OLD ANTITRUST EXAM QUESTIONS

QUESTION TYPE 1: OPINION/DISSENT

1A. There are three big players in carbonated soft-drinks, Coca-Cola, Pepsi-Cola and Seven-Up. In most major markets in the United States, their products constitute about 70% of sales. Generally the big three sell at the same price, a price at least 5 cents a can or 30 cents a two-liter bottle higher than that of local or grocery store brands.

A group of six grocery chains in Southern Indiana each markets its own store brand of carbonated beverages. These store brands have about 14% of the local carbonated soft drink market among them. The six agreed to advertise jointly their store brands of carbonated beverages on television. Together, they could afford prime time advertising that was too expensive for their individual budgets.

Ancillary to the advertising agreement, they agreed to set maximum prices for their own brands of soft drinks 7% lower than the prevailing market price for national soft drink brands. The price agreement allowed them to state during the ads price levels applicable to all six stores. Thus, each ad contains language like: "Try store brand sodas: at least 7% less than what you pay for Coke & Pepsi" and then lists the grocery stores in question.

The Department of Justice brought suit to enjoin operation of the agreement, claiming it was per se illegal price fixing. The grocery stores claim that Rule of Reason analysis should apply. The District Court applied the per se rule, and, after finding the facts set out above, granted the injunction. The Court of Appeals reversed, finding that the grocery stores' arrangement "sufficiently differed from a classic price fix that the lower court should not have employed the per se rule, but the Rule of Reason."

The Supreme Court granted certiorari, limited to the following question: "Should a maximum price-fixing agreement among a group of competitors who jointly have no market power be governed by the Rule of Reason?"

Write an opinion and a shorter dissent addressing this question on the facts of this case. You should discuss relevant and analogous caselaw and the theoretical materials we have read and discussed in class.

X1

1B. Myers Mining, Manufacturing, and Miscellany (4M), a large corporation which sells a wide variety of consumer goods, held a patent on "Stick-Em-Ups," small pieces of paper with adhesive on part of one side that allows the user to attach them to other pieces of paper. Stick-Em-Ups are placed on other documents to make comments and notes that can be easily removed when no longer needed. When they first appeared, they revolutionized office management, nearly replacing the paper-clipped memo.

When 4M's patent on Stick-Em-Ups expired 7 years ago, 4M had a complete monopoly on the product. Since then, 4M has reduced the price of Stick-Em-Ups slightly, although they still charge more than their competitors and still make healthy profits. 4M also has undertaken extensive advertising, including the development of a catchy jingle (sung to the tune of the popular "Engel Song") which includes the lyric: "The original Stick-Em-Ups, still better than the rest. You stick with us, you'll stick with the best."

Several competitors manufacture "adhesive notepaper" (the generic term for Stick-Em-Ups) and sell it at prices 5-10% less than 4M's. In the first few years after its patent expired, 4M lost some market share, but it has maintained about 85% of the market for the past three years. Moreover, 4M sold 12% more Stick-Em-Ups last year than it did the last year it held the patent.

The government brought suit against 4M, alleging it had violated Section 2 of the Sherman Act by engaging in the conduct described above. After discovery, 4M acknowledged that it had monopoly power in the adhesive notepaper market, but moved for summary judgment, claiming it had engaged in no illegal conduct. The District Court granted the motion, stating that "4M merely competed well and good competition is never a Sherman Act violation."

The Court of Appeals reversed, stating that the facts alleged by the government constituted a Section 2 violation under Alcoa since 4M expanded to meet growth in the market and advertised to maintain its market share.

The Supreme Court granted certiorari limited to the following question: "Is it a violation of Section 2 for a firm that admittedly has monopoly power to meet competition by lowering price, expanding output and advertising extensively?"

Write an opinion and a shorter dissent for the Court addressing this question on the facts of this case. You should discuss relevant and analogous caselaw and the theoretical materials we have read and discussed in class.

X2

1C. Stanley's, Paladini's, and The Three Phils are department store chains, each of which operates one store in Carey City, a large midwestern city. Mikey Likes It is a large warehouse-style discount store, also in Carey City. Mikey Likes It runs commercials on late night Carey City Cable TV, advertising appliances and household goods at prices 25% less than those of major department stores. Some of the commercials mentioned Stanley's, Paladini's, and The Three Phils by name as "high-priced, snob-appeal, rip-off joints."

The managers of the Carey City stores for the three chains met and agreed they had to do something. First, they sent a joint letter to Mikey Likes It, threatening "harsh action" if the ads mentioning their stores by name were not dropped. When Mikey Likes It didn't respond, the managers called several major manufacturers and convinced them to stop doing business with Mikey Likes It.

Mikey Likes It brought a Sherman Act section 1 suit, alleging a per se illegal group boycott. After a bench trial, the District Court made the following findings of fact:

1) Stanley's, Paladini's and The Three Phils conspired to get manufacturers to refuse to deal with Mikey Likes It.

2) Entry barriers into the retail market were low. Stanley's, Paladini's and The Three Phils between them had less than 5% of the Carey City sales of items sold by Mikey Likes It. They therefore did not have market power.

3) Each of the products that was part of the boycott was sold by no more than two of the three defendants. Many other sellers of appliances and household items ran businesses without selling any of them at all. Thus, the products involved in the boycott, even in the aggregate, did not constitute items necessary to conduct business.

Based on these findings, the court held that the boycott should be judged under the Rule of Reason. Because Mikey Likes It had not shown actual harm to competition and had not demonstrated that the defendants had market power, the court held that the defendants had not violated the Rule of Reason.

The Court of Appeals reversed, holding that whenever a group of firms agree to convince suppliers not to do business with a competitor, the harm to competition is obvious, and the agreement is per se illegal.

The Supreme Court granted certiorari, limited to the following question: "Is it per se illegal for a group of firms without market power to agree to convince an entity at another level of the distribution chain to ceasedoing business with one or more of their competitors, when the conspiracy does not deprive the competitor of products or services necessary for it to do business?" Write an opinion and a shorter dissent for the Court deciding that question with reference to the facts given. You should assume that the District Court's factual findings are supported by the evidence.

X3

1D. Assume that instead of settling the Ivy League Price-Fixing case (U.S. v. Brown University; Course Materials pp.157-69), defendant M.I.T. petitioned the Supreme Court for certiorari. In its petition, M.I.T. argued that agreements between Universities related to financial aid packages of prospective students do not come within the scope of the antitrust laws. Assume further that the Supreme Court granted certiorari, limited to the following question: "Should the federal antitrust laws be interpreted to govern decisions of colleges and universities regarding admissions and financial aid?"

Write an opinion and a shorter dissent for the Court deciding that question with reference to the facts of U.S. v. Brown University. Assume that all the facts given in the Third Circuit's opinion are correct, and that factual issues that the Third Circuit believed to be unresolved are still unresolved. Assume also that the question posed has been properly raised and preserved at all stages of the case.

X4

1E. The American Bar Association (ABA), the professional association of American lawyers, evaluates American law schools on a number of criteria it believes relevant to the proper training of new lawyers. It then decides whether or not to issue a certificate of accreditation. If a school is not accredited by the ABA, its graduates cannot become lawyers in 41 of the 50 states, its students cannot transfer credits to ABA accredited institutions, and its administrators cannot attend conferences at which potential faculty are hired.

In 1988, the Massachusetts School of Law (MSL) opened its doors. It advertised itself as preparing students to practice in the modern world. It taught extensive reliance on computer researching, encouraged students to work during law school, and utilized many practicing lawyers as part-time faculty. To keep costs down, MSL hired relatively few full-time faculty members and had them teach 15 class hours a semester.

In 1993, the ABA denied accreditation to MSL. It relied on several key findings:A) MSL had a student to full-time faculty ratio of 1:45,

well above the 1:30 required by the ABA, and many faculty were teaching more than the 10 hours a semester maximum imposed by the ABA;

B) MSL had less than half the number of volumes in its law library that the ABA required;

C) Many full-time MSL students worked more than the 20 hours a week allowed by ABA regulations.

The ABA report on MSL concluded that MSL had made insufficient efforts “to create even the minimally credible academic institution of the type necessary for the proper education of young lawyers.”

MSL sued, claiming that denial of accreditation by the ABA constituted an illegal boycott. Their complaint admitted that the three findings listed above were true, but claimed that their students received a more useful legal education at a lower price than that provided by many accredited schools. MSL thus concluded that denying them accreditation on the three grounds listed constituted an unreasonable restraint of trade.

The District Court ruled that the case would be judged under the Rule of Reason because it involved accreditation standards involving a professional association. The court also held the ABA undoubtedly had market power in the sense that it effectively could prevent the creation of new lawyers by unaccredited law schools. However, the court dismissed the action, saying that the three grounds for denying accreditation were reasonable as a matter of law.

The Court of Appeals affirmed. The Supreme Court granted certiorari, limited to the question of whether the ABA’s admissions criteria were reasonable within the meaning of the Rule of Reason as a matter of law. Write an opinion and a shorter dissent for the Court deciding that question. Assume that the trial court correctly determined that the Rule of Reason (and not the per se rule) applies to this case. Assume also that the ABA has market power in the relevant market.

X5

1F. American states generally require that attorneys-to-be pass a state-administered bar exam after they complete law school. Most state bar exams incorporate some multiple choice questions that are simultaneously administered nationwide. However, every state reserves at least half of the exam for questions it creates and administers itself, often on peculiarities of its own statutory and common law. Thus, studying for the bar exam differs to some extent in each state.

A number of private firms offer review courses that prepare students to take the various state bar exams. Generally, the courses include a review of the subjects tested by the state in question, exam-taking tips, and practice questions and answers. Almost every student who takes a bar exam purchases one of these courses. The firms sell the courses to law students in association with a variety of promotional activities at the law schools. Industry practice is to give substantial discounts to students purchasing courses early in their law school careers. Because each state bar is different, many of the firms that provide review courses only operate in a single state. However, firms can achieve some economies of scale by preparing materials geared toward the national portion of the bar exam and using them in several states.

Between 1993 and the present, only two firms have operated bar courses in every state. BarGreed, established in the 1970’s, currently sells 63% of the bar review courses purchased in the U.S. Its closest rival, Eastbar, only in existence since 1993, sells 11% of the courses purchased nationwide. Both BarGreed and Eastbar hire famous professors from top 20 law schools to travel the country lecturing on the national portions of the bar. These professors also do videotaped supplemental lectures that are tailored to the state portions of the exams. BarGreed and Eastbar compete with a variety of local and regional firms that vary greatly in popularity from state to state.

As of Summer 1993, BarGreed sold 88% of the courses geared to the Florida bar. In that year, it was joined in the market both by Eastbar and by a local firm called Robyn, Rodriguez & Rosenblatt, which did business under the trade name “3R’S.” 3R’S, a subsidiary of the educational testing firm Learning Limited, tried to distinguish its course from BarGreed by using popular local law professors. Its marketing included the slogan, “Back to Basics with 3R’S: Let Florida’s Best Prep You For Florida’s Bar.” By Summer 1996, this campaign had succeeded sufficiently that 3R’S sold 17% of the bar review courses for the Florida Bar compared to 65% for BarGreed and 9% for Eastbar. In addition, 3R’S had sold even greater percentages of the Florida courses for 1997 and 1998 purchased at a discount by first and second year students. In light of this success, 3R’S began exploring the possibility of applying its strategy in other states.

In the late Spring of 1996, worried by the decline in its share of the sales of Florida bar review courses, BarGreed launched an intensive investigation of 3R’S and of the Florida market. As a result, it developed a marketing plan for Florida courses that it implemented during the 1996-97 school year. The plan, known internally as “Operation Kill-R’S,” had three components:

QUESTION 1F CONTINUES ON THE NEXT PAGE

X6

QUESTION 1F CONTINUED

(1) Hiring: BarGreed hired five popular professors who had taught major subjects for 3R’S’ courses in prior years. None of the five was yet under contract with 3R’S for Summer 1997. BarGreed continued to use its regular teachers to teach the national portions of the bar courses and contracted with the new hires only to teach the Florida portions. Although their contracts contained no exclusivity provisions, the five Florida professors were effectively precluded from working for other bar review courses by the time needed to meet their contractual commitments to BarGreed.

(2) Advertising: BarGreed’s investigations revealed that 3R’S’ parent company, Learning Limited, had fairly serious financial problems and had entered bankruptcy in the spring of 1996. However, the investigations also revealed that the bankruptcy would not affect 3R’S, which was in good shape financially and easily was able to meet its obligations to its employees and students. BarGreed passed out flyers on law school campuses that emphasized Learning Limited’s problems and suggested, without actually saying so, that 3R’S would be affected. For example, one flyer read:

Federal Judge Appoints Receiver To Run Parent of 3R’S:CAN 3R’S AFFORD TO KEEP THE LIGHTS ON?

None of the advertising was untrue and BarGreed never violated state laws regarding false advertising or defamation.

(3) Discounting: During the 1996-97 school year BarGreed lowered prices only on sales of its Florida courses. The sale price was above BarGreed’s own costs, but below the costs of 3R’S. BarGreed was aware of 3R’S’ cost structure because of its investigations.

Operation Kill-R’S was highly successful for BarGreed. During the 1996-97 school year, it sold 80% of Florida bar review courses. Eastbar sold 10%, and 3R’S share declined to just 6%.

3R’S sued BarGreed in federal court, claiming that its implementation of Operation Kill-R’S had monopolized the market for Florida bar review courses in violation of Sherman Act §2. After a trial at which 3R’S introduced evidence supporting the facts laid out above, the jury found for 3R’S. On appeal, the 11 th Circuit Court of Appeals reversed. It characterized each of the components of Operation Kill-Rs as “robust competition” and thus held that there was insufficient evidence of bad conduct to support a Section 2 claim.

3R’S petitioned for certiorari. The Supreme Court granted the petition, limited to the question of whether the three components of Operation Kill-Rs were sufficient, individually or in combination, to meet the conduct element of a Section 2 monopolization claim. Write an opinion and a shorter dissent for the Court deciding that question.

X7

1G. Red Shield is a medical insurer that provides group insurance for employees to a large number of employers in a sparsely populated western state. Red Shield undertook a study of certain expensive non-emergency medical procedures and concluded that physicians were ordering some of these procedures much more often than they were actually required. It therefore instituted a policy whereby they would pay for these procedures only if the treating physician obtained approval in advance from Red Shield.

The State Medical Association (SMA), which included as members almost all the physicians in the state, met to discuss the Red Shield pre-clearance policy. SMA members almost unanimously believed that the policy interfered with their ability to exercise their medical judgment and was dangerous for patients.

SMA attempted to negotiate with Red Shield to find some way around the policy, but the insurer refused to compromise. The members of SMA then voted to refuse to treat the patients of any insurance company that adopted pre-clearance policies. Facing the likelihood that the people it insured would receive no medical treatment, Red Shield rescinded its pre-clearance policy.

Subsequently, Red Shield brought a suit in federal district court alleging that the SMA refusal to do business with Red Shield constituted an illegal group boycott. The trial court made the following findings of fact:

(1) The relevant market is the provision of medical services in the state. Members of SMA have overwhelming market power in that market.

(2) Red Shield does not have market power in the market for the provision of group medical insurance.

(3) Most people in the state would not be able to afford the medical procedures at issue if they were not covered by insurance.

(4) Most members of SMA have a good faith belief that Red Shield’s pre-clearance policy would harm many patients. This belief is reasonable.

The District Court then held that the boycott did not violate the Sherman Act “because it was adopted based on a good faith reasonable belief that adherence to the pre-clearance policy would interfere with their professional ethical responsibilities to provide necessary patient care.”

QUESTION 1G CONTINUES ON THE NEXT PAGE

X8

QUESTION 1G CONTINUED

The Court of Appeals reversed, finding the case indistinguishable from Indiana Federation of Dentists. It held that the Sherman Act provided no defense of the kind found by the District Court. The court concluded, “If the pre-clearance policy harms patients, the market should correct it. In the unlikely event that the market does not do its job, SMA is free to lobby the state legislature or Congress to change the law.”

The Supreme Court granted certiorari to decide whether it was a defense to a group boycott claim that the conspirators had a good faith reasonable belief that their refusal to deal was necessary to perform their professional responsibilities to clients or patients.

Draft the analysis sections of an opinion and of a shorter dissent for the U.S. Supreme Court deciding this question in the context of the facts of this case. Assume that the record supports the District Court’s findings of fact.

X9

1H. Idunno is a city of 30,000 located on an island off Alaska's southeast peninsula. The island is accessible only by boat or plane, and is 70 miles from the nearest town of 5,000 or more people. In 1989, there were 3 movie theatres in Idunno, each owned by a different local resident.

General Universal Cinematic Kitsch, Inc. ("GUCK") owns movie theatres in hundreds of cities across the U.S. In 1989, Guck purchased the smallest of the Idunno theatres, one which garnered about 20% of the city's movie ticket revenue. This year, GUCK signed agreements to purchase the other two movie houses. The Department of Justice brought suit to challenge the acquisitions, and moved for a preliminary injunction barring the sales.

The District Court, after a hearing, made the following findings of fact:

1) The relevant market was movie houses in Idunno. Thus, the mergers would give GUCK 100% of the market.

2) Because there were many buildings in Idunno convertible to movie houses, and because opening movie houses requires little capital, barriers to entering the market were low.

3) The merger created economies of scale. Specifically, GUCK would realize substantial cost savings in presenting movies in Idunno because its large operation allowed it to negotiate volume discounts with both movie distributors and manufacturers of candy and related products.

Nonetheless, the court found that under Brown Shoe and its progeny, a merger that resulted in a monopoly clearly violated Clayton Act Section 7 and issued the preliminary injunction.

On appeal, the Ninth Circuit reversed. It found that Brown Shoe implicitly had been overruled by recent Supreme Court antitrust jurisprudence. It held that a merger in a market with low entry barriers that results in significant economies of scale does not violate Clayton Act Section 7 as a matter of law.

The Supreme Court granted certiorari, limited to the following question: "Can a a merger in a market with low entry barriers that results in significant economies of scale violate Clayton Act Section 7?" Write an opinion and a shorter dissent for the Supreme Court resolving this question. Assume that the evidence before the District Court supported its factual findings.

X10

1J. K-Mart, one of the largest chains of discount department stores in the U.S., announced that it was going to purchase Office Depot, the second largest chain of office supply Superstores (OSS) in the U.S. After an investigation lasting several months, the FTC announced its intent to challenge the merger, relying on the “actual potential competition” theory. It brought suit in U.S. District Court seeking a preliminary injunction barring the merger. After a two-day hearing, the court issued its findings of fact, which included the following:

(a) As found in FTC v. Staples, OSS constitute their own product market and do not face significant competition from other sellers of office supplies. The only firms in the market are Staples (1999 share 40%), Office Depot (1999 share 35%), and Office Max (1999 share 25%). Because of huge volume discounts enjoyed by the OSS, smaller sellers of office supplies cannot effectively compete with them.

(b) Although K-Mart sells some of the same products as Office Depot, its prices for these products usually are 25-30% higher than those of Office Depot. The FTC does not contend that K-Mart is part of the same market as Office Depot. Thus, the proposed merger is not “horizontal” in the usual sense.

(c) K-Mart undertook a study to explore significantly expanding the office supply departments in its stores to try to compete directly with the OSS. The study concluded that such a move would be very profitable. K-Mart’s management had approved plans to go ahead with the project when they got word that Office Depot might be interested in a merger. Absent the merger, K-Mart would have attempted independently to enter the OSS market.

(d) K-Mart has expertise in wide-scale consumer marketing and in the operation of a large national distribution system that make it especially well-qualified to participate in the OSS market.

(e) K-Mart is one of the nation’s largest advertisers. It receives significant discounts because of the quantity of advertising it purchases from television stations. Internal studies conducted in anticipation of the merger indicate that the use of the K-Mart name and of celebrities under contract to K-Mart (e.g., Rosie O’Donnell and Penny Marshall) in advertising would significantly increase the name recognition and consumer appeal of Office Depot.

In its conclusions of law, the District Court noted that the Supreme Court had never explicitly approved the actual potential competition theory and that the Court had not addressed the question in over 25 years. It then held that “trends in Antitrust law” strongly suggested that the Court would not approve the theory today. It also held that even if the actual potential competition theory was viable, the advertising advantages created by the use of K-Mart’s name and resources would make Office Depot a stronger competitor and improve competition in the OSS market. It thus overturned the FTC’s decision and held that the merger could proceed.

QUESTION 1J CONTINUES ON THE NEXT PAGE

X11

QUESTION 1J CONTINUED

The FTC appealed and the Court of Appeals reversed. It argued that allowing K-Mart to buy Office Depot rather than enter the market itself harmed competition by further entrenching an oligopoly. It also held that the advertising advantages relied on by the District Court simply raised barriers to entry and were not the kind of productivity-enhancing economies of scale that could be used to offset the potential negative effects of the merger. The court of appeals remanded the case to the District Court to determine whether the merger met the actual potential competition test laid out in Marine Bancorp (course materials at 504).

The U.S. Supreme Court granted certiorari, limited to two questions:

(1) Does the “actual potential competition” theory state a cause of action under Clayton Act §7?

(2) Can advertising advantages like cost savings and increased brand recognition be used under Clayton Act §7 to justify an otherwise anti-competitive merger?

Write drafts of the analysis sections of an opinion and a shorter dissent for the Supreme Court resolving these questions in light of the facts of the case. Assume that the District Court’s findings of fact are supported by the record.

X12

1K. Battery-powered handheld organizers (like the Palm Pilot) have become very common in the last several years. The simplest versions allow people to record phone numbers and appointments. More complex versions are equipped to transfer information to and from computers, act as wireless e-mail and internet receivers, serve as pagers, etc.

A relatively small electronics firm, Chen-Young, Bailine & Atlason, manufactures handheld organizers under the trade name “Cyba.” The Cyba line is well-regarded in the industry and constituted about 8% of the handheld organizers sold in the U.S. in the last four years.

Three years ago, researchers at Chen-Young, Bailine & Atlason made a major breakthrough and developed a tiny but powerful projector that could project the images from handheld organizers onto walls, pieces of paper, or other surfaces. This allows people to view the information in a larger, easier to read format and makes the image easily viewable to several people at one time. The projector is called the Digital Image Optical Node (DION).

Initially, Chen-Young, Bailine & Atlason marketed DION as a small accessory that could be used with any handheld organizer. The device proved very popular, but it burned out after about three months use. After additional research, they developed DION II, which provided an even clearer projection, and lasted considerably longer. They decided to build DION II directly into their Cyba organizers and not to market it as a separate product. They also stopped producing the original DION accessory.

After widespread consumer complaints regarding the unavailability of DION technology separate from the Cyba organizers, the Department of Justice brought an action against Chen-Young, Bailine & Atlason, claiming that their decision to market DION technology only as part of Cyba organizers constituted illegal tying in violation of Clayton Act §3.

After an expedited trial, the District Court held that the conduct in question was a per se illegal tie. It based its decision on the following findings of fact:

There clearly were two separate products because the DION accessory had originally been sold separately and consumers wanted DION technology separate from the Cyba organizer

Chen-Young, Bailine & Atlason had market power because no other product served the same function as DION technology and, because of the patents on DION and DION II, no other manufacturer was likely to have an equivalent product within five years.

On appeal, the Court of Appeals reversed. It held, following the D.C. Circuit’s opinion in U.S. v. Microsoft, that the per se rule should not apply to ties that took the form of physical integration of products in rapidly changing high technology markets. It remanded to the trial court for evaluation of the case under the Rule of Reason.

The U.S. Supreme Court granted certiorari to determine when, if ever, the per se rule for tying should be employed in high technology markets. Draft the analysis sections of an opinion and of a shorter dissent for the Court deciding this question in the context of the facts of this case. Assume that the record supports the District Court’s findings of fact.

X13

1L: During and after the catastrophic 2004 hurricane season, residents in affected areas complained that many sellers of hurricane-related products (e.g., batteries, duct tape, plywood and electric generators) had engaged in “price gouging” by raising prices both before and after the storms to “unfair” levels. In response, a group of hardware retailers that did business in the states most commonly affected by hurricanes formed the South-Eastern Anti-Gouging League (SEAGL).

The members of SEAGL all signed an agreement regarding their pricing of a specific list of important hurricane-related products. Each retailer agreed that it would not raise its prices for these products during the following hurricane season (June 1-November 30, 2005). In other words, each retailer agreed to treat its price for each listed item as of May 31, 2005 as a maximum price for the following six months. SEAGL held a press conference to announce the agreement and stated that its members would post SEAGL logos in their stores “so the public can shop for hurricane supplies at our stores with confidence that they are not getting gouged.”

The U.S. Department of Justice immediately brought suit against the members of SEAGL seeking to enjoin the agreement under Sherman Act §1 as a horizontal maximum price-fixing agreement. The states of Georgia, Alabama, Louisiana, and Florida (GALF) jointly filed an amicus brief in the case, arguing that the SEAGL agreement was “in the public good” because the cap on prices would reduce hurricane-related stress, would allow affected residents to recover more quickly, and would reduce the financial strain on insurance companies and FEMA (which pay much of the cost of post-hurricane rebuilding). The GALF states asked the court to allow the agreement to stand and offered, if necessary, to provide evidence for the defendants to use at trial to support the “public good” claims.

On cross-motions for summary judgment, the District Court held that the agreement was per se illegal, relying on Arizona v. Maricopa County. It also rejected the “public good” claims made by the GALF, arguing that “National Society of Professional Engineers makes very clear that you cannot avoid antitrust liability by arguing that prices set by freely operating markets are not in the public interest.”

The Court of Appeals reversed and remanded. It reasoned that “antitrust law has sufficiently evolved since 1982 that we are certain the Supreme Court would not treat a horizontal maximum price-fixing agreement as per se illegal absent a showing that the agreement was simply camouflage for an agreement on minimum prices.” The appellate court further held that, in the event of a rule of reason trial, the district court should “consider” the “important state interests” raised by the GALF states.

The U.S. Supreme Court granted certiorari to address two questions:

(1) When, if ever, should the per se rule apply to horizontal maximum price-fixing agreements?

(2) What legal significance, if any, should be given in an antitrust case to evidence that a particular agreement serves the “public good”?

Draft the analysis sections of an opinion and of a shorter dissent for the Court deciding these questions in the context of the facts of this case. Assume that the members of SEAGL do not contest the existence of the agreement between them or its terms.

X14

QUESTION TYPE 2: ISSUE SPOTTER

2A. As of 1990, there are five major manufacturers of legal textbooks. They are listed here with their 1989-90 market shares:

Little, Brown 34% West 26%Foundation Press 19%Matthew Bender 11%Michie 7%

Foundation Press and Little, Brown also manufacture textbooks in other fields. They sell 4% and 3% respectively of all textbooks sold in the U.S. None of the other legal text manufacturers sell more than 1/2 of 1% of American textbooks. None of the five sells more than 1% of all hardcover books.

In the summer of 1990, West decides to purchase the legal textbook division of Foundation Press. It files the appropriate paperwork with the Department of Justice. The government chooses not to challenge the transaction, which becomes effective in August.

Because of the size of its new operation, West is able to reduce its cost per text to approximately $27. While Little, Brown has a comparable per text cost, the smaller companies spend about $35 on average to produce legal texts. Each company prices its texts at an average of about $45.

In December, 1990, a marketing manager at West circulated the following memo to management:

The market shares of Michie and Matthew Bender are vulnerable. We can increase our share at their expense by playing hardball. I suggest the following four-point plan:

1) Lower prices to approximately $38 in subjects like Torts and Property where we compete with the smaller companies. Raise prices slightly in subjects where we are alone or only compete with Little, Brown.

2) Target Michie & Matthew Bender popular authors; see if we can convince them (without illegally tampering with existing contracts) to publish with us.

3) Lobby the state and federal government in favor of changes in complex statutes. We are in a better position than the smaller companies to do revisions of casebooks and statutory supplements.

QUESTION 2A CONTINUES ON THE NEXT PAGE

X15

QUESTION 2A CONTINUED

4) Do a big advertising push to law professors extolling the virtues of our lower prices, our (hopefully) new authors, and our up-to-date materials.

West adopted the plan for the 1991-92 school year. During the year, West succeeded in luring 3 popular authors away from Michie. In addition, Congress enacted several statutory changes for which West had lobbied, and West immediately published and sold appropriate statutory materials. Meanwhile, Little, Brown chose to adopt the same pricing policy as West (lowering prices where it competed with Michie and Matthew Bender; raising prices where it did not).

The percents of legal textbooks sold in 1991-92 were as follows:

West-Foundation 50%Little, Brown 36% Matthew Bender 8%Michie 4%

Identify and analyze the violations of the antitrust laws that arguably arise from this scenario and briefly discuss who might have standing to sue.

X16

2B. Commercial passenger airline transportation is handled within the US by a few major carriers that operate nationwide and several small carriers that operate only in one state or region of the country. The industry has high fixed costs. The cost of aircraft and related servicing equipment and fixed personnel and management costs make up a much greater percent of the airlines' costs than do the fuel and per passenger costs associated with each flight. However, an airline must have quite a few planes to compete success-fully even on just a few routes. On the other hand, once an airline is operating, it can easily shift its planes and personnel around to serve new routes or to provide expanded service for current ones. The main cost in entering a new city is renting gate and hangar space at the airport.

One of the major "byproducts" of the airline industry is the computerized reservation system (CRS). A CRS provides travel agents with information regarding flight times and fares for all airlines and allows them to book tickets online. Four of the major airlines, Divided, National, Gamma, and Southeast, operate CRS's by compiling relevant information, inputting it on to a computer system, and leasing terminals and software to travel agents. Almost all airline bookings currently take place through CRS's.

Early in the development of CRS's, the airlines that operated them used them to gain a competitive edge by displaying their own flights first when travel agents requested information. After a federal investigation, regulations were issued limiting the ability of the carriers to discriminate to their own advantage on CRS's.

In the past few years, the American domestic passenger air transport market has undergone substantial upheaval. Several of the leading players have disappeared via bankruptcy and merger, and others are in severe financial difficulties. By the beginning of 1991, the industry was dominated by two major airlines, Divided and National. However, some individual routes were dominated by other companies. The chart on the last page lists early 1991 market shares of the key players nationwide and on several key routes.

Early in 1991, the management of Trans-America Airlines (TAA) announced that to avoid bankruptcy, it wished to sell its planes and its rights to gate space at US airports. Gamma Airlines agreed to buy the TAA assets. After reviewing the parties' Hart-Scott-Rodino filings, the federal government chose not to challenge the asset sale. Shortly afterward, TAA sold its remaining assets and dissolved.

In the two years following the merger, prices industry-wide stayed about the same on average, but there were some routes that saw changes. Prices for round-trip flights from New York to Los Angeles, for example, dropped from an average of $358 round trip in early 1991 to $298 by 1993. On the other hand, round-trip fares from Atlanta to Los Angeles which had averaged $366 in 1991 rose to about $408 by 1993. The changes in market share over the same period are laid out on the chart on the last page.

QUESTION 2B CONTINUES ON THE NEXT PAGE

X17

QUESTION 2B CONTINUED

During these same two years, a small competitor, the Grump Shuttle, made a concerted effort to expand its presence on the New York to Chicago route. By using smaller planes, more flights and reduced-price fares, Grump more than doubled its share of passenger miles on the route. The total number of flights on the route for all airlines increased 17% and the average round-trip fare fell from $259 to $198 between 1991 and 1993.

Grump's frequent schedule and fare changes made it a constant problem for CRS's, which had to input new data almost daily. As a result, Divided and Gamma independently notified Grump that they would stop including it on their CRS's unless its operations "stabilized." After several months with no change, in mid-1992 Divided announced that it would no longer carry Grump flights on its CRS. Within days of the public announcement, the other 3 CRS's dropped Grump as well. These cutoffs did not violate any existing regulations regarding CRS's. Despite this setback, Grump continued to increase its market share into early 1993, although not at the rate it had before the CRS cutoff.

It is now Spring 1993 (my, how time flies). Identify and analyze any violations of the antitrust laws that arguably arose from this scenario. The chart on the next page provides market share information and HHI calculations for your convenience. Assume my math is correct!!

QUESTION 2B CONTINUES ON THE NEXT PAGE

X18

QUESTION 2B CONTINUED

Question 2B: Airline Market Share Figures and HHI's 1991, 1993

Carrier 1991 1993

National Commercial Airline Passenger Miles

Divided 31% 29%National 27% 28%Gamma 16% 27%Southeast 14% 11%TAA 8% --Others 4% 5%HHI 2210 2480

New York-Los Angeles

Divided 44% 42%National 37% 34%TAA 1 9% --Gamma -- 24%HHI 3666 3496

Atlanta-Los Angeles

Gamma 43% 67%Divided 22% 20%Southeast 19% 13%TAA 16% --HHI 2950 5058

New York-Chicago

National 32% 26%Divided 30% 24%Gamma 14% 29%TAA 14% --Grump 10% 21%HHI 2416 2534

X19

2C. Since its deregulation in 1978, the airline industry has undergone significant changes. One of the most important has been the development of Frequent Flyer programs. Under these programs, air travellers earn bonus points for each mile they fly with a particular airline. When they acquire a specified number of points, they get free tickets or other benefits from the airline running the program. Because higher point totals yield more valuable prizes, air travellers have an incentive to become regular customers on one airline.

One important effect of the frequent flyer programs has been to alter the habits of business travellers. Encouraged by receiving benefits based on air miles they don't them-selves pay for, many business travellers prefer to book flights on their regular airlines (largely ignoring price) in order to build up mileage bonuses. American, United and Delta, which can offer foreign travel as part of their plans, and which fly to more US cities than other airlines, have been particularly successful in attracting business travellers.

An additional effect of deregulation has been the development of the hub system described in your materials. Each airline tends to charge significantly higher fares in and out of cities where it is the only major airline with a hub. A Department of Transportation official was quoted as saying the airlines "compete between their hubs, not at them."

Assume that in early 1993, the Clinton Administration brings a Section 2 action against American, Delta, and United, claiming that their use of frequent flyer programs constitutes monopolization or attempted monopolization of the markets for business travel to and from certain cities (those at which only one airline has a hub). Assume that the government produces the following evidence about conditions in the industry between 1989 and 1992:

1) The three airlines' fares for flights where the passenger stays over Saturday night at the destination city were approximately one-half the fares for flights where the passenger does not stay over Saturday night.

2) The three airlines' fares for passengers booking their flights more than 30 days in advance averaged 30% less than those booked within 30 days of the travel date.

3) At a number of major hub cities, the dominant airline had at least 60% of the domestic flights. These included San Francisco, Denver, and Orlando (United), Atlanta and Cincinnati (Delta), and Nashville, Raleigh-Durham, Dallas and San Jose (American).

QUESTION 2C CONTINUES ON THE NEXT PAGE

X20

QUESTION 2C CONTINUED

4) Fares for flights from or into each of these cities were 11% higher than the average fare for other flights of the same length.

5) Of passengers flying from or into each of these cities, the dominant airline carried over 70% of those whose travel dates did not include a Saturday night stayover and over 75% of those who booked flights less than 30 days in advance.

Discuss whether the Section 2 action is likely to succeed. Note any other information that you would find helpful in resolving the case.

X21

2D. Americans can purchase clothing and household items from a wide variety of sources. Department stores offer wide selection and service, but charge high prices. Boutiques and specialty shops may have better offerings for consumers who know what they want, but they also can be expensive. Discount stores provide low prices, but less service and selection. Chain drugstores and mom-and-pop groceries often are open long hours, but have fairly limited selections in addition to high prices.

A recent development in American retailing is the "Mega-Warehouse store." Mega-Warehouses are very large retail establishments that sell a wide variety of consumer household products and clothing. They combine low-cost surroundings, very limited service, department store selection, and discount pricing. They maintain low prices by locating further outside urban areas than traditional malls, by limiting service personnel, and by volume purchasing. If consumers are willing to undertake what is often a considerable drive to find them, Mega-Warehouses can provide inexpensive one-stop shopping. Although a few major cities have several Mega-Warehouse outlets, most metropolitan areas have no more than two at the present time.

As of the beginning of 1993, there were several major Mega-Warehouse operations in the U.S. Although between them, they made less than 4% of all retail sales in the U.S., they each did substantial business in terms of the dollar value of merchandise sold. Their relative size is indicated on the chart below, measured as a percentage of the total retail sales made by Mega-Warehouse stores:

Paul-Mart 34%Bergacker's 32%Discount Club 16%Lhota Merchandise 13%

Thus, if Mega-Warehouse sales were defined as a market, the nationwide HHI would be around 2610 when the smaller players are included. If all retail sales constitute the market, the nationwide HHI is under 100.

Early in 1993, Discount Club and Lhota Merchandise decided to merge. They filed appropriate papers and were cleared by the FTC. The new firm, called the Lhota Discount Club (LDC), was able to get greater volume discounts in purchasing both merchandise and advertising. It thus could lower its prices even further.

McKinney's Drugs was an established drug store chain operating in several mid-Western states. Like the Mega-Warehouses, it also sold a variety of household items. Early in 1993, it announced that it was having financial difficulties. Subsequently, without communicating among themselves, Paul-Mart, Bergacker's, and LDC all began having sales on items sold by McKinney's in the areas in which McKinney's operated.

QUESTION 2D CONTINUES ON THE NEXT PAGE

X22

QUESTION 2D CONTINUED

They accompanied these sales with massive advertising. McKinney's' sales plummeted, and it closed its doors in January, 1994, after a very weak Christmas season. In the ensuing year, all three of the Mega-Warehouse stores raised their prices above pre-sale levels in the areas where McKinney's had been.

Gonzalez & Gonzalez (G&G) is a drugstore chain similar to McKinney's. It operates in the Southwestern United States. Earlier this year, it announced it was having financial difficulties. Shortly thereafter, Paul-Mart, Bergacker's, and LDC all began sales in their stores in and around cities where G&G has stores, accompanied by extensive advertising. G&G felt particularly threatened by LDC because a majority of the Mega-Warehouse stores that seem to compete directly with G&G are LDC stores. Thus, G&G filed suit under Clayton Act Section Seven (15 U.S.C. ss18) challenging the merger that created LDC. The suit was filed within the applicable statute of limitations.

Discuss:

(1) Does G&G have standing to challenge the merger?(Suggested time allotment: 15-20 minutes)

(2) Assuming G&G has standing, did the merger violate §7?(Suggested time allotment: 40-45 minutes)

X23

2E. One of the great one-hit wonders of the rock world in the 1980s was the band Smilin’ Salamander. In 1984, the song “No Newts is Good Newts” that the band both wrote and recorded hit the top of the charts. However, although they made four albums, no other song they recorded ever was very popular. When they broke up in 1987, the members of the band sold all rights to their songs to their manager, Les.

In 1993, “No Newts is Good Newts” was used as the theme song for 20th Century Frog’s hit movie, Amphibian Invasion and once again radio stations played the song regularly. Musicians across the U.S. searched for the sheet music, which was out-of-print. Les decided not to reissue the sheet music individually, because it would sell for merely three or four dollars for the one song. Instead, he published a book that included the music for all of the band’s songs, entitled Smilin’ Salamander: Smooth Sounds, Special Songs. Although the book did not sell as many copies as the individual sheet music would have, Les made much greater profits on the book than he would have selling the song individually.

In early 1994, Les set out to organize a sheet music song book called Greatest Hits of 1984. He negotiated with the owners of the rights of the 13 other best selling songs of 1984 to work out the details for producing the album. The rights to the second best selling song of that year, “Orwell That Ends Well,” were owned by record mogul Michael Moore. Michael and Les simultaneously were negotiating a contract for an album for one of Les’s clients on one of Michael’s record labels. The record contract fell through, and Michael instead signed a rival of Les’s client to a major contract. Subsequently, Les convinced the other participants in Greatest Hits of 1984 to exclude “Orwell That Ends Well” from the album. He also got them to agree that they would not allow their songs to be used in any other songbook for at least five years. The songbook proved to be a great best seller. Despite many requests, Les refused to issue individual sheet music for “No Newts is Good Newts” or to allow it to be used in any songbooks except the two noted here.

Although the two songbooks proved popular, they represented only a tiny fraction of the total number of songbooks sold in 1994. And although fans could not get new copies of “No Newts is Good Newts” in stores except by buying the songbooks, they had several other avenues available to them. A few copies of the song remained in circulation from the original publication of the sheet music. Musically adept fans could copy out the music after listening to the song several times. And of course many fans simply photocopied the music to the song illegally. “Orwell That Ends Well” is available to its fans in individual sheet music and in several other songbooks.

Assume that the copyright laws allow Les and the other song owners to control the publication of their songs in the manner described. Assume also that there is no question that the agreements between Les and the other song owners would satisfy the concerted action element of Sherman Act §1. Discuss both of the following issues:

(1) Does Les’s refusal to sell sheet music for “No Newts is Good Newts” except in the two songbooks constitute an illegal tying arrangement?

(2) If Michael Moore sued the song owners claiming that the agreement to exclude “Orwell That Ends Well” from their songbook constituted an illegal boycott, should the court judge the agreement among the song owners under the per se rule or the rule of reason?

X24

2F. Tugender Township is a political subdivision of the State of Equilibrium. It is shaped roughly like a square, each side of which is about 35 miles long. It includes a number of rural and suburban communities with a total population of about 120,000. Most of the population of Tugender is in the eastern third of the Township, the region closest to the neighboring large city of Jacobsberg (population 360,000).

Tugender Township contains 3 hospitals. Christian Congregations is a religious non-profit hospital that is part of a regional chain. St. Stephen’s is a religious non-profit hospital run by the local Roman Catholic Archdiocese, and is not part of a chain. Lasting Love is part of a national chain of for-profit hospitals. In addition, there are eight hospitals in the city of Jacobsberg. From the geographical center of Tugender Township, the Jacobsberg hospitals on average are 50 minutes away by car if there is no significant traffic; the closest is 35 minutes away. There are no other hospitals within a 2-hour drive of the center of Tugender. Tugender residents tend to use Jacobsberg hospitals primarily for more complicated procedures that require specialists not found in the Township.

Most women bearing children in the state of Equilibrium do so in hospitals attended by obstetricians (M.D.’s specializing in childbirth). Equilibrium also licenses Nurse-Midwives to deliver children. Nurse-Midwives are trained professionals who usually assist women who prefer natural methods of childbirth. Typically, births assisted by Nurse-Midwives involve home delivery and fewer drugs. They also cost less because, if all goes well, no hospitals or M.D.’s are directly involved. In the rare case when the birth becomes complicated, Nurse-Midwives typically will call in an obstetrician. To ensure the provision of back-up medical services in an emergency, Equilibrium requires its licensed Nurse-Midwives to enter into a cooperating agreement with a local hospital before they can begin providing childbirth services.

Marta’s Midwives, Inc., founded in 1991, provides licensed Nurse-Midwives for Tugender Township residents. Since its inception, it has had a cooperating agreement with Christian Congregations. Marta’s Midwives has tried several times to obtain cooperating agreements with Lasting Love and St. Stephen’s, but both these hospitals, independently, have refused. The company has never tried to enter cooperating agreements with any Jacobsberg hospital.

During 1995, women residing in Tugender Township used medical providers for childbirth in the following proportions:

Lasting Love 34%St. Stephen’s 32%Christian Congr.* 21%Marta’s Midwives* 9%Various Jacobsberg Hospitals 5%

* Slightly less than 1% of births used services of both Marta’s Midwives and Christian Congregations.

QUESTION 2F CONTINUES ON THE NEXT PAGE

X25

QUESTION 2F CONTINUED

Two other types of medical services are relevant here. Neurosurgery is surgery performed on the brain and central nervous system. More than half of the neurosurgery performed in 1995 on Tugender residents took place in Jacobsberg. Most of the rest was divided between Christian Congregations and St. Stephen’s.

Oncology consists of testing and treatment related to cancer. Oncology services are sometimes performed in hospitals and sometimes in outpatient or nursing facilities dedicated to cancer patients. None of these dedicated facilities are located in Tugender. In 1995, Tugender residents used local hospitals for about 60% of the oncology services they received, mostly divided between Lasting Love and Christian Congregations. Most of the remainder of the oncology services were provided by hospitals and dedicated cancer-treatment facilities in Jacobsberg; a few Tugender residents went further away.

Late in 1995, at the behest of local employers concerned about rising medical costs, representatives from the three Tugender hospitals met to discuss ways to save money. They agreed to a plan entitled “Efficiency Agreement,” which provided that, beginning January 1, 1996, each hospital would eliminate non-emergency service in one specialty area. Specifically, Christian Congregations would eliminate childbirth, Lasting Love would eliminate neurosurgery, and St. Stephen’s would eliminate oncology. The hospitals believed that the Efficiency Agreement would lower costs by reducing training, staffing, supplies, and equipment needed in each hospital, and providing economies of scale through greater utilization of each hospital’s specialties. The hospitals also believed that the agreement would improve patient care by spreading staffs less thinly and allowing them to focus more on their specialties.

Several developments followed the implementation of the Efficiency Agreement:

- By the end of 1996, all three hospitals had experienced the cost savings anticipated by the Efficiency Agreement.

- Compared with prior years, only a few more patients utilizing the three relevant services went to Jacobsberg in 1996; most continued to use the Tugender hospitals that still provided them.

- A state report found fewer patient complaints and malpractice suits regarding the relevant services in the Tugender hospitals in 1996 than in 1995.

- During 1996, Christian Congregations’ prices remained the same. Lasting Love raised prices 3% for all services. St. Stephen’s kept prices the same for many services, including neurosurgery; it increased prices about 10% for a few services, including childbirth.

QUESTION 2F CONTINUES ON THE NEXT PAGE

X26

QUESTION 2F CONTINUED

- Once Christian Congregations had eliminated childbirth services, Marta’s Midwives could no longer provide these services itself unless it entered a cooperating agreement with one of the other hospitals. It tried unsuccessfully to enter agreements with St. Stephen’s and Lasting Love, and declared bankruptcy in late 1996.

Marta’s Midwives sued the three Tugender hospitals under a variety of state and federal legal theories. The complaint included a claim for damages resulting from a horizontal market division in violation of Sherman Act §1. Discuss whether Marta’s Midwives would be successful on this market division claim. Assume that the Efficiency Agreement itself is sufficient to meet the concerted action requirement. Assume that the product market in which the legality of the market division will be judged is the market for medical services related to childbirth.

X27

2G. In the Spring of 2001, the new Dole administration dropped the government’s still-pending suit against Visa and MasterCard, issuing a statement saying that the intense competition among card issuers protected consumers from any harm resulting from supposed collusion among the managers of the two leading payment systems. Encouraged by the government’s stance, Visa and MasterCard merged into a single entity called VistaCard. The government did not challenge the merger. In 2002, the first full year of operation for the new entity, the shares of the leading players in the market (by dollar amount charged) were:

Payment Card Systems Payment Card Issuers

VistaCard 65% American Express 25%American Express 25% Citicorp 12%Discover 8% Discover 8%

First Chicago 5%HHI 4912+ MBNA 5%

Chase Manhattan 5%

HHI 908+

Early in 2003, engineers at VistaCard patented a new identification system that included new cards and new merchant verification machines. Each new card came with a one-inch square in one corner of the card that was covered by a peel-off plastic sticker. Consumers would peel off the sticker and immediately place their thumb on the exposed surface, which would take an impression of the thumbprint and quickly dry. When they purchased a product, consumers placed the new card and their thumbs into designated slots in the new verification machines. The machine would then (1) verify (through the thumbprint) that the consumer was the owner of the card; (2) indicate to the merchant whether the consumer had adequate credit to cover the sale; and (3) post on a screen visible only to the consumer the amount of credit the consumer had available on that card.

By the end of 2003, VistaCard had provided the new verification machines free to all their existing merchants. The accurate identification feature and the credit balance feature proved very popular with consumers.

Under the new system, as in the past, VistaCard charged merchants a percentage of each transaction. However, in conjunction with the new machines, VistaCard instituted volume discounts that allowed merchants to pay smaller percentages of their total transactions if the total reached certain benchmarks. For example, the VistaCard charge was 0.85% for merchants having up to $100,000 in VistaCard transactions in any given month; 0.83% for merchants with between $100,000 and $200,000; 0.8% for merchants between $200,000 and $500,000, etc.

QUESTION 2G CONTINUES ON THE NEXT PAGE

X28

QUESTION 2G CONTINUED

As a result of the volume discounts, many merchants encouraged their customers to use only VistaCard. Some merchants stopped accepting Discover and American Express. As a result, for the first half of 2004, the shares of the leading players in the market (by dollar amount charged) were:

Payment Card Systems Payment Card Issuers

VistaCard 73% American Express 20%American Express 20% Citicorp 18%Discover 5% First Chicago 8% Chase Manhattan 8%HHI 5754+ MBNA 7%Discover 5%

HHI 926+

Discover and American Express asked to purchase licenses to use the new technology, but VistaCard refused to negotiate with them. Worried by their declining market shares, Discover and American Express decided to merge. Their internal studies suggested that the new joint entity would better be able to develop services that could compete with VistaCard.

(1) Discuss whether any of VistaCard’s post-merger activities violate the antitrust laws. Do not discuss the legality of the initial merger between Visa and MasterCard.

(2) Discuss the legality of the proposed merger between Discover and American Express.

Assume that the relevant geographic market for both questions is the U.S.

X29

2H. Specter, Inc. was the only department store in Thomasville, a small midwestern city. In order to purchase appliances in Thomasville, consumers either had to shop at Specter or at one of three smaller discount appliance stores, Thurmond's, The Electronics Hatch, or Half-Price Heflin's. Of course, consumers always could drive 35 miles to the much larger metropolis, Silver City, where there were numerous appliance dealers, or could order appliances through mail order catalogues. Of sales made by Thomasville retailers of certain major appliances, including VCR's, televisions, microwave ovens, and refrigerators, Specter made between 45-55% and the three smaller appliance dealers split the rest roughly evenly. In the greater Silver City metropolitan area as a whole, Specter sold less than 5% of any one type of appliance. Specter's prices generally were slightly higher than those in Silver City itself, although rarely by more than 5%.

Earlier this year, Specter embarked upon a plan to increase its market share. First it entered identical contracts with the two newspapers that distributed Sunday editions in Thomasville. The contracts guaranteed that on Sundays, the newspapers would publish advertising for appliances only from Specter and not from the three smaller Thomasville dealers. The newspapers remained free to run appliance advertising from retailers from Silver City. In addition, Specter began running regular sales on popular brand-name appliances, such as the Biden-Your-Time VCR. Because it could get volume discounts, Specter was able to price these items just above its own costs, but below the costs that would be incurred on the same items by the three smaller dealers. In the first two months after implementing its plan, Specter increased its total sales by about 5%.

The three smaller dealers had previously spent much of their advertising budgets on ads in the Sunday newspapers. Deprived of this outlet, they jointly printed and delivered to most Thomasville residences on Sundays a four-page advertising flyer. Because the distribution costs were so high, the retailers could only afford to use the flyer if they worked on it jointly. As part of the arrangement, the three dealers agreed to advertise and sell certain key items at the same price. Thus, one week, the front page of the flyer said that all three dealers would sell the Simple Simon Easy-To-Use Microwave for $299.99. By listing only one price for all three dealers, they saved advertising space and could display more products in the flyer for less money. They also avoided customer confusion. Their agreement on price only applied to items advertised in the flyer during the week after the flyer was circulated.

Discuss whether these facts give rise to any of the following antitrust violations:

1) Attempted Monopolization by Specter

2) Illegal Concerted Refusal to Deal between Specter and the newspapers

3) Illegal Price-Fixing by the three smaller dealers

X30

Question 2J: Bates is a city of about 150,000 people located in a large Western state, more than 150 miles from any other significant population center. Many of its residents are employees or students at the state university (“the U”) located in the city. The media in Bates consist of:

- four local television stations, whose call letters are CGR, EGL, GFR and WLF;

- nine radio stations, including KIOT, which is owned and operated by the U;

- one daily newspaper and the university newspaper (published three times a week when school is in session).

All four TV stations and three of the radio stations (including KIOT) run regular news programming that includes coverage of local news. No media located outside Bates regularly cover local news from Bates.

The news shows produced by WLF were the most popular in Bates. WLF presented news from 5:30-6:30 p.m. and again from 10:30-11:30 p.m. It had photogenic news anchors*, a popular folksy cheerful weatherman, and a sportscaster who graduated from the U and had been an Olympic diver. As of late 1998, the percentages of news viewers in the relevant time periods watching each station’s news were as follows:

Early Evening (5-6:30 pm) Late Evening (10-11:30 pm)

CGR 13% 20%

EGL 16% 15%

GFR 7% 6%

WLF 64% 59%

Because of WLF’s larger following, it charged advertisers more for commercials during the news. However, the number of people watching all these news programs together never exceeded 40% of the people watching TV at any one time. The cost of ads during the news, even at WLF, remained well below the cost of ads during sports broadcasts, talk shows, and soap operas.

Early in 1999, WLF hired both the weather person from EGL’s early evening news show and CGR’s best sports reporter to work full-time doing feature stories and to sit in for the regular weather and sports reporters as needed. It advertised the new hires heavily (“WLF Evening News, now featuring … as well as your old favorites …”). WLF suggested that more hiring raids were possible (“You never know who will be next to join the most popular news team in Bates.”) even though none in fact were planned.

Alarmed, the producers of the news at EGL and CGR met to discuss ways to protect themselves from WLF. They decided to include KIOT in their plans. After extensive discussions, the three stations reached an agreement in August 1999 that included the following provisions:

QUESTION 2J CONTINUES ON THE NEXT PAGE

* “News anchors” are the “stars” of news programming. They sit at the main desks, read the major stories, and introduce on-the-scene reporters and the people who do sports and weather.

X31

QUESTION 2J CONTINUED

Pooling. EGL, CGR and KIOT will pool newsreporting. One reporter representing all three stations will cover each story. Each station will retain separate news anchors, weather and sports reporters, but will use all the reporters in the pool for on-site news and feature stories. CGR, EGL and KIOT will jointly select the most effective and popular reporters from all three stations to serve in the pool.

Allocation of Territories. Bates will be divided into two areas, North and South. EGL reporters will cover the North, CGR reporters will cover the South, and KIOT reporters will cover the campus. CGR and EGL will each, in alternate weeks, provide camera crews for the KIOT reporters. CGR and EGL will provide audio tapes of their own reporters’ stories for KIOT to use on its radio news broadcasts.

Allocation of Time Slots. CGR will broadcast TV news in the evenings only from 5-6 pm and 11-11:30 pm. EGL will broadcast TV news in the evenings only from 6-6:30 pm and 10-11 pm. No limits are placed on KIOT’s transmission schedule.

The August Agreement proved very effective in a remarkably short time. CGR and EGL used some of the cost savings stemming from the pooling arrangement to broadcast the news with fewer advertisements and heavily promoted this new arrangement (“Now with fewer commercials and more of the news you need.”). By March 2000, the percentages of news viewers in the relevant time periods watching each station’s news had altered to the following:

Early Evening (5-6:30 pm) Late Evening (10-11:30 pm)

CGR 22% 32%

EGL 29% 19%

GFR 5% 3%

WLF 44% 46%

In March 1999, the producers of GFR news asked if they could join the reporting pool. After discussions, CGR, EGL and KIOT refused the request, saying that GFR did not have any reporters with sufficient popular appeal to justify interfering with an arrangement that was working well. Shortly thereafter, GFR abandoned its evening news programs entirely, broadcasting reruns of old TV comedies in the relevant time slots.

You are an FTC attorney assigned to investigate the events described above. Your research has determined that the following state regulation is the only relevant provision governing conduct of the U:

Programs at state universities are authorized to enter into joint ventures with for-profit businesses. Such joint ventures may include the sales and marketing of exclusive rights to the university logo and mascot and to intellectual property created by university students and faculty.

Identify possible violations of the antitrust laws that might have occurred and, for each possible violation, discuss whether the FTC should take legal action and how likely it would be to succeed if it did. Assume that none of the conduct described here would violate any other state or federal law.

X32

2K. Based on the following facts, discuss whether the antitrust laws we have studied would be violated by (a) the exclusion of CHAD and DRAG from PLATTS; and/or (b) the proposed merger of CHAD and DRAG.

The market for legal services in Anchorage, Alaska, is divided up among several different types of entities. There are four major law firms with their main offices in Anchorage. From largest to smallest, they are:

Gibson, Eckert, Miller & Schumann (GEMS)

Stern, Cohen, Albu & Myers (SCAM)

Cadet, Holman, Alfonso & Diaz (CHAD)

Durkin, Rabbitt, Auborg & Gutierrez (DRAG)

The basic hourly charges for these firms, arrived at independently, range between about $150 for junior associates to about $350 for senior partners. These firms do most of the basic corporate legal services for the largest local businesses including contracts, real estate transactions, tax, labor, pensions and basic litigation. In addition, all but GEMS do trusts and estates work for local financial institutions and for relatively wealthy individuals. CHAD and DRAG also do some family law and white collar criminal defense work, also for relatively wealthy clients.

When Anchorage businesses have engaged in complex deal-making or litigation, they traditionally have employed law firms from Seattle. Although this practice has diminished as the four biggest Anchorage firms have become more sophisticated, the five largest Seattle law firms still do a substantial amount of work for Anchorage clients. The hourly rates for these firms range from about $225 to about $500.

In addition, many smaller firms and solo practitioners do business in Anchorage. These lawyers handle plaintiff’s tort claims, employee’s labor and discrimination issues, smaller family cases, criminal defense, trusts and estates, tax, etc. They charge a wide range of fees, but except for a few very specialized small firms, their hourly rates are not above $200.

In 2000, GEMS and SCAM agreed to jointly establish a business to provide litigation support for large civil cases. The business, known as Professional Litigation and Trial Technology Services (PLATTS) primarily organizes and summarizes documents and prepares trial exhibits. PLATTS allows GEMS and SCAM to provide these services more efficiently than they had in the past and more cheaply than the Seattle firms can. PLATTS provides its services to GEMS and SCAM and to some other Anchorage law firms, but will not do business with CHAD, DRAG or the Seattle firms.

QUESTION 2K CONTINUES ON THE NEXT PAGE

X33

QUESTION 2K CONTINUED

As a result of PLATTS, GEMS and SCAM were able to draw litigation business away from both the Seattle firms and from CHAD and DRAG. The charts at the bottom of the page show the extent of the changes from 1999, the year prior to the creation of PLATTS, to 2001, the first year it was fully operable, under two plausible definitions of the relevant market.

Early in 2002, CHAD and DRAG began negotiations to merge in order to compete more effectively with GEMS and SCAM. The charts at the bottom of the page show effects of the potential merger under the same two definitions of the relevant market. If all Anchorage law firms and solo practitioners are included in the market, you can assume that the relevant HHI figures both before and after the proposed merger would be well below the thresholds that attract scrutiny under the Merger Guidelines.

(1) Market Shares/HHI (measured in billable hours)(If Market = Large Anchorage Firms)

1999 2001 If MergerGEMS 36 40 40SCAM 28 30 30CHAD 20 15 30DRAG 16 15 --HHI 2736 2950 3400

(2) Market Shares/HHI (measured in billable hours)(If Market = Large Anchorage Firms + Anchorage business of Seattle firms)

1999 2001 If MergerGEMS 27 32 32SCAM 21 24 24CHAD 15 12 24DRAG 12 12 --SEATTLE 5 25* 20** 20HHI 1672 1978 2266

* 7 + 5 + 5 + 5 + 3 = 25** 6 + 5 + 4 + 3 + 2 = 20

X34

2L: Discuss whether any of the conduct described in the following scenario violates Sherman Act §2 or Clayton Act §3. Assume that any relevant geographic markets are national.

“Organic” baby food differs from non-organic baby food in three important ways. First, the FTC only allows the baby food to be designated “organic” if it meets several criteria:

it includes only fruits and vegetables grown “organically”, which means, among other things, that the farmers use no pesticides and only natural fertilizers.

it includes only animal products processed in particular ways that are considered less cruel to the animals

it includes no artificial coloring, flavoring or preservatives

Second, “organic” baby food generally is not sold in ordinary grocery stores, but in health and natural food stores, through the internet and by mail order from ads found in health-focused periodicals. By contrast, non-organic baby food is marketed through grocery stores in roughly the same way as described in the Antitrust Revolution case study of the failed merger attempt by Heinz and Beech-Nut.

Third, as of late 2003, organic baby food typically retailed at prices 40-60% higher than those for the non-organic products of Gerber (the leading manufacturer). For example, a 4-ounce jar of Gerber non-organic strained carrots normally retailed for 79¢, while a similar jar of “organic” carrots cost $1.15 per jar by mail order and often retailed for $1.29 in natural food stores.

Earth’s Best manufactures “organic” food products, including 92% of the “organic” baby food sold in the U.S. in 2003 (the other 8% was produced by very small local companies). In addition, Earth’s Best owns and operates a monthly magazine called “Child of Nature,” targeting parents who wish to raise their offspring in an “organic lifestyle.”

At the very end of 2003, testing by an independent consumer group revealed traces of a dangerous pesticide in two of the baby food flavors sold by Heinz. The press publicized this news extensively and sensationally (“Are You Giving Your Baby Poison for Xmas?”). Gerber products had recently been tested by the same consumer group and found to be safe, so Gerber was able to do quick and extensive publicity to protect its sales.

Because of the baby food “crisis” and Gerber’s fast response, many consumers switched from Beech-Nut and Heinz to Gerber and to “organic” baby foods. Earth’s Best quickly found itself manufacturing at maximum capacity and arranged to build an additional plant that it expects to complete in 2007. During the first four months of 2004, Earth’s Best made 97% of the “organic” baby food sold in the U.S., and was able to raise its prices by 10-15% without losing sales. The percentage of all baby food sold in the U.S. by the four largest manufacturers had shifted as follows:

QUESTION 2L CONTINUES ON THE NEXT PAGE

X35

QUESTION 2L CONTINUED

2003 2004(Jan-Apr)Gerber 65% 76%Heinz 17% 6%Beech Nut 15% 12%Earth’s Best 2% 4%

On May 1, 2004, Gerber introduced an “organic” baby food of its own called “Baby’s All Natural from Gerber’s” (BANG). It sold BANG at prices about 25% higher than those it charged for its non-organic products. BANG was not an instant success. Many consumers wondered why they should pay more for BANG when ordinary Gerber’s was safe. Some grocery stores and some natural food stores independently decided not to stock BANG.

Gerber tried to purchase ads for BANG in Child of Nature, but the magazine refused to run them. In addition, the magazine ran a column in its July 2004 issue, negatively “reviewing” several BANG flavors, concluding,

The attempt by the ultra-corporate megafirm to take advantage of the recent pesticide crisis to belatedly enter the health food business has resulted in bland and unappealing mush. We expect that “BANG” will soon be “DEAD.”

As of November 30, Gerber had only managed to capture about 8% of the US sales of “organic” baby food and had not significantly altered its share of all baby food sales. Earth’s Best continued to sell out all the baby food it produced. As of December 1st, Gerber embarked on the following three-prong plan to try to capture market share from Earth’s Best:

(1) Gerber required grocery stores which purchased its non-organic baby food to devote 20% of their Gerber shelf space to BANG products.

(2) Gerber had discovered that Earth’s Best used several types of genetically modified vegetables in its baby food. Gerber knew that neither published reports nor its own internal studies showed any evidence that using genetically-modified vegetables created any risks for consumers. However, it hired a lobbyist to try to convince the FTC to change the criteria for “organic” baby food to exclude genetically modified vegetables.

(3) Earth’s Best had been buying most of its baby food jars from Gerber under a contract that was due to expire at the end of 2004. Although the parties had been in negotiations and were close to completing a deal to renew the contract, Gerber suddenly announced it had decided not to renew.

X36