Chapter 46 Antitrust Law Business Law Legal E-Commerce

Antitrust Laws A series of laws enacted to limit anticompetitive behavior in almost all industries, businesses, and professions in the United States. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 2

Federal Antitrust Laws • Sherman Act of 1890 • Clayton Act of 1914 • Federal Trade Commission Act of 1914 • Robinson-Patman act © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 3

Antitrust Enforcement • The federal antitrust statutes are broadly drafted to: – reflect the government’s enforcement policy – allow the government to respond to economic, business, and technological changes • Each administration adopts an enforcement policy for antitrust laws. • Antitrust laws are enforced more stringently at some times than at other times. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 4

Antitrust Penalties • Federal antitrust laws provide the following penalties: – Criminal sanctions • Individuals may be fined up to $350, 000 and three years in prison • Corporations may be fined up to $10 million – Civil penalties • Treble damages © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 5

Antitrust Penalties (continued) – Private civil actions • Clayton Act – Consumers must have dealt directly with violators – Treble damages, plus costs and attorneys’ fees – Plaintiff has four years to bring action » Tolled during suit by federal government © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 6

Antitrust Penalties (continued) • Effects of Government Judgment – Prima facie evidence of liability in private civil treble damage action • Defendants often enter a nolo contendere plea or enter into a consent decree – Defendant does not admit guilt but is subject to penalty © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 7

Restraints of Trade • Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies in restraint of trade. • To violate Section 1, the restraint must be found to be unreasonable under either of two tests: – Rule of reason – Per se rule • Requires the concerted action of two or more parties © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 8

Rules to Determine Lawfulness of a Restraint Rule of Reason • A rule that holds that only unreasonable restraints of trade violate Section 1 of the Sherman Act. Per se Rule • A rule that is applicable to those restraints of trade considered inherently anticompetitive. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 9

Horizontal Restraints of Trade • Occurs when two or more competitors at the same level of distribution enter into a contract, combination, or conspiracy to restrain trade. – Most fall under the per se rule; some examined under the rule of reason © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 10

Horizontal Restraint of Trade Agreement to restrain trade Competito Competit r or No. 1

Horizontal restraints of trade include: • Price-Fixing – occurs where competitors in the same line of business agree to to set the price of the goods they sell. A per se violation. • Division of Markets – occurs when competitors agree that each will serve only a designated portion of the market. A per se violation. • Group Boycott – occurs when two or more competitors at one level of distribution agree not to deal with others at another level of distribution. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 12

Group Boycott by Sellers Seller Competito r No. 1 Agreement not to deal with a customer Seller Competitor No. 2 Boycotted Customer © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 13

Group Boycott by Purchasers Purchaser Competitor No. 1 Boycotte d Supplier Agreement not to deal with a supplier © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Purchaser Competitor No. 2 47 - 14

Other Horizontal Agreements • Reasonable restraints are lawful • Examined under rule of reason • Unreasonable restraints are violation of Section 1 of Sherman Antitrust Act © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 15

Vertical Restraints of Trade • Occurs when two or more parties on different levels of distribution enter into a contract, combination, or conspiracy to restrain trade. • Court applies both per se rule and rule of reason. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 16

Vertical Restraint of Trade Supplier Custom er Agreement to restrain trade © 2007 Prentice

Vertical restraints of trade include: • Resale Price Maintenance (vertical price- fixing) – occurs when a party at one level of distribution enters into an agreement with a party at another level to adhere to a price schedule that either sets or stabilizes prices. – A per se violation of Section 1 of the Sherman Act. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 18

Vertical restraints of trade include: (continued) • Nonprice Vertical Restraints – are unlawful under Section 1 of the Sherman Act if their anticompetitive effects outweigh their pro-competitive effects. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 19

Defenses to Section 1 of the Sherman Act • Unilateral Refusal to Deal – A unilateral choice by one party not to deal with another party. – This does not violate Section 1 of the Sherman Act because there is no concerted action. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 20

Defenses to Section 1 of the Sherman Act (continued) • Conscious Parallelism – Occurs when two or more firms act the same but without concerted action. – This does not violate Section 1 because there has been no concerted action. • Noerr Doctrine – Two or more parties may petition the government to enact laws or to take other action. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 21

Monopolization • Section 2 of the Sherman Act • Prohibits the act of monopolization as well as attempts and conspiracies to monopolize. – Can be violated by the conduct of one firm • The following elements are necessary to prove a defendant in violation of Section 2: – Relevant market – Monopoly power – Act of monopolizing © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 22

Defining the Relevant Market • Includes substitute products or services that are reasonably interchangeable with the defendant’s products or services. • Relevant geographical market is the area in which the defendant and its competitors sell the product or service. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 23

Monopoly Power • The power to control prices or exclude competition. • Measured by the market share the defendant possesses in the relevant market. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 24

Willful Act of Monopolizing • A required act for there to be a violation of Section 2 of the Sherman Act. – Predatory pricing • Possession of monopoly power without such an act does not violate Section 2. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 25

Defenses to Monopolization • Superior Business Acumen – Monopoly that is acquired by superior skill, foresight, or industry. • Natural Monopoly – Monopoly that is thrust upon the defendant. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 26

Mergers • Section 7 of the Clayton Act provides that it is unlawful for a person or business to acquire the stock or assets of another “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly. ” © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 27

Mergers (continued) • The following elements are necessary to prove a violation of Section 7: – Line of commerce – the market that will be affected by the merger. – Section of the country – geographical market that will be affected by the merger. – Probability of a substantial lessening of competition. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 28

Types of Mergers Horizontal Mergers Vertical Mergers Conglomerate Mergers Market Extension Mergers © 2007

Horizontal Mergers • A merger between two or more companies that compete in the

Vertical Mergers • A merger that integrates the operations of a supplier and a customer. – Backward vertical merger – Forward vertical merger © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 31

Market Extension Mergers • A merger between two companies in similar fields whose sales

Conglomerate Mergers • A merger that does not fit into any other category. • A merger between firms in totally unrelated businesses. • Section 7 examines the lawfulness of such mergers under the: – Failing company doctrine – Small company doctrine © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 33

Defenses to Section 7 Actions The Failing Company Doctrine Prentice Hall, 2001 Chapter 1 The Small Company Doctrine 34 47 - 34

Tying Arrangements • A tying arrangement is a restraint of trade where a seller refuses to sell one product to a customer unless the customer agrees to purchase a second product from the seller • Section 3 of the Clayton Act prohibits tying arrangements involving sales and leases of goods. – Tangible personal property © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 35

Tying Arrangements (continued) • Section 1 of the Sherman Act prohibits tying arrangements involving goods, services, intangible property, and real property. • A tying arrangement is lawful if there is some justifiable reason for it. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 36

Price Discrimination • Sellers often offer favorable terms to their preferred customers. • Price discrimination occurs if the seller does this without just cause. • Unlawful trade practices under Section 2 of the Clayton Act, otherwise known as the Robinson. Patman Act. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 37

Direct Price Discrimination • Section 2(a) of the Robinson-Patman Act prohibits direct and indirect price discrimination by sellers of a commodity of a like grade and quality where the effect of such discrimination may be to substantially lessen competition or to tend to create a monopoly in any line of commerce. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 38

Direct Price Discrimination (continued) • To prove violation, you must prove these elements: 1) The defendant sold commodities of like grade and quality, to two or more purchasers at different prices at approximately the same time, and the plaintiff suffered injury because of the price discrimination. 2) 3) © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 39

Indirect Price Discrimination • Sophisticated ways to provide discriminatory prices to favored customers. • Illegal under Robinson. Patman. – Favorable credit terms – Freight charge reductions © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 40

Defenses to Section 2(a) Actions Cost Justification Changing Conditions Meeting the Competition © 2007

Cost Justification • Seller’s price discrimination is not unlawful if price differential is due to differences in cost of manufacture, sale, or delivery. – Bulk shipping rates that vary depending upon amount transported © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 42

Changing Conditions • Price differentials that are a result of changing market conditions are not illegal. – Reducing prices that reflect the deterioration of perishable goods © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 43

Meeting the Competition • A seller may lawfully engage in price discrimination to meet a competitor’s price. – Seller must meet but not beat competitor’s price. – Rockport shoes meeting price of Great Lakes Shoe Co. in Michigan and Wisconsin only. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 44

Unfair Methods of Competition • Section 5 of the FTC Act prohibits unfair methods of competition. – Broader than other antitrust laws. – Covers conduct that violates any provision of the Sherman Act or the Clayton Act, violates the spirit of those acts, fills the gap in those acts, and offends public policy. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 45

Exemptions From Antitrust Laws • Statutory Exemptions – Exemptions from antitrust laws that are expressly provided in statutes enacted by Congress. • Implied Exemptions – Exemptions from anti-trust laws that are implied by the federal courts. • State Action Exemptions – Business activities that are mandated by state law are exempt from federal antitrust laws. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 46

State Antitrust Laws • Most states have enacted antitrust statutes. • State statutes are usually patterned after the federal antitrust statutes. • State antitrust laws are used to attack anti-competitive activity that occurs in intrastate commerce. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 47