ANTITRUST- LONGWELL- SPRING 2012 1

Antitrust Outline

Key Statutes & Assumptions

Sherman Antitrust Act- § 1 Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the

several States, or w/ foreign nations, is hereby declared to be illegal. [Violators] shall be deemed guilty of a felony, and [punished by a fine and/or imprisonment]

- § 2 Every person who shall monopolize or attempt to monopolize, or combine or conspire . . . to monopolize any part of the trade or commerce among the several States, or w/ foreign nations, shall be deemed guilty of a felony

- Key Differenceso Collective v. Unilateral Conduct: § 1 requires collective action (i.e. contract, combination or conspiracy) while § 2

is principally concerned w/ unilateral conducto Agmt v. Monopoly: § 1 deals w/ unreasonable trade restrictions while § 2 deals w/ monopoly or attempted

monopoly

§ 7, Clayton Act: Incipiency statute allows prevention of acquisition or mergers when “the effect of such acquisition may be to substantially lessen competition, or to tend to create a monopoly”

FTC Act, § 5- “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce

are hereby declared unlawful” 15 USC § 45- Only FTC can use- Can be used to purse Sherman violations

Economics

Antitrust promotes competition out of the belief that competition presses producers to satisfy consumer wants at the lowest price while using the fewest resources

- Basic Assumptionso Cartels must be able to reduce output either individually or collectively

In Microsoft, court found co. had unilateral monopoly power. Internal corporate e-mails cited this. Microsoft could reduce its own output and raise prices

o Four necessary means to control output Set a plan. Frustrated by competitor’s differing cost structures and achieving consensus on mkt allocation Monitor Punish deviants Cope w/ entrants

- Benefits of Competitiono Economic Benefits

Less transfer of wealth from buyers to sellers Less Allocative Efficiency Loss Non-Economic Benefits Prevent Concentration of Wealth Individual autonomy

o “Competition is destruction in our industry” generally rejected

Which Horizontal Agmts Are Illegal

A. Relevant US Laws and General Legal Standards- Horizontal agmts are agmts between firms who operate at the same mkt level

o Vertical agmts between firms that are in some supply relation Ex: Agmt b/w steel supplier & car maker

Effects at both mkt levels: steel mkt = upstream, car mkt = downstream

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Three statutes cover horizontal agmts- The most important is Sherman Act § 1 - Every contract, combination in the form of trust or otherwise, or conspiracy, in

restraint of trade or commerce among several States, or w/ foreign nations, is declared to be illegal

Per Se

Every agmt in restraint of trade or commerce is declared illegal- But this was eventually held not to be taken literally, otherwise every contract would or partnership would be unlawful- Traditional view is that “unreasonable” restraints of trade, w/ an unreasonable restraint being one whose anticompetitive

effects outweigh its procompetitive ones

SCOTUS has held that certain agmts are so likely to be anticompetitive, and so unlikely to have procompetitive effects, that they are condemned “per se”

- i.e. price fixing, mkt divisions, output restraints and boycotts- when pro se, SCOTUS will not consider procompetitive justifications or whether anticompetitive effects actually occurred

Rule of Reason

If not a per se violation, the Cts consider on a case by case basis whether the agmt has a plausible procompetitive justification- must prove an anticompetitive effect either through direct proof or by showing mkt power that can be used to infer the

anticompetitive effect o If shown, the must prove the procompetitive justification and that this was the least restrictive means of

accomplishing that pro-competitive virtue- Then Ct must balance effects – does anticompetitive effects outweigh procompetitive?

However, no reason to keep pro se and rule of reason separate b/c SCOTUS stated:1. Even if a horizontal agmt literally constitutes price-fixing, an outright restraint or a boycott, it will not be deemed per se

illegal when a procompetitive justification in fact exists2. Even if a restraint falls w/in rule of reason, it will condemned summarily as a naked restraint if not procompetitive

justification is offered

One way to think about the cases will be to keep in mind the distinction b/w horizontal agmts among unrelated firms and those among firms that are in a productive business relationship (which seeks through joint efforts to produce some tangible product or service).

- When there is a productive joint venture, the pro-competitive justification may take a restraint out of the per se rules- Unwilling to listen to unrelated horizontal businesses that restraints have a procompetitive justification

The distinctions between the pro and anti competitive agmts - Courts have been less willing to condemn per se professional efforts to self-regulate through horizontal agmts that are not

ancillary to any productive business collaboration

Sherman Act § 2: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire w/ any other person or person, to monopolize any part of the trade or commerce among the several States, or w/ foregin nations, shall be deemed guilty of a felony…”

- Agmts to form a corp’n that exercises monopoly power have long been held to constitute a violation of § 2

FTC Act § 5: “Unfair methods of competition in or affecting commerce . . . are hereby declared unlawful”

B. Horizontal Price Fixing

The earliest cases acknowledged that explicit agmts by competing firms to fix process are a primary concern of § 1 - The idea of price fixing is so abhorrent, there should not be a reasonableness standard for such agmts- “Any combination or agmt between competititors formed for the purpose and w/ the effect of raising, depressing, fixing,

pegging or stabilizing the price of a commodity in interstate commerce is illegal per se.

Per Se Rule for Horizontal Price Fixing

United States v. Trenton Potteries (SCOTUS 1927)- 23 companies making up 82% of the toilet pottery mkt agreed to charge certain prices. - Issue: whether it was correct to not instruct the jury to consider the reasonableness of the particular constraints charged?

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ANTITRUST- LONGWELL- SPRING 2012 3- Holding : No matter how beneficial this agmt was, the potential for harm to competition meant the agmt was illegal

o Agmts which create such potential power may well be held to be in themselves unreasonable or unlawful restraints, w/o the necessity to inquire about the reasonableness of a particular price

o Unreasonable restraints on trade such as price fixing are illegal regardless of the price fixed

Potential for Rule of Reason Analysis in Horizontal Price Fixing Cases

1) The agmt is the most efficient way to protect the business of the s

BMI v. CBS (SCOTUS 1979)- ASCAP’s members grant it nonexclusive rights to license nondramatic performances of works, issue licenses & distribute

royalties to copyright owners- BMI created later to do same thing- CBS held licenses from both BMI and ASCAP- Trial ct rejected claim that this was per se violation of § 1, i.e., price fixing- Issue: whether issuance of blanket licenses to CBS y ASCAP and BMI to copyrighted music at fees negotiated by them is per

se illegal price fixing- Holding : not going to apply per se rule, but rule of reason b/c blanket license is not a “naked restraint of trade, but a more

efficient way of monitoring and enforcement against unauthorized copyright useo Per se rule: “plainly anticompetitive” and “lack any redeeming virtue”o Difficult for individuals to enforce copyrighted use; restraint on the music stems from copyright lawo Ask: Facially, does the effect or purpose appear to restrict competition?o ASCAP is really a separate seller offering a blanket license, it sets the price, price is not set by collaboration w/ all

individual copyright ownerso CBS can obtain individual licenses for each composition

Arizona v. Maricopa County Medical Society (SCOTUS 1982)- Doctors belong to org’n in Maricopa Cty, establishing max fee that drs agree to accept as payment in full for services

performed under insurance plans approved by Soc’y- Patients covered by a plan endorsed by the Soc’y are guaranteed complete coverage for the full amount of his medical bills

only if treated by a member dr- Drs argue it is procompetitive b/c it provides consumers w/ a uniquely desirable form of insurance coverage- Issue: did agmt among competing physicians setting max fees violate § 1?- Holding: Price fixing by setting a maximum price is subject to the per se rule as it still interferes w/ the price mechanism and

hinders competitiono Claim that price restraint will make it easier for customers to pay does not distinguish medical profession from any

other provider of goods & serviceso Rule of reason: decide whether under all circumstances of the case the restrictive practice imposes an unreasonable

restraint on tradeo Insurers are capable not only of fixing maximum reimbursable prices but also of obtaining binding agmts w/

providers guaranteeing the insured full reimbursement of a participating provider’s feeo Differ from BMI b/c individual practitioners still competing & are not in the business of selling insurance, deriving

no profit from the actual policies

2) Productive joint ventures

Texaco v. Dagher (SCOTUS 2006)- Texaco and Shell created a joint venture, Equilon- Equilon refined and sold gas under the original brand names - Equilon set the pricesfor gasoline- Trial Ct use ancillary restraints doctrine:

o is nonventure restriction a naked restraint on trade? Yes, invalido is restrict ancillary to the legitimate & competitive purposes of the business ass’n? yes, valid

- Issue: was this price fixing per se illegal under § 1?- Holding : When persons who would otherwise compete w/ each other pool capital and share risks of loss, such joint ventures

are regarded as a single firm competing w/ other sellers in the mkto Jt venture sold the gasoline, T & S were not competing, but sharing in profits as investors of the venture, so not per

se illegal3

ANTITRUST- LONGWELL- SPRING 2012 4o Jt venture has discretion just as any other firm to determine the prices of its producto Do not apply ancillary restraint doctrine

Horizontal price fixing case usually a per se violation, unless the s can come up w/ very strong procompetitive justifications to get the court to employ the Rule of Reason analysis

- Such justifications includeo Only efficient way to control against copyright infringemento Productive joint venture that is a single firm competing w/ other sellers in the mkt

C. Horizontal Output Restrictions

Given any particular mkt demand curve, every output level implies a price and every price implies an output level- Thus, horizontal agmts to restrict output below the competitive level are just the flip side of horizontal agmts to fix prices- Indeed, a horizontal agmt on output production is generally necessary for any price-fixing agmt, otherwise members of the

cartel might increase production to greater mkt share at the cartel price, and, if left w/ unsold product, may be tempted to undercut the mkt to unload it

- Cartels like OPEC do this all the time and focus on agmts to restrict rather than fix priceThus, like price-fixing, horizontal agmts to restrict output are typically regarded as per se illegal

- However, like price fixing, the Ct has recognized circumstances where an agmt that literally restricts output should nonetheless be characterized as falling outside the per se rule

NCAA v. Board of Regents of Univ. of Oklahoma (US 1984)- NCAA negotiated TV rights w/ CBS & ABC, limiting any individual school to no more than 6 televised games- NCAA threatened disciplinary action against OU & other major colleges that signed individual TV Ks w/ NBC- Issue: does the NCAA’s restriction of freedom to negotiate & enter own TV Ks violate § 1?- Holding : not per se illegal, but after applying rule of reason, agmts are still anticompetitive w/ no compelling & reasonable

justificationo This is a limitation on output b/c restraining quantity of TV rights for saleo What is critical in this case is that it involves an industry in which horizontal restraints on competition are

ESSENTIAL if the product is to be available at all Product cannot be preserved except by mutual agmt But TV plan does not promote procompetitive efficiency

o Absence of proof of mkt power does not justify a naked restriction on price or output, but NCAA does have mkt power b/c advertisers will pay a premium to reach this particular mkt audience

o Rule of Reason does not support a defense based on the assumption that competition itself is unreasonable

When it is claimed that a certain degree of cooperation is essential for competition, the court may apply rule of reason

D. Horizontal Mkt Divisions

Any agmt (explicit or tacit) among businesses performing similar services or dealing in similar products whereby the available mkt is divided up and each is given a share is illegal per se

- Such mkt divisions generally involve territorial divisions where each firm agrees to limit itself to a geographic area different from the other firm

Consumers may also be divided in other ways, such as having one rival sell to commercial users and another to regular consumers, or by having firms agree to restrict themselves to different products or lines of commerce

- Bid rigging is also a form of mkt division, where conspirators agree that only one of them will really bid for each particular job

Palmer v. BRG (SCOTUS 1990)- BRG and HBJ were in competition in GA as providers of bar review courses- Enter agmt in 1980, HBJ giving BRG exlcusive license to mkt HBJ materials and use BarBri name- HBJ agrd not to compete w/ BRG in GA and BRG would not compete w/ HBJ outside of GA- Rec’d $100/student and 40% of revenues over $350, increased course price from $150 to $400+- Trial ct said not illegal b/c did not divide the rest of the mkt (outside of GA) b/w them- Issue: was this an agmt that constitutes per se illegal price fixing even though constrained to a geographic area?

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ANTITRUST- LONGWELL- SPRING 2012 5- Holding : Agmt is per se illegal b/c it was “formed w/ the purpose and w/ the effect of raising” the bar review course prices

(US v. Socony-Vacuum Oil Co.) and agmts agreeing not to compete w/ any allocation of territory stifle competition making them illegal (US v. Topco Associates) Purpose or Effect Test

US DOJ/PTC Guidelines for Collaborations Among Competitors (2000)- Competitor collaboration: set of one or more agmts, other than merger agmts, b/w or among competitors to engage in

economic activity resulting therefrom- Treat a competitor collaboration as a horizontal merger if:

o Participants are competitors in that relevant mkto Formation of the collaboration involves an efficiency-enhancing integration of economic activity in the relevant mkto The integration eliminates all competition among the participants in the relevant mkto Collaboration does not terminate w/in a sufficiently ltd period by its own specific & express terms

- Agmts Challenged as Per Se Illegalo If participants in an efficiency enhancing integration of economic activity enter into an agmt that is reasonably

related to the integration and reasonably necessary to achieve its procompetitive benefits, the Agencies analyze the agmt under the rule of reason, even if it is of a type that might otherwise be considered per se illegal

Was there facially a good reason for the collaboration? Ct may do some sort of balancing

o Agmt may be reasonably necessary w/out being essential Agencies consider whether practical, significantly less restrictive means were reasonably available when

the agmt was entered into, but do not search for a theoretically less restrictive alternative that was not practical given the business realities

Undertake a limited factual inquiry to evaluate claim- Identifying Procompetitive Benefits of the Collaboration

o If agencies conclude that the agmt has cx-d or is likely to cx anticompetitive harm, they consider whether the agmt is reasonably necessary to achieve “Cognizable Efficiencies” = efficiencies that do not arise from anticompetitive reductions in output or service, and cannot be achieved through practical, significantly less restrictive means

Cognizable efficiencies are assessed net of costs produced by the competitor collaboration or incurred in achieving those efficiencies

- Safety Zone for Competitor Collaborations in Generalo Absent extraordinary circumstances, the Agencies do not challenge a competitor collaboration when they account

for no more than 20% of the relevant mkto Safety zone does not apply to per se illegal agmts

E. Horizontal Agmts not to Deal w/ Particular Firms

These are known as “horizontal boycotts” and are considered to be per se illegal- Not to protect competitors, just competition

Differ from other per se offenses such as fixing prices or output or dividing mkts- 1. Boycotts are often aimed at harming particular competitors rather than competition in general

o But should it be condemned by antitrust law then?- 2. More likely to have plausible noneconomic justifications, such as punishing particular bad actors

Boycotts by Unrelated Rivals

Klors v. Broadway-Hale Stores, Inc (SCOTUS 1959)- Two retailers of electronic appliances developed a strong dislike for each other- Klor’s is the mom & pop, Broadway- Hale is a chain, right next to each other- Competing manufacturers retail through both K and BH- Manufacturers agrd at BH’s request to not to deal w/ Klor’s anymore- he had enough mkt power to do so- Issue: did this group boycott violate § 1?- Holding : Yes, deprives Klor’s of freedom to compete on open mkt and manufacturers’ freedom to sell, interfeeing w/ the

natural flow of interstate commerce. One-by-one elimination of small businesses tends to creep towards a monopolistic state

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ANTITRUST- LONGWELL- SPRING 2012 6o Group boycotts, or concerted refusals by traders to deal w/ other traders have long been held to be in the forbidden

category

Fashion Originators Guild of America v. FTC (SCOTUS 1941)- Members of Guild design, manufacture, sell, and/or distribute women’s clothing- After make a design and sell it, others copy designs at lower prices “style piracy”- Boycott retailers and decline to sell to those who sell garment copies of those designs belonging to Guild members- Retailers signed agmts agreeing to cooperate w/ boycott program for fear that the manufacturers would stop dealing w/ them- Guild has card system they distribute to manufacturers: red = non-cooperators; white = cooperators- Also audits members’ books and sends shoppers to retailers to see if violating agmts- FTC issued a cease & desist order - Issue: do Guild agmts restrict field of competition violating both Sherman & Clayton Acts?- Holding : Yes, it narrows the outlets to which manufacturers can sell and sources from which retailers can buy; subjects all

members and retailers to comply w/ an organized boycott; takes away freedom of action of individual members and has necessary tendency and as its purpose and effect the direct suppression of competition . Uphold cease & desist order

o Commerce is restrained by driving out of business the small dealers and worthy men whose lives have been spent therein, and who might be unable to readjust themselves to their altered surroundings

Exclusions or Expulsions from a Productive Collaborations of Rivals

US v. Terminal Railroad Association (SCOTUS 1912)- RR Cos. operating through St. Louis created an organization, Terminal RR Ass’n of St. Louis, to operate the bridges and

terminals in St. Louis for getting across Miss. R.- Toll bridges could be used by all on equal terms, but accessible only by the terminal companies that operate lines connecting

w/ RR terminal- Issue: was this jt venture a violation of the Sherman Act?- Holding : Yes, because the result of the geographical and topographical situation peculiar to the locality is that it is, as a

practical matter, impossible for any RR co. to pass through or even enter St. Louis, so as to be w/in reach of its industries or commerce, w/o using the facilities entirely controlled by the RR terminal co.

o A combination of two or more terminal companies into a single system does not violate the Sherman act when it is of the greatest public benefit

o But it is a violation in where inherent conditions are such as to prohibit any other reasonable means of entering the city, the combination of every such facility under the exclusive ownership and control of less than all of the companies under compulsion to use them violates both the first and second sections of the act, in that it constitutes a K or combination in restraint of commerce

- Remedy:o (1) Provide for admission of any existing or future RR to jt ownership and control of the combined terminal

properties, upon such just and reasonable terms as shall place such applying company upon a plan of equality in respect of benefits and burdens w/ the present proprietary cos.

o (2) such plan of reorganization must also provide definitely for the use of the terminal facilities by any other RR not electing to become a jt owner, upon such just and reasonable terms and regulations as will, in respect of use, character, and cost of service, place every such company upon as nearly an equally plan as may be wrt expenses and charges as that occupies by the proprietary cos.

Associated Press v. United States (SCOTUS 1945)- AP members are newspapers- AP members provided news from its area for AP to distribute to its other members- AP bylaws prohibited members from providing news to non-members & could only admit w/o payment any new member

that did not compete w/ any existing membero Free rider problem of competitors in same area just using another’s rpt

- Issue: do by-laws hinder interstate commerce, hindering competition?- Holding : net effect was to limit opportunity of any new paper to enter mkt where a current member resides, frustrating the

free enterprise system, so AP cannot discriminate against non-members although do not have to furnish news to non-members

o Sherman Act meant to prohibit independent businesses from becoming associates in a common plan bound to reduce their competitor’s opportunity

o While it is true in a general sense that one can dispose of his property as he pleases, he cannot go beyond that right and unduly hinder or obstruct the free and natural flow of commerce

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Productive collaborations not OK when denies open access to competitors in situation when open access is important. To violate § 1, need to be able to tie restraint being challenged to productive collaboration.

Situations in which Per Se Rule will not apply:

Northwest Wholesale Stationers v. Pacific Stationery (SCOTUS 1985)- NW Wholesale is a purchasing cooperative made of 100 office supply retailers- Members and non-members can both buy wholesale from NW Wholesale, but at end of year, members are distributed profits- Amended by-laws to prevent members from engaging in wholesale operations, except those members which already engaged

in whole sale (grandfather clause)- Pacific was a grandfathered member, but did not report when a controlling share of stock changed owners- Failure to notify NW Wholesale of ownership change violated by-laws, voted to expel Pacific w/o hearing or notice- Pacific maintains expulsion b/c continued to maintain wholesale business rather than failure to notify NW of change in

ownership- Issue: does expulsion fall into category of activity that is conclusively presumed to be anticompetitive? Is it a group boycott

or a concerted refusal to deal?- Holding : not a per se violation, apply rule of reason b/c group designed to increase economic efficiency and render mkts

more competitive and expulsion from a wholesale cooperative does not necessarily imply anticompetitive animus and thereby raise a probability of anticompetitive effect

o Decision to apply the per se rule turns on whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output. If it is there to promote economic efficiency and render mkts more competitive, rule of reason applies

o The burden is on Pacific to show an anticompetitive effect on remand

If the agmt has the effect of being a group boycott, but there is enough procompetitive justification, the rule of reason analysis will apply

A seeking application of per se rule must present a threshold case that the challenged activity falls into a category likely to have predominantly anticompetitive effects.

F. Social Welfare Agmts as Justification for Horizontal Agmts

In several cases, the defendants had engaged in horizontal conduct that restrained trade argued that certain social welfare benefits justified the conduct, at least enough to move out of per se territory to rule of reason analysis

National Society of Professional Engineers v. United States (SCOTUS 1978)- NSPE created canon of ethics that prevented competitive bidders from revealing the price of the job until the customer had

chosen an engineer based on background and quality- Argued that this was justified as it prevented a race to the bottom in prices which would affect the quality and safety of

engineering projects.- Issue: does this violate the Sherman Act, or is it in the public interest?- Holding : professional practice should be treated differently, meaning should most likely apply Rule of Reason analysis. But

still violated Sherman Act b/c it placed a ban on competitive bidding preventing customers from making price comparisonso Standard Oil Test: whether the challenged Ks or acts “were unreasonably restrictive of competitive

conditions.” Unreasonableness under that test could be based either: (1) on the nature or character of the Ks

OR (2) on surrounding circumstances giving rise to the inference or presumption that they were intended

to restrain trade and enhance priceso Under either branch, inquiry is confined to a consideration of impact on competitive considerationso Allowing an exception for all things affecting public safety would be “tantamount to a repeal of the statute”o

Two Categories of Analysis:(1) agmts whose nature and necessary effect are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality = illegal per se(2) agmts whose competitive effect can only be evaluated by analyzing the facts peculiar to the business, the history of the restraint, and the reasons why it was imposed = rule of reason analysis

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ANTITRUST- LONGWELL- SPRING 2012 8FTC v. Indiana Federation of Dentists (SCOTUS 1986)

- Dental insurers grouped together and decided not to send X-Rays to insurers b/c insurers were second guessing them to determine if treatment was necessary

- Issue: did this violate § 5?- Holding : not per se violation b/c boycott was not to discourage members from doing business w/ insurers, but no

procompetitive effect in making it more costly for patients and insurers who are the dentists’ customers, so still a violation under rule of reason

o A concerted and effective effort to w/hold or make more costly info desired by consumers for the purpose of determining whether a particular purchase is cost justified is likely enough to disrupt the proper functioning of the price-setting mechanism of the mkt that it may be condemned even absent proof that it resulted in higher prices than would occur in its absence

o The per se approach is limited to cases in which firms w/ mkt power boycott supplierso The effect of the rule was to deny the patients the ability to have the info sent to the insurer.

The customer may not use that particular provider They were interfering w/ services available to customers and it is not the place for dentists to decide what

information is relevant to patients

Lack of Mkt Power is no defense to a per se violation

FTC v. Superior Court Trial Lawyers Ass’n (SCOTUS 1990)- Group of Ct appt-d att’ys agreed not to take any more cases until the local authority raised the std hourly rate- Issue: even if it is agreed that this was a restraint of trade, was it unreasonable so as to violate Sherman Act?- Holding : unreasonable restraint of trade under per se analysis b/c this was not an organized union and allowing a loophole to

antitrust laws could prevent problems which could never be fixedo any horizontal agmt not to deal which restrains trade is a violation of the the antitrust laws, cannot just say the

antitrust laws do not applyo lack of mkt power is not an excuse, nor does it matter under antitrust law

Quick Look Analysis: The difficulties wrt per se and rule of reason in these cases has lead the court to develop a “quick look” analysis which requires a Ct to briefly examine the benefits of a horizontal agmt to determine if a full blown Rule of Reason analysis should apply

California Dental Association v. FTC (SCOTUS 1999)- 75% of dentists in a particular town formed an ass’n w/ code of ethics that ltd what dentists could say in advertisements re:

fees and quality of services- Issue: is this anticompetitive, do professional price and quality advertising fall w/in prima facie rule of anticompetitiveness?- Holding : not obvious whether the arrangement had anticompetitive effects and it is possible the agmt might have

procompetitive effects. When the anticompetitive effects are not obvious and the agmt is “inherently suspect”, the court should undergo a “quick look” analysis to weigh up the anticompetitive and procompetitive effects

o Question is not whether the universe of possible advertisements has been ltd but whether the limitation on ads obviously tends to limit the total delivery of dental services

o Often no bright line seperating per se from rule of reason analysis since considerable inquiry into mkt conditions may be required before the application of any so-called per condemnation is justified

o Generally no categorical line to be drawn b/w restraints that give rise to an intuitively obvious inference of anticompetitive effect and those that call for more detailed treatment – instead must do an inquiry of the case, looking to the circumstances, details, and logic of a restraint to see whether the experience of the mkt has been so clear that a confident conclusion about the principal tendency of a restriction will follow from a quick look in place of a more thorough one

- Breyer: break into 4 Qs-o (1) what is the specific restraint at issue?o (2) what are it’s likely anticompetitive effects?o (3) are there offsetting procompetitive justifications?o (4) do the parties have sufficient mkt power to make a difference?

After California Dental, Caselaw appears to adopt the following analysis:1) must allege an agmt that theoretically has anticompetitive potential – if it does, then the Ct goes to step 2

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ANTITRUST- LONGWELL- SPRING 2012 92) s must respond by articulating a theoretically plausible claim that there exists a procompetitive justification for

which the restraint was reasonably necessarya. If fails to do so, they lose summarily – per se (Trenton Potteries; Klors; Professional Engineers; Indiana Dentists;

Trial Lawyers)b. If ’s can articulate a theoretically plausible procompetitive justification, then the treatment varies depending on

other factors:i. If the restraint at issue is reasonably necessary to advance the procompetitive purposes of productive

business collaboration among those s (that is, the collaboration that actually has some business product), then the court moves to step 3 – the full scale rule of reason analysis (BMI; Northwest Stationers; Dagher)

ii. If the restraint is not alleged to be reasonably necessary to advance the procompetitive purposes of any productive business collaboration and is on price (or on a output level that would affect price), then the procompetitive justification is inadmissible, and the agmt is condemned under the per se rule (Maricopa County)

iii. For other restraints that are not reasonably necessary for any productive business collaboration, treatment likely varies depending on whether the s are professionals that traditionally engage in mkt self-regulation or are financially disinterested in the restraint

1. Professionals apparently get rule of reason review for such self- regulation even when they have a financial self-interest, at least when the regulation is directed at informational mkt defects, and thus can get to step 3 by articulating a procompetitive justification for which the restraint is reasonably necessary (California Dental)

2. Non professionals probably do not enjoy the same rule of reason review for self-regulation unrelated to productive business collaborations, at least not if they are financially interested, and instead the agmt is summarily condemned under the per se rule (Fashion Originators). But, they may well enjoy a rule of reason review and be able to go onto step 3 when they are financially disinterested in their restraint

3) If both sides have articulated theoretically plausible anti-and procompetitive effects in a way that triggers full-scale rule of reason review, then the has the burden of producing empirical evidence of the anticompetitive effects under rule of reason. (California Dental). Such anticompetitive effects can be shown by direct evidence or inferred from mkt power. (Indiana Dentists). If the does prove anticompetitive effects, then the court moves to step 4

4) Given evidence of actual anticompetitive effects, the has the burden of producing empirical evidence to support the claimed procompetitive effects and to show that less restrictive alternatives could not equally achieve those procompetitive effects. (California Dental). If the does, then the court moves to step 5

5) In the final stage, the tribunal weighs the anticompetitive and procompetitive evidence to determine which is greater. The has the burden of persuasion on whether the net effect is anticompetitive.

Less Restrictive Alternatives: The issue of whether a less restrictive alternative exists is often considered a separate step, but it can be applied at steps 2 and 4 because it bears on whether theoretically or empirically the restraint was reasonably necessary to advance the claimed procompetitive justification

- Step 2 should be used to consider theoretical arguments that the restraint is not reasonably necessary to advance the procompetitive justification because a less restrictive alternative exists that could equally advance that justification. But, often such arguments are controverted by theoretical arguments that the posited alternative was not feasible etc. Such a theoretical relationship between the justification and the restraint to survive step 2

- Step 4 should be used to resolve such theoretical conflict w/ empirical evidence about whether the posited alternatives are in fact, feasible, useful and less restrictive

G. Intellectual Property Law Justifications for Anticompetitive Restraint

There is an inherent tension between antitrust law and patent law because antitrust aims to protect competition and patents create monopolies that aim to eliminate competition in order to reward invention

- May be seen that the procompetitive effects of protecting invention outweigh need for competition

US v. GE (SCOTUS 1926)- GE licensed the right to make light bulbs under its patents to Westinghouse, limiting the prices and terms of conditions

Westinghouse could sell the product- Issue: May the patentee, GE, limit the license to sell the light bulbs?- Holding : Yes, provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the

patentee’s monopoly9

ANTITRUST- LONGWELL- SPRING 2012 10o Price at which a patented article sells is certainly a circumstance having a direct relation and is germane to the rights

of the patentee o Not price fixing b/c this is a patent, which is basically immune from antitrusto Ct does not want to pursue an antitrust law that would undercut the rights of patentees

However, the agmts may be held to be illegal when the move beyond what is protected by the patent monopoly

US v. New Wrinkle (SCOTUS 1952)- Two rival companies in the wrinkle free shirt industry pooled their resources to create a new company which held all patents. - Thought they could use GE rationale and set conditions on the use of the product- But price fixing schedules not to become operative until 12 of principal producers of wrinkle finish subscribed to the

minimum prices subscribed in the licensing agmt- More than 200 manufacturers had same price fixing K by time of this action- Issue: Was this price fixing in violation of antitrust law- Holding : where license agmts are entered into w/ knowledge on the part of licensor and licensees of the adherence of others,

w/ control over prices and methods of distribution through the agmts is sufficient to establish a prima facie case of conspiracy, violating Sherman Act

o Need to look at value of patent when evaluating whether price fixing is justifiedo Cross licensing as a means of price control was barred in US v. Line Material as way of patent monopoly

Examine mkt relevant to the patent technology. If in fact all the manufacturers are practicing the patent and have placed a significant value on the patent more likely court will apply GE rule

US DOJ/FTC Antitrust Guidelines for Licensing of IP (1995)- 3 General Principles:

o (1) for purpose of antitrust analysis, IP is comparable to any other form of propertyo (2) Agencies do not presume that IP creates mkt power in antitrust contexto (3) Agencies recognize that IP licensing allows firms to combine complementary factors of production and is

generally procompetitive- Take into acct characteristics of IP when evaluating in antitrust context- No presumption that a patent, copyright, or trade secret confers the power to exclude wrt the specific product, process, or

work in Q- Field of use, territorial, and other limitations on IP may serve procompetitive ends by allowing licensor to exploit its property

as efficiently and effectively as possible- Focus will be on the actual effects of a licensing arrangement rather than its terms- Not required to create competition in own technology, but antitrust concerns may arise when a licensing arrangement harms

competition among entities that would have been actual or likely potential competitor in a relevant mkt in absence of license- If a restraint in a licensing arrangement has no efficiency-enhancing integration of economic activity and if the type of

restraint is one that has been accorded per se treatment, the Agencies will challenge the restraint under the per se rule, otherwise apply rule of reason analysis

- Safety Zone: Absent extraordinary circumstances, the Agencies will not challenge a restraint in o An IP licensing arrangement if (1) the restraint is not facially anticompetitive and (2) the licensor and its licensees

collectively acct for no more than 20% of each relevant mkt significantly affected by the restrainto An IP licensing arrangement that may affect competition in a technology mkt if (1) the restraint is not facially

anticompetitive and (2) there are 4 or more independently controlled technologies in addition to the technologies controlled by the parties to the licensing arrangement that may be substitutable for the licensed technology at a comparable cost to the user

o An IP licensing arrangement that may affect competition in an innovation mkt if (1) the restraint is not facially anticompetitive and (2) 4 or more independently controlled entities in addition to the parties to the licensing arrangement possess the required specialized assets or characteristics and the incentive to engage in R&D that is a close substitute to the R&D activities of the parties to the licensing arrangement

- Cross licensing and pool arrangements are agmts of 2 or more owners of differ items of IP to license one another or 3d parties

o Benefits of integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation

- In general, exclusion from a pooling or cross-licensing agmt is unlikely to have anticompetitive effects unless (1) excluded firms cannot effectively compete in the relevant mkt for the good incorporating the licensed technologies and (2) the pool participants collectively possess mkt power in the relevant mkt. Then evaluate whether arrangement’s limitations on

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ANTITRUST- LONGWELL- SPRING 2012 11participation are reasonably related to the efficient development and exploitation of the pooled technologies and will assess the net effect of those limitations in relevant mkt

H. Buyer Cartels

A horizontal agmt may exist at a level below the manufacturer/wholesaler- For example, an agmt as to prices retailers will buy from manufacture will violate § 1

Mandeville Island Farms v. American Crystal Sugar (SCOTUS 1948)- Refiners of sugar beets agreed to purchase beet based on average profits resulting in all 3 refiners paying same price for beets- B/c the refiners are the only mkt for the growers of beets, they effectively control the quantity of beets grown, harvested &

mkted- Issue: Does this violate the Sherman Act, even if beets bought were not in interstate commerce but refiners sold their

products in interstate commerce?- Holding : by agmt acquired not only a monopoly of the raw material but also control of the quantity of sugar manufactured,

sold, and shipped in interstate commerceo Effected interstate commerce by depriving grower of the advantage of the individual efficiency of the refiner w/

which he deals and of the price that refiner receiveso Sugar is a very common commodity, so it is a very competitive mkt

If the agmt is: (1) Price fixing; (2) Output restriction; (3) Mkt division; and (4) Certain group boycotts, then the per se rule applies

If the agmt is “inherently suspect” then the s must provide some procompetitive justification under the “quick look analysis”

All other agmts where the purpose or effect is unclear, then the Rule of Reason applies where the court will balance the harms and benefits

Unilateral Conduct Deemed Illegal - Monopolization

Sherman Act § 2- Every person who shall monopolize, or attempt to monopolize, or combine or conspire w/ any other person or persons, to

monopolize any part of the trade or commerce among several states or w/ foreign nations, shall be deemed guilty of a felony

To prove a violation of section 2, a Plaintiff must prove:- Monopoly power in the relevant mkt (mkt power) OR certain kinds of exclusionary conduct- Willful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of a

superior product, business acumen or historic accident. (This is known as the purposeful act requirement)

Monopoly = power to control prices or exclude competition

A. Monopoly Power in a Relevant Mkt

To determine whether a has monopoly power, the π must first define the relevant mkt. - Mkt definition will often determine the outcome of the case- Cts tend to use alternative of inferring monopoly or mkt power from firm mkt shares, at least when coupled w/ evidence that

entry barriers to that mkt are relatively higho will argue for a narrow mkt definition, which will make appear to be the dominant player in the mkto will argue for an expansive mkt which will make the share smaller and lead the court to conclude that the is not a

monopolist- The relevant mkt is comprised of 2 parts: the relevant product mkt and the relevant geographic mkt

o Thus, to establish the first element the must show:1) The relevant product mkt2) Define the relevant geographic mkt3) Prove the has monopoly power over that mkt

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ANTITRUST- LONGWELL- SPRING 2012 12Relevant product mkt

The relevant product mkt is largely determined by consumer preferences and the extent to which physically dissimilar products can fulfill the same consumer need; i.e., what products are viewed as being reasonably interchangeable?

United States v. du Pont (SCOTUS 1956) (the Cellophane case) - Gov’t brought action alleging that DuPont was monopolizing the cellophane mkt w/ 75% under its control- DuPont argued that the relevant product mkt was flexible wrapping materials and that it only had 20% of the mkt- Cellophane costs a lot more than the other materials, which is why the gov’t claims that this is a separate mkt- Issue: What is the relevant mkt and how is the relevant product mkt defined?- Holding : agrd w/ DuPont and held the mkt to be flexible wrapping materials b/c all the products are used in the same way

and have the same qualities; it is control of price or competition that establishes the existence of monopoly power under § 2o Determination of the competitive mkt for commodities depends on how differ from on another are the offered

commodities in character or useo Stressed the cross-elasticity of demand, competition w/ other products, and the functional interchangeability of those

products Reasonable interchangeability for the purposes for which they are produced—price, use and

qualities considered – Test for deciding if in Same Mkto Cost of production is not relevant, profit margin is b/c a product facing very high profit margins may be a single

factor towards the determination of mkt power- Dissent: does think that cellophane and other flexible wrapping materials are differ enough to constitute differ mkts- Cellophane Fallacy: inferring a single product from substitution at current prices b/c really want to know what substitution

rates will be if prices were elevated from competitive levels

The general rule is that “commodities reasonably interchangeable by consumers for the same purposes make up the ‘part of the trade or commerce,’ monopolization of which may be illegal”

You want to include all appropriate substitutes - How do you get this formula?

o Cross elasticity of demand – “reasonably interchangeable” Not perfect substitutes Elastic mkt – consumers are sensitive of price and will shift based on price Inelastic mkt – Focus on quality of the product

- Factors relevant to this inquiry:o Physical attributes

Quality of the product Physical difference that conferred different functional advantages did not alone prove a separate product

mkto Price

Doesn’t necessarily reflect that the products are in the same mkt – costs may be different Price differ may indicate that buyers value items differently rather than monopoly power

o High Profit margins Could be relevant as it shows mkt power to be able to charge higher prices, but the ct here did not examine

the comparison against other productso Internal documents

DuPont documents showed it wasn’t concerned w/ competitors. This is relevant but not dispositive.

US DOJ/FTC Horizontal Merger Guidelines (2010)- Issue: whether the merger will increase prices from the levels that would prevail w/o the merger- Market Definition : demand substitution factors

o Mkt shares of different products in narrowly defined mkts are more likely to capture the relative significance of these products and more accurately reflect competition b/w close substitutes

o Product Mkt Definition: when a product sold by one merging firm (Product A) competes against one of more products sold by the other merging firm, the Agencies define a relevant product mkt around Product A to evaluate the importance of that competition

Hypothetical monopolist test: designed to evaluate whether groups of products in candidate mkts are sufficiently broad to constitute relevant antitrust mkts

Requires that a product mkt contain enough substitute products so that it could be subject to post-merger exercise of mkt power significantly exceeding that existing absent the merger

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ANTITRUST- LONGWELL- SPRING 2012 13 Hypothetical profit-maximizing firm not subject to price regulation would impose at least a small

but significant and non-transitory increase in price (SSNIP)o Most often use a 5% SSNIPo Incentive to raise prices depends both on the extent to which the consumers would likely

substitute away from the products in the candidate mkt in response to such a price increase and on the profit margins earned on those products

Profit margin = price – incremental costs on units Evidence to consider likely responses to higher prices:

How customers have shifted purchases in the past in response to relative changes in price or other terms and conditions

Info from buyers including surveys Conduct of industry participants:

o Sellers’ business decision or documents indicated sellers’ informed beliefs concerning how customers would substitute

o Industry participants’ behavior in tracking and responding to price changes by some or all rivals

o Objective information about product characteristic and costs and delays of switching products, especially switching to products outside the candidate mkt

o % of sales lost by one product in candidate mkt, when its price alone rises, that is recapture by other products in candidate mkt, w/ a higher recapture % making a price increase more profitable

o Evidence from other industry participantso Legal or regulatory requirementso Influence of downstream competition faced by customers in their output mkts

Also conduct critical loss analysis- asks whether imposing at least a SSNIP on one or more products in a candidate market would raise or lower profits

o Critical loss is defined as the # of lost unit sales that would leave profits unchangedo Predicted loss is defined as the # of unit sales that the hypothetical monopolist is

predicted to lose due to the price increaseo Price increase raises profits if predicted loss < critical loss

o Geographic Mkt Definition Defined by supplier locations

Evidence for considering customer reaction to price increases in a geographic mkt:o How customers have shift purchases in past b/w different locationso Cost and difficulty of transporting the product in relation to its priceo Whether suppliers need a presence near customers to provide service and supporto Evidence on whether sellers base business decisions on the prospect of customers

switching b/w geographic locations in response to changes in priceo Costs and delays of switching from suppliers in candidate geographic mkto Influence of downstream competition faced by customers in their output mkts

Defined by location of consumers- Market participants, market shares, and market concentration

o Mkt participants: all firms that currently earn revenues in the relevant mkto Mkt share and mkt concentration are based on historical evidenceo Mkt share is measured by its actual or projected revenues in the relevant mkt

Conduct Element – Purposeful Act Requirement – Prohibited Mkt Behavior

The “act” or “conduct” referred to is that by which the alleged monopolist obtained and/or maintains a monopolistic position

Predatory Pricing

A violation may be found for predatory pricing, often defined as pricing below average or marginal cost. However, it is often difficult to prove predatory conduct or distinguish it clearly from honestly industrial, competitive price cutting behavior. SCOTUS has made it clear that charges of predatory pricing must make economic sense (i.e. the must produce evidence that a predatory pricing scheme carries a reasonable chance of success at a reasonable cost to the ) for such charges to survive a ’s MSJ (see Matsushita v. Zenith).

Test for Predatory Pricing

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ANTITRUST- LONGWELL- SPRING 2012 14(1) discipline or eliminates a competitor(2) price is below an appropriate measure of costs(3) recoupment is likely

Brooke Group v. Brown & Williamson Tobacco Corp. (SCOTUS 1993)- Brooke Group (Liggett) decided to introduce a wholesale cigarette w/ volume rebates- B&W also introduced a discount brand w/ large volume rebates- BG argued that B&W violated the Robinson-Patman Act b/c they resulted in prices that were discriminatory and below costs- Issue: Does this price discrimination injure competition in violation of act?- Holding : B&W’s conduct did not violate act, did not show enough evidence of recoupment to justify finding a violation

o Predatory pricing is condemned when it poses a dangerous probability of actual monopolizationo Two pronged test for predatory pricing:

must prove below-cost pricing by ; and must have a dangerous probability of recouping the money it lost on below-cost pricing

o General rule: exclusionary effect of prices above a relevant measure of cost either reflects the lower cost structure of the alleged predator and so represents competition on the merits or is beyond the practical ability of a judicial tribune to control w/o courting intolerable risks of chilling legitimate price cutting

o Must demonstrate likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level that would be sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it

o In other words, if competition in the relevant mkt is such that one party’s predatory pricing, even if it harms a rival, can never put the D In a position to recover the profits lost by the scheme, then no violation of the laws has occurred. “The laws protect competition, not individual competitors”

o Increase in price is not itself anticompetitive

Refusals to Deal

No general requirement for a monopoly power to cooperate with its rivals but exclusions by a monopolist that hamper rival competition are exclusionary if they are not “competition on the merits” or “normal competition”

- Predatory if excluding on some basis other than superior efficiency

There are exceptions to this rule:

Essential Facilities

If a company possesses exclusive access to a facility that is “essential to competition and that it could feasibly share, the company may be required to provide access to that facility on a reasonable, nondiscriminatory basis – even to its competitors

- The 4 elements necessary to establish liability under the essential facilities are:1) Control of the essential facility by a monopolist;2) A competitor’s inability practically or reasonably to duplicate the essential facility;3) The denial of the use of the facility to a competitor; and4) The feasibility of providing the facility

Otter Tail Power Co v. US (SCOTUS 1973)- Otter Tail had exclusive franchises from small towns to sell electric power- As these franchises expired, Otter Tail attempted to prevent the towns from setting up their own power facilities by (1)

refusing to sell wholesale power across its lines and (2) refusing to “wheel” power to such systems (to transfer by direct transmission or displacement electric power from one utility to another)

- Each town where Otter Tail distributes can accommodate only one distribution system, making each town a natural monopoly mkt for the distribution and sale of electric power

- Issue: does Otter Tail’s refusal to sell violate § 2?- Holding : Otter Tail used its monopoly power to foreclose competition or gain a competitive advantage, or to destroy a

competitor, in violation of “attempt to monopolize” clause of § 2o It used this dominance to foreclose potential entrants into the retail area from obtaining electric power from outside

sources of supplyo Promotion of self-interest does not invoke the rule of reason

- Reasons to reject natural monopoly immunity:

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ANTITRUST- LONGWELL- SPRING 2012 15o Even if it is a natural monopoly, anticompetitive conduct might adversely affect which firm acquires or maintains

monopoly powero Whether mkt is a natural monopoly is often uncertain, and impeded competition helps provide a mkt test that the

mkt really is a natural monopolyo Changing technologies, mkt conditions, or firm efficiencies may alter whether the mkt is a natural monopoly and/or

which firm would be the best natural monopolist

Canceling existing deals

Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (SCOTUS 1985)- Aspen Skiing Co. owned 3 of 4 mountains and attempted to force its sole rival, π Highlands, to accept deep concessions in

the distribution of proceeds of “all-Aspen tickets” or it would not participate in the program- Highlands received 17.5% originally, then 13.2%- Tickets entitled their bearers to use each of the 4 major mountain ski facilities in Aspen- Revenues from their sales had been distributed to the competitors on the basis of surveys designed to determine the number

of skiers who used each facility. - demanded that its competitor accept a fixed share of revenues from sales of the all-Aspen tickets, which share was

significantly below the competitor’s historical average based on usage- refused to increase ’s revenue share, stopped 4 mountain program and refused to accept π’s vouchers from customers for

skiing at their 3 mountains- Issue: Was the challenged conduct exclusionary or anticompetitive?- Holding : No general duty to engage in a joint mkting program w/ a competitor but this was an abuse of the monopoly power

o Right to not cooperate is not unqualifiedo Here, monopolist didn’t just reject offer to participate, but made an important change in a pattern of distribution that

had originated and persisted in the competitive mkt changed the character of the mkt- Aspen Skiing has since been held to be “near or at the boundary of section 2 liability”- What showed it was bent on anticompetitiveness?

o Unilateral termination of a voluntary and presumably profitable course of dealingo Unwillingness to renew ticket even if compensated at retail price

Verizon Communications v. the Law Offices of Curtis Trinko (SCOTUS 2004)- Trinko sued Verizon for problems fulfilling network orders on a discriminatory basis by not allowing rival exchanges access

to its network technology, discouraging customers to remain customers of those competitive companies- Verizon and AT&T have deal under Telecommunications Act specifying how access to operations support systems will be

met to ensure qualityo Duty to offer unbundled network access on “just, reasonable, and nondiscriminatory terms”o This act does not supersede any of the antitrust laws

- Issue: does Telecommunications Act of 1996 allow failure to share its network w/ competitors to constitute a violation of § 2, beyond what antitrust laws say?

- Holding : the presence of a regulatory scheme, such as the 1996 Telecommunications Act enforcing sharing, may allow a refusal to deal, but insufficient assistance in providing service of wholesale leasing to rivals is not a recognized antitrust claim

o Verizon did not voluntarily make the cooperative agmt and then pull the plug as in Aspen Skiingo To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is

accompanied by an element of anticompetitive conduct

Price Squeezing

A price squeeze can exist when a firm sells the inputs (in what is sometimes called an upstream mkt) and also sells the finished product (in the so-called downstream mkt) that uses that input and the firm prices the inputs high but the finished product low to defeat competitors who can no longer make a profit

Pacific Bell Telephone Co. v. Linkline Communications Inc. (SCOTUS 2009)- AT&T sold DSL in California and owns most of the infrastructure and facilities to provide it- Linkline complained about the prices it was charging for wholesale DSL, claiming AT&T was putting a “price squeeze” on

its wholesale customers/retail competitors by charging relatively high prices at wholesale and relatively low prices at retail, making it impossible for anyone other than AT&T to sell DSL

- AT&T is obligated

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ANTITRUST- LONGWELL- SPRING 2012 16- Issue: can a price squeezing claim be brought under § 2?- Holding : No, a firm is allowed to set the price of its inputs and the price of its finished product so long as it is not engaging in

predatory pricing schemeo General rule: business are free to choose the parties with whom they deal as well as the prices, terms, and conditions

of that dealing – only ltd circumstances when a unilateral refusal to deal amounts to antitrust liability A firm should be able to raise input prices and lower retail prices w/o being found to violate antitrust law

o A firm w/ mkt power in the upstream mkt can squeeze its downstream competitors by raising the wholesale price of inputs while cutting its own retail prices. This will raise competitors’ costs (because they will have to pay more for their inputs) and lower their revenues (because they will have to match the dominant firm’s low retail price)

Predatory Bidding

Predatory bidding describes a situation in which an alleged monopolist outbids its potential competitors for a necessary input by overpaying in order to deny the competitors access to that input

- While such overpayment may cause the monopolist short-term losses, it may result in long-term profits if the firm can exercise “monopsony” power (mkt power on the buyer side) after it becomes the only buyer left in the mkt. The monopolist may also be able to charged monopoly prices after rivals are forced out

Weyerhaeuser Co v. Ross-Simmons Hardwood Lumber (SCOTUS 2007)- R-S sued W alleging W drove it out of business by bidding up the price of sawlogs to a level that prevented R-S from being

profitable- Price of alder sawlogs increased while prices for hardwood lumber fell- Predatory bidding: exercise of mkt power on the buy or input side where a purchaser of inputs bids up the mkt price to such

high levels that rival buyers cannot surviveo Monopsony power is mkt power on the buy side of the mkt

- Issue: Was the bidding up of prices anticompetitive?- Holding : Evidence does not satisfy Brooke Group Test

o Apply Brooke Group predatory pricing testing to predatory bidding: (1) π must show that alleged predatory bidding led to below cost pricing of the predator’s outputs (2) A predatory-bidding π also must prove that the has a dangerous probability of recouping losses

o Predatory bidding may have little to no effect on consumers b/c it effects input prices and not direct prices to consumers

B. Attempts to Monopolize

§ 2 outlaws “attempts to monopolize”

Specific Intent Required

An attempt to monopolize requires a specific intent to exclude competitors and gain monopoly power.- Specific Intent may be inferred from conduct

Anticompetitive Conduct Required

Because of the intent to monopolize, the must be seeking monopoly power through means other than “business acumen”; i.e. the must be using “unfair means”

Lorain Journal v. United States (SCOTUS 1951)- Lorain Journal had a monopoly in the area over the sale of news and advertising- A radio state opened up, Journal refused to accept local advertisements from companies who advertised on the radio- Issue: was it anticompetitive for Journal to refuse to advertise those who also used radio station?- Holding : inducement of others to boycott one’s competitors was anticompetitive

Dangerous Probability of Success Required

An attempt to monopolize is the “employment of methods, means and practices which would, if successful, accomplish monopolization, and which, though falling short, nevertheless approaches so close as to create a dangerous probability of it.”

US v. American Airlines (5th Cir 1984)16

ANTITRUST- LONGWELL- SPRING 2012 17- US had a tape of the AA president having a conversation w/ the Braniff president about raising prices- Braniff & AA together enjoy mkt share of 90% at DFW, competing fiercely at this location- Putnam (AA) turned the tape over to authorities voluntarily about Braniff wanting to price fix

o Putnam never intended to agree- District Ct said Gov’t failed to state a claim b/c Putnam never intended to agree- Issue: was this an attempted monopolization?- Holding : this an illegal attempt b/c if Putnam had accepted the offer, there would have been mkt power & dangerous

probability of success- to establish illegal monopolization, two elements must be shown:o (1) Possession of monopoly power in relevant mkt;o (2) Willful acquisition or maintenance of that power, distinguished from growth or development as a consequence of

business factorso Discouraging naked proposals for formations of cartelso Agmt is not an absolute prerequisite for the offense of attempted jt monopolization

Spectrum Sports v. McQuillan (SCOTUS 1993)- Shock absorbing polymer used in medical, athletic & equestrian products had 5 regional distributors – one was McQuillan,

another Spectrum Sports- Manufacturer terminated M when it refused to give up its athletic shoe distributorship and keep its equestrian, appointing SS

as its athletic shoe distributor and another company its equestrian product distributor- Issue: was this an attempted monopolization, if the manufacturer cut off relationship, and not SS, the direct competitor?- Holding : purpose of Sherman Act is not to protect businesses from the working of the mkt but to protect from the failure of

the mkt – no attempt to monopolize w/o dangerous probability of achieving monopoly powero Where acts are not sufficient in themselves to produce a result which the law seeks to prevent but require further acs

in addition ot the mere forces of nature to bring that result to pass, an intent to bring it to pass is necessary in order to produce a dangerous probability that it will happen

o Elements: Anticompetitive conduct Specific intent to monopolize Dangerous probability of achieving monopoly power

Vertical Agmts that Restrict Dealing w/ Rivals

A. Definition of “Vertical Restraints”

There are frequently various stages in the production of a particular item- For example, before a refrigerator is sold to a consumer, several steps must occur: coke and iron ore must be mined and

refined into steel; the steel ingots must be processed into useable sheets of steel; the steel, together w/ other materials, must be made into a refrigerator; the refrigerator must then be distributed through wholesalers and jobbers until it reaches the retailer; and the retailer must then sell the product to the consumer

This process involves various levels of production and distribution, and the relationships between the various levels can be described as “vertical” dealings

Rule of reason or per se?- Certain tying arrangements are called per se illegal, though the label is misleading- Most vertical restraints are afforded rule of reason scrutiny

There is another distinction in the world of vertical agmts- Inter brand restraints- Intra brand restraints

o Inter brand – competition among competing products (Chevy v. Toyota)o Intra brand – completion among retailers in the sale of the same product (Chevy retailer no. 1 v. Chevy retailer no.

2)

B. Exclusive Dealing

A buyer may agree to handle only the seller’s products and not those of a competitor

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ANTITRUST- LONGWELL- SPRING 2012 18- Often, take the form of a buyer’s agmt to purchase “requirements” exclusively from the seller- To a certain extent, the effect is similar to tying arrangements- Exclusive dealing may be treated under either § 1 of the Sherman Act OR § 3 of the Clayton Act (if it involves sale of goods)- Concerned that such agmts might foreclose enough of the mkt to rival competition to impair competition- Where network effects exist –meaning one seller’s product is more valuable to buyers the more that other buyers have

purchased the same good from that seller—foreclosure can impair rival efficiency by denying rivals access to the # of buyers they need to make their products more valuable to all buyers

- May encourage relation-specific investment, increasing efficiency only as to one buyer and seller

Clayton Act § 3 - Provides it shall be unlawful for any person … to lease or make a sale … of goods …, whether patented or unpatented, … or

fix a price charged therefore, or discount from, or rebate upon, such price, on the condition, agmt, or understanding that the lessee or purchaser thereof shall not use or deal in the goods … of a competitor or competitors of the lessor or seller, where the effect … may be to substantially lessen competition or tend to create a monopoly in any line of commerce

- Two elements:o (1) sales or discounts of goods that conditioned on the purchaser not dealing w/ rivalso (2) proof that their effect may be to substantially lessen competition

United States v. Griffith (SCOTUS 1948)- Theatres operated in 85 towns – 53 of these were closed towns (towns in which there were no competing theatres)- 5 years earlier, only had theatres in 37 towns- Agmts w/ distributors to license all 1st runs of films to them fixing a minimum price to the chain as a whole- Issue: was there a violation of § 3 if he was the only theatre in town and thus had no competition?- Holding : a man w/ monopoly of theatres in any one town commands the entrance for all firms into that areas and if he uses

that strategic position to acquire exclusive privileges in a city where has had competitors, he is employing his monopoly power as a trade weapon against his competitors – he was here by linked his closed town theatres w/ his competitive ones

o Not always necessary to find a specific intent to restrain trade or to build a monopoly in order to find that the anti-trust laws have been violated, but sufficient that a restraint of trade resuls as the consequence of a ’s conduct or business arrangements

Standard Fashion v. Magrane-Houston (SCOTUS 1922)- NY manufacturer and distributor of clothing patterns agreed to sell stds patterns at a discount of 50% from retail prices to

MH & MH agreed not see on its premises any other patterns- MH violated 2 year agmt by switching to a rival company’s patterns- Issue: Is the K unenforceable as a restraint on trade?- Holding : amounted to giving the manufacturer a monopoly of its patterns in small communities

Standard Oil & Standard Stations v. United States (SCOTUS 1949)- Standard Oil sold gasoline through its own stations and independent stations- Standard Oil had exclusive supply contracts w/ 16% of the retail gasoline in the Western Mkt- Issue: whether the showing that the effect of the agmts may be to substantially lessen competition may be met simply by

proof that a substantial portion of commerce is affected or must demonstrate that competitive activity has actually diminished?

- Holding : no violation of § 3 b/c it was intended to prevent agmts that would create an actual tendency to monopolize, not those that create a remote lessening of competition

o Lessening of competition must be substantialo Quantitative Substantiality Test:

The requisite adverse effect on competition is presumed when a sellers exclusive dealing foreclose a SUBSTANTIAL SHARE OF THE MKT (e.g., a substantial number of outlets for his product in the case of a manufacturer selling to retailers).

Ks affecting $58M of business, even though had only 6.7% of the mkt was a potential clog on the mkt which represents the removal of a substantial amount of competitive activity

o Requirements K may have an economic advantage to buyers as well as sellers, and thus indirectly help consumers Nothing that says a dealer effectively forecloses an opportunity to buy from competing suppliers by having

a requirements K w/ Standard Oil Competition has flourished despite use of the Ks Duration of the Ks is not excessive and Standard does not by itself dominate the mkt

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ANTITRUST- LONGWELL- SPRING 2012 19 For buyers: assures supply; for sellers; may make possible the substantial reduction of selling expenses,

given protection against price, and offer the possibility of a predictable mkt

To show a violation of § 3 of the Clayton Act, there must be proof that competition has been foreclosed in a substantial share of the line of commerce affected

How do you measure “substantial foreclosure”? – Cumulative Foreclosure

FTC v. Motion Picture Advertising Service (SCOTUS 1953)- MPAS produced and sold advertising in theatres and contracted w/ theatre owners for the display of the advertising, running

for terms of up to 5 years, the majority being 1 – 2 yrs- It had exclusive Ks w/ almost 40% of the theatres in the area in which it operated, meaning would only display

advertisements from MPAS- FTC filed complaint alleging that the exclusive Ks limited the outlets for competitors, restricting the Ks to 1 yr terms- Issue: Were the exclusive Ks an unreasonable restraint on trade in violation of § 5 of the FTC Act?- Holding : Substantial evidence supporting unreasonable restraint on competition b/c # of outlets is ltd and MPAS and its 3

main competitors have foreclosed on 75% of all available outlets- Dissent: More than half of Ks only run for 1 year now, boiling down to only 6% of the total theaters in the country w/ Ks for

more than 1 yr; no concerted act or conspiracy to foreclose on the mkt

In an exclusive dealing case under Sherman Act § 1 and FTC Act § 5, the foreclosure share should be measured by aggregating the foreclosure produced by the leading sellers, i.e, adding the total % of the mkt of the main competitors

- Foreclosure can anticompetitively affect the ID of firms in the mkt as well as the # of them- Even if not simply aggregated, the anticompetitive effect of one firm’s exclusionary agmts can depend on whether other

firms have similar exclusionary agmtsQualitative Substantiality Test

Later, the Court suggested a second test that focuses on the size of the mkt share foreclosed by the K

Tampa Electric v. Nashville Coal (SCOTUS 1961)- Tampa Electric owned 2 plants and K-d w/ Nashville Coal to provide coal for a period of 20 years- Nashville Coal wanted out of K, said illegal under § 1- Issue: was the exclusive deal for Nashville to supply Tampa w/ coal illegal under § 1?- Holding : Even though a K is found to be an exclusive-dealing K, it does not violate § 1 unless it is probable that

performance of the K will foreclose competition in a substantial share of the line of commerce affectedo Must consider the following:

The line of commerce (i.e. the type of goods) The area of effective competition in the known area of commerce The competition foreclosed by the K must be found to constitute a substantial share of the relevant

mkto To determine the substantiality in a given case, it is necessary to weigh probable effect of the K on the relevant area

of effective competition, taking into account the relevant strength of the parties, the proportionate volume of commerce involved in relation to the total volume of commerce in the relevant mkt area, and the probable immediate and future effects which pre-emption of that share of the mkt might have on effective competition therein

- Here, the K is an exclusive dealing arrangement and the line of commerce is coalo The relevant mkt is neither peninsular FL or Florida, or Georgia. Bulk of the overwhelming tonnage mkted from the

same producing area as serves Tampa is sold in seven stateso The tonnage required for the power station amounted to .77% of the 7 state mkt – quite insubstantial (even though

this amounted to a $120M K) o No foreclosure—but a K that is to the economic advantage of buyers and sellers

Exclusive dealing arrangements are evaluated today under the rule of reasonFactors to consider include:

- Duration of the exclusive arrangement- Whether the arrangement is terminable on short notice- Percentage of the mkt foreclosed- Alternative sources or distribution channels

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ANTITRUST- LONGWELL- SPRING 2012 20- Anticompetitive effects- Presence of legitimate business justifications for the exclusive dealing arrangement

There is no fixed number as to the substantial effect, but exclusive contracts that make it difficult for a rival to gain wider distribution will be suspect and require strong procompetitive justifications.

C. Tying Arrangements

Introduction

Under a tying arrangement, the seller refuses to sell product A (the “tying” product) to a customer unless the customer also agrees to buy product B (the “tied” product) from the seller

- The seller is thus said to “tie” or condition the sale of the desired “tying” product to the purchase of the “tied” producto Buyers are thus “coerced” and suppliers “foreclosed”

Types of tying arrangements- The tying product and the tied product may be related in a variety of ways:

o They may be products that are used in fixed proportions (e.g. nuts and bolts);o The tied product may be designed to be used w/ the tying product (e.g. software w/ a personal computer);o Or the tied products may be usable together or separately (e.g., seed and fertilizer).

- A tying arrangement may be contractual, in which a seller says that it will not sell the tying product unless the buyer will also purchase the separate tied product. Or the tying arrangement may be technological, in which the seller physically integrates the tying product and tied product, so that anyone purchasing the tying product necessarily purchases the tied product simultaneously.

5 Key Assumptions of a Single Monopoly Profit Model (Critique to anti-tying)1. Buyers do not use varying amounts of the tied product w/ the tying products;2. Buyer demand for the two products has a strong positive correlation;3. Buyers do not use varying amounts of the tying product;4. The competitiveness of the tied mkt is fixed; and5. The competitiveness of the tying mkt is fixed.

Relaxing anyone of these assumptions results in an anticompetitive result.1. Intraproduct price discrimination - strong positive correlation b/w tying and tied product

a. Example: printer and paper, decrease printer price by requiring buyers to only buy paper from printer seller2. Interproduct price discrimination – no strong positive correlation

a. Tying profitably permits price discrimination across buyers of both products3. Extracting individual consumer surplus

a. Differ b/w each buyer’s valuation of those inframarginal units and the monopoly price will be the consumer surplus enjoyed by each buyer at the monopoly price

b. If spending or valuation is significantly higher for the tying product, then tying will reduce ex post total welfare of the consumer

4. Increased tied mkt powera. If the tied mkt is not perfectly competitive, tying that forecloses a substantial share of the tied mkt can reduce rival

competitiveness by impairing rival efficiency, entry, existence, aggression, or expandabilityb. Can decrease aggressiveness by either: (1) each firm sets output in response to the output choices of others,

encouraging reduced output and higher prices (Cournot competition) or (2) mkt is concentrated but undifferentiated inducing rival to charge higher tied product prices (Bertrand competition)

c. Tying that impairs rival competitiveness w/o increasing the degree of tying mkt power cannot increase monopoly profits if (1) the products are used or bundles in a fixed ratio AND (2) the tied product has no utility w/o the tying product

5. Increased tying mkt power – by (1) foreclosing enough of the tied mkt to deter or delay later entry into tying mkt, (2) raising costs of a partial substitute that constrains tying mkt power, or (3) transferring mkt power from waning technology to next-generation technology

Combination of (1) fixed ratio, (2) no separate utility, and (3) no substantial tied foreclosure share precludes all five!

Requirements for a Tying Arrangement

There are five basic requisites for an illegal tie:1) There must be separate tying and tied products;

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ANTITRUST- LONGWELL- SPRING 2012 21a. Not mere components of a single product

2) The sale must be conditioned on the arrangement of the purchaser taking the seller’s tied producta. Coercive pricing or bundle “discounts”

3) Must be non-trivial dollar amount of sales in tied product4) The seller must have sufficient mkt power in tying product5) Must prove tying was least restrictive means of producing offsetting efficiencies that were passed on to consumers to an

extent large enough to eliminate any harm to consumer welfare can then dispute above 4 elements Reasons Tying Arrangements are Used

To extend Mkt Power- A firm may be able to use its monopoly power in the mkt for one product to create monopoly power or monopoly profits

in its sales of the two products together- For instance, a firm selling a unique patented product can force buyers to purchase a related product from that firm

simply by tying sale of the patented product to purchase of the related product - Theoretically, the monopolist may be able to reduce or eliminate competition for the tied product and to create a

monopoly for itself in the mkt for that product

To protect products, image, or goodwill- A firm may try to protect its product, image or business goodwill b a tying arrangement- For example, a firm may fear that its products will be serviced poorly by untrained or unauthorized operators, and to

eliminate that risk it may refuse to distribute replacement parts to independent service providers - In the franchise context, a franchisor may require its franchises to purchase tied products in order to ensure all franchises

deliver a consistent product

To engage in price discrimination or to evade price controls- This may allow a firm to engage in price discrimination- For example, suppose a company has a patent on a high speed printer, but the print cartridges are not patented and

available from a number of suppliers o If the company leases the printer to all of its users at the same rental rate but requires these users to purchase

print cartridges from the company, it can effectively charge heavier users more for the lease of the printer, even though all leases are written at the same rental rate

- Regulated forms may use ties to evade price regulation. I.e. a cable TV service rates are set by the FCC, but the firm may “lease” you the converter box

To take advantage of efficiencies and economies of scale- Most products are, in fact, combinations of several separate products and services, any one of which might be viewed as

capable of being sold separately- But does it make sense to say that car makers “tie” sales of their engines to sales of the rest of their cars? Do customers

want to buy those “products” separately?o The answer to these questions is clearly no, pointing up a critical tension between the law against tie-ins and

economic reality. For a variety of reasons, it is probably more efficient and cost-effective to have the car’s engine made and installed by the manufacturer, and there are infinitely more examples of efficiencies and economies of scale created by the assembly and sale of related products as a single, unified whole

o Although courts do not generally acknowledge efficiencies or economies of scale as justifications for tie-ins, they do address the issue implicitly when they determine (as they must) whether the tying item and the tied item are separate products. The car/engine example seems an easy case, but other cases are not so clear

- (1) bundling can lower costs or increase value- (2) bundling can improve quality- (3) metering to shift financing or risk-bearing costs to the Firm that can minimize them

Tying Called Illegal Per Se

Although limited exceptions are recognized (see the “new industry” and “quality control” defenses), the oft-repeated rule is that tying arrangements are illegal per se, when the prerequisites of separate products, coercion or force, mkt power, and a more than de minimis amount of commerce are established

- Note, while courts use the term “illegal per se” to describe tying arrangements, the per se rule in this context is not the same as it is in the context of horizontal price fixing agmts

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ANTITRUST- LONGWELL- SPRING 2012 22- In tying cases, the Courts require a detailed inquiry into mkt definition and the existence of mkt power, something they

do not do in other “per se” cases

Jefferson Parish Hospital v. Hyde (1984)- Anesthesiologist sues Hospital for not being hired b/c K w/ Roux & Assocs. to perform all anesthesiologist services- Operating rooms (tying product) with chosen anesthesia service (tied product)- Anesthesia billed separately from hospital services- Issue: did this refusal to sell these two products separately restrain competition?- Holding : two distinguishable services in a single transaction, but 70% of patients in the area go to other hospitals, so

cannot infer mkt power AND consumers lack price consciousness, meaning their choices would not be affected if there were now 5 anesthesiologists rather than 4

o Condemn tying arrangements when the seller has mkt power to force a purchaser to do something that he would not do in a competitive mkt

o A seller’s decision to offer packages can merely be an attempt to compete effectively, which is conduct consistent w/ the Sherman Act

o Cases conclude that the essential characteristic of an illegal arrangement is the use of the mkt power over the tying product to force the buyer into the purchase of a tied product.

- Brennan, concurring: this is not per se illegal, which is what tying arrangements are subject to- O’Connor, concurring: feels it appropriate to use Rule of Reason

Per Se condemnation is only appropriate if the existence of forcing is probable. Thus, application of the per se rule focuses on the probability of anticompetitive consequences

- As a threshold matter there must be a substantial potential for impact on competition in order to justify per se condemnation

Eastman Kodak v. Image Technical Servs. (SCOTUS 1992)- Kodak had policy of selling replacement parts for copying machines only to buyers of Kodak equipment who use Kodak

service to buy/repair machine- ISO service for repairs preferred by customers sued for § 1 violation of Sherman Act- Issue: did Kodak illegally tie the buying of parts and service of the machine?- Holding : some consumers would prefer to buy just parts or just service, so policy of tying does not almost always

enhance competition- Scalia, dissenting: says ct has only use per se rule when the seller has a special ability to force a purchaser to do

something— does not understand why a seller’s inherent control over the unique parts for its own brand amounts to mkt power of a character sufficient to permit invocation of the per se rule against tying

o Would evaluate tying arrangement between after mkt products – parts and service—under rule of reason

Illinois Tool Works v. Independent Ink (SCOTUS 2006)- Issue: should the presumption established in Jefferson Parish that mkt power exists in a patented product should survive

despite demise in patent law of the concept?- Holding : reversed the International Salt decision re: patent misuse doctrine that created a presumption that when the tying

product was patented or copyright, mkt power could be presumed and a patentee could enjoin an infringer – tying arrangements involving patented products should be evaluated under Jefferson Parish

o Patent does not necessarily confer mkt powero In all cases involving a tying arrangement, π must prove mkt power in the tying product

US v. Microsoft (SCOTUS 2001)- Microsoft bundled IE with Windows Operating System- Disallowed users from de-selecting IE as default browser- Disallowed companies loading the Windows operating system on their products to load other browsers through exclusive

dealing arrangements- Holding : per se rule against tying arrangements should not apply to platform software products e.g., computer operating

systems, because it may chill efficient innovation. Tying arrangements based on platform software should be evaluated under the rule of reason

Providing that tying and tied products are separate

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ANTITRUST- LONGWELL- SPRING 2012 23To determine whether 2 products are in fact separate for tying purposes, courts do not focus “on the functional relation between them, but rather on the character of demand for the 2 items”

- There must be sufficient demand for the 2 products for firms to provide them separatelyAlthough this is not usually a problem there are cases where a may credibly argue the product is a single one

- Note that in the context of technological integration, it is sometimes difficult to determine whether there are separate products.

o If the integration of 2 formerly separate products creates a more efficient new product, the integration may not constitute tying (US v. MS)

Conditioning or Coercion

Courts have split on what type of proof is required to establish that the conditioned sale of the tying product on the buyer’s agreeing to purchase the tied product as well

- Some courts hold that a written K containing the condition is sufficient i.e. United ShoeThe conditioning or coercion element is probably satisfied if the bundled products are priced so that purchase of the products individually is not economically viable

Mkt Power

Early casesProof of dominance in the tying product mkt was what was necessary in early cases

- Examples include the patented salt machines to which were tied the purchase of salt (International Salt) - However, SCOTUS has since reversed its International Salt decision in Illinois Tool Works

o Now, an antitrust must specifically prove that the possesses mkt power in the tying product mkt, even if the ’s product is protected by IP rights

Modern TrendSCOTUS has subtly shifted the mkt power inquiry

- The court emphasizes the power of ’s to force consumers to make choices they would not make in a competitive environment

- This test stresses the ability of the s to influence decision making in the mkt for the tied product. Jefferson Parish Hospital (mkt power not sufficient because 70% of people in mkt go to other hospitals)

Proving more than an insubstantial amount of commerce involvedThe must show that more than an insubstantial amount of commerce is involved. This can be done by showing more than a de minimis volume is involved

- For example, foreclosure of $500k in salt was sufficient commerce in International Salt

D. Loyalty and Bundled Discounts

Loyalty and bundled discount cases are controversial- They interfere w/ rivals’ ability to access the mkt

They are akin to exclusive dealing- You get discount if you take a certain number of products from me over a period of time

o These aren’t strictly volume discounts o The key is that they are not mandatory

LePages Inc. v. 3M (3d Cir 2003)- 3M manufactures Scotch Tape, held dominate share above 90% until 1990s- LePage sold a second brand of tape in the 1980s, upon which superstores could place their name—private label tape- LePage argued that 3Ms introduced private label brand tape in competition w/ LePage and offered bundled rebates to people

purchasing 3M product lines- 3M never priced below cost, but the rebates were of a substantial amount- Issue: Did 3M violate § 2 of the Sherman Act by offering a rebate program offering discounts to certain customers

conditioned on purchases spanning 3M’s product lines?- Holding : violated Sherman Act – the bundled rebates reflected an exploitation of the seller’s monopoly power … the

evidence in this case shows that scotch-brand tape is indispensible to any retailer in the transparent tape mkt b/c when offered by a monopolist they may foreclose portions of the mkt to a potential competitor

o A will be found to violate § 2 of the Sherman Act if it engages in exclusionary or predatory conduct w/out a valid business justification

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ANTITRUST- LONGWELL- SPRING 2012 24o The anticompetitive feature of package discounting is the strong incentive it gives buyers to take increasing amounts

or even all of a product in order to take advantage of a discount aggregated across multiple productso Depending on the number of products that are aggregated and the customer’s relative purchases of each, even an

equally efficient rival may find it impossible to compensate for lost discounts on products that it does not produceo Best to analyze the joint competitive effect of the bundled packaging AND the exclusive dealing arrangementso The bundled discount here was anticompetitive because it effectively foreclosed the mkt for LePage

Agmts and Conduct that Arguably Distorts Downstream Competition in Distributing a Supplier’s Products

The concern w/ vertical distributional agmts is generally that price or nonprice competition among the downstream dealers might be lessened

The concern w/ vertical conduct like secondary-line price discrimination is that supplying some input at different prices to different downstream firms might provide the firm getting the input at the lower price w/ an unfair competitive advantage in the downstream mkt

Problems w/ vertical distribution (nonprice) agmts:1) Vertical agmts that fix resale prices might facilitate oligopolistic coordination among upstream manufacturers because retail

prices are easier for each other to monitor than wholesale prices2) A vertical restraint may reflect the mkt power of a downstream cartel or firm, and is thus imposed on the upstream firms

against their interests3) Vertical restraints may be designed to get dealers to push the manufacturer’s brand irrespective of its merits4) Might be designed to facilitate downstream price discrimination against consumers. Ex: a supplier might sell at a higher

wholesale price in geographic mkts where consumers are richer than in poorer mktsThus, a ban on vertical restraints can thus reduce price discrimination

A. Intraband Distributional Restraints on Resale

A vertical minimum price-fixing agmt is an agmt between a manufacturer and dealer that fixes the minimum prices at which the dealer can resell the manufacturer’s brand.

- A vertical nonprice agmt restrains distribution of a manufacturer’s brand in some way other than price, usually by limiting where or to whom the dealer can resell that brand

Vertical Nonprice Restraints on Distribution

The most important type of vertical nonprice agmts are those that limit to whom a dealer can resell the manufacturer’s product - Sometimes these take the form of vertical territorial restraints, limiting dealers to a particular geographic area - Such contracts are subject to the Rule of Reason analysis

Continental T.V. v. GTE Sylvania (SCOTUS 1977)- Sylvania started to phase out its wholesale distributors and began to sell its TVs directly to a smaller more select group of

franchised retailers in effort to decrease # of competing Sylvania retailers in hope of attracting more aggressive and competent retailers

- Ltd # of franchises granted for any given area- Increased mkt share from 1-2% to 5%, adding another retailer in San Francisco- Its existing San Fran retailer, Continental TV was denied request to open a location in Sacramento, but Continental did so

anyway- When Sylvania found out, it terminated Sylvania’s franchise agmt- Issue: is the vertical agmt restricting the location of a dealer illegal per se?- Holding : Overruled Schwinn b/c distinction b/w sale and nonsale transactions is not related to economic impact; rule of

reason should apply to all nonprice vertical restrictions on customers, territory or locationo Old Schwinn Rule: per se violation of the Sherman Act for a manufacturer to impose territorial restrictions on which

the retailer may resell goods purchased from the manufacturer Held that rule of reason applies though when title has not passed to the dealer

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ANTITRUST- LONGWELL- SPRING 2012 25o Certain nonprice vertical restrictions may foster interbrand competition and thereby have redeeming competitive

virtues, even though they reduce or eliminate intrabrand competition In fact, it may promote interbrand competition by allowing the manufacturer to achieve certain efficiencies

in the distribution of its products

The court will apply rule of reason analysis to intrabrand restrictions on distributers as there are too many economic justifications to say that it is per se illegal

Vertical Maximum Price-Fixing

- Vertical maximum price-fixing cannot further the reduction of free riding in dealer services. - It directly reflects the manufacturer’s procompetitive interest in minimizing the retail profit margin- The vertical agmts fixing maximum prices also don’t raise the same anticompetitive concerns as agmts that set minimum

prices because they can’t induce dealers to engage in brand pushing and are unlikely to reflect dealer mkt power or to help facilitate oligopolistic coordination by manufacturers

State Oil Co. v. Khan (SCOTUS 1997)- Max price fixing illegal per see for fear that suppliers would interfere w/ dealer freedom- Issue: should the per se rule for max price fixing stand?- Holding : Overturned prior rule from Albrecht v. Herald (1968), which claimed that agmts to set a maximum resale price were

per se illegal, saying that Cts should subject maximum price setting to the rule of reason believing manufacturers would not set a price that was too low

Vertical Agmts fixing Minimum Resale Prices

It used to be a per se violation of § 1 for a seller (e.g., a manufacturer) contractually to set the minimum price at which the buyer (e.g. a retailer) can resell the product

Leegin Creative Leather Products v. PSKS, Inc (SCOUS 2007)- PSKS, a retailer, sued Leegin (who manufactured Brighton products) for instituting the “Brighton Retail Pricing and

Promotion Policy” which stated that Leegin would only do business w/ retailers who followed Leegin’s suggested retail prices for its Brighton Products.

- In 2002, PSKS had violated Leegin’s pricing policy, Leegin suspended shipments- Issue: should Ct abandon per se rule and allow resale price maintenance agmts to be judged by rule or reason?- Holding : overruled its decision in Dr. Miles, ruling that minimum resale price maintenance should be judged under the rule

of reason analysis- Rule of reason is the standard rule – resort to per se rules confined to restraints that would ALWAYS or ALMOST

ALWAYS tend to restrict competition and decrease output - It is necessary to examine, in the first instance, the economic effects of vertical agmts to fix minimum resale prices - Can

stimulate interbrand competition - makes brands themselves more efficient by eliminating intraband competitiono Encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s

position as against rival manufacturerso Discounting retailers may be able to free ride on retailers who furnish services and then capture some of the

increased demand those services generate Free riders rely on the brand built up by retailers

o Facilitates mkt entry for new firms and brandso Encourages retailer services that would not be provided even absent free riding

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 mkt share by inducing the retailers performance and allowing it to use its own initiative

- Anticompetitive effects:o Facilitate a manufacturer cartelo Retailer cartels might organize to fix prices to consumers, compelling a manufacturer to aid the unlawful

arrangement w/ resale price maintenance

1) Per Se rules are very important, but are a very powerful weapon. Ct has a duty to reevaluate these as economic evidence becomes available that calls them into question2) Economic evidence for these vertical agmts has shown that there are enough procompetitive justifications to warrant the application of a rule of reason analysis as opposed to the per se analysis

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Applying the rule of reason analysis to Retail Price Maintenance, courts should consider:1) The number of manufacturers using the practice (“when only a few manufacturers lacking mkt power adopt the practice,

there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers”)2) The restraint’s source (“if retailers are the source, “there is a greater likelihood that the restraint facilitates a retailer cartel or

supports a dominant inefficient retailer”); and3) The manufacturer’s mkt power (“if a retailer lacks mkt power, manufacturers likely can sell their goods through rival

retailers”)

Vertical Agmts to Boycott the Rival of a Dealer w/o any Procompetitive Justification

Nynex v. Discon (SCOTUS 1998)- Mariel, owned by NYNEX, bought services from NY Telephone- Mariel switched purchases from Discon to AT&T b/c it could charge higher prices for telephone removal services which

could be passed onto NY Telephone and then passed on to consumers in higher service charges- Discon claimed it refused to participate and went out of business as a result- Issue: are group boycotts illegal per se in the context of a buyer’s decision to buy from one seller rather than another w/o a

justified competitive objective?- Holding : No, the problem with the monopoly was w/ NY Telephone—which buyers were choosing to use over other

companys, not Marielo the decision to switch suppliers lies close to the heart of the competitive process

B. Price Discrimination that Distorts Downstream Competition

Texaco v. Hasbrouck (SCOTUS 1990)- Texaco sold gas directly to Hasbrouck and other retailers at its retail tank wagon prices, but granted substantial discounts to

distributors who acted as wholesalers and retailers [functional discounts]- Increased distributors sales volume while retailers bringing suit had a decline- Brought suit under § 2 of Robinson Patman Act- Issue: do functional discounts violate the act even if the seller is not responsible for independent resale pricing decisions?- Holding : yes, when the discounts apply to BOTH wholesale and resale portions and not just for the portion that will be used

for wholesale, it is anticompetitive and prohibited by the acto To prove violation of § 2, must show:

Texaco’s sales to Gull & Dompier were made in IC That the gas sold was of the same grade and quality as sold to the retailers That Texaco discriminated in price as b/w Gull and Dompier; and the retailers That the discrimination had a prohibited effect on competition

o A price discrimination w/in meaning of statute can be “a mere price difference”o Functional discounts should be allowed when it can be shown that they constituted a reasonable reimbursement for

the value to the supplier of the distributor’s actual mkt’g function [due recognition and reimbursement]

Volvo Trucks N.A. v. Reeder Simco GMC (SCOTUS 2006)- Volvo trucks are sold by franchise dealers who bid on dealers stating specs- When a bid is successful, the dealer purchases the trucks, building to meet customer specs- Sued Volvo for offering wholesalers different prices- Issue: is there illegal price discrimination under the Robinson-Patman Act for offering dealers different wholesale prices

when no evidence that resell to same customers?- Holding : No, competition of this character is not covered when sold through a customer-specific bidding process

o Did not establish that it was disfavored in comparison to other Volvo dealers even if differences b/w it and non-Volvo dealers

Proving an Agmt or Concerted Action

The concept of “agmt” is critical in a § 1 case - Sometimes a conspiracy or agmt can be proved by direct evidence

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ANTITRUST- LONGWELL- SPRING 2012 27o Direct evidence includes copies of the actual written contracts at issue, videotapes, and audio evidence of the

conspirators agreeing, or testimony of witnesses who observed the agmts being entered intoo Often, however, the evidence is only circumstantial and must be inferredo It is therefore important to clarify what is meant by “agmt”o This is especially true in cases of price leadership or “conscious parallelism” in price, or other terms of sale by firms

in an oligopolistic mkt structure

“Conscious parallelism” is the process by which firms in a concentrate mkt might in effect share monopoly power, setting their prices at a profit maximizing, supracompetitive level by recognizing their shared economic interests (Brooke Group)

- Mere conscious parallelism is not sufficient – the crucial question is whether respondents’ conduct … stemmed from independent decision or from an agmt, tacit or express. To be sure, business behavior is admissible circumstantial evidence from which the fact finder may infer agmt

o The Ct has never held that proof of parallel business behavior conclusively establishes agmt or, phrased differently, that such behavior itself constitutes a Sherman Act Offense

A. Intra Corporate Conspiracy – Are the s Separate Entities?

Copperweld v. Independence Tube Corp. (SCOTUS 1984)- “Intra-enterprise conspiracy” doctrine provides that §1 liability is not foreclosed merely b/c a parent and its subsidiary are

subject to common ownership- Issue: whether the coordinated acts of a parent and its wholly owned subsidiary can, in the legal sense contemplated by § 1 of

the Sherman Act, constitute a combination or conspiracy?- Holding : “intra-enterprise conspiracy” doctrine is inappropriate; the Sherman Act makes a conscious distinction between

single and concerted action and § 1 is not violated by the internally coordinated conduct of a corporation and one of its unincorporated divisions – activity of a parent and subsidiary must be view as a single enterprise for purposes of § 1

o Internal agmts do not raise antitrust dangers – corp’ns cannot conspire w/ their own officerso Subsidiary acts for benefit of parent – there were never separate interestso A corp’n’s initial acquisition of control will always be subject to scrutiny under § 1

A conspiracy cannot exist between a corporation and its wholly owned subsidiary under § 1 of the Sherman Act

American Needle Inc v. NFL (SCOTUS 2010)- NFL owners created a group, NFLP, that controlled the IP of the teams and licensed the use of logos on apparel- Voted to authorize the use of exclusive license to Reebok rather than the nonexclusive licenses (such as to Am. Needle) they

had been using for over 30 years- NFL, the teams and the NFLP defended on the ground that they were incapable of conspiring because they were a single

economic enterprise, at least wrt the licensing of IP- Issue: was NFL teams capable of violating § 1 as a single enterprise ?- Holding : the relevant inquiry for a §1 violation is whether there is a “K, combination, or conspiracy” amongst “separate

economic actors pursuing separate economic interests” such that the agmt “deprives the mktplace of independent centers of decisionmaking,” and therefore “diversity of entrepreneurial interests,” and this of actual or potential competition; NFL’s licensing activities constituted a concerted action to be judged under the Rule of Reason

o Inquiry is whether the agmt joins together “independent centers of decision making” If it does, the entities are capable of conspiring under § 1, and the court must decide whether the

restraint of trade is an unreasonable and therefore illegal one Function of the agmt, not form

o The NFL teams do not possess either the unitary decision-making quality or the single aggregation of economic power characteristic of independent action

Each of the teams is a substantial, independently owned & independently managed business

Standards for Finding a Vertical Agmt

Monsanto Co. v. Spray-Rite Service Corp (SCOTUS 1984)- Monsanto manufactured pesticides and its sales accounted for approx 15% of corn herbicide mkt & 3% of soybean herbicide

mkt - S-R distributed pesticides, Monsanto declined to renew S-R’s distributor license- S-R sued claiming that the termination was pursuant to a conspiracy b/w Monsanto & distributors to set prices- Trial Ct and COA found enough evidence of a concerted action to prove a § 1 violation based on competitor complaints

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ANTITRUST- LONGWELL- SPRING 2012 28- Issue: Was evidence of competitor complaints enough to prove a § 1 violation of concerted action?- Holding : Affirms, but says need more than complaints from competitors which are a normal part of business – must present

direct or circumstantial evidence that reasonably tends to prove that the manufacturer and others had “a conscious commitment to a common scheme designed to achieve an unlawful objective”

o There was sufficient evidence for the jury reasonably to have concluded that Monsanto and some of its distributors were parties to an agmt or conspiracy to maintain resale prices and terminate price cutters

o In fact, there was substantial direct evidence of agmts Monsanto had approached the price-cutters and warned them to raise prices This is evidence of a meeting of minds There was also a letter discussing incentives to maintain minimum mkt price levels

There must be evidence that tends to exclude the possibility of independent action by the manufacturer and distributor. That is, there must be direct or circumstantial evidence that reasonably tends to prove that manufacturer and others had a conscious commitment to a common scheme designed to achieve an unlawful objective

Standards for Finding a Horizontal Agmt or Concerted Action

Proving conspiracies w/ indirect or circumstantial evidence is difficult

Matsushita Electric v. Zenith Radio (SCOTUS 1986)- US TV manufacturers sued Japanese TV manufacturers alleging that the Japanese had conspired to drive American firms out

of the consumer electronic products mkt by selling TVs at a high price in Japan and using the supracompetitive profits to severely discount TVs in the US

- Cannot recover for cartels occurring in Japan b/c US law cannot regulate that - Alleging that Japanese manufacturers are trying to monopolize US mkt- Issue: was this predatory pricing scheme a conspiracy?- Holding : evidence of conspiracy was at best circumstantial as the success of any predatory pricing scheme depends on

maintaining monopoly power for long enough to recoup losses, even if it is only a single firm seeking monopoly powero There are many incentives in this context for members of the alleged conspiracy to cheat because of the speculative

nature of the actiono The alleged conspiracy’s failure to achieve its ends in the two decades of its asserted operation is strong evidence

that the conspiracy does not in fact existo Parties have no rational motive to sustain such losses for 20 yearso A conspiracy to raise prices in one mkt does not tend to show conspiracy to sustain losses in another

A § 1 must present evidence that tends to exclude the possibility that the alleged conspiracy acted independently

United States v. United States Gypsum (SCOTUS 1978)- 9 to 15 producers of gypsum in 60s- 8 largest make up 94% of the mkt; 7 single plant producers make up the rest- Gypsum Ass’n is trade ass’n of gypsum bd manufacturers- Bd manufacturers would telephone producers for price verifications- Issue: whether verification of price concessions w/ competitors for sole purpose of defense of “meeting competition” should

mean no § 1 liability?- Holding : a good faith belief is sufficient – but need to do close scrutiny under Sherman Act to ensure it is w/in Robinson-

Patman Act complianceo § 2(b) does not require the seller to justify price discrimination by showing he met a competitor’s price but that price

was made in good faith to meet a competitor’s – must investigate or verify the reliability of informants of a § 2(b) defense

Howard Hess Dental Laboratories Inc. v. Dentsply Int’l, Inc. (3d Cir. 2010)- Two dental labs—Hess and Jersey Dental, bring suit against manufacturer or artificial teeth for making deals with Dealers to

not carry certain competing brands of teeth in the form of an exclusive agmt- DOJ already got an injunction against Dentsply for its anticompetitive acts- Issue: were the s injured if Dentsply’s direct competitors were injured and DOJ got an injunction against it already?

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ANTITRUST- LONGWELL- SPRING 2012 29- Holding : nothing says that a is relieved of its evidentiary burden of showing an entitlement to injunctive relive when the

gov’t has already obtained its own injunction

Merger – Procedure

T Mobile/ATT Merger- Two cases: DOJ and Sprint’s Private Action- Clayton Act § 7, 15 USC § 18

No person shall acquire the whole of any part of the assets of another person where in any line of commerce or in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly

- Regular Rule of Reason analysis applies- Mergers are a special review area under the law- HSR Act- gov’t must examine a merger at the outset before it is consummated- Review of mergers delegated to DOJ and FTC

o Up to the proponents of a merger to convince that it is a good ideao Review of the relevant mkt as a whole or so-called oligopoly effects (what will the rest of the mkt look like after the

merger)o Will the merger be so concentrated that the merger will actually facilitate oligopoly type behavioro Individual effects o Coordinated effectso Mitigating circumstances

New entry and entry barriers or lack thereof b/c of continual entry of new competitors- Horizontal merger – concentration of mkt is very important

o To determine concentration: take A, B, C, and D and square mkt shares. The most you can have is 10,000 because 100 squared is that meaning that there would be 4 participants but there is a monopolist that has SOLE mkt share

- Analysis is under § 1 but always is challenged under § 7 of Clayton Act

Chronology:Mar 20: AT&T announce acquisition intentions: to acquire from DT AG all issued and outstanding shares of T-Mobile, for approx.. 39billion. Said would bring in customers, expand US mobile broadband infrastructure. Expect to close in a year.Mar 28: Sprint announces formal opposition to mergerMar 31: AT&T files notice of transaction under H-S-R w/ DOJApr 21: AT&T files Application and description of public interest w/ FCCApr 28: Commission sought comment on proposed transactionAug 11: AT&T leaked internal document, where it states that AT&T could expand LTE coverage/upgrade for $3.8 billion, which was less than the cost of the proposed mergerAug 26: FCC restarts 180 day period (at day 83) in which it makes it decisionAug 31: DOJ files complaintSept 6: Sprint files complaintSept 20: C-Spire wireless files complaint (later consolidated w/ Sprint’s)Sept 30: DOJ files 2d Amended complaint; AT& T files MTD to Sprint’s complaintNov 2: Judge Huvelle issues memo opinion on AT&T’s MTD in Sprint caseNov 21: Verizon states company has no objection to mergerNov 22: FCC calls for administrative hearing: said was not in the public interest; AT&T would have to defend itself against that finding. Suggestion that AT&T might divest as much as 40% of T-Mobile’s assets.Nov 24: AT&T asks to withdraw merger proposal from FCC – to avoid hearingNov 30: FCC allows AT&T to withdraw merger proposal; FCC releases its report about how merger would harm public interestDec 12: DOJ and AT&T file Jt Motion to Stay – not clear that no deal could never happenDec 13: spring, C-Spire & AT&T file Jt Motion to StayDec 19: AT&T formally announced it was ending its pursuit to acquire T-Mobile

DOJ’s Issues w/ Merger- No one can break into this mkt—the barrier in terms of money is just too much and it would take WAY too long for anyone

to build a customer base to be anywhere in the competition- Innovation!! Driving mkt—not necessarily the competitors.- T-Mobile is a thought leader and a challenger to the mkt, pushing the others in the mkt to innovate and be competitive

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