating joint incentives to undertake risky research and development projects.

6. When are price-fixing agreements lawful under the Sherman Act? Never. Because the dangers of such agreements to open and free competition are enormous, the Supreme Court has held that the asserted rea-sonableness of a price-fixing agreement is never a defense; any agreement that restricts output or artifi cially fixes prices is a per se violation of Section 1 of the Sherman Act.

7. What is an exclusive dealing contract? An exclusive dealing contract is one in which a seller forbids the buyer from purchasing products from the seller’s competitors. Such contracts are prohibited under Section 3 of the Clayton Act if the effect of the contract will “substantially lessen competition or tend to create a monopoly.”

8. What are the ethical values underpinning antitrust laws, and why are those laws applied to tying arrangements in particular? The ethical values underlying the antitrust laws include honesty and equity (and liberty or freedom if those can be characterized as ethical values). A challenge to a tying arrangement is generally justified on the basis that the seller’s position of power in the marketplace for the tying product is used to restrain competition in the marketplace for the tied product. The essential characteristic of an invalid tying arrangement lies in a seller’s



exploitation of its control over a tying product to force a buyer to buy a tied product that the buyer either does not want or might prefer to buy elsewhere on different terms

9. In what circumstances might a tying arrangement be considered procompetitive? A tying arrangement (and any restraint of trade subject to a rule of reason analysis) may be considered procompetitive if it results in lower prices or other benefits for consumers without illegally suppressing competition. A tying arrangement would not be illegal as long as a seller does not have sufficient market power to force a buyer to buy a product or do something else that the buyer would not otherwise do in a competitive market

10. How does the Sherman Act affect international business? Section 1 of the Sherman Act declares that its provisions are applicable both in the U.S and abroad; it purports to reach any conspiracy (foreign or domestic) that has a substantial effect on U.S. commerce. Foreign governments as well as natural persons can be sued for violating the Sherman Act regardless of whether the alleged violations occurred inside or outside the U.S. Before a U.S. court will exercise its jurisdiction over an alleged antitrust violation, however, the party bring ing the claim must demonstrate that the alleged violations have the requisite effect on U.S. commerce. The jurisdiction of the court will be automatically invoked, however, if a per se violation has been committed as would be the case if a U.S. firm had joined a foreign cartel and conspired successfully to control the production, price, or distribution of a good that substantially affected U.S. commerce.

ACTIVITY AND RESEARCH ASSIGNMENTS

1. Ask each student to write a short research paper analyzing whether the antitrust laws have had much effect in stemming anticompetitive behavior by major corporations in the past decade.

2. Ask students to bring in newspaper and magazine articles that discuss the present state of antitrust law enforcement in the United States. Is the federal government abdicating its responsibility to enforce the antitrust laws?

EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT

Footnote 8: Leegin Creative Leather Products, Inc. (Leegin), designs, makes, and distributes a line of leather goods and accessories under the brand name “Brighton.” When Leegin learned that PSKS, Inc. (PSKS), which operates Kay's Kloset, was marking down Brighton goods by 20 percent, Leegin stopped selling to the store. PSKS filed a suit in a federal district court against Leegin, alleging antitrust violations. The court entered a judgment against Leegin. The U.S. Court of Appeals for the Fifth Circuit affirmed. Leegin appealed. In Leegin Creative Leather Products., Inc. v. PSKS, Inc., the United States Supreme Court reversed and remanded, holding that the rule of reason applied to such resale price maintenance agreements. “Resort to per se rules is confined to restraints * * * that would always or almost always tend to restrict competition and decrease output. * * * [T]he per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue, and only if courts can predict with confidence that it would be invalidated in all or almost all instances under the rule of reason.” Resale price maintenance may have anticompetitive effects or represent an attempt to obtain monopoly profits. But they can instead stimulate competition and offer advantages to consumers.

In what ways do minimum resale price maintenance agreements facilitate interbrand competition? In the Leegin case, the United States Supreme Court explained that without such agreements “the retail services that



enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate. Consumers might learn, for example, about the benefits of a manufacturer's product from a retailer that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees. Or consumers might decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider. With price competition decreased, the manufacturer's retailers compete among themselves over services.

Such agreements may actually increase interbrand competition. On this point, the Court cited “facilitating market entry for new firms and brands. New manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer. New products and new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price maintenance there is a procompetitive effect.

Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided [otherwise] * * * . It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer's market share by inducing the retailer's performance and allowing it to use its own initiative and experience in providing valuable services.”

In general, how are the interests of manufacturers, retailers, and consumers aligned—and in conflict—with respect to a product’s profit margins? (A product’s profit margin is the difference between the price a manufacturer charges retailers and the price retailers charge consumers.) In the Leegin case, the United States Supreme Court explained the common and divergent interests of manufacturers, retailers, and consumers. The Court stated, “The difference between the price a manufacturer charges retailers and the price retailers charge consumers represents part of the manufacturer's cost of distribution, which, like any other cost, the manufacturer usually desires to minimize. A manufacturer has no incentive to overcompensate retailers with unjustified margins. The retailers, not the manufacturer, gain from higher retail prices. The manufacturer often loses; interbrand competition reduces its competitiveness and market share because consumers will substitute a different brand of the same product. As a general matter, therefore, a single manufacturer will desire to set minimum resale prices only if the increase in demand resulting from enhanced service * * * will more than offset a negative impact on demand of a higher retail price.”

Should the Court have applied the doctrine of stare decisis to hold that minimum resale price maintenance agreements are still subject to the per se rule? Why or why not? The Court explained that the doctrine of stare decisis did not block the overruling of the previous common law application of the per se rule to minimum resale price maintenance agreements primarily because of “the dynamics of present economic conditions.” In other words, the economic situation had changed since the per se rule was first applied to these agreements. Also, as is indicated in the text’s discussion of other practices among competitors, the trend in antitrust law has been away from the application of such per se rules.

Footnote 14: Illinois Tool Works Inc., owns Trident, Inc. The firms make and sell printing systems that include patented components that use unpatented ink. As part of each sale, a buyer agrees to buy ink exclusively from Illinois and Trident. Independent Ink, Inc., sells identical ink at a lower price. Independent filed a suit in a federal



district court against Illinois and Trident, alleging that they were engaged in illegal tying. Independent filed a motion for summary judgment, arguing that because the defendants owned patents in their products, market power could be presumed. The court issued a summary judgment in the defendants’ favor. The U.S. Court of Appeals for the Federal Circuit reversed. Illinois and Trident appealed. In Illinois Tool Works, Inc. v. Independent Ink, Inc., the United States Supreme Court vacated and remanded to give Independent “a fair opportunity” to offer evidence of the relevant market and the defendants’ power within it. “[T]he essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product.” At one time, it was presumed that a company automatically possessed market power in a product for antitrust purposes if the firm held a patent in the product. Over time, however, the patent misuse doctrine on which this presumption rested has been eroded—most recently by Congress’s amendment of the patent laws. Now, a plaintiff who alleges an illegal tying arrangement involving a patented product must prove that the defendant has market power in the tying product. In other words, tying arrangements involving patented products should be evaluated under such factors as those that apply in a rule-of-reason analysis.

What factors does a court consider under the rule of reason? In light of these factors, how might the court rule on remand with respect to the facts of the Illinois case? Factors that a court considers under a rule-of-reason analysis include the purpose of an agreement between the parties, the parties’ power to implement the agreement to satisfy that purpose, and the effect of the agreement on competition. A court might also consider whether there were less restrictive means to accomplish that purpose. In the Illinois case, the purpose of the tying agreement might have been to require a party to buy the tied product from the maker of the tying product simply to increase the maker’s profit and eliminate the competition. There is the evidence of the competition’s lower price. What would the maker have done if a party had bought the competition’s product? The purpose might have related more practically to the maker’s tying product, however—to lengthen its life, for example—but other means to achieve this purpose might then be weighed to assess the legitimacy of the tying agreement.


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