Antitrust I OutlineProfessor Meyers

Fall 2012______________________________________________________________________________

The Antitrust laws protect competition, not competitors

I. Introduction to the Competition Model

A. Antitrust Generally- Antitrust – the law of competition that regulates how businesses can compete.

o Not concerned with whether competition is fair because we deal in a free enterprise society and expect to have winners and losers.

o Antitrust laws want vigorous competition so consumer will get the best possible price Ultimate beneficiary of Antitrust laws – Consumer

- Antitrust Exemption – it is possible to have an exemption from the antitrust laws and they will not apply to you.o Ex. Players Associations, Owners Associations, Unions – employees collectively bargaining for

what they will get paid

B. Antitrust Laws- Federal Antitrust Statutes

o Sherman Act General – Passed in 1890, it is still basically the same it was then. There was basically no

regulation before the enactment of this and Teddy Roosevelt vigorously enforced it after its passage.

Statute is very lean but there is thousands of pages of case law interpreting it. Violation of the Sherman Act is a felony

o Government can enforce civilly or criminallyo Private Actors can enforce civilly

§1 – prohibits every K, combination or conspiracy in unreasonable restraint of trade 2 Elements to §1 Violation:

o 1. K, Combination or Conspiracyo 2. Acts in Unreasonable Restraint of Trade

Does not mean any contract in restraint of trade (every contract restrains trade) but courts have interpreted it to be a contract in unreasonable restraint of trade

§2 – prevents monopolization, attempts to monopolize or conspiracy to monopolizeo §3 Clayton Act

Purpose - Restricts buyer from agreeing not to deal with the other sellers if it substantially lessens competition or tends to create a monopoly

Only deals with goods, not services Effects Clause (Substantiality Test) - § 3 is violated “where the effect of such lease, sale, or

Kx may be to substantially lessen competition OR tend to create a monopoly.”

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Substantiality Elements – No violation unless it’s probable that performance of the Kx will foreclose competition in a substantial share of the line of commerce effected. o 1. Define the Product Market (line of commerce)o 2. Define the Geographic Market (relevant area of competition)o 3. Whether the Kx covers a substantial share of the relevant geographic market

(market power) IF all 3 met, § 3 violation

Substantiality test is a lesser hurdle b/c the only proof needed is that it “tends to harm competition” rather than “harms competition” (Sherman Act)

Penalties – Same as Sherman Act civillyo §5 Federal Trade Commission Act – enforceable only by FTC

Courts have construed this to be subject to all the tests of §1 Sherman

- Oklahoma Antitrust Statutes o Antitrust Constitutional Provisions:

Art. 2 §32 – Monopolies are contrary to the genius of a free government and shall never be allowed

Art. 5 §44 – Legislature shall define unlawful combination, monopoly, trust, act or agreement and enact laws to punish those engaged

Art. 9 §45 – No discriminating by pricing for the purpose of creating a monopoly or destroying competition

o Oklahoma Antitrust Reform Act – Mention this Statute on Final – point 79 OS §203(A) – K, Combination, Conspiracy or Act in restraint of trade or commerce

within OK is illegal 79 OS §203(B) – Unlawful for person to monopolize, attempt to monopolize or conspire to

monopolize 79 OS §203(D)(1) – Definition of Monopolize

Possession of MP in relevant market and exclusionary conduct 79 OS §203(D)(2) – Definition of Monopoly Power

Power to control price or exclude competition 79 OS §203(D)(3) – Essential Facilities Doctrine

Facility: (a) controlled by an entity with MP, (b) that a competitor would be unable to duplicate, (c) the use of which has been unreasonably denied to a competitor or customer, and (d) it would be feasible to allow competitor or customer use without causing harm or unreasonably interfering with the entity with MP.

o Restraint of Trade Statutes: 15 Okla. Stat. §217 – Restraint of Trade: Every Kx by which any one is restrained from

exercising a lawful profession, trade, or business of any kind, otherwise than as provided by §§ 218 and 219, is to that extent void.

Exceptions:o 15 Okla. Stat. §218 – Exception as to Sale of Goodwill

One who sells the goodwill of a business may agree w/ the buyer to refrain from carrying on a similar business w/in a specified area (i.e., town, county, etc) so long as the buyer, or anyone deriving title to the goodwill, carries on a like business. While such agreements are valid, they’re only valid w/in the county comprising the primary place of the conduct of the business and w/in any contiguous counties.

o 15 Okla. Stat. §219 – Exception as to Partners

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Partners, when anticipating the dissolution of their partnership, may agree that none of them will carry on a similar business w/in a specified area (i.e. town, county, etc.). While such agreements are valid, they’re only valid win the county comprising the primary place of the conduct of the business of the partnership and w/in any contiguous counties.

o 15 Okla. Stat. §219A – Noncompetition Agreements If you engage in a non-compete agreement, you can engage in the same

business as your former employer as long as you don’t sell the same stuff or service.

- Enforcement o Jury Trial

Entitled to jury trial if seeking damages Not entitled to jury trial if seeking injunction

o Entities that can enforce Antitrust laws: 1. Federal Government

There are agreements among federal entities as to who will bring which kind of action:o Department of Justice – only entity that can bring both a criminal and civil

actiono Federal Trade Commission – can bring civil action but not criminal

Civil Actions by Federal Governmento If private parties have been harmed, Federal Government can bring suit for

injunction only.o If Federal Government has been harmed, they can get damages or injunction.

Criminal Actions by Federal Governmento Penalties:

Individuals – Up to 10 years in prison and fines up to $1 million. Corporations – Fines up to $100 million.

2. State Attorney General can bring an action on behalf of state:

o 1. If state is harmed, oro 2. On behalf of citizens (parents patriai)

States can recover damages or injunctive relief 3. Private Parties

95% of all antitrust cases are brought by private parties Private parties can seek damages or injunctive relief Damages:

o Treble Damages – plaintiff’s are entitled to recover their damages x3.o Plaintiff Attorney’s Fees – plaintiff’s, if successful in their claim, will recover

reasonable attorneys fees Note: Defendants do not get their fees if they win. (were it otherwise,

plaintiff’s attorneys would fear going out of business because antitrust suits cost 500K to 1M to bring)

Policy – Damages and attorney’s fees provide huge incentives for plaintiffs to bring actionso Government does not have the resources to find every company doing wrong so

they incentivize private parties to bring actions.

- Common law legacies

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o Naked Restraints – restraints which don’t have a main valid purpose and are thus, illegal. Restraint of trade must be ancillary to a valid purpose, otherwise considered a naked restraint. (Addison Pipe & Steel)

C. Determining §1 Sherman Act Violations- To constitute a §1 violation you must have:

o K, Combination or Conspiracy Single actors cannot violate §1 of the Sherman Act

o Acts in Unreasonable Restraint of Trade 3 Tests to determine if restraint of trade is unreasonable:

1. Per se Test – Applies to conduct so inherently anticompetitive that it is unlawful on its face and has no redeeming value in the marketplace (more likely to be applied in horizontal cases).o Injury to competition is inferred (no need to prove)o Procedure – Π puts on evidence and judge determines he does not need to hear

anymore (Δ cannot respond why he did it, but only that he did not do it) Application of per se ends inquiry; once restriction is proven to exist, Δ

does not have opportunity to say why they did it (irrebuttable presumption of illegality).

If applied, all Δ can do is try and limit the damages.o Rule of Judicial Economy – if the courts have previously applied a per se rule for

similar circumstances, they are more likely to apply it again. 2. Rule of Reason – Applies to conduct that might have some redeeming value

through its pro-competitive effects (more likely to be applied in vertical cases).o Must prove injury to competition (detrimental effects Ex. Reduction of output)

Determine if conduct is AURT and ask if it has injured competition AURT – must be unreasonable in a certain market so you must

define the product and geographic markets If actual harm can’t be shown, prove that D has monopoly power (and

detrimental effects will be inferred) – DO WE HAVE THIS BACKWARDS?

o Test – Balance of pro-competitive and anti-competitive effects. If acts are more pro-competitive Not unreasonable

Ex’s. eliminate Intrabrand competition to promote interbrand competition, eliminate free-riding, maintain quality (product image)

If acts are more anti-competitive Unreasonableo 3 factors considered:

1. Nature of the Conduct – What is the conduct and who controls it 2. Scope of the Conduct – Effect on supply and demand 3. Effect of the Conduct -

o Procedure – Π puts on evidence of §1 violation and shows how anti-competitive the acts are and then the Δ puts on evidence why they did what they did and how it was in fact, pro-competitive.

3. Quick Peek/Quick Look – Applies to same conduct as RR but court feels like such an in-depth analysis is not necessary.o Supreme Court has never applied QP nor affirmed cases that applied QP rule.

Specific Intent (Criminal Only)

II. Cartels & Other Joint Conduct by Competitors 4

A. Horizontal Restraints – (AURT Element)- General – Inter-brand competitors that agree to restrain trade through some conduct (could be buyers

or sellers).

- Price Fixing – generally receives PER SE test, but there are exceptionso RR Exceptions:

Price fixing is acceptable when it enhances/facilitates competition (Chicago Board of Trade) The more often the price is subject to change and the greater impact the market has an

impact on the price, the more likely the RR will be applied. Courts may use the RR when current economic conditions require (Appalachian Coal)

Ex. Depressiono Reasonableness of price fixed can never be a defense – unlawful per se (United States v. Trenton)

Reasonable price today is an unreasonable price tomorrowo Summary – normally apply per se analysis to agreements that fix price – but if you can argue that

agreement has purpose and effect of making market function more competitively or of creating efficiencies, effect on prices may be viewed as merely an ancillary restraint and subject to RR.

- Supply and Output Restrictions – restriction on output or supply with purpose of affecting price – PER SEo Under the Sherman Act, a combination formed for the purpose and with the effect of raising,

depressing, fixing, pegging, or stabilizing the price of a commodity is illegal per se. – put this quote on exam

o When setting price is not ancillary to a main valid purpose, it is a naked restraint and unlawful per se under §1. Price setting could come in the form of restriction of supply or output. (Socony-Vacuum) Efforts to “stabilize” price are not a defense and are still unlawful

Horizontal agreements must Leave Price Alone

- Agreements Limiting Price Competition – fee schedules (minimum or maximum) arrived at among competitors are typically violative of §1 under PER SEo Ex. Minimum fee schedules for lawyers were found to be violations (Goldfarb)o There is no exemption for professional services (Arizona v. Maricopa County)

- Data Dissemination and Information Exchange – you are more likely to be found in violation of §1 if your exchange involves current information that stabilizes price.o Usually judged under RR unless the intent of the information exchange is solely to affect price

(American Column)o Non-legitimate business reasons for exchanging information – dividing territories, fixing priceso Legitimate – sharing information through trade organizations

Trade Associations – where competitors come together to share mutual industry interests and objectives and to collect and share industry data.

Main Question – determine if the cooperative commercial arrangement has the effect of limiting competition by facilitating price coordination (Hovencamp)o The more recent or confidential the information, the more likely violative of §1.

o Market Structure – great weight is placed on market structures when performing a §1 analysis

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Oligopolistic Markets with Homogenous Product – With so few competitors, excess capacity and a fungible product, you expect price to be stable because it is very important and that is the competing point (U.S. v. Container Corp.)

Ex. Gas – competition is on price and there are few competitorso Summary – Not every exchange of sales or price information between competitors will be per se

violations (if you have a “fake Trade Association” but are just trying to manipulate prices, per se bitches). Determine if violation of §1 by looking at the exchange of information and structure of the market.

- Meaning and Scope of the Rule of Reason o Reasonableness is not a defense under the RR (just because it is reasonable, you cannot take price

out of the equation) – The RR looks to the harm to competitiono Joint Ventures – horizontal competitors banding together with consent to provide a product not

available on an individual basis. Courts are likely to apply RR because there is usually a reason other than price fixing that the

competitors got together Trying to achieve a legitimate result that cannot be achieved individually

o Ex. Sports Leagues – if there was no cooperation among competitors, there would be no product

B. Proof of Agreement (K, Combination or Conspiracy)- General – §1 of the Sherman Act requires proof of a K, Combination or Conspiracy but it is hard to

show that this exists.o Best Form – Direct evidence of competitors getting together to agree

Rarely ever found so usually proven by circumstantial evidence (Evidence showing “meeting of the minds,” concerted action, or mutual understanding sufficient to support inference of agreement)

- Conscious Parallelism – when one company changes their prices to a certain price and another company notices and changes their price similarly.o Looking for evidence of a conspiracy from conscious parallelism

You can infer a conspiracy without an express agreement (Interstate Circuit)o A conspiracy is not established solely because a group of competitors acted in a like manner

(Theatre Enterprises)o To infer a Conspiracy you must have Conscious Parallelism + “plus factors”

How to determine conscious parallelism: Nature of proposal Communication of proposal Departure from prior policy Unanimity of action Evidence used to dispute

o Production of weak evidence when strong is available, jury will be instructed that the strong information, if given, would have been unfavorable

“plus factors” = Evidence indicating that competitors were involved in: 1. A proposal for joint action, 2. A complex yet identical set of responses, 3. Direct communication or an opportunity for it, 4. A failure to deny agreement, or

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5. A set of circumstances which made each participant aware that it was in its interest to participate if all did, but adverse to its interest to participate if others did not.

- Oligopoly Pricing and Facilitating Devices o Oligopoly – a market with few sellers

More oligopolistic the market, then more likely an exchange of information will encourage price collusion

- Intra-Enterprise Conspiracy o General Rule – A parent corporation and its wholly owned subsidiary are legally incapable of a §1

Sherman Act conspiracy Sub Rules – If entities are incapable of conspiring, say “they’re incapable of conspiring

because they have a Unity of Interest” 1. Parent and Wholly Owned Subsidiary – Cannot conspire 2. Parent and Unincorporated Division – Cannot conspire 3. Parent and 2 Wholly Owned Subsidiaries – 2 Subs cannot conspire 4. Parent and Partially Owned Subsidiary (51%) – Less clear, but if parent owns

controlling interest and has power to control business operations, cannot conspire. 5. If parent owns less than 50% - Probably held to be able to conspire

o Gap in Sherman Act coverage for Individuals (or Parents/Subs treated as individuals) – $***WILL BE ON FINAL***$

MARKET SHARE CHARTMarket Share Conspiracy Individual Activity

50-100% §§ 1 & 2 § 230-49% §§ 1 & 2 § 20-29% § 1 GAP

o Interpretation of Chart Gap – If you’re an individual with < 30% market share, you are not liable for either a § 1

violation (unreasonable restrain of trade) or § 2 violation (monopoly or attempt to monopolize)

Policy – Congress didn’t want to make the rules so restrictive as to inhibit vigorous competition

o Oklahoma Antitrust Act – Has plugged the gap (on exam) § 203(A) – Every K, Combination, Conspiracy, or Act

This is not in Sherman Act Effect - Plaintiff can bring action against a single actor who is unreasonably restraining

tradeo Covers all firms, regardless of size

OK is the only state with this

- Burdens of Proof and Summary Judgment Problems o Economic Context - If the economic context of the conspiracy is implausible, P must meet a

higher burden of proof on a summary judgment motion than they otherwise would (Matsushita) Ex. If D lowered prices to knock out competitors, but it would take 25 years to recoup the

losses, and in the meantime new competitors could enter the market anyways because of low barriers to entry.

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C. Market Allocations- Horizontal Market Divisions – When competitors get together and decide how they’re going to divide

the marketo Examples

Geographic / Territorial – Ex. Plumbers in Norman agree that 1 will take the north half, one will take the south

Traditionally per se illegal (U.S. v. Topco), though today probably ROR By Customers – Ex. Competitors agree that 1 takes retail, 1 takes wholesale, and 1 takes

governmental entities According to Products – Ex. Competitors agree that 1 will sell the “heavy” stuff and 1 will

sell the “light” stuffo Intra-brand v. Inter-brand

Intra –Intrabrand competition is the competition between the distributors of the product of a particular manufacturer.

Inter – Interbrand competition is the competition among the manufacturers of the same generic product

This is the type of competition the antitrust laws are designed to protect, even at the expense of intra-brand competition

Note: Courts are more lenient on intra-brand restraints than on inter-brand restraintso Exception – A horizontal agreement not to compete judged by ROR if ancillary to a valid

business purpose (Polk Bros. v. Forest City Enterprises) Ancillary – Part of or attached to an otherwise valid joint venture

D. Boycotts and Other Concerted Refusals to Dealo Boycott – Concerted refusal to deal

Individual boycotts are OK, but you can’t lobby others to do the same (b/c it may take form of conspiracy)

Horizontal Boycott v. Vertical Boycott Horizontal – When competitors conspire with each other

o True horizontal boycotts (i.e., retailers agreeing w/ other retailers to not deal w/ a new retailer) would have no effect b/c they don’t deal anyway. Most boycotts have vertical aspects to them.

Vertical – When competitors conspire with seller/buyer for the latter not to supply or buy from another particular competitoro Classic Boycott - Retailers joining together and threatening wholesaler that

they’ll collectively stop dealing if they deal with the new retailer across the street. This creates a barrier to entry and tends to restrict output.

o Development of a Per Se Analysis: Collective Agreements Aimed at Competitors Implied Boycotts – Even if no explicit exists, boycotts can be implied from conduct (Eastern

States Retail Lumber Dealers’ Ass’n) On exam, prove the implied boycott with a conscious parallelism analysis

Standard Classic Boycott (horizontal agreements among direct competitors) – per se Everything else – ROR WHAT’S AN EXAMPLE OF A NON-CLASSIC

BOYCOTT?o Industry Self-Regulation and Disciplinary Actions

Rule: Apply per se rule if a cooperative buying arrangement has: Strong Market Power – Boycotting firm has dominant market share

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Control over an Essential Facility – Boycott cuts off access to supply, facility, or market necessary to enable the boycotted firm to compete (NW Stationers v. Pacific Stationery & Printing Co.)

Note: P must make threshold showing that anticompetitive effects are likely (either b/c of market power or exclusive access), and if successful, per se applies. If not, ROR applies.

III. Vertical Restriction

- General o Definition – Agreements b/w manufacturer & distributor, or b/w wholesaler & retailer, or b/w any

two sequential parties in production-distribution chain. Quick Rules

Setting Minimum Price – Per se Setting Maximum Price - ROR

o Types of Vertical Restraints – 1) Resale price maintenance (RPM), 2) market division, 3) exclusive dealing, & 4) tying arrangement

- Intra-Brand Distributional Restraints o Resale Price Maintenance – Manufacturer sets price at which the product will be distributed

1. Setting Vertical Minimum Prices Rule - Per se violation of § 1 for seller (manufacturer) contractually to set minimum

price at which buyer can resale product (Dr. Miles Medical Co.) 2. Consignment Contracts as Means to Control Vertical Price

Definition – Owner placing goods in hands of another who agrees to sell them, but title remains with the manufacturer

Rule - Owner of the products may set the price at which the dealer is to sell it unless the consignment device is being used to as a vast manipulation of distribution. (Simpson v. Union Oil)

3. Unilateral Refusal to Deal as Means to Enforce Vertical Price Maintenance: The Colgate Doctrine

Colgate Doctrine – In the absence of a purpose to maintain or create a monopoly, the Sherman Act does not restrict the right of parties to choose with whom they deal. (U.S. v. Colgate)o Test: You can refuse to deal if: 1) you’re not maintaining or creating a

monopoly, and 2) you’re not conspiringo Can refuse to deal with retailers who won’t follow your policy, but can’t use

refusal to enforce your policy. If a monopoly is found and Colgate therefore doesn’t apply, does that mean we have a

§ 2 violation? 4. Vertical Maximum Price Fixing

Rule – Vertical maximum retail price maintenance is judged under ROR Intrabrand restrictions are OK if they foster interbrand competition b/c the policy of

antitrust laws is to promote interbrand competitiono Ex. Gas manufacturers make the same profit per gallon sold no matter where the

stations set their own prices. However, mfrs have interest in stations not raising prices b/c it would reduce how much they buy from the mfrs. Because mfrs would be selling more, this makes the mfrs brand more competitive in the interbrand market.

5. Dealer Termination

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Issue – Terminated dealer asserts that his termination (or failure of his Kx to be renewed) was caused by his failure to adhere to vertical restraints imposed on him by manufacturer or supplier.o More of these cases than any other antitrust cases

Rule – To get per se, P must show: o 1) there was an agreement b/w dealer and mfr (not unilateral terms by

distributor); ANDo 2) it was a minimum price, not a non-price, agreement (if max price, ROR)

Failure to show (1) = termination is legal (just “got fired”) Failure to show (2) = analyzed under ROR (typically found legal)

o Non-Price Standard – Basically a presumption that restrictions are non-price. If there’s any plausible purpose that makes sense for terminating this dealer that doesn’t involve price, we will assume it’s non-price (and apply ROR if it’s a max limit, per se if min limit [and agreement])) (Business Electronics v. Sharp Electronics)

Ex. of Non-price purpose – To provide better service to your customers, territorial restrictions

Vertical Price-Fix Conspiracieso Rule – To infer a vertical price-fix conspiracy (1st element of § 1), there must be

evidence that excludes any chance that mfrs and distributors were acting independently

Complaints (i.e., from fellow distributors that you are selling at a lower price) followed by termination are not enough to infer a conspiracy

o Territorial & Customer Restraints Territorial Non-Price Restriction – General rule is to apply ROR (Continental v. Sylvania) –

Note: We’ve already said this when we said non-price restrictions are ROR Exception – per se when the economic effect of the territorial restriction is pernicious

ex: manufacturer has high market power so that retailers can charge premium over competitors b/c they don’t have to compete w/ other intra-brand competitors

Justifications:o New mfrs give retailer exclusive territory to induce them to make good

investment into franchiseo Mfrs use to prevent free riding where cheap retailer is benefiting from poor

retailer’s advertising efforts and undercutting them on price which could put good retailer out of business.

- Inter-brand Vertical Foreclosure – ex. Seller 1 sells to Buyer 1 on condition that they won’t deal w/ S2. B1 is foreclosed from dealing w/ S2, and therefore inter-brand competition b/w S1 and S2 is restricted.o Exclusive Dealing under ROR

Clayton Act (see above) Types of Kx’s

o Requirements Kx’s – Whatever the buyer requires must be bought from a particular seller

Prohibition is upon sellers (lessor) extracting a requirements Kx (not the other way around ) – Basically seller is in wrong if they force buyer.

Subject to ROR under § 3 Clayton Act and § 1 Sherman Acto Output Kx’s – Whatever the seller produces must be sold to a particular buyer

Not subject to § 3 (still potential § 1 problems)

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o Tying Arrangements – Definition – Seller selling product 1 on the condition that buyer also has to buy product 2

Anti-competitive impact of tying is that you have substantially foreclosed interbrand competition for the less desirable tied product.

Ex. Microsoft – Sells hardware, but requires you to also buy Office, Internet Explorer, etc.

Note: All tying arrangements are exclusive dealing arrangements, but not all EDA’s are tying arrangements

Development of Unique Per Se Rule for Tying Arrangements Elements of Tying Arrangements

o 1. 2 Separate Products Factors to consider if you have only 1 product: (a) physical

characteristics, (b) business justification (i.e., cost efficiencies), (c) usage, (d) whether the challenged aggregation is an essential ingredient of the products success, (e) the industry trade practices, (f) whether the products are ever sold in separate markets

o 2. Sufficient power in tying product market; AND Just have to have enough market power for coercion to be possible and

the tying arrangement to work Note: Element was “substantial monopoly power” before Northern

Pacific RRo 3. Substantial commerce is affected in tied product market

Sherman and Clayton must both have (2) and (3) Proof of Tying Product Power (element #2)

Issue – What kind of proof do you need to show that D possesses sufficient economic power in the tying market?

New Standard – P must prove that D has sufficient market power to pull of the tying arrangement (seller has advantage not shared by competitors) (US Steel Corp. v. Fortner) (element #2)o How to prove and how much: Can’t use % alone – must take % in context of

time and trends of the marketo Old Standard (don’t use)

Sufficient mkt power proven if you had a unique product Sufficient mkt power proven if you merely had a tying arrangement.

Can a manufacturer have sufficient monopoly power in his own product?o Yes – Mfrs can have monopoly power in his own product (Eastman Kodak Co.

v. Image Technical Services) Note: Meyers thinks this holding was just the SC helping out P b/c the

situation was unfair. Lock-In Situation – ex. Once you buy copier from Kodak, you’re

locked in to parts and service from Kodak. Package Licensing and Bundling: Intellectual Property Licenses

Defined – When a product is bundled together to be sold/leased under a single unit price.

Old Rule – You can infer market power if D has a copyright or patent on the tying product, and it’s a per se violation. (U.S. v. Loew’s, Inc.)o NO LONGER THE RULE – Now, copyright alone isn’t enough to infer

market power. However, it is a Sherman Act violation to license one product on the condition that you have to take another.

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o Now judged under ROR Full Line Forcing, Full System Contracts, and Franchise Arrangements

Definition – When a supplier requires a dealer to purchase a complete line of related products, though the tied products are less desirable. o ex. Mazda dealers must buy the entire line – can’t cherry pick the most

profitable designs. Standard: ROR

o Business justifications for restrictions that were valid at the inception can become invalid with the passage of time (U.S. v. Jerrold Electronics Corp.)

Summary of Tying Arrangements Tying Arrangements get a unique per se analysis:

o 1. Is there a coherent basis for distinguishing the two products?o 2. Does defendant possess sufficient economic power in the relevant market of

the tying product? Can tying product market be appreciably restrained by Δ? Must define relevant market

ROR Exceptions:o 2 definite exceptions:

1. Package licenses and bundling 2. Full Line Forcing

o All others get unique per se analysiso ROR Ask:

Are there two distinct products? Are there more anti- or pro-competitive effects from the tying

arrangement?

IV. Monopoly Structure, Power & Conduct

- General o Sherman Act

§1 – Two Components: 1. K, Combination or Conspiracy 2. Acts in unreasonable restraint of trade Claims evaluated under per se or RR

§2 – no per se or RR analysis Very different from §1, although same conduct can violate both sections Single entities can violate §2 as opposed to §1 (and multiple parties can join together

to violate §2 as well)o Oklahoma Counterpart – 79 O.S. 203(a) (see above)

o § 2 Prohibitions 1. Monopolizing (verb implying action) – taking some kind of action in the context of being

a monopoly Doesn’t prohibit having a monopoly, just monopolizing Principle Fear – Companies will charge monopoly price and reap monopoly profits

2. Attempts to Monopolize 3. Conspiracy to Monopolize – pretty much a dead letter in the antitrust law

There can be no violation for conspiracy to attempt Courts basically ignore this because the test is subsumed in the tests for 1 and 2

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On Exam – must list all 3 if asked broadly “What does §2 prohibit”o Monopoly Terms

Monopoly Power – The power to control price or exclude competition Limit Pricing – Pricing at a level that is not below your cost but makes the market less

attractive and limits new entrants (legal) New entrants will see the start up cost and measure that against the pricing they will be

able to charge and the profits will not be as attractive. Predatory Pricing – Pricing below your cost to drive out competitors (not legal) Price Umbrella – Pricing high enough so competitors can come into the market and steal

market share while making money because you are pricing so high (legal and stupid) Barriers to Entry -

A. Monopolization- Problem of Monopoly

o 3 Possible §2 Monopolization Tests Most Hostile Test

MP = Monopolizationo Not used today

Classic Test MP + bad acts = Monopolization

o Bad acts are acts that could constitute AURTo Not used today

Intermediate Test (test used today and on exam) MP + Exclusionary Conduct = Monopolization

o 1. Monopoly Power – power to control price or exclude competition Inference of Monopoly power from market share

Market Share – define product and geographic markets 30/60/90 test –

o 30% - no presumption of MPo 60% - unclearo 90% - presumption of MP

o 2. Exclusionary Conduct – conduct that is not competitively inevitable (conduct outside your competitively inevitable conduct)

On Exam – Draw distinction between classic test bad acts and exclusionary conduct by saying it is not conduct that would be a violation of §1 (AURT) but is conduct that is not competitively inevitable

o Defenses to Monopolization (Applying these shows your conduct is not exclusionary) 1. Passive Beneficiary – There was no choice to monopolize, it just naturally happened.

Ways to happen:o Competitors drop out on their own and market share goes to Δo Too hard to get in marketo Great Barriers to Entry – Δ has such a good persona that any attempt to take a

portion of the market share would be too costlyo Market cannot support more than one competitor

Ex. Newspaper or movie theatre in small town 2. Natural Monopoly/Thrust Upon – Innocent monopolist

No one interested in getting in the market 3. Superior Skill, Foresight and Industry

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Monopoly Power gained just by being better than everyone If you engage in exclusionary conduct, this defense doesn’t work

4. No Excess Profits – Consumer is not being gouged or mistreated Doesn’t usually work

- The Modern Offense of Monopolization o Defining Monopoly Power

2 Ways to Show Monopoly Power: 1. Direct evidence of controlling price or excluding competition 2. Inference of MP from sufficient market share to control prices or exclude prices

o To get Market Share: 1. Measure Product Market 2. Measure Geographic Market 3. Determine total sales in market (geographic and product) 4. Determine Δ’s sales in market

Measuring Product Market General

o This is where the fight in litigation is (if you win this fight, you usually win the case)

Plaintiff wants to define market narrowly because they can establish MP easier (low cross elasticity of demand and supply).

Defendant wants to define it broad so they will not have MP in the market (high cross elasticity of demand and supply).

o Analyze both supply and demand side of market on exam Definition of Product Market

o When trying to find a product market, look to other products that are interchangeable and substitutable if the defendants product has been raised to a price that is unacceptable and you want a change (DuPont)

Market share diminishes with each substitute Factors determining Interchangeability or Substitutability:

Price – similar price Use – similar use Characteristics – similar characteristics

o Cross Elasticity of Demand – Looking from consumer’s viewpoint to see how many substitute products you could turn to if the price of your product got too high or if it were otherwise unavailable. (DuPont)

Spectrum of Cross Elasticity of Demand High – many products are within the same product market because

there are many substitutes Low – few products are within the same product market because

there are few substitutes Example

Dr. Pepper monopoly? – If they were to go up 5 dollars what could you substitute?o Substitutes – Coke, Pepsi, Root Beero With each substitute added, market share moves downward

o Cross Elasticity of Supply – Looking from supplier’s viewpoint to see how many products could be easily altered (for low cost) to be substitutable or

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interchangeable with product in question if the product in question’s price was raised or otherwise unavailable. (Telex v. IBM)

Spectrum of Cross Elasticity of Supply High – many products that are within the same product market

because they could easily be altered to make them into substitutes. Low – few products that are within the same product market

because altering them would not make economic sense Actual fungibility is not required (doesn’t have to be an automatic

substitute) Example

IBM monopoly? – What products could be altered easily to make them substitutable or interchangeable if IBM raised their price $50?o Substitutes – Telex peripherals that could be altered for $1 to

be in direct competition with IBM peripheralso Each substitute that is easily altered lowers market share

Measuring Geographic Market General

o Usually not where the litigation fight is but sometimes comes up Definition of Geographic Market

o Geographic market is the distance that a reasonable buyer would be willing to travel away from a seller for an alternative product if the seller of the original product got greedy and raised prices.

Elasticity of Demand – Looking from the consumer’s viewpoint to see how far a consumer is willing to travel to get an alternative product if the original seller raised the price. Usually fairly local

Elasticity of Supply – Looking from the supplier’s viewpoint to see from what distance a supplier would swoop in to provide an alternative product if original seller raised price. Can be national in scope

o Determining Exclusionary Conduct General

Exclusionary conduct is different than excluding competition Exclusionary conduct is not conduct that is an AURT under §1 but is conduct that is

“honestly industrial”o Honestly industrial – lawful but vigorous

Barriers to Entry Actions which unnecessarily exclude actual and potential competition and restrict the

free market may indicate exclusionary conduct (US v. United Shoemakers)o Double Standard:

You must have MP to make exclusionary conduct actionable Someone without MP can engage in exclusionary conduct

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Possible Conduct None Competitively Inevitable Exclusionary AURT

MP Allowed Range of Conduct

Non-MP

Strategic Behavior – When is a monopolist engaging in exclusionary conduct? General Rule – Conduct with no valid business justification other than excluding

competitors is exclusionary Being innovative and keeping those innovations secret is not exclusionary conduct as

long as it has a valid business justification and is not directed at smothering the competition (Berkley Photo v. Eastman Kodak)o Valid Business Justification – This is better for the consumer (must have

consumer benefits) Improving your own sales is not a valid business justification

o Leverage Theory – cannot use your MP in one market to gain in another market Not enough to say you exclude someone because you can exclude others with a valid

business justification for doing so and there will be no monopolization violationo You cannot, as a competitor, say that you are coming out with a product in 3

months while you know it will not come out for 9 months (trying to stifle competition)

Not valid business justification for strategic behavioro Redesigning products to make them more attractive to buyers, whether by

reducing price or improving performance, is not exclusionary (Cali. Computer Products v. IBM)

Sub-Markets in Monopoly Conduct Sub-markets enable plaintiffs to prove market power easier because you end up

calculating market power within the sub-market (Aspen Ski Co. v. Aspen Highlands) Always consider whether there should be a sub-market

o Aspen Ski Co. – Important 10th Circuit case that is still good law concerning essential facilities

Essential Facilities 3 criteria for there to be an essential facilities holding (there is an essential facility

involved)o 1. The facility is essential to the plaintiff’s survivalo 2. The plaintiff cannot practicably duplicate that facility on its owno 3. It can be used by the plaintiff without interference with the defendants use

If we decide there is an essential facility, the law will imply a duty to comply with competitors with regard to that facility

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There is a tendency to find an essential facility where the facility is owned by a government subsidiary or public utilityo If owned by private organization, less likely to be essential facility

B. Attempt to Monopolize- General

o Can be either civil or criminalo Elements

1) Specific Intent (inferred from bad conduct) (conduct element) The only time we had this was § 1 crim violations (which required mens rea element) You infer specific intent from conduct

o Doesn’t mean “what was the person thinking when the executive ordered action” Very often engaged in by people who think they’re not violating any law

o Note: Conduct in Monopolization was exclusionary (not competitively inevitable). For Attempt to Monopolize, it’s the same as under § of Sherman (acts in unreasonable restraint of trade). Must be “pretty bad”

The same conduct that meets § 1 violation might not be bad enough for § 2

2) Dangerous Probability of Success (power element) Do you have enough mkt power to have dangerous success of succeeding if you take

the action? Must Plead and prove the relevant mkt, and give D’s share in the mkt (just like we did

under monopolization, ROR in § 1o Note: Arbitrary sufficient mkt share is 30%o Factors to take into account:

Barriers to entry – If BTE’s are high, mkt share requirement will be lower Historical data – don’t look at mkt share from one single date; also look

to mkt share before and after in hopes of ascertaining a trend Point – It’s not likely that someone’s attempting to monopolize with

30% mkt share if they’ve plummeted from 80% in the last year- Predatory Pricing

o Definition – The offense of driving rivals out of business by selling products at less than cost, with the expectation of charging market price in the future when the rivals have either left the market or been cajoled into raising their own prices. (i.e., dropping price below cost to drive out competitors) Hypo: A engages in predatory pricing b/c it has great resources (and therefore great staying

power). If B follows A, both lose money. However, B eventually drops out of mkt, and A then raises price to a supra-competitive level in order to recoup the losses sustained at low cost

o Elements – Plaintiff must show: 1. D sold the product below D’s own costs, AND

Total Cost = fixed + avg variable costso Fixed – Costs that continue w/out regard for output (how much you sell) (ex.

executive salaries, mortgages, equipment costs)o Variable – Costs that vary w/ output (ex. raw materials – you might have to

double the amt of iron to double output) Areeda-Turner Test – Majority of courts use this standard to determine what price

levels constitute predatory pricing. 2. D had a “dangerous probability” of recouping its losses

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If mkt circumstances or deficiencies in proof would bar a reasonable jury from finding that the scheme alleged would likely result in sustained supra-competitive pricing, P’s case has failed.

Ct’s look to mkt structure to see if recoupment is feasible. Note: Just b/c D couldn’t recoup losses doesn’t mean he didn’t engage in predatory

pricing. Price Discipline is actionable as well.o Price Discipline – ex. Competitor w/ more resources “sends message” to price

cutting competitor (usually in oligopoly setting) by temporarily engaging in predatory pricing (setting it below profitable levels), but doesn’t do it to drive B out of business. Rather, just long enough to send message.

o Miscellaneous Predatory pricing is extremely rare b/c employers don’t like the thought of losing $

(especially if they have to explain it to shareholders).

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