47 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 46 Antitrust...

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 47 - 1

Chapter 46Antitrust Law

Business LawLegal, E-Commerce, Ethical, and International

Environments


Antitrust LawsAntitrust Laws

A series of laws enacted to limit A series of laws enacted to limit anticompetitive behavior in anticompetitive behavior in almost all industries, almost all industries, businesses, and professions in businesses, and professions in the United States.the United States.


Federal Antitrust Laws

• Sherman Act of 1890• Clayton Act of 1914• Federal Trade Commission

Act of 1914• Robinson-Patman act


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.


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


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


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


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


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.


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


Horizontal Restraint of Trade

CompetitorCompetitorNo. 1No. 1

CompetitorCompetitorNo. 2No. 2

AgreementAgreementto restrain tradeto restrain trade


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.


Group Boycott by Sellers

SellerSellerCompetitorCompetitor

No. 1No. 1

SellerSellerCompetitorCompetitor

No. 2No. 2

AgreementAgreementnot to deal withnot to deal with

a customera customer

BoycottedBoycottedCustomerCustomer


Group Boycott by Purchasers

PurchaserPurchaserCompetitorCompetitor

No. 1No. 1

PurchaserPurchaserCompetitorCompetitor

No. 2No. 2AgreementAgreementnot to deal withnot to deal with

a suppliera supplier

BoycottedBoycotted SupplierSupplier


Other Horizontal Agreements• Reasonable restraints are

lawful• Examined under rule of

reason• Unreasonable restraints are

violation of Section 1 of Sherman Antitrust Act


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.


Vertical Restraint of Trade

SupplierSupplier

CustomerCustomer

Agreement toAgreement torestrain traderestrain trade


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.


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.


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.


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.


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


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.


Monopoly Power• The power to control prices or

exclude competition.• Measured by the market share

the defendant possesses in the relevant market.


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.


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.


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.”


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.


Types of Mergers

Horizontal Horizontal MergersMergers

Vertical MergersVertical Mergers

Market Extension Market Extension MergersMergers

Conglomerate Conglomerate MergersMergers


Horizontal Mergers

• A merger between two or more companies that compete in the same business and geographical market.


Vertical Mergers

• A merger that integrates the operations of a supplier and a customer.– Backward vertical merger– Forward vertical merger


Market Extension Mergers

• A merger between two companies in similar fields whose sales do not overlap.


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

Prentice Hall, 2001© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

3447 - 34

Defenses to Section 7 Actions

The Failing The Failing Company Company DoctrineDoctrine

The Small The Small Company Company DoctrineDoctrine


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


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.


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 Section2 of the Clayton Act, otherwise known as the Robinson-Patman Act.


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.


Direct Price Discrimination (continued)

• To prove violation, you must prove these elements:

1) The defendant sold commodities of like grade and quality,

2) to two or more purchasers at different prices at approximately the same time, and

3) the plaintiff suffered injury because of the price discrimination.


Indirect Price Discrimination• Sophisticated ways to

provide discriminatory prices to favored customers.

• Illegal under Robinson-Patman.– Favorable credit terms– Freight charge reductions


Defenses to Section 2(a) Actions

Cost JustificationCost Justification

Changing Changing ConditionsConditions

Meeting the Meeting the CompetitionCompetition


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


Changing Conditions

• Price differentials that are a result of changing market conditions are not illegal.– Reducing prices that reflect

the deterioration of perishable goods


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.


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.


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.


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.

47 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 46 Antitrust...

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