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Antitrust, Spring 04Professor Gavil

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CHAPTER 1: COMPETITION POLICY FOR A GLOBAL ECONOMY

A. Two Introductory Case Studies (skipped)

B. Identifying the Core Questions of Antitrust Law

1. What are the purposes of competition law systems?

a. What economic purposes can they serve?

The primary concern of antitrust is to prevent the acquisition or exercise of marketpower, as the term is used in microeconomics. Firms exercise market power by raising price andreducing output. Price increases, however, also are natural phenomena that result from thenormal lawful operation of the market for that producte.g. supply and demand.

b. What non-economic purposes can they serve?

Antitrust laws seek, ultimately it seems, to advance or protect the public interest by

protecting consumers from being exploited by firms. In addition, they seek to promote equityamong competitors by advancing fairness, protection of small businesses, social justice, andpolitical stabilityi.e. non-economic goals. The idea is that lack of competition and choice forconsumers will be detrimental; the protection of the small businesses and competitors may beseen as a means to achieve the ends of consumer protection. See United States v. Trans-MissouriFreight Assn, 166 U.S. 290, 324 (1897); United States v. Aluminum Co. of America, 148 F.2d416, 428-29 (2d. Cir. 1945). Modern U.S. antitrust jurisprudence has subordinated non-economicgoals to the attainment of economic efficiency. But, non-economic goals are still importantconsiderations.

Case: United States v. Brown University,5 F.3d. 658 (3d Cir. 1993); p. 33

Parties: Petitioner (U.S. government); Respondent (Overlap Group, a collective of Ivy Leagueuniversities).

Facts: The Overlap Group developed a plan in which members attempted to eliminate priceconsiderations from commonly accepted students, those accepted to more than one Overlapmember, by ensuring aid packages to such students would be the same. Each university wouldindependently calculate aid packages using the same formula, which included familycontributions. The schools only granted need-based aid. Discrepancies in aid $$ still came up sothe members would meet once a year to determine the amount the student would be granted.Failure to comply w/ would result in retaliatory sanctions resulting in rare non-compliance thatwould be quickly remedied.

Ph: Antitrust Division of DOJ filed civil suit against Overlap. Only MIT went to trial; the othermembers signed a consent decree.

Issue: Whether Overlap members agreement w/ respect to aid packages is a 1 violationrequiring significant procompetitive justifications?

Holding/Rationale: MIT/Overlap didnt violate 1 due in large part to the non-economicprocompetitive justifications for the plan. This case involves Rule of Reason due to nature of


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higher education and procompetitive features of the plane.g. fostering vitality of the mind, freeexchange btw. different thoughts, communication among different peoples.

MIT didnt dispute Overlaps intention to eliminate price competition for talentedstudents. The plan is facially anticompetitive, so the plan requires competitive justification evenin the absence of a detailed market analysis. MITs justifications: 1) plan promotes socio-economic diversity at member institutions increases quality of education; 2) plan increases

consumer choice through need-based focus because the opportunity to go to member universitiesextended to those who previously couldnt afford it; 3) lack of price competition turns focus tocampus life considerations such as curriculum, faculty-student ratio, etc.; and 4) promotion ofequal education opportunity.

Overlap didnt w/hold desirable services as inNSPEandIndiana Federation of Dentists;rather, choice was extended to those who couldnt attend previously. Agreement should beviewed under rule of reason because its anticompetitive nature is not the type looked down uponby per se rules.

2. What conduct, public or private, can impair the proper functioning of markets?

Competitive markets are expected to yield production, allocative and consumption

efficienciesi.e. maximum consumer welfare. The structural features of competitive marketsinclude:

Enough buyers/sellers to ensure competitive pricing, features, quality and innovation;

Undifferentiated products or services (that are of good quality);

Easy entry, expansion and exit by firms; and

Relatively unhindered information and knowledge about market conditions of buyers andsellers.

Markets are less competitive if any of these features is lacking. Antitrust isnt necessarilyconcerned w/ all of these factors. It is primarily concerned w/ 2 features of perfect competition:number of buyers/sellers and conditions of entry. The public sector is w/n the scope of antitrust

laws but U.S. antitrust law doesnt reach it due to the legislative history of the Sherman Act andconstitutional issues related to federalismextensive regulation in public licensing of trades andprofessions can directly impair the functioning of markets. Private conduct that tries tomanipulate the above considerations attracts antitrust scrutiny.

a. What do we mean by anticompetitive conduct?

Anticompetitive refers to conduct likely to the creation, maintenance, or enhancementof market power, or that involves the actual exercise of market power. Market power refers tothe ability of a firm (or firms) to raise price by reducing output, or limiting other dimensions ofcompetition. Typically, market power is associated w/ a departure from the conditions necessaryfor optimal market (see the above features of competitive market).

Case: Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.,429 U.S. 477 (1977); p. 41

Parties: Petitioner (Brunswick), 1 of 2 largest manufacturer of bowling equipment; Respondent(Pueblo) bowling alleys competing w/ other alleys acquired by Brunswick.


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Facts: Pueblo challenges Brunswicks acquisition of 6 (competing) bowling centers in its market.In violation of 7 Clayton Act, and under 4, wants 3 xs the reasonably expectable profits to bemade from the operation of their bowling centers. The acquired bowling centers were strugglingbefore Brunswick bought them; Pueblo wants the profits it would have gotten if the acquiredcenters just went out of business.

Issue: Whether antitrust damages are available where the sole injury alleged is that competitorswere continued in business, thereby denying respondents an anticipated increase in marketshares?

Holding/Rationale: No. Pueblos injury is not the type contemplated by antitrust laws. Antitrustlaws are designed to protect competition and not competitors. The injury alleged in this caseresulted from increased competition. It alleged that w/out Brunswick, its competitors wouldveshut down and given Pueblo larger market. Increased competition from a larger, perhaps moreefficient rival, decreased Pueblos hoped-for profitsthis isnt antitrust injury.

Notes:

Collusive effects directly impair markets and typically will involve coordinated action bycompetitors who collectively possess market power.

--emulating the behavior of a monopolist by raising price while restrictingoutput;

--analysis of collusive effects seeks to determine whether the conduct will resultin exercise of market power.

Exclusionary effects confer market power b y raising rivals costs by cutting it off fromkey inputs to production or limiting access to market by cutting off access to key channelof distribution.

--the effects of exclusionary conduct are almost always indirect, regardless ofindependent or concerted action.--can be either act of single from or concerted action (multiple firms);

--this conduct is condemned when a firm or firms establish conditions in whichits able to, or is likely to, exercise market power.

Antitrust plaintiffs today must articulate a coherent theory of anticompetitive effects andalso bears the burden of linking particular conduct to those effects.

Antitrust defendants must link the mentioned conduct to neutral/procompetitive effects.

*Regardless, both parties must show whether the conduct is collusive or exclusionary andwhether intent to incapacitate competition was to do so directly or indirectly.

Note Case:Rothery Storage & Van Co. v. Atlas Van Lines (Wald, J. concurring),792 F.2d 210 (D.C. Cir. 1986); p. 65

Rothery (petitioner) is an independently owned storage company that operated as part ofAtlass (respondent) network of moving and storage. Atlas forbad its affiliates to use itslogo while they were doing non-Atlas business, that business they were doing on theirown behalf or other companies.

Rothery was fired when it refused to follow this policy. Atlas directed its other affiliatesnot to deal w/ Rothery on Atlas-related jobs.

Rothery alleged that Atlass behavior violated 1 Sherman Act.


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Court dismissed claim because Atlas only accounted for 6% of all moving and storagesales in U.S. Consequently, it stated Rothery couldnt show that Atlass actions hinderedcompetition in the moving and storage market.

**J. Wald wrote concurring opinion stating that S. Ct. hadnt yet decided on the purposeof antitrust laws and until it does, courts shouldnt just disregard the other non-competitive justifications for enforcing antitrust laws. J. Wald disagreed w/ majoritys

use solely of economic factors.

CHAPTER 2: CONCERTED ACTION AMONG COMPETITIORS (HORIZONTAL

AGREEMENTS)

A. THE EVOLUTION OF UNREASONABLENESS UNDER 1 OF THE SHERMANACT

The Sherman Act of 1890 was the first federal antirust statute in U.S. 1 states that [e]verycontract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade is

unlawful both civilly and criminally. Two elements of 1:1) concerted action- A contract, combination or conspiracy;2) anticompetitive effect- A restraint of trade.

Section 2 addresses single firm conduct, usually the activities of actual or would-be monopolists.It places emphasis on the evaluation of the market effects of allegedly anticompetitive conduct.

The Court went from a literal application of 1s every contract provision, UnitedStates v. Trans-Missouri Freight Assn 166 U.S. 290, 328 (1897), to a more subjective approachearly in antitrust law. J. Whites dissent in Trans-Missouri advocated for a reasonabilityframework, i.e. the rule of reason; his approach was adopted in his majority opinion inStandard Oil Co. v. United States, 221 U.S. 1 (1911). He wrote that the rule of reason was/isbased on standard of reason used in the common law before Sherman Act was enacted. The

Court has a different role in Sherman Act jurisprudence because Congress wanted the Court todevelop antitrust rulescourts have more leeway in antitrust law. Then, in Chicago Bd. Of Tradev. United States, 246 U.S. 231, 238-39 (1918), J. Brandeis writing for the majority reaffirmed therule of reason stating that to determine whether a restraint is procompetitive or anticompetitive,courts should consider the particular industry before and after the restraint is imposed; the natureand effect of the restraint; as well as looking at the intention of the restraint. These factors shouldbe considered to better understand the facts of the particular case and topredictthe consequencesof the restraint, thereby condemning those restraints contemplated by the Sherman Act. Id. Herecognized that restraints could in fact promote competition, and not always destroy or impaircompetition.

Restraints can be divided into two categories: plainly anticompetitive restraints, andancillary restraints. Addyston Pipe & Steel Co. v. United States, 85 F. 271 (6th Cir. 1994). The

first category had no purpose but to restrain trade/competition and was absolutely condemned incommon law (per se). Legality of these restraints depended on their anticompetitive effect. Thesecond category involved restraints ancillary to legitimate business purposese.g. covenantsnot to compete. These restraints were allowed at common law if they were integral to thelegitimate purpose AND were not greater than what was necessary to further the purposelookto geography and time to determine reasonableness. The reasonableness suggested by Taft inAddyston Pipe only applied to ancillary restraints, while that suggested by Brandeis in ChicagoBd. Of Trade advocated a more broad application.


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Combined w/Applalachian Coals, Inc. v. United States, 288 U.S. 344 (1933), these twocases suggest per se unlawfulness applies where the producers, or defendants, have a highmarket share. Socony Vacuum clarified this suggestion.

Case: United States v. Socony-Vacuum Oil Co.,310 U.S. 150 (1940); p. 91

Parties: Petitioners (government); Respondents (major oil companies)

Facts: This case resulted from Great Depression. Gas production involved 4 steps: 1) explorationand drilling; 2) refining; 3) distribution; and 4) retail sale. The major companies that were fullyintegrated were the only firms capable of performing all four functions. Independents alsorefined but sold their output to jobbers, who were distributors supplying appx. 50% of retail gasstations in Midwest. Independents sold to jobbers @ spot market prices that fluctuated. Bigcompanies also sold to jobbers, but w/ long-term ks that also took spot market sales into account.Independents increased overall supply of oil, which pushed spot market prices downward (highsupply = lower price) which, in turn, decreased overall wholesale prices of oil.

Respondents agreed amongst each other to select 1 or more independents to buy the

surplus oil from and would hold that surplus off of the market, storing it their storage facilities.This helped raise spot market prices by decreasing supply of the oil, which resulted in higherprices. The agreements stabilized prices and raised spot prices. Evidence suggested thatrespondents had significant share of market. Respondents argued that their actions didntunreasonably restrain trade because they took evil surplus oil that was depressing the price ofoil off the market.

Ph: District court charged that corporations and those w/ market power cannot conspire to fixprices and that the reasonableness of the price is immaterial. Circuit Court of Appeals reversedstating that price fixing is not unlawful unless it is an unreasonable restraint on trade.

Issue: Whether Appellate Court erred by looking to the reasonableness of the price fixing on

trade?

Holding/Rationale: Yes, the appellate court erred in reversing. Uniform price fixing has longbeen held to violate the Sherman Act, despite its reasonableness. The evidence suggested thatrespondents reached an agreement amongst themselves and that the agreement was meant to raiseprice; furthermore, the agreement caused or contributed to an increase in the price of oil. Theelimination of competitive evilsi.e. the surplus oilisnt a valid justification because pricefixing is always unlawful. Considering the reasonableness of all price fixing schemes wouldemasculate the Sherman Act; indeed, the reasonableness of price fixing is immaterial.**Monopoly power isnt all that 1 prohibits; the conspiracy in this case can be viewed asbehavior of a monopolist: respondents collectively had market power and exercised that powerby restricting output resulting in raised prices.

Notes:

Socony Vacuum established once and for all that price fixing is per se unlawful and thatthe reasonableness should not be considered.

Once a per se agreemente.g. price fixingis established, then anticompetitive effect ispresumed. All defenses and attempts to provide procompetitive justifications areprecluded.


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Per se unlawfulness applies to conduct that is so blatantly anticompetitive that asearching inquirynamely a rule of reason analysisis unnecessary because chances arethe agreement will be found an unlawful restraint of trade.

**REMEMBER:Per se establishes an irrebuttable presumption of unreasonableness!!!

2. Rule of Reason or Per Se: Tensions emerge in the modern treatment ofprice-fixing.

AfterSocony Vacuum, the only hope defendants had of defeating antitrust challenges totheir behavior is to themselves challenge the classification of their conduct from price fixing, orother per se categories, to non-per se categories. Defendants goal is to reclassify literal pricefixing as something else. Their successes in reclassification challenges create tension betweenper se precedent, which is still good law, and rule of reason analysis.

Case:Broadcast Music, Inc. v. Columbia Broadcasting System, Inc.,441 U.S. 1 (1979); p. 99

Parties: Petitioners (BMI & ASCAP), the original defendants, are organizations allowing musicalcopyright owners to authorize performances of their works; Respondents (CBS), originalplaintiffs, tv network that makes use of copyrighted music for tv programs it supplies to affiliatestations.

Facts: Petitioners were formed to make it easier for composers/copyright owners to negotiatewith others for performers of the formers music as well as make it easy for the composers todetect unauthorized performances of their music. Members give petitioners the nonexclusiveright to license performances of their works, receiving royalties to copyright owners based on afee schedule (arrangement) that reflects the nature of the performances and amount of their musicused. BMI has 1 million copyrighted pieces of music, and ASCAP has 3 million; petitioners

account for almost all domestic copyrighted composition.Blanket licenses, petitioners main method of operation, give the licensees the right to

perform any and allcompositions owned by the members or affiliates as often as the licenseeswant for a stated term. Fees for blanket license = % of total revenues OR dollar amount. Feesdont depend on the amount or type of music used. Radio and tv broadcasters are primary usersof blanket licenses. Respondents allege that: petitioners are unlawful monopolists; the blanketlicenses are illegal price fixing; blanket licenses are unlawful tying arrangements; concertedrefusals to deal; and petitioners misuse copyrights.

Ph: Trial court rejected the claim that blanket licenses are price fixing and per se 1 violations,stating that negotiations w/ copyright holders is feasible and, therefore, theres no undue restraintof trade. The Court of Appeals held that blanket licenses were per se Sherman Trust violations,

but agreed w/ lower courts fact-finding and legal conclusions on the other issues.

Issue: Whether the blanket licenses issued by petitioners to tv/radio stations are a form of pricefixing in violation of 1?

Holding/Rationale: No, blanket licenses are not per se unlawful. The Court of Appealsapparently used a literal interpretation of price fixing in finding a per se violation, which is toosimplistic an approach. Copyright laws protect copyright owners ability to control their


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copyright. Marketing arrangements, such as blanket licenses, that are reasonably necessary toadvance the rights of the copyright owners arent expected to violate the Sherman Act.Petitioners are only granted nonexclusive rights to license copyrights, meaning the copyrightowners can authorize others to, or themselves, negotiate performances of their music. Petitionersarent allowed to insist on blanket licenses and are required to offer the applicant a genuineeconomic choice between the per-program license and the more common blanket license.

Per se unlawfulness means that the agreement is plainly anticompetitive and likelyw/out redeeming virtue. The agreements at issue do not have the effects contemplated by theSherman Act. Blanket licenses allow copyright owners to more easily negotiate and trackperformances of their music, w/out giving up any of their rights to their copyrights. Therefore,there is no antitrust violation.

Notes:

Note Case: Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643 (1980)

Facts: Beer wholesalers colluded to stop providing credit w/ interest for 30-42 days. Therewasnt evidence that they agreed to a price. Plaintiffs alleged that prior to the agreement,

wholesalers vigorously competed on terms of credit; retailers considered this as a form ofdiscounts. The agreements made retailers pay in advance or on delivery.

Holding/Rationale: The Court held that wholesalers violated 1 by eliminating competitionconcerning one component of price and tended to stabilize prices. The Court also emphasizedthat the machinery employed by a combination for price-fixing is immaterial (quoting SoconyVacuum), finding that there was no difference between price fixing and a collective refusal tocompete on credit terms.

Note: Catalano is a reminder that price is comprised of many components. The Courts priorrejection of reasonableness defenses in Trenton Potteries and other cases precluded theargument that eliminating competition of price components isnt the same as fixing price.

Case: Arizona v. Maricopa County Medical Society,457 U.S. 332 (1982); p. 107

Parties: Petitioners (government); Respondents (Maricopa), nonprofit corporation of licenseddoctors in private practice (1750 doctors, 70% of practitioners in Maricopa County).

Facts: Maricopa was formed to provide a competitive alternative to existing health insuranceprograms. It promotes fee-for-service medicine by: 1) establishing maximum fee schedule thatmembers must accept as full payment for services performed for patients insured under approvedplans; 2) reviewing medical necessity and propriety of treatment provided by members to

(insured) patients; and 3) its authorized to draw checks on insurance company accounts to paydoctors for services performed on (insured) patients. Insurance plans receive approval if theyagree to pay the doctors charges up to the scheduled amounts in exchange for the doctorsacceptance of $ as full payment. Doctors may charge more to uninsured patients, and may chargeless to insured patients. Insured patients may go to non-member doctors but must pay difference,if any, of non-member bill.

Arizona Dept. of Insurance considers Maricopa an insurance administrator. Arizonaalleges that the fee schedules periodic upward revisions stabilize and enhance the level ofactual charges by doctors. The increase in fees results in an increase in insurance premiums.


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Maricopa argues that the plan imposes a meaningful limit on physicians prices that allowsinsurance companies to more efficiently limit and calculate risks, which has saved patientsmillions.

Maricopa argues that the per se rule doesnt apply because: 1) the agreements arehorizontal and fix maximum prices; 2) are among members of a profession; 3) are in an industryantitrust laws have little experience in; and 4) have procompetitive justifications.

Issue: Whether agreements among competing physicians to set maximum fees they may claimfor services provided to policyholders of specific insurance plans violates 1?

Ph: The 9th Cir. held that the issue couldnt be answered w/out evaluating the purpose and effectof the agreement at a full trial.

Holding/Rationale: Yes, the plan violates 1. Price fixing is simply per se unlawful.(Addressing Maricopas defenses)

First, horizontal agreements to set maximum prices are on same economic and legal level asagreements to set minimum or uniform prices. The current restraint gives all doctors, regardless

of individual skill, experience, training, or willingness to employ innovative/difficult procedure inindividual casesdoctors dont need to be better than each other to get patients.

Second, there is no distinction between professionals and nonprofessionals in antitrust.Maricopas claim that the fee schedule makes it easier for patients to pay bills, making the planitself more attractive (than other insurance plans) seems like an attempt at a reasonablenessfefense for the price fixing. Precedent has rejected this defense.

Thirdly, the judiciary doesnt have to have experience in the medical industry w/ respect toenforcing antitrust laws; it has PLENTI-O experience in antitrust to detect and invalidate per seunlawful price-fixing schemes.

Finally, procompetitive justifications dont matter when dealing w/ price fixing becauseanticompetitive potential of per se categories cannot be rebutted. Per se rules suggest thatprocompetitive justifications are so unlikely to prove significant in any particular case that theyare disregarded.

The Courts adherence to the per se rule is based on economic prediction (high probability ofanticompetitive effect), judicial convenience (no need to conduct searching inquiry), businesscertainty and to its role to develop the parameters of the Sherman Act.

Ancillary Restraint Analysis

Non-compete clauses are permissible as long as they are reasonable

******************SEE ALSO DISTINGUISHINGBMIAND DISSENT**************** Like BMI, the plan was not an exclusive method of business practice

There is the argument that a uniform fee schedule was necessary for insurance reasons

C. MARKET DIVISION BY COMPETITORS

Competitors try to emulate a monopolist through collusive agreements aimed at restrictingoutput and raising price. Competitors may also agree to divide the relevant market amongst them


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to limit competition as a whole, not just price competitionthey are agreeing to create mini-monopolies for themselves. They may divide markets by agreeing not to compete in a definedgeographic, dividing up and assigning customers or customer categories, agreeing not to soliciteach others customers, or by agreeing to divide product lines. Division of markets, unlike price-competion, forecloses all forms of competition in the relevant market, price and non-price. Thecompetitors must collectively have market power in order to be able to divide the market in such

a manner as to behave as a monopolisti.e. exercise market powerbecause they will facecompetition from competitors not party to the agreement.

Note Case: Timken Roller Bearing Co. v. United States, 374 U.S. 593 (1951) (p. 117),

Facts: Defendants were the main manufacturers of antifriction bearings who, over 40 yrs., hadagreed to divide the world markets territorially. The division included allocating tradeterritories, fixing the price of products of an affiliate that were sold in anothers territory,cooperating to hinder new entry, and restricting imports and exports form the U.S.

Holding/Rationale: The Court viewed the defendants as a cartel and their agreements as anotherway to fix price. In doing so, the Court implied that division of markets by competitors needed

per se treatment.

Case: United States v. Topco Associates, Inc.,405 U.S. 596 (1972); p. 118

Parties: Petitioner (government); Respondent (Topco) is a cooperative of 25 small to mediumsized regional supermarkets.

Facts: Topco was created to help smaller supermarkets compete w/ the larger nationalsupermarket chains. Member stores are independently operated. Topco purchases and distributes1,000+ food/nonfood items, most of which are Topco-Brand products, to members. Members

individual market shares ranged from 1.5% to 16%, but collectively through Topco totaled thefourth largest sales amount in 1967 behind only three national grocers. Members rely on Topcobrand products for substantial profits and increase ability to compete w/ other supermarkets.

Topcos agreement: membership must be approved by the board of directors and then by75% of the members. Actual members w/n the same geographic market as a potential member(w/n 100 miles) can object, thereby raising the requisite approval by members to 85%. Also,members cant sell products wholesale w/out the associations permission, which is rarely given.Exclusivity provisions insulate members from competition for Topco-brand goods. Thegovernment alleges 1 violation through members agreements to not compete against each otherin same territory. Topco defense states: 1) territorial divisions are necessary to compete w/ largerchains; 2) exclusivity of divisions is the only way the cooperative can exist; and 3) the restrictionof Topco-brand competition increases overall (interbrand) competition by allowing members to

successfully compete w/ larger chains.

Issue: Whether competitors division of markets provided sufficient procompetitive justificationsto make it consistent w/ antitrust laws?

Holding/Rationale: Division of markets by competitors is a per se violation of 1. Topcosdefense that restricting competition in one area, Topco brand products, helps overall competitionis misplaced. Destruction of competition in one sector to promote competition in another is animportant rationale to maintain per se rules. Also, Topcos territorial restrictions on wholesaling =


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customer restraints that limit members ability to interact w/ potential customers. This is ahorizontalagreement among competitors, namely Topco members (independently operated).Similarverticalagreements may be justifiedas reducing intrabrand competition to increaseinterbrand competition, but horizontal arrangements are per se invalid.

**Dissent (Burger, C.J.): The agreements between Topco members is ancillary to a legitimate

business purpose: to help smaller businesses to compete w/ national chains by makingeconomically feasible quality control, large quantity purchases at bulk prices, development ofattractively printed labels, and the ability to offer different lines of trademarked products.Ancillary restraints must not restrain more than what is necessary to achieve a legit businesspurpose, which is what Topco does. Topco created the market for Topco brand product just asnational chains create markets for their own private brandse.g. Giant spaghetti, Cub Foodsbread. National chains are allowed to limit access to their private labels because they createdthem; Topco should be allowed to do the same because Topco-brand products only exist becausethe cooperative exists.

Case:Palmer v. BRG of Georgia,

498 U.S. 46 (1990); p. 125

Parties: Petitioner (Palmer) law students signed up for Bar/Bri bar prep courses; Respondent(BRG) bar prep review organizers in Georgia

Facts: HBJ (Bar/Bri) and BRG had intense competition between them for bar review coursesin Georgia in late 1970s. In 1980, they agreed that BRG would get exclusive license to useHBJs trade name in Georgia; BRG wouldnt compete w/ HBJ outside of Georgia and wouldntface competition in Georgia. HBJ received kick back for students BRG recruited. Price for barcourses immediately increased from $150 to $400.

Ph: The district court held agreement was lawful. Eleventh Circuit Court of Appeals agreed

stating that a horizontal price fixing scheme required an explicit agreement on price or agreementthat the other party would be consulted on the first partys prices. Also, the Court held thatallegations of per se geographic market division theory required respondents to agree to subdividea market in which they had previously competed.

Issue: Whether the lower courts erred in the application of per se rules on the price fixing schemeand allocation of geographic territory?

Holding/Rationale: Yes, the lower courts erred. First, relying on Socony Vacuum, the Court heldthat agreements made to raise, depress, or stabilize price is per se unlawful. Here, respondentsintended to raise the price of bar review courses as evidenced by the dramatic increase in priceafter the agreement was formed; therefore, respondents agreement is per se unlawful. Second,

relying on Topco, the Court held that agreements among competitors to allocate territories tominimize competition are illegal. Here, respondents had previously competed against each otherGeorgia but after the agreement HBJ left that market while BRG left all markets outside ofGeorgia. Reserving markets for individual competitors is no different than dividing markets;therefore, respondents territorial allocations are per se unlawful. Case is remanded.

D. GROUP BOYCOTTS HAVING COLLUSIVE EFFECTS


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Group boycotts are also termed concerted refusals to deal. There are two types of groupboycotts, or concerted refusals to deal: collusive group boycotts and exclusionary groupboycotts.

Collusive group boycotts refer to concerted refusals with suppliers that result incollusive effects, i.e. those that directly restrict output or raise pricee.g. competitors agree toboycott a supplier to get lower prices, or competitors boycott a purchaser to get him to accept a

higher price. Boycotters are attempting to directly impact output and price, just as all collusiveanticompetitive effect. Proof of the boycott will be the ability of the boycotter to attain hisdemanded price; justifications will not likely be accepted.

Exclusionary group boycotts refer to concerted refusals directed at rivals of thecolluding firm. Price is affected indirectly. Indirect power over price can be achieved by raisingrivals costs, limiting rivals access to necessary sources of supply or to customers, or otherwisehinder rivals ability to enter or expand a market. By limiting the number of rivals, overall outputof the relevant market is restricted and price goes up. The evidence must also show that inaddition to excluding a rival that the excluding firm(s) possessed the necessary power to raiseprice.

1. Foundation Cases: FromEastern States toKlors

Note Case: Eastern States Retail Lumber Dealers Assn v. United States, 234 U.S. 600 (1914)(p.130).

Facts: Petitioners (original defendants) were a group of retail lumbers that collectively agreed torefuse purchasing supplies from wholesalers that were dual distributorsselling lumber as botha wholesaler and retailer. As dual distributors, the wholesalers were also petitioners competitors.The wholesalers had a cost advantage over the retailers due to their ability to vertically integrateinto retailing. Through their retailers trade association, the retailers blacklisted dualdistributors and encouraged members and customers to refuse to deal w/ them. The purpose wasto force dual distributors from retailing.

Holding/Rationale: The Court struck down the agreement. Relying on Standard Oils per se rule,the Court found that while an individual retailer may independently refuse to deal w/ a supplier ordual distributor, he cannot conspire w/ or induce others to do the same. Doing so obstruct thefree course of commerce.

Note Case: Fashion Originators Guild of America v. FTC, 312 U.S. 457 (1941)(p. 131).

Facts: FOGA was a trade organization for designers and manufacturers of womens highfashion dresses. Some retailing customers would allegedly pirate FOGA members designs,selling the same style dresses at lower prices. Members boycotted the pirating retailers andinduced retailers to cooperate w/ the boycott. Half of the retailers agreeing to boycott did soout of fear that members wouldnt sell to those refusing to cooperate.

Holding/Rationale: The Court struck down the boycott, rejecting FOGAs defense that it did notreduce quality, limited production (output) or set a fixed price. FOGA also 1) prohibitedmembers form participating in retail advertising; 2) regulated discounts they may allow; 3)prohibited their selling at retail; 4) cooperated w/ local guilds in regulating days on which specialsales were held; 5) prohibited members from selling womens garments to persons conductingbusiness in residences, residential quarters, hotels or apartment houses; and 6) deniedmembership to retailers who participate with dress manufacturers in promoting fashion showsunless the merchandise used is actually purchased and delivered. These factors combined w/ the


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boycott had severe anticompetitive effects by limiting outlets to who manufacturers could sell andsources where retailers could buy, subject those not participating in FOGAs plan to a boycott,and suppresses competition from copied dresses. The reasonableness of the boycott is immaterialand action falling into FOGAs defense categories (see above) isnt exhaustive of conductprohibited by the Sherman Act.

Case:Klors, Inc. v. Broadway-Hale Stores, Inc.

359 U.S. 207 (1959); p. 132

Parties: Petitioner (Klors) is an independent appliance store; Respondents (BWH) includenational appliance manufacturers.

Facts: Klors competes w/ BWH in selling appliances. Its as capable as BWH to sell allappliance brands. Klors alleges that BWH conspired w/ GE, RCA, Zenith, and other well-known brands to refuse to sell to Klors, causing Klors to lose profits, goodwill, reputation, andprestige.

Ph: District Court granted s/j for BWH stating that the claim didnt allege a public wrongproscribed by the Sherman Act. Court of Appeals affirmed because petitioner didntcharge/prove that price, quantity, or quality offered to the public was affected; the public wasntharmed by the conduct so the Sherman Act doesnt prohibit the conduct.

Issue: Whether the Sherman Act prohibits boycotts where the only party affected is an individualcompetitor and no proof of affect on price, quantity, or quality offered to the public is provided?

Holding/Rationale: Yes, under the Sherman Act, group boycotts are per se unlawful. Groupboycotts fall into the per se category because they have been held by their nature or character tobe unduly restrictive to trade. The combination alleged includes manufacturers, distributors and aretailer, not individual or independent choice to not deal w/ Klors. The boycott has a definite

monopolistic tendency that can thrive by eliminating one competitor at a time or a number ofcompetitors. That only one competitor was harmed makes no difference because such conduct isunlawful.

2. Contemporary Treatment of Collusive Group Boycotts

See Charts on pp. 128 & 129

Case: Federal Trade Commission v. Superior Court Trail Lawyers Assn,493 U.S. 411 (1990); p. 137

Parties: Petitioner (FTC); Respondents (SCTLA) a voluntary organization of DC trial lawyers.

Facts: The Criminal Justice Act allowed the court to appoint private attorneys as public defendersfor indigents. CJA regulars are approximately 100 lawyers who depend on representing indigentsfor their entire income. CJA provide $30/hr. for in court time and $20/hr. for out of court time;CJA regulars wanted $35/hr. At a SCTLA meeting, attorneys agreed to strike if they didnt get$55/hr. court time and $45/hr. for out of court time; they signed a petition. After they began theirstrike, the mayor authorized a pay increase. The FTC filed suit thereafter alleging SCTLAmembers, who regularly compete against each other for CJA appointments, conspired to raise


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price in violation of 1. SCTLAs defenses: 1) the boycott is justified by the public interest ingetting better legal representation; 2) the boycott is exempt from antitrust reach because it was amethod of petitioning the legislature for change; and 3) the boycott was a form of politicalexpression protected by 1st Am.

Ph: ALJ dismissed the complaint because, even though the allegations in the complaint had been

proven, district officials accepted the boycotts net positive effects. Court of Appeals affirmedstating that the 1st Am. aspect the boycott was protected, underOBrien, and imposition on theserights isnt justified unless its no greater than is essential to an important governmental interest,which the FTC didnt establish.

Issue: Whether SCTLAs conduct violated 5 of the FTC Act and whether the conduct isprotected by 1st Am.?

Holding/Rationale: SCTLA violated 5. CJA attorneys, before the boycott, competed w/ eachother to get appointed to indigents; their agreement through the SCTLA, therefore, is a horizontalagreement. SCTLA sought to increase price by forcing an increase in hourly rates, threatening toand, carrying out a, strike if their demands werent met. This is a naked restraint on price and

output. Respondents justifications and the lower courts rationales look to the reasonableness ofthe naked restraints, which is precluded by their classifications as naked restraints. Also,respondents reliance onNAACP v. Claiborne Hardware for 1st Am. protection is misplacedbecause this case involves conduct by business competitors, not private individuals seeking toobtain equality and freedom.

Note: Brennan and Marshall dissented arguing that the Courts use of the per se ruledemonstrated insensitivity to the venerable tradition of expressive boycotts as an importantmeans of political communication. (Brennan, J., dissenting).

A. COLLUSIVE EFFECTS AND THE RULE OF REASON

1. Origins of the Traditional Rule of Reason

The Courts rule of reason adopted in Standard Oilwas explained by J. Brandeis inChicago Bd. Of Trade, setting out not only the prevailing statement of the rule, but also theearliest example of its practical application.

Case: Bd. Of Trade of the City of Chicago v. United States,246 U.S. 231 (1918); p. 146

Parties: Petitioners (Board), the commercial center through which most of the trading of grain inthe Chicago grain market is done; Respondents (government).

Facts: The Board has 1600 members from all facets of grain market. There are 3 forms of trading:1) spot sales, grain already in Chicago that is ready for immediate delivery; 2) future sales,agreements for delivery at a time in the future; and 3) sales to arrive, agreements to delivergrain in transit to Chicago or soon to be in transit. In 1906, the Board developed the call rule,which prohibited purchasing or offering to purchase between the close of call and the opening thenext day. Before the rule, members made bids throughout the day and even after close w/outknowing actual market conditions. The rule made members decide by close if they wantedarrival grain.


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Ph: Lower courts found that the Board engaged in a conspiracy to restrain interstate foreign trade,enjoining them enforcing the plan.

Issue: Whether the call rule is an unreasonable restraint of trade in violation of 1?

Holding/Rationale: No, the rule is not invalid. All trade agreements restraint trade in one way oranother. The test of legality should be whether the restraint has the effect of destroyingcompetition. Courts should consider the particular industry before and after the restraint isimposed; the nature and effect of the restraint; as well as looking at the intention of the restraint.These factors should be considered to better understand the facts of the particular case and topredictthe consequences of the restraint, thereby condemning those restraints contemplated bythe Sherman Act. The restraint had no effect on general market prices (price) and did notmaterially affect the total volume of grain entering into Chicago (output). The Court noted theprocompetitive aspects of the restraint, including allowing country dealers more participation inthe market and bringing buyers and sellers into more direct relations. The Court recognized thatrestraints could in factpromote competition, and not always destroy or impair competition;accordingly, a more subjective view of the restraint should be used.

Case: National Society of Professional Engineers v. United States,435 U.S. 679 (1978); p. 150

Parties: Petitioners (NSPE) are professional organization of engineers; Respondents(government)

Facts: NSPE was organized to deal w/ the promotion of the professional, social, and economicinterests of its members. Its membership includes 69,000 engineers throughout the world. 11(c)of NSPEs Code of Ethics prohibits competitive bidding by its members, encouraging membersto focus on quality of work and other non-price related factors. NSPE defended its practicestating that price competition among engineers is contrary to the public interest by forcing

engineers to cut-back on quality materials. NSPE argues that their plan protects the publicfrom poor work.

Issue: Whether NSPEs ethical canon is justified because it is developed by a professionalorganization to minimize the risk that [price] competition would produce inferior work?

Holding/Rationale: No, the NSPEs ban on price competition is unlawful. The Court recognizedtwo analytical frameworks for antitrust analysis: per se rules, which expressly prohibits certainpractices, and the rule of reason, which considers the totality of the circumstances. The inquiryis on the restraints effect on competition. The current plan prohibits members, who are alsocompetitors, from price competition; the ban prohibits consumers from making pricecomparisons. The Sherman Act protects competition believing that healthy competition best

serves consumers.

Notes:See questions on p. 155

Even though the rule of reason is accepted as a means of analyzing restraints on trade, buttheres no guidance, from Chicago Bd. Of Trade, about what factors are important to ruleof reason.


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What factors, if identified, should be given more weight and what procompetitive factors,if any, could protect a restraint?

How are the burdens of proof and production to be allocated? How much and what kindof evidence of purpose, nature, and effect will be sufficient to shift a burden ofproduction to the defendant? How can the defendant rebut this evidence?

There is no exception to the rule of reason based on profession

2. Ancillary Restraint AnalysisAn Alternative Approach to Defining

Reasonableness

Case: United States v. Addyston Pipe & Steel, Co.,85 F. 271 (6th Cir. 1899); p. 156

Parties: Petitioner (government); Respondents (Addyston) competing producers of cast iron pipe.

Facts: Respondents agreed to fix prices defending on the ground that w/out the agreement, 1) they

would be subject[ ] to ruinous competition from each other; 2) reasonable prices; and 3) theydidnt have significant market share (30%).

Issue: Whether Addystons price fixing scheme is valid due to its justifications?

Holding/Rationale: The price fixing agreements are per se unlawful, involving nothing butrestraint; the defenses were all rejected. J. Tafts reasonableness approach focused on ancillaryrestraints, which are more limited than that announced in Standard Oil. To uphold a restraint,courts must find that the restraint is reasonably necessary 1) to the enjoyment of the covenantee;2) to legitimate business ends; 3) for the protection of the covenantor; 4) to protect theconvenantor from the misuse of trade secrets.

Notes: Ancillary restraint analysis required consideration of these questions:

o Was the restraint ancillary to a proper or legitimate purpose?

o How necessary was it?

o Was it no more restrictive than necessary to facilitate the proper purpose?

Ancillarity served to promote the integration of resources facilitating greater economicactivity and a more efficient allocation of resources.

The focus on the economic aspect of horizontal restraint analysis is now a widelyaccepted.

3. The Import of Less Restrictive Means

In per se cases, defendants face an irrebuttable presumption of illegality because suchrestraints are assumed to do nothing but restrain. In non-per se cases, there is a burden shiftingprocess. Plaintiff will always bear the burden of proof, but can shift the burden of production byproviding evidence of actual anticompetitive effectsi.e. direct evidence of restricting output andraising priceor through proof of market power (the exercise of?). With this evidence plaintiffestablishing a rebuttable presumption of illegality, shifting the burden of production to thedefendant. Defendant must now demonstrate that the restraint is ancillary to a legitimateunderlying purpose to rebut the presumption of illegality. Plaintiff may still prevail by showing


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that although the restraint is ancillary, it is unreasonable either by arguing either that thelegitimate reasons are pretext or that the restraint is more than what is necessary to achieve thelegitimate purpose. SeeBrown University.

COLLUSIVE ANTICOMPETITIVE EFFECTS: MODERN TRENDS

See Figure 2-7 for Summary of Traditional Horizontal Per Se Rules (p. 164). There arethree per se categories: 1) price fixing; 2) division of markets; and 3) collusive group boycotts.

1. Per Se Offenses by Competitors

Case: JTC Petroleum Co. v. Piasa Motor Fuels, Inc.,190 F.3d 775 (7th Cir. 1999); p. 165

Parties: Petitioner (JTC) an applicator that bids for road construction/maintenance jobs;Respondents (Piasa) producers of asphalt and other applicators.

Facts: JTC alleges that both defendant applicators and producers agreed among each other to not

compete on local government jobs, allowing the cartel to assign jobs to various applicators.Producers of asphalt refused to sell to JTC, a maverick, at the direction of the colludingapplicators.

Ph: District court granted s/j for defendants that didnt settle w/ petitioners.

Issue: Whether the lower court erred in granting s/j to producers and applicators alleged to haveengaged in unlawful collusion?

Holding/Rationale: Yes, the lower court erred. The evidence suggests that the asphalt industrywas ripe for collusion given its history of bid rigging, the inelasticity of asphalt, the limitednumber of producers, and the high switching costs for producers. The evidence, which is to be

viewed in the light of the non-moving party, suggests that applicators conspired w/ each other toeliminate competition for jobs and assigned jobs to one another to achieve this end. Furthermore,evidence suggested that applicators paid producers to refuse to sell to mavericks, such as JTC.Given the evidence and burden shifting, JTC created an issue of fact to be tried.

2. The Search for a Structured Rule of Reason: The Quick Look and OtherAbbreviated Approaches

Starting w/NSPE, the courts began looking for an intermediate framework between per seapplication and rule of reason. The third category premised that not all cases literally falling intothe per se category warrant per se treatment and not all non-per se cases deserved a full-blownrule of reason analysis.

Case:NCAA v. Bd. Of Regents of University of Oklahoma,468 U.S. 85 (1984); p. 169

Parties: Petitioner (NCAA) governing agency of collegiate athletics; Respondents (Okla.) is auniversity and member of NCAA.


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Facts: NCAA implemented a plan regulating tv rights to members football games. Regulationslimited who could broadcast games (CBS & ABC) and the number of times members may appearon tv. The agreements determined compensation for television appearances regionally andnationally. NCAA tried to get as many members on tv as possible so certain schools wouldntreceive all tv contracts and get all corresponding money. Members are not allowed to sell their tvrights inconsistently w/ the NCAAs plan. Respondents did so, and sued when NCAA threatened

sanctions.

Ph: The district court found for respondents; the court of appeals affirmed.

Issue: Whether the NCAAs limitations on the televising of college football games by networksand amount of compensation paid to televised members violate 1?

Holding/Rationale: Yes, the NCAAs plan violates 1 because it restrains competition among themembers. A cooperatives regulation of members ability to market a product isnt illegal per se,but only if the limits restrain competition among the members. Members agree to eliminate pricecompetition or kind of tv rights w/ respect to the relevant product, college sports. Horizontalrestraints on college sports are necessary if the product is to be available. NCAA, therefore,

widens consumer choice by making available a product that, w/out it, may not be available.However, the plan prevents popular schools, such as Oklahoma and Georgia, from using theirpopularity to negotiate more favorable tv rights and make more $$; this aspect of the plan violates1.

(The quick look analysis) The Court refused to apply per se rules because of the natureof the industry and special role the NCAA plays in regulating all collegiate athletics. It didnt,however, go too in depth into the rule of reason analysis. Factors the Court considered include:1) members inability to compete w/ price and outputhow much each member would get for aparticular game and how many games would be televised of that particular school; 2) whatnetworks are able to broadcast gamesNCAA restricted this to CBS & ABC, those nationalnetworks that could cover all of the NCAA.

Case: FTC v. Indiana Federation of Dentists,476 U.S. 106 (1986); p. 178

Parties: Petitioner (FTC); Respondent (IFD) independent dentists in IN.

Facts: IFD organized itself as a union to try to avoid antitrust laws. Membership is small but isheavily concentrated in the Andersen-Lafayette-Fort Wayne area. After forming, IFDimplemented a policy forbidding members from submitting patients x-rays w/ insurance claims.FTC alleged that the work rule suppressed competition among competitors w/ respect tocooperating w/ insurance companies. There is no dispute as to the existence of the work ruleconspiracy to not cooperate w/ insurance companies exists.

Ph: The 7th Cir. found that competition wasnt suppressed because 1) dentists dont normallycompete w/ respect to cooperation w/ requests for information by patients insurance companiesand 2) assuming dentists compete in this service, the policy didnt impair competition becausemembers allowed insurance companies to use other methods of evaluating diagnoses (probablymore costly).

Issue: Whether the horizontal conspiracy to refuse patients requests for x-rays to submit toinsurance companies for evaluation of claims violates antitrust laws?


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Holding/Rationale: Yes, IFD unlawfully deprived patients (consumers) of a service (cooperationw/ insurance companies) in which dentists formerly competed. The record indicates that dentistsperceived unrestrained competition tended to force them to comply w/ insurance companiesrequests in order to secure patients. The effect of the non-cooperation was that insurancecompanies had to use more costly, perhaps prohibitively costly, methods of evaluation. IFDeliminated a competition w/ respect to a service that patients could use to choose a particular

dentist. The conspiracy is analogous to a group boycott and is thus improper.The Court applied the rule of reason but used an abbreviated analysis because the

evidence of anticompetitive effects was fairly obvious.

Case: California Dental Association v. Federal Trade Commission,526 U.S. 756 (1999); p. 183

Parties: Petitioners (CDA) professional organization of dentists; Respondents (FTC).

Facts: CDA is a nonprofit professional organization that was created to provide members accessto different insurances, including liability coverage, and finance members real estate, equipment,cars, and patients bills. CDAs Code of Ethics 10 prohibited false or misleading advertising by

its members in material respects including w/ price, competence and expertise of the member.FTC alleged that CDA restricts advertising in relation to price, particularly discount fees, andquality of services.

Ph: ALJ found that CDA unlawfully restricted legitimate forms of advertising and, although itdidnt have market power, its policies violate 5 of the FTC Act. The Commission acceptedALJs findings, but further found, under and abbreviated rule of reason analysis, that the CDAprice and non-price advertising restrictions violated the FTC and Sherman acts. Court of Appealsaffirmed.

Issue: Whether a quick look sufficed to justify finding that certain advertising restrictionsadopted by the CDA violated the antitrust laws?

Holding/Rationale: No, quick look analysis is too limited to use here because theanticompetitive effects of the restraints are not intuitively obvious so a more thorough inquiryunder the rule of reason is required. A quick look analysis is appropriate only where someonew/ a limited understanding of economics could conclude that the arrangements in question wouldhave anticompetitive effects on the market and consumers, or where anticompetitive effects areeasily ascertainable. Court doesnt answer the question of the restraints validity, but states thatthe restrictions may have a net procompetitive effect. In this case, the plausibility of both theCDAs and FTCs theories shouldve ruled out the quick look analysis. Courts should look tothe circumstances, details, and logic of a restraint before striking it down.

**(Breyer, J., dissent, w/ Stevens, J., Kennedy, J., and Ginsburg, J. in part and concurring in part)

Dissenters argue that under rule of reason the FTC carried its burdens. The factual disputes wentagainst CDA, according to the ALJ and Commission, and the Courts role is to see if theconclusions of fact were reasonable, which they are. The advertising restrictions on quality ofwork result in an overall limitation on competition because they prevent patients from finding outabout dental services of members. CDA could not substantiate its procompetitive justificationsempirically according to the Commission, which is an expert in false/misleading advertising andthe arbiter of reasonableness in the matter. CDA had market power because its membershipincluded, on average 75% of the marketplace, in one area having 90%. CDA hasnt provided


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strong evidence to contradict the presumption of anticompetitive effects. Therefore, thedissenters argue that the court of appeals and ALJ be affirmed.

Notes:

Quick look came about because, under the old framework, restraints were either

condemned swiftly if they were categorized in per se categories, or if the restraints didntfall into per se categories, an in depth analysis into potentially a large amount of datamust be undertaken.

Two forms of quick look analyses resulted from the potential over-inclusiveness andunder-inclusiveness of the rule of reason: quick look to condemn and quick look toexonerate:

o Quick Look to CondemnSometimes the anticompetitive impact of a restraint

can be readily demonstrated, even if the restraint falls outside of the establishedper se categories (Prof. Areeda). NCAA & Indiana Federation Of Dentists turnedon,

A facial review indicating harm to competition,

Plausible efficiency defenses justifying abandoning per se rules, but

Condemnation when evidence doesnt support the defense

Also, when the full, formal rule of reason is the governing standard,plaintiffs almost never win. (p. 198)

o Quick Look to ExonerateLooks to identify insubstantial cases for

exoneration through the use of filters to weed out non-meritorious cases (J.Easterbrook).

Filter #1: Market Power, if P cant show that D has market power, thenthe case is thrown outeven if conduct falls in a per se categorybecause according to Easterbrook, firms w/out market power cant injurecompetition no matter how hard they try.

If market power is established, then other filters must be passed through

(casebook doesnt identify these filters). Guidelines for Competitor Collaborations tries to synthesize the two quick look

frameworks. Its goals are:o To avoid full blown market inquiries when anticompetitive effects are evident

o To avoid inquiry into justifications and efficiencies when evidence of market

power is lacking, ando To preserve the flexibility to promptly condemn conduct having plausible

efficiencies when those efficiencies in fact cannot be substantiated.o ******BRING THESE TO THE EXAM!!!!

G. JOINT VENTURES AND STRATEGIC ALLIANCES

The cases involving price fixing, group boycotts, and division of markets have beencondemned by the Court. The cases where the Court has upheld defendants schemes have beenlabeled joint ventures, that is agreements formed among rival firms to achieve specifiedpurposes, purposes that none of the participants couldve realized on their own. MeaningChicago Bd. Of Trade, NCAA, BMI, and Topco may all be examples of joint ventures, suggestingjoint ventures have procompetitive cooperation relationships that saved them from condemnation.


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1. Categorizing Joint Ventures by Function

Joint ventures generally all into one of three categories or a combination of multiple categories:research and development joint ventures, production joint ventures, or distribution joint ventures.

Research and Development (R & D) Joint Ventures: This venture pools the intellectual and

financial resources of firmsoften rivalsto pursue the development of new products,processes, or even basic scientific or technical knowledge. The cost of undertaking research canbe daunting for a single firm, especially one that lacks the resources to pursue this course ofaction. R & D ventures can accelerate innovation and lead to significant technologicalbreakthroughs.

Production Joint Ventures: An undertaking to jointly produce something, typically a newproduct. This is similar to R&D ventures in that both may involve the sharing of knowledge andresources. To encourage both production and R&D ventures, Congress allows for antitrustexemptions to firms pursuing them.

Distribution Joint Ventures: This venture combines the capabilities of firms to bring new or

existing products or services to market. The may combine, improve upon or expand existingcapabilities, or lead to the creation of new capabilities or methods.

All joint ventures share certain characteristics, including 1) integration of resources toproduce something firms couldnt independently produce on their own; 2) efficiency and costsaving from the sharing of costs and risks; and 3) contractual restraints to ensure parties are notbeing exploited by sharing information.

2. Possible Anticompetitive Effects of Joint Ventures

Joint ventures often occur between rivals thereby substituting cooperation forcompetition. The possibility and conditions exist that firms would use joint ventures to directly

or indirectly facilitate anticompetitive coordination. Essentially, a joint venture can serve asanother method of setting price and restricting output, or restricting competition. In formation ofjoint ventures, the broader the scope of the venture, the greater the risk of the collectiveattainment of market power, the closer the firms come to becoming monopolists. The formationof a joint venture can also exclude other thereby causing exclusionary effects. In the operation ofjoint ventures, both collusive and exclusionary effects are also implicated.

3. The Variegated Legal Framework for Analyzing Joint Ventures

Joint ventures, given their potential for collusive and exclusionary effects, and the rangeof conduct that can be described as joint ventures, analysis of joint ventures involves applicationof multiple competition policy systems. Joint ventures are looked upon favorably because of

their high potential to facilitate production and innovation. However, the possibility for abuseand the corresponding danger to the market and consumer require that they be monitored closely.


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CHAPTER 3: PROVING CONCERTED ACTION

A. ANTITRUSTS SPECIAL SCRUTINY OF COLLECTIVE ACTION

Antitrust laws rarely interfere w/ individual competitors acting alone, but instead focuseson concerted action. Independent action is not seen as a threat because individual should have the

right to control the output and prices of their products. Coordinated efforts between competitors,on the other hand, suggest that the public is being deprived and/or exploited by firms.

Figure 3-1 Solving Cartel Problems

Reaching consensus

Deterring deviation (i.e. Cheating); and

Preventing new competition

Case: Copperweld Corp. v. Independence Tube Corp.,467 U.S. 752 (1984); p.214

Parties: Petitioner (Copperweld) is a corporation being sued along w/ its wholly-owned

subsidiaries; Respondents (Independence) a new entrant into the steel tubing industry.

Facts: Independence alleges that Copperweld and its wholly owned subsidiary, Regal, unlawfullyinduced a mill supplier to breach a contract it had w/ Independence to supply tubing; the allegedbreach delayed Independences entry into the steel tubing industry.

Ph: Jury found for Independence but stated that only Copperweld and Regal conspired, not themill supplier. Court of Appeals affirmed stating that a parent and its subsidiary could provide theplurality of actors necessary for 1 violations.

Issue: Whether a parent and its subsidiary are sufficient to provide the plurality of actorsnecessary for a 1 violations?

Holding/Rationale: No, a parent and its subsidiary are essentially one entity. 1 violationsrequire concerted action or conspiracy to findings of liability. 2 addresses individual action, butthen only when dealing w/ monopolists. Drafters of the Sherman Act likely felt that concertedactions to restraint of trade are a bigger threat to competition than single-entity restraints. Aparent and its unincorporated subsidiaries are incapable of conspiring because they share thesame interest in identitythis is drastically different than concerted action where competitorsconspire because each conspirator has its own identity.

Notes:

Threshold for proof under 1 is less than that of 2.

Circumstantial evidence in terms of market power demonstrated by market sharebecomes important

B. THE MODERN ECONOMICS OF COLLUSION

Although collusion is a significant concern of antitrust laws, it is difficult to prove, or evenaccomplish. Colluding firms must solve the three cartel problems: 1) reaching consensus; 2)deterring cheating; and 3) preventing new competition. (Case studies are skipped).


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**Figure 3-2 (Factors facilitating or Frustrating Coordination)

Facilitating Frustrating

Few firms Many firms

Product homogeneity Product heterogeneitySimple products Complex, changing products

Excess capacity (multiple firms) Excess capacity (individual firm)Inelastic market demand Vertical integrationLow marginal costs relative to price Sale of complementary products

Open transactions Private transactionsPredictable demand Unpredictable demand

Small transactions Lumpy salesSmall buyers Large buyers

The cartel problems are not easily solved for a number of reasons including mistrustamong the cartel members in the sharing of information and loyalty to the cartel. In addition, it isdifficult for firms to predict general market conditions such as demand so that the cartel mayfunction properly. (p. 244-46 discusses strategies employed by firms attempting to form a carteland the evidence plaintiffs would likely need to produce to bring them down.)

A key concept in this section is conscious parallelism, where competitors follow theleader in pricing practices, including the increase in price. Conscious parallelism is a legitimatebusiness tactic involving no collusion by the competitors. Conspiracy requires more thanconscious parallelism.

2. Inferring Conspiracy from Circumstantial Evidence:

Case:Interstate Circuit, Inc. v. United States,306 U.S. 208 (1939); p. 247

Parties: Petitioner (Interstate) operator of first and second run theaters; Respondent(government).

Facts: Interstate and other film distributors attempted to force local theater owners to raiseminimum prices for first and second run films. Interstate sent a letter to eight branch managers ofthe distributors informing them all of its request/demand that they raise price on movies orInterstate will stop distributing movies to them. All distributors implemented the plan andsubsequently raised price. There was no direct evidence that the distributors expressly agreed w/

each other to comply.

Issue: Whether the existence of an agreement has to be definitely established to find a conspiracyin restraint of trade?

Holding/Rationale: No, the agreement was inferred. Although there was no direct evidence of anexpress agreement, Interstate distributed its proposals to all distributors in a letter w/ all theirnames on it. As a result, each distributor knew of the plan, knew to who the letter was sent; eachknew that uniform cooperation in the plan was necessary in order for the plan to work; and they


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each knew the anticompetitive effects of their actioni.e. that they were violating 1. With theinformation, the distributors participated in and renewed the plan. The plan required a significantdeparture from standard behavior and it taxes credulity to believe that the several distributorswould, in the circumstances, have accepted and put into operation with substantial unanimitysuch far-reaching changes in their business methods without some understanding that all were tojoin. This was a Hub-and-Spoke conspiracy.

Case: American Tobacco Co. v. United States,328 U.S. 781 (1946); p. 252

Parties: Petitioners (American) are the countrys largest tobacco producers; Respondent(government).

Facts: Collectively petitioners account for 90% of the total U.S. cigarette production. Theircigarette prices were almost identical for a number of years, and then the prices were identical.The price increases took place when the costs for cigarettes raw materials were decreasing,thereby decreasing Americans manufacturing costs. The price increases took place on the sameday to the identical amount. The market followers, American and Liggett (who followed

Reynolds) defended stating that Reynolds increase in price would give it more ad spending andthey had to keep up. The conduct resulted in less volume sales but dramatic increase in profits.

Issue: Whether a conspiracy under 1 of the Sherman Act may be shown by a uniform course ofdealing?

Holding/Rationale: Yes. A formal agreement isnt necessary to constitute an unlawfulconspiracy. A conspiracy may be found in a course of dealings or other circumstances inaddition to express words when combined w/ concerted action (or uniform action as here). TheSherman Act is concerned w/ the result of the agreement, not its form. Here, the Court foundthrough evidence of the circumstances of a unity of purpose or common design andunderstanding, or a meeting of minds in an unlawful arrangement. The followers conscious

parallelism combined w/ plus factors justified a finding of conspiracy.

Note Case: Theatre Enterprises v. Paramount Film Distributing Corp., 346 U.S. 537 (1954)(p.255).

Facts: Movie distributors refused to allow an exhibitor access to first-run films for showing in asuburban theater. The movie distributors argued they had not conspired and provided economicjustifications for their independent decision for the same course of action.

Holding/Rationale: Court held that defendants didnt conspire, stating that while consciousparallelism is helpful in determining conspiracy, it has not replaced the conspiracy requirements;there needs to be more than follow the leader.

Notes:

Courts will apply concerted action to interfirm coordination through means other thandirect exchange of information.

Agreements can be inferred from circumstantial proof suggesting that the challengedbehavior more likely than not was the result of a jointly determined course of action.


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Courts wont find concerted action where plaintiffs show only that defendants engaged inconscious parallelism; additional evidence termed plus factors are necessary toestablish conspiracy.

Case: Matsushita Electric Industrial Co. v. Zenith Radio Corp.,475 U.S. 574 (1986); p. 257

Parties: Petitioners (defendants below, Matsushita) are 21 Japanese corporations thatmanufacture or sell electronic products, mainly tv sets; Respondents (plaintiffs below, Zenith)American manufacturers and sellers of tvs.

Facts: Zenith alleges that Matsushita and other engaged in predatory pricingpricing at belowmarket value w/ the intent to force competition out of the market and, thereafter, restoring price tomarket level or higher. Zenith alleged that Matsushita for 21+ years priced their products in theU.S. at artificially low prices to drive them out of the U.S. market. Zenith further alleged that thisplan was feasible because the Japanese government allowed them to maintain artificially highprices in the Japanese market tempering their lost profits in the U.S. markets. Zenith had a largermarket share than its Japanese competitors.

Ph: District court granted Matsushitas s/j motion, but the Court of Appeals 3d. reversed findingdirect evidence of conspiratorial behavior in Japan and corresponding inferences in the U.S.market.

Issue: Whether a s/j plaintiff show direct evidence of concerted action and a plausible motive toengage in predatory pricing to survive a defense to the s/j motion?

Holding/Rationale: Yes. A s/j plaintiff must show direct evidence of concerted action along w/ aplausible motive to engage in predatory pricing. A plaintiff seeking damages for a 1 violationmust present evidence that tends to exclude the possibility that the alleged conspirators actedindependently. The 3d Cir. looked to petitioners anticompetitive behavior in Japan to justify its

denial of s/j for petitioners. The Court held that a conspiracy to increase profits in one market(Japan) doesnt tend to show that a conspiracy to sustain loss in another market (U.S.). The Courtfound that there wasnt a rational motive to conspire in the manner Zenith alleges. S/J forMatsushita was proper because there was no genuine issue of material fact created by Zenith asto predatory pricing.

*Plaintiff must show below cost pricing and a probability of recoupment.

**(White, J., dissent) Argues that the Court hearing a s/j motion in an antitrust case can requiremore than what is required in a typical s/j motion to decide whether a genuine issue exists.

Figure 3-6: Synthesizing the Plus Factors for Proving Conspiracy

(Parallel Pricing +)

Communication or opportunity to communicate (e.g., meetings, trade associationconferences)

Rational motive to behave collectively (e.g., inelastic demand, difficult conditions ofentry)

Actions contrary to self-interest unless pursued collectively (e.g., failure to alter pricebased on changes supply and demand)


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Market conduct that appears irrational absent agreement (e.g., failure to price based onrelative const advantages

Past history of industry collaboration (e.g., historic evidence of successful interdependentor collusive action)

Facilitating practices (e.g., pre-announcement of price increases)

Industry structure (e.g. oligopolistic market structure, homogeneous products, difficultentry conditions, large numbers of purchasers, information asymmetries, frequenttransactions)

Industry performance (e.g., stability of market shares over time, sustained and substantialprofitability, persistently supra-competitive pricing)

Decisions analyzing plus factors dont rank the factors from most probative to least orspecify the minimum number of factors needed to establish concerted conduct. Future litigationis somewhat unpredictable.

In re Text message-adds new prong, must meet (I THINK). This case did not mentionmastusisha case. In willimason it was the leading case used as precedent. Williamson and Textmessage (one is the standard-exclude used in Williams, text is not)

Apply-Prob 3-1 (Durab1) Industry conducive to coordination)- this is not enough so say there is a comp or not

(concentrated industry, etc). Here, hard to enter market some tried and fell. Did they have meansto reach concsensus, to punish cheating).

2) evidence of agreement (talk to the press. In willimason, but it tells us this is not the same.There is more back and forth here through the press as if they have negotiated (this is a big fact0r-this is not simple leader follow case, this is negotiation through the press). Battery sizes changedtogether at the same time, unusually. Question is would you deem this worthy of furtherinvestigation?

Case: Blomkest Fertilizer, Inc. v. Potash Corp. of Saskatchewan, Inc.,203 F.3d 1028 (8th Cir. 2000); p. 283

Parties: Petitioners (Blomkest) a class of consumers that bought potash from one of therespondents; Respondents (Producers) are six Canadian and two American potash producers.

Facts: Potash is a mineral essential to plant growth and thats used in fertilizer. The potashmarket is an oligopoly where a few firms dominant the market; consequently, producers mustcharge relatively the same price or risk losing market share. Canada produces most of the potashconsumed in U.S. mainly through a government-established firm PCS. American firms insistedthat during the 1980s PCS, whose main purpose was to provide Canadians w/ jobs, strippedmore potash than demanded and would dump the excess potash into the U.S. driving the price ofpotash to historically low levels. In 1986, Canadian elections introduced a new administrationthat privatized PCS, which then drastically reduced output and raised its price. In 1987, the USDept. of Commerce reached an agreement w/ Canadian companies that set minimum pricesCanadian producers could charge for potash in the U.S. PCS announced a price increase whichother Canadian producers paralleled leaving the price of potash markedly higher after thesuspension agreement; prices have slowly stabilized since Canadian producers entered into theagreement w/ the U.S.

Blomkest alleges that, from 1987 to 1994, the Canadian companies colluded to increasethe price of potash. Blomkest provides evidence of conscious parallelism and plus factors: 1)


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interfirm communications between the producers; 2) producers actions against self-interestrespondents; and 3) economic models suggesting that potash prices wouldve been lower in theabsence of collusion. Respond that the price increases resulted from the privatization of PCS, theSuspension Agreement and the interdependent nature of the industry.

Ph: District court granted the producers motion for s/j.

Issue: Whether Blomkests circumstantial evidence can defeat the producers motion for s/j in anantitrust case?

Holding/Rationale: No, Blomkest fails to establish a prima facie case. Plaintiffs must provideevidence that tends to exclude the possibility of independent action by the producers: theirinitial burden is conscious parallelism w/ one or more plus factors, but they didnt meet theirburden.

First, plaintiffs interfirm communication evidence includes meetings at tradeshows/conventions, price verification calls, and general discussions regarding the Canadianpotash exports36 price verifications btw. various employees (including high level) in 7 yrs. TheCourt stated that the communications involved price checks on completed sales, not future sales.

Subsequent price verifications of sales cant support a conspiracy to fix market price beginning atdate plaintiffs allege. Second, plaintiffs allege that the producers acted against their self-interestby entering into the Suspension Agreement because producers w/ low dumping margins couldveundercut their competitors w/ high dumping margins. The producers stated that, even w/ lowdumping margins, they wouldve had to pay high bonds, and that the results of the Deptsinvestigation were unpredictable. They wanted to end the dumping investigation w/ a settlementallowing for unreasonably low prices to increase. The Court found that this wasnt acting againstself-interest and that plaintiffs didnt rebut defendants legitimate business decision forcomplying w/ the Dept of Commerce. Finally, plaintiffs expert testimony regarding the price ofpotash in the absence of a conspiracy among the producers is flawed because it 1) didnt take intoaccount the privatization of PCS in 1986 or the anti-dumping investigation by the Dept ofCommerce, and 2) relied only on evidence thats not probative of collusion, such as the

producers membership in a trade association and their publication of list prices to customers.

**(Gibson, J., dissenting) The Court requires too high a standard for plaintiffs defending s/jmotions: instead of allowing circumstantial evidence, the Court wants direct evidence. Monsantorequired direct or circumstantial evidence that reasonably tends to prove commitment to aconspiracy. The industry is conducive to conspiracy. A genuine issue was created and the caseshouldve gone to trial. (See Fig. 3-7 for compare/contrast of the majority and dissentingopinions)

***Key question: What if plaintiffs miscalculated the starting date of the conspiracyitcouldve started earlier than 1987? The interfirm communications could be evidence of detectingcheating for a previously established conspiracy.

Note: Sidebar 3-5 discusses What is an agreement? and also examines the role of plus factors.It states that plus factors are evidence that the alleged conspirators have negotiated andexchanged assurances for their parallel behavior.


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CHAPTER 4: VERTICAL INTRABRAND AGREEMENTS

Key concepts:

Vertical restraints are restraints upon relationships between suppliers, manufacturers anddistributors;

Intrabrand competition is competition among sellers of the same brande.g. rival Chevy dealers,competition among Burger King franchises.

Typical restraints upon this form of competition include allowing sellers to sellfrom authorized locations or within specified geographic areas;

If interbrand competition is robust, then intrabrand competition does not raisemany antitrust concerns.

Interbrand competition is competition involves competition amongst rivals in the same productmarket.

A. PRICE VS. NON-PRICE VERTICAL RESTRAINTS: THE UNRESOLVED TENSION

BETWEENDr. Miles and Sylvania

1. Minimum Resale Price Maintenance:Dr. Miles and the Origins of the Per Se Rule :

Case: Dr. Miles Medical Co. v. John D. Park & Sons Co.,220 U.S. 373 (1911); p. 343.

Parties: Dr. Miles Medical Company (Dr. Miles) sold medicines manufactured by secretformulasi.e. placebo medicines.

Facts: Dr. Miles sold to jobbers and wholesale druggists to distribute its medicines, and alsosold directly to retailers. Sales were also largely dependent on Dr. Miles goodwill and

reputation. Department stores began selling Dr. Miles products at cut pricesthey couldspread any losses throughout the store, so the department stores would realize much loss, if any.

Dr. Miles decided to set minimum prices for its retailers and jobbers; retailers receive anumber of products and any surplus is sold back to Dr. Miles. Also, they could only sell toapproved customers. Dr. Miles alleges validity of its minimum price maintenance by 1) claimingits product is made by secret formula or trade secret; and 2) that as a manufacturer, it is entitled tocontrol prices of its products.

Issue: Whether the restrictive agreements Dr. Miles requires of its distributors, jobbers, andretailers are lawful restraints under 1 of the Sherman Act?

Holding: Dr. Miles unlawfully restrains its retailers and distributors with its agreements.

Rationale: Generally, restraints on the alienation of articles are void as against public policy.The public interest is the first consideration. Restraints can be valid if they are found to bereasonable with respect to the public and the parties, and if the limitation is what is fairlynecessary for the protection of the covenantee* (Addyston Pipe ancillary restraint analysis).Fixing of prices also injurious to public interest.

Notes:


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J. Holmes dissented arguing that the restraint was essentially necessary in order toprevent knaves from undercutting prices and so called freeloading.

Colgate doctrine: A firm seeking to impose minimum RPM (retail price maintenance)was free to do so unilaterally provided it was not a monopolist:

In the absence of any purpose to create or maintain a monopoly, the act does notrestrict the long recognized right of a trader or manufacturer engaged in an entirelyprivate business, freely to exercise his own independent discretion as to parties withwhom he will deal. And, of course, he may announce in advance the circumstancesunder which he will refuse to sell.

2. Non-Price Restraints: Sylvania and the Return of the Rule of Reason :

In United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967), the Court adds vertical,intrabrand, non-price restraints to the per se category. By 1977, all vertical intrabrand pricerestraints were per se unlawful (Dr. Miles (1911) andAlbrecht(1968)) and non-price restraints(Schwinn (1967)). All horizontal territorial restrictions are per se unlawful (Topco (1972)).

Case: Continental T.V., Inc. v. GTE Sylvania, Inc.,433 U.S. 36 (1977); p. 350

Parties: Sylvania, Respondent, manufacturer of tv sets; Continental, Petitioner, formerdistributor.

Facts: Sylvania had a low market share in nationwide TV market and switched to moreaggressive strategy. Began selling sets to smaller and more select group of franchised retailers, todecrease the number of competing Sylvania retailers. Required franchisees to sell only fromspecified locations from which it was franchised. Plan, which took place in 1962, resulted in an

overall 5 % share of TV sales, and being ranked as nations 8th largest color TV manufacturer.The current dispute revolves around broken franchisor-franchisee relationship between

the parties. Sylvania had prior deal w/ Continental in San Francisco to sell its TVs, but becameunhappy w/ low sales in the city. Sylva

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