antitrust outline jb 01

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2. Is any deviation from PC a bad thing? Arthur believes that some are not bad.a. Many times, progress comes at the expensive of some parts of PC

i. Ex: Going to school no standard productive assets. May not want everyone and everything to be exactly thesame.

b. Innovationi. Innovation is completely left out of the PC modelii. Short run gains to allocative efficiency must therefore be weighed against antitrust regulations long run costs t

entrepreneurial innovation.

1. If too much regulation, it keeps people away who want to be the next Bill Gates

B. Types of Trusts/Combinations

1. BRANDEISS VIEWa. Small business is good

i. Worried about large companies having too much power and developing a nation of employees1. Inequality (Rockefellers)

b. Thought bigger was automatically more inefficienti. This was not true, b/c most of these companies were MORE efficient than competitors

1. Trusts are combinations. Some amount of combination is good. May become more effective when they work together anmay be able to specialize more (lawyers)

2. BRANDEIS 4 TYPES OF COMBINATIONSa. Tight

i. Type 1: Zero integration1. Ex: Divvying up the work in an area or pure price fixing. Nothing that is more efficient, just agreeing not to compete

ii. Type 2: Some integration1. Ex: All agree to sell through the same distributor to make sure all sell for the same price

b. Loosei. Type 3: Trust

1. Ex: Trustee runs business and owners get share of profits. Companies give over legal control/title of their companies togroup of trustees.

ii. Type 4: Firm (vertical integration)3. 2 MAIN KINDS OF COMBINATIONS

a. Loose cartelsi. What is it?

1. May consist of price fixing, dividing up areas so that each can have a monopoly in that area2. Still make your own decisions and run your own business3. No integration/ cooperative production (not like law partnership)

a. Ex: Agree not to compete. Nothing to make the companies more efficientii. Why are they formed?

1. Greed (OPEC)2. Distress (overcapacity & loss minimizing)

a. In PC, these companiesshouldgo out of businessi. Ex: Industrial revolution. It was no good to produce a lot if you cant sell it. Led to organizational efficiency

(advertising, marketing) and productive efficiency (technological, organizational)

iii. This type of cartel did not work very well. Problems:1. Cheaters one may secretly sell for a lower price

a. May be hard to catch. Also, K may be against public policy and will be unenforceable.2. To solve this they began to use some horizontal integration

a. Ex: Centralized selling agency to prevent cheating.b. Begin to act a bit like a firm to produce jointly.

i. Partial integration (milk marketing)iv. Benefits

1. To producersa. Can minimize losses or make more profitb. Can all weather the storm keep them alive during tough periods

2. To consumersa. Choices are retainedb. Since it keeps companies from going bankrupt, it protects investorsc. Unions/workers keep their jobs

v. Costs1. Consumers Increased prices (fixed)2. Inefficient use of resources Loss in allocative efficiency

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b. Facts: Ds were a group of RR companies that established uniform rates to eliminate a price war during harsh times. Argued that thprices were reasonable

i. 1: condemns every contract, combination... or conspiracy in restraint of trade.c. Holding (Peckham): Here, the court went with literal lang and the RR loses

i. Makes a bright line rule: EVERY contract that restrains trade is illegal, regardless of intent or reasonableness1. But then he hedges his bets and adds a section that says that collateral (ancillary) restraints are still ok

2. Addyston Pipe & Steel (1899) 6th circuita. Point of this case : Established the ancillary restraint doctrine (as long as reasonable)

i. NOTE: this is Arthurs favorite rule in all of antitrust he thinks it can explain all of the lawb. Facts: 6 companies that manufacture cast iron pipes and fix prices (cartel). Allocated territory and jointly fixed prices. Purpose w

to create an artificial barrier by establishing prices low enough to discourage new entrants, but higher than the natural pricei. Ds argument: Dont deny that this is a K in restraint of trade. Argue that they are not a monopoly b/c they did not have markcontrol (just 30%) and are reasonable.

c. Holding : not lawful b/c not ancillary reasonableness doesnt matter if naked restraintd. Established ancillary restraints doctrine

i. All direct (naked) restraints are ipso facto unlawful, even when outcome is reasonableii. Ancillary restraints that were unreasonable were unlawful

1. EVEN IF ancillary, if the real purpose is for a monopoly it is illegala. Merges the ancillary restraint rule with the monopoly rule

iii. Ancillary restraints that are reasonable are lawfule. Taft

i. He is a lower court judge and is trying to help out the Supreme Court1. Believes that the 1890 Congress did not want the reasonableness test. It is too hard to have a clear standard here.

ii. Primarily argues for the Ancillary/Naked restraint doctrine

1. Goes through arguments, but says that most common law cases made the decision b/w naked and ancillary agreements als3. Standard Oil(US 1911)

a. Importance of this case: Court modifies theAddyston Pipe ancillary restraint doctrine. The Supreme Court compromises and saysthat statute is only against unreasonable restraints of trade with monopoly power.

b. Facts: 37 oil companies managed by a single holding company.c. SC does not adopt ALL of Tafts approach, but mostly just the 3rd step

i. Afterwards, courts show that cartels always lose. Monopolistic mergers are illegal

***What really happened, is that there is no authoritative opinion by the Supreme Court that tells us which one to use. 3 options below...

E. 3 Ways to Analyze the Rule of Reason

1. ANCILLARY RESTRAINT RULEa. Requirements

i. Covenant must be ancillary to the main purpose of the contract, ANDii. Necessary to protect the covenantee

b. Main pointsi. Bright line rule: Agreement not to compete that is ONLY aimed at keeping market forces from operating is illegal per se. (i.e

restraint cant be forpurpose of killing competition)

1. Combination w/o integration is per se invalid.c. How do you tell what is ancillary?

i. One test: Would the transaction still take place without this agreement?1. If yes, then it is ancillary2. If no, it is central, and thus illegal per se

ii. Examples1. To facilitate:

a. Sales (business/asset) gains from tradei. Ex: Cov. not to compete after sale of business (keep goodwill)

b. Joint production (like partners)i. Ex: After partner leaves, etc...

2. Must be reasonably related to a goal look at why do you need this?a. Ex: Wants to buy Sams Bakery to get profits. To make the deal make sense, he has to make sure that Sam does

not compete near him. This is OK.

d. Addyston Pipe definitive authority re: acceptance of ancillary restraint doctrine in USi. Suggested that partial or ancillary restraints were lawful if they were reasonably necessary to serve legitimate ends of business

arrangement (e.g., employment contract or contract to sell business)

ii. But balancing approach only applied to ancillary restraints if restraint were determined to be of a general nature, it was illegaper se (no rule of reason analysis)

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iii. Taft: argues that most restraints held up in the past were in conformity with this rule1. Believes that reasonableness test is too subjective. Need a standard

e. Summaryi. Arthur believes that this is structured and universalii. If didnt facilitate the sale of goods/assets or produce productive efficiencies (cost reductions, quality improvements), then you

would have to analyze it further.

2. PURPOSE/EFFECT MONOPOLYa. If the purpose or result is to control the market not ok. Otherwise, we dont care (if only 2% of the market)

i. Ex: courts weighing mergers (are the companies too big to be allowed to merge?)ii. This is more of an economic analysis and is less structured than #1

iii. Limited to looking only at effects on market, not the whole thing like #31. Cts spent less time inquiring into business reasons for the restraints in question, and looked more to purpose and naturaleffects of the restriction itself

b. Originally, like a factual economic analysis w/o a particular structure. Used to determine purpose/effect of producing a monopoly.Good for easy cases, but can get tricky

i. In modern days, this has morphed into a balancing of pro-competitive v. anticompetitive aspects3. OPEN-ENDED REASONABLENESS

a. American minority/English rule let people do what they want to doi. This approach still sneaks in some cases

b. Look at purposei. Any good intention = reasonable. General reasoning anything you can think of that is reasonable

1. Reasonable price (not being greedy, just doing enough to keep control)2. Lack of market control, etc3. Helping a distress industry, allowing people to go home on Sunday

c. Adds to #2 ANY good purpose. In #2 only look at whether trying to be more productive or take over the market nothing elsematters. In #3, other things matter. Could be trying to preserve payrolls, reduce cutthroat competition, etc.

II. Horizontal RestraintsA. Overview

1. Primary concern of antitrust law: preserve and encourage competition among firms in same industrya. Thus, place limits on collaboration among competing firms (i.e., horizontal restraints)

2. Basic elements of 1 claima. To establish liability under 1 of Sherman Act, P must prove

i. (1) Agreement or concerted action (unilateral action is not prohibited)ii. (2) That unreasonably restrains trade, andiii. (3) That has an effect on interstate commerce

b. To show that a particular restraint of trade is unreasonable, cts generally apply one of two tests: [a] the per se rule or [b] the rule ofreason (see approach below)

APPROACH TO PROVING EXISTENCE OF HORIZONTAL AGREEMENT

Is there an actual written agreement?

YESYESYESYES

NONONONOThere is no agreement.There is no agreement.Determine whether the agreement unreasonably restrains trade.Are there anyplus factors (e.g., communication among parties, acts in contravention of indiv-idual economic interests, radical departure of past practicetc.)?Is there conscious parallelism (i.e., party knows of actions of its competitors and decides to do the same)?Is there direct evidence of an agreement(e.g., witnesses, tape, etc.)?

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Horizontal Restraint Analysis

Identify the type of restraint Price fixing, market, boycott

Then identify the rule for that type of restraint Per se or ROR?

Horizontal Per Se Rules

PF Mkt Div Boycott

1st generation Socony Topco FOGA, Kloys, AP

2nd generation BMI, NCAA Polk Bros? NW Wholesale, Dentists

B. Price restraints

1. FIRST GENERATION/FOUNDATION CASESa. Overview

i. The foundation cases are important b/c they show the two major ways in which 1 cases came to be decided, up until more recently1. Rule of reason (more of a standard): lots of factors considered; balancing of pros and cons; discretion of the cts in individual

casesa. Main cases that followed this approach: Chicago Bd of Trade;Appalachian Coalsb. Wide open standardc. All three common law rules of reason are possible alternatives

i. I.e., naked/ancillary restraints doctrine; purpose & effect; catchall tests2. Per se analysis (more of a rule): excludes/screens out certain conduct; much less discretion given to the cts in deciding each

individual case

a. Main cases that followed this approach: Socony; Trenton Potteriesb. Big issue tends to be evidence of an agreementc. Direct evidence is easiest; indirect evidence raises interesting questions

b. Chicago Board of Trade (1918) Brandeisi. Importance of this case: Court adopts a broad rule of reason test to determine whether it promotes or suppresses competition,

look at nature of restraint, facts of the business, etc (p. 128)

1. Because the Gov. failed to allege either an output restriction or an effect on prices, the Court refused to characterize the Dsconduct as price fixing (p. 120)a. Thus, used ROR instead of per se rule.

ii. Facts: Fixes the call rule of grain sales after closing time (price at the end of the day sticks). Like the stock market.1. Held that it is not a cartel and not price fixing. Call session actually facilitates competition by increasing information, regulati

hours, etc.

a. Compare to OPECi. In OPEC, there is NO integrationii. Here, they are more like partners. And the market is still competitive

iii. Ancillary restraint?1. Purpose is jt. production. A partial integration.

a. But is call rule REALLY ancillary? Is it necessary to make the call session work?iv. Problems with this case

1. Brandeis says that you should look at everything(seems to put all 3 theories together). He doesnt give an organized way to

analyze it.2. Suggests that in every case you must consider a broad range of facts, effects, history, etc. There is no standard to decide.

c. US v. Trenton Potteries (1927)i. Importance of this case: Rejects defense that fixed prices can be reasonable. Implies that by definition a price-fixing agreement i

per se unlawful. However the courts use of if effective couches its reasoning and suggests thatper se treatment applies only whprice fixing is effective (p. 119, 129-130)

ii. Facts: Cartel that fixed price for bathroom pottery. Controlled 82% of the market and not many substitutes. Odds that they wereeffective were high.

1. Holding: price fixing and illegaliii. Rationale (Stone):

1. Look at the purpose of the statute.

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a. Purpose was to protect from evils of monopoly and price control by maintenance of competition.i. Wants a standard to enforce the statute and reasonable price is not enough. Competitive price is the reasonable

price.

b. Statute was meant to keep the price system working. If there is market power, they are able to set the price and this isagainst the statute.

c. No way that the gov. can control this if they continue to look at everything. Makes cases too complicated.iv. Ways to limit this case even though it seems to say cartel price restraints are per se illegal

1. Must have market power2. Must have uniform price schedule

d. Appalachian Coal(1933)

i. Importance of this case: Case seems to suggest that the Act should be interpreted like the Constitution and the courts can doanything that is reasonable (more like common law and not like a statute)1. The specifics of the case disappeared, but the Constitutional idea is still around2. Partial integration allowed as long as viewed as reasonable under the Act

ii. Facts: During the Depression. Cutthroat price cutting. Coal people get 1 sales agency that sets the price and sells all of the coal.The restraint is not a just joint selling agency to advertise, etc, but they are also getting rid of direct option to buy (unlikeTicketmaster). Ends all competition among coal companies.

1. Holding: Upheld. Arrangement is allowed.2. This is in the time of the Great Depression this plays a role

a. Justified b/c of the deplorable economic condition in the industryiii. The opinion uses a bit of all 3 versions of the rule of reason

1. Ancillary2. Purpose/effect was not monopoly

a. Less than 80% control

b. But didnt want to bother unless they had over 70% seems to be evidence that they wanted control3. Reasonableness cutthroat, etc

a. Used a broad weighing analysis that included economic conditionsiv. Implications for today

1. Agreements designed to facilitate the operation of the market and efficiency w/in markets are increasingly being viewed underROR standard. (Well see this later in BMI, etc)

a. A bit of integration of integration is good and ok2. NOTE: this is one of the cases that, though not officially overturned, is no longer followed.

e. Socony-Vacuum (1940) THE 1st GENERATION PER SE RULEi. Importance of this case: Finally establishes a per se rule of price fixing. Rejects Trentons implication that per se rule is only

applicable when price fix is effective (p. 119). Just tampering with the price system is enough.

1. Also applies to maximum price fixing2. From now on, a price cartel cannot be covered by good intentions reasoning (3) if it is a naked price restraint

ii. Facts: Too much output in the oil industry. Arrangement where each oil company has an independent refinery that they willpurchase from to keep the spot market price stable. Clearly trying to hold prices up. (Illegal)iii. Compared to other cases

1. Compared withAppalachiana. Arthur thinks that the facts in this case are very similar to Appalachian both are trying to deal with overcapacity.b. Why does the court find differently?

i. Different times?ii. Language about the possibility that they may have an effect on prices. Douglas doesnt want to hear about

destructive competition

2. Emphasis on Trenton Potterya. Picks up on Trentons focus on supply/demand and purpose of statute

i. Need to look at the standards of the statute which are only about the competitive effects. Not interested in goingbeyond that.

ii. W/o supply and demand, there is no way to know what the reasonable price is

iv. What does Socony do?1. Finally establishes a per se rule on price restraints

a. Arguably, Trenton had already done this, but now there was no uncertainty/backslidingb. Only issue is did they do it? If so, no defenses

i. It is per se illegal, to get together and do a cartelii. What if 2 guys w/ only 2% of the market get together? The Court has said that this is illegal. Remember, price fixin

also includes output control. (FN 59)

2. Gives broad definition of price restrainta. ANY combination which tampers with price structure is illegal dont have to have control of the market. Fixed include

range, etc.

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b. Case suggests that price is really important. Price fixing is an actual or potential threat to the central nervous system ofthe economy. Messing with this leads to problems with allocative efficiency.

3. Market power is not necessarya. FN 59: The Court made clear that market power is NOT a precondition to finding a per se violationb. Dont even have to have an effect a conspiracy/agreement is enough.

4. Socony is the law today, but Appalachian and Chicago were never overruled.v. Practice Pointers

1. Trade association and sit around complaining. Court does not require a strong agreement tacit is enough. Advice: if client in a meeting where they start talking about the prices charged GET OUT and make sure that everyone remembers that you gout.

vi. 2 issues that need to be resolved afterSocony1. Problems with the scope of the price fixing rule2. What about price fixing that is not a cartel? (like partial integration)

a. Small town grocers get together to buy joint ad in paper w/ specials. Is this illegal per se? This remains open.b. What about ancillary restraints? If it really aims toward productive efficiencies...seeProfessional Engineers

f. Catalano (1980)i. Importance: First and only time they used per se since Socony. However, it is after BMI, etc where it looked like the court was

moving to ROR

ii. Facts: Beer distributors used to extend credit agree not to do that anymore.iii. Argument:

1. Pro-competitive effectsa. People know what the price isb. Easier for new people to come in

2. Court does not buy this. You are just messing with the price

a. A horizontal agreement among competitors to eliminate credit was the equivalent of a discount and thus an inseparable paof the price per se illegal

i. No excuse that the price was reasonableiv. Why Arthur thinks this case is right

1. Were probably fixing the prices too and were using credit to undercut each other2. It is a naked restraint of trade

2. 2nd GENERATION CASES CHARACTERIZATIONa. Professional Engineers (1978) RETURN TO ROR

i. Importance of this case: Retreat fromper se analysis. SC says that ROR in price-affecting cases is focused on the examination ofwhether the conduct promotes or suppresses competition (public interest should not factor in). This is a structured ROR that isnarrower that BOT. Analysis is limited to competition (no room for non-economic factors such as social or political benefits). Stilretreats from Socony by not making it per se illegal. (p. 136-138)

1. One of first instances of quick-look rule of reason analysis => i.e., ostensibly applied rule of reason analysis, but stillinvalidated the agreement in question b/c of lack of procompetitive or efficiency-related justifications

ii. Facts: Canon of ethics prohibiting bidding by its members. Dont discuss prices until after picked. Ds argument is goodintentions says it is for public safety.

iii. Stevens analysis1. Makes it hard for consumer to shop for a priceessentially this is price fixing.

a. However, this isnt a per se caseb. Wants to make a point that even if its not under a per se rule, that doesnt automatically mean that good intentions can sav

it. You dont get to have anything goes just b/c youre in the rule of reason.

2. Here, Ds lose not b/c they are per se illegal, but by looking at the rule of reason.a. Before this case, analysis under rule of reason generally meant victory for D not anymore! D will still have to show som

justifications; it is not anything goes

iv. Single standard1. The case basically takesPottery and applies them to all cases. An attempt to get to a single standard. It becomes much more

structured, even if it is still the rule of reason

2. Could have just said this is like Socony a per se case, but they dont.a. Under Socony, the fact that this affects prices should be the end of it

3. Court suggests that even the ROR should be more limited and more rule likea. Still rule of reason but much narrower than that used in Chicago Board of Tradeb. Instead of having it where per se and ROR were so separated, there should not be such a hard line

b. BMI(1979) THE BEGINNING OF CHARACTERIZATIONi. Importance of this case: Evolves into a 2nd generation of the rule characterization. Literally price fixing does not make it a pe

se violation. Price fixing must be of a certain variety. Competitive harms will be weighed against economic benefits, even when thchallenged conduct directly affects price competition. (p. 139)

1. Necessary to characterize doing this is the difficult question and the court has not answered it2. BMI suggests that the price-fixing label is applied or rejected AFTER the Court makes the economic harm/benefit analysis (13

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a. This is the quick look testb. When theper se conclusion is accepted, it now seems more like a substance law conclusion at the end of the balancing

analysis that the net effect of the practice is not procompetitive.

ii. Facts: Price fixing through ASCAP and BMI. Individual composers give license to these companies and then radio, etc get therights from them. Given in blanket license so you dont have to individually negotiate (but this is still an option). Too hard tonegotiate for every song. Also an enforcement agency.

1. Issue in this case: What do we do with price fixing that makes things more effective?2. Holding: not illegal

iii. Whites test: Inquiry must focus on the effect on the free-market economy whether the practice facially appears to be one thatrestricts competition/output or increases efficiency

1. Stressed the review standard was limited to whether conduct is designed to increase economic efficiency and rendermarkets more, rather than less, competitive

iv. Reasoning1. BMI suggests that per se rule does not apply (rule of reason applies) if there is partial integration

a. This is not a naked restraint with no purpose except stifling competitionb. This is similar to a partnership partial integration (National Egg Board for advertising, marketing, but separate in

other areas)

2. Efficienciesa. The efficiencies created by integration are hugeb. The cost savings here are so overwhelming the rights would be worthless w/o something like this (need a middleman)

3. New product/Nature of the marketa. The blanket license is like a new productb. There is no restraint here, it is just the nature of the market (have more than 1 BMI, ASCAP)

4. Direct negotiations

a. Also, direct negotiations are still allowed and they are non-exclusive licenses (not sole licensee).i. Compared to a cartel: a cartel would only let you buy directly from them. Must sell through this group and no other

1. Comparing to Ticketmaster can still buy tickets directlyii. Would be a different case if musicians had to agree only to license to them

v. 2 ways to characterize1. Ancillary restraint v. naked

a. Arthur thinks this case looks like an ancillary restraint (ancillary to economic integration)b. What if you have a price restraint (looks per se illegal) but it is also ancillary? Is this per se forbidden? There is no clear

answer

2. Quick look testa. Before applying the per se rule, the court looks to see whether any procompetive effects...

vi. Readings of BMI:1. Broad: ANY pro-competitive defense will save you from the per se rule

2. Narrow: Must be a new product. Too dangerous to let this go any furthervii. Effects of this case1. The per se rules begin to become less hard edged and mechanical become more standard. At the same time the ROR becom

more limited. There is a convergence of the 2.

a. Stevens inNCAA: there is no clear line b/w ROR and per seb. The court does not seem to be able to make up its mind

2. Arthur was excited about this ruling when it first came out b/c it looked like the court was going to stop being so overly broadwith the per se rule

a. Previously, the court assumed that there was no redeeming value in price fixing. Thought that this rule had no costsb. Chicago school (2nd generation): What about partial integration (real estate brokers listing service, Got Milk, NYSE,

NBA)? The law shouldnt mess with this...

3. What do you do with Socony?a. Looks like it is price fixing but there is a conflict about the per se rule

i. The rule seems to be too much here b/c there is redeeming value

4. Problem comes from the Maricopa case

BMI established a turning point in price-fixing cases: not all arrangements among competitors that have an impact on price are per seviolations of the Sherman Act or even unreasonable restraints

NEW RULE OF REASON ANALYSIS:

(1) Whether challenged conduct is reasonably necessary to achieve the cost-reducing efficiencies;

(2) Whether the restraint that follows is actually necessary to the integration;

(3) Whether the efficiency achieved by integration outweighs the adverse effect of the restraint. Thus, initial summary analysis under the per se rule is on the decline, although the Ct sometime vacillates on where the line should b

drawn in classifying price fixing

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Ct now values economic efficiency as a means of defining competition

Competitive harms will be weighed against economic benefits, even when the challenged conduct directly affects pricecompetition

Inquiry is whether economic efficiency is achieved without sacrificing output

c. Arizona v. Maricopa (1982)i. Importance of this case: The only reason that this case is a big deal is b/c it came after BMI and applies aper se rule.ii. Facts: maximum fees for heath services agreed upon by doctors by reimbursement of heath services provided to policy holders of

certain insurance plans

1. Holding: setting a maximum price is just as anticompetitive as setting a minimum price (still price fixing and interrupts thesignals of the marketplace)

2. Pro-competitive justificationsa. It appears that this doesnt count either under the per se ruleb. This is a very strong version of the per se rule

iii. Why isnt this like BMI?1. Powells dissent

a. This looks like BMI. Arthur thinks that he is right2. Other factors

a. Integrationi. Looking at the product. Why isnt this just considered an integration of doctors (like BMI)? Court held that this wa

violation of statute

ii. ASCAP was a partial integration, same as Foundation. Used as a method of organizing a particular kind of insurancb. Option to buy directly

i. Doctors really arent bound to the Foundation either. Can still go directly. There is no real restraint. It is equally

open as BMI...c. New product

i. BMI created a new product with the blanket licenseii. Arthur thinks that they are really just trying to make an exception to the rule b/c w/o this, there would be no product

d. Necessaryi. The result seems to turn on whether the agreement among the doctors was necessary to achieve the desired efficienci

or whether less restrictive means were available. (133)

1. Note: b/c it directly fixed the price, could not be ancillary (naked restraint)ii. In BMI, unlike Maricopa, the participation of the individual composers was essential to the plan (p. 139)

1. It wasnt necessary for the doctors to do it, like BMI3. The justices say that there is a distinction b/w these cases, but Arthur does not believe that there is. This case does not differ a

all from BMI.

d. NCAA (1984) Justice Stevens

i. Importance: Court applies a ROR analysis even though there was price-fixing agreement and an output restriction. The ROR wasagain accepted, this time on the belief that in certain markets horizontal restraints on competition are essential if the product is to bavailable at all. (p. 140)

ii. Facts: Joint venture among college sports teams that restricted # of games that could be broadcast and set price.1. Court agrees that the contracts restrict output and fixed the price. However, they reject the per se approach b/c this was a mark

that required cooperation or interdependence (or else no product). The Court examined whether, under theBMIanalysis, therewere offsetting procompetitive features that could take this case out of the naked restraint category. (p. 140)

2. Holding: the scheme was not illegal per se, but illegal under RORa. NCAA lacked procompetitive justifications (defense of keeping attendance, etc was not enough)

iii. Compared toMaricopa andBMI1. This looks per se illegal underMaricopa

a. Stevens: In Maricopa, he says that the per se rule is broad. Then in NCAA, he says that the rule should not be so broad.2. NCAA looks the most like a cartel. If you want to play, they must be in charge. It is not market driven. It spreads the busine

so that everyone gets a share (very much like a cartel)

a. Unlike BMI, the individual colleges are not allowed to negotiate directly with radio stations must go through NCAA.3. Arthur thinks that this case has more restraints than any of the others, yet it is not per se illegal.

a. Court uses a broad sword to use rule of reason b/c of the area (sports)iv. 2 ways to read this case. ROR applies to :

1. Any network industry (where parties have to cooperate to make things work)2. Ancillary to creating a new product (a new type of football). Having 1 college is not enough. All have to participate to keep

grades up, etc

3. SUMMARY OF THESE MODERN CASESa. Overview

i. The court decisions here are very muddled and filled with false distinctions

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1. Lower courts have a lot of room. There are a lot of phony distinctionsii. All 3 of these cases are similar. Each has a middleman that puts together a substantial mass so that this will work. Compiling it is

something of value.

iii. Looks like ROR makes the following OK1. New Product (BMI)2. Cooperation/network industry (NCAA)

b. What should you do as an attorney?i. Depends on what your objective is

1. Want ROR (defendant)a. Argue that NCAA is the most recent case and should be followed (consistent with BMI) just ignore Maricopa

b. You could also argue for new product or network industry2. Want per se rule (plaintiff)a. Socony has never been overruled and was followed in Maricopa

4. RULE TODAY REGARDING PRICE RESTRAINTSa. Determining what constitutes price-fixing

i. Any agreement among competitors fixing minimum pricesii. Agreement among competitors fixing maximum prices

1. I.e., presence of max price tends to stabilize prices and distort resource allocationiii. Agreement among competitors on how much they will sell or produce, even though there is no specific agreed-upon priceiv. Agreement among buyers on price they will offerv. Agreement prohibiting competitive biddingvi. Elimination of short-term credit

Horizontal Price Fixing Analysis use info from BMI, Maricopa, NCAA above

Originally,per se rule applied to all price fixing agreements. Later, the court began accepting affirmative defenses and instead applied the Ro

When applying theper se rule, ask if the price fixing agreement stems from a naked restraint, making the situation facially appear to be a carteIf ancillary, or if there is partial integration, apply RoR. (BMI)

Court will also consider whether there is some procompetitive purpose to the restraint. If so, use RoR. Looks at productivity and efficiency

Consider Ancillary Restraints

Consider Exceptions: NCAA, Maricopa

Direct agreements that fix prices and reduce output are illegal UNLESS

Cooperation/interdependence/integration is required to produce procompetitive efficiencies that offset the restraint AND

Less restrictive means are not possible (according to Maricopa, so maybe)

C. Joint Ventures

1. What is a joint venture?

a. Joint venture is the formation of a single entity by two or more independent firms for the purpose of engaging in research, production, ormarketing activities

b. Joint conduct may be of the type that either firm is capable of carrying out individually or, b/c of its nature, could not be undertaken if thefirms acted separately

2. Why have a joint venture?a. Firms engage in joint ventures for numerous reasons some lawful, some unlawfulb. Possible benefits of joint venture: increased productivity and competitionc. BUT costs associated with joint ventures include potential for price fixing, output restrictions, market divisions, and increased monopoly

power

3. Rule of Reasona. Because joint ventures have the potential of producing benefits as well as costs, cts generally analyze them under the rule of reason

i. I.e., cts attempt to weigh the economic efficiencies against the actual costs of the ventureb. The more pure research-oriented the venture is, the more likely it is lawful

c. As the venture moves toward production and marketing, the more serious antitrust concerns are implicated4. Analysis of joint venturesa. (1) Cts begin analysis with inquiry into nature of joint venture (i.e., research, production, or marketing) and whether actual creation was

lawful (esp. in purpose)

b. (2) Also consider joint venturers and competitive relationship (or lack thereof) of the members of the joint venturei. Direct competitors who join together in joint venture have greater potential for anticompetitive conduct than other relationships

c. (3) Finally, cts analyze the restraints imposed on the joint venturers in scope and duration, and determine whether they are reasonablynecessary to achieve the benefits of the venture or whether they are overbroad

i. Venture that is broad in scope and lengthy in time is more problematic.5. NOTE: if the collateral restrictions include price agreements, output limitations, market divisions, customer allocations or refusals to deal, the

will be declaredper se illegal

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a. BUT if restraints are merely ancillary to otherwise lawful agreement and limited in scope duration so they are reasonably necessary toachieve goals of project, they will be held lawful.

D. Market Division

1. OVERVIEWa. Types of Market Divisions

i. Territorial1. 2 parties take what could be a single market and split it into segments. If effective, each person becomes a sole seller in their

segment (essentially a monopoly).

a. Ex: (Addyston Pipe, Topco, Palmer)b. Topco (each has its own regional territory and would be the only one that could sell Topco there)

ii. Customer1. Topco/wholesalers: These are usually vertical restraints

iii. Products1. Polk Bros built store together2. Microsoft: alleged that they went to Netscape and said we wont make a browser if you dont make a operation system

b. Why do it?i. This is actually a clean and simple way to get a monopoly

1. Cartels can be combinations of price fixing and market divisionsii. Market divisions are more stable than price fixing b/w optimum prices changeiii. With price fixing, you can still compete on things other than price (service/product), but if you have a good market division you can

compete on anything. This is the most complete restriction

c. Vertical v. horizontali. Horizontal: among competitors. These are viewed with more suspicion than verticalii. Vertical: b/w buyer and seller (ex: arrangement b/w GM and dealer that GM will sell to police, but not to customers)

1. Coke has territorial limits on their bottlers. Vertical b/c the manufacturer is laying down the restriction.2. To determine whether vertical/horizontal look at who is imposing the restriction

2. CASESa. Sealy (notes p. 365)

i. Holding: the Sealy guys were per se illegal. However, when Topco comes up they do not apply a per se rule from Sealy. What isthe difference?

1. Sealy had both price fixing and market division for their mattresses. This could be a distinction. Also, in Sealy, the price fixinwas enough to make it per se illegal in the 60s.

b. Topco (US 1972)i. Importance: The high water mark of the per se rule. Court says that horizontal geographic market divisions (even without price

fixing) are illegal. (p. 173). However, the court also discusses market power, which indicates that there may be some ROR analysisstill left.

ii. Facts: Independent grocery stores that create a house brand to compete with large grocery stores. Topco is a cooperative

association/joint venture of the grocery stores horizontal. Different than GM and its dealers, etc.1. 3 restrictions:a. Can only sell Topco in the allotted area (territorial). However, can still compete in all other ways in that area.b. New members in that area have to be voted on (but probably wont happen)

i. Effects: customers can only get Topco brand from 1 place in that area. Dont want to lose exclusivity in your territoc. Restriction on wholesalers (customer restriction)

i. Can only sell to retail customers in your territory. Cannot be a middleman would get the brand out to too manyother stores

2. Partial integrationa. Hypo: If they joined together and just formed 1 store chain, then they would be a firm and this is OK. But this is not wh

they have done here. Here, they are only partially integrated

b. This is the best of both worlds. Better than a firm b/c they keep control. Topco is not a cartel.3. Holding : this is per se illegal

iii. What Arthur thinks is frustrating with this opinion

1. Ancillary Restrainta. Arthur believes that this is a prime example of an ancillary restraint and that this is a terrible opinion. In 1979, the court

says in BMI (and later in NCAA) that not every horizontal restraint is illegal per se. The rule loses its strictness.

i. It might be argued that later cases in price-fixing area undermine the rationale in this case (e.g., NCAA,BMI) i.e.,they apply the rule of reason

ii. If you were consistent with BMI and other cases, this would be ok. There is integration, small % of the market.Eyeballing it it is not a cartel

2. Reasonablenessa. Court says that reasonableness (that they only have 16% of the market and actually improves competition) is not enough t

make it ok

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i. Court doesnt care about positive aspects and is very stubborn about wanting a uniform approach. Wants a per se ruso that there is predictability.

ii. Says that the courts are not capable of dealing with difficult economic problems (were not smart enough). Cover itby making it all illegal

3. Harsh Languagea. Compared toNorthern Pacificcourt uses harsh language, but never applies it again

c. Polk(1985) 7th circuiti. Facts: 2 stores build stores together and agree not to compete on certain products

1. Uses quick look to decide if illegal per se. Recognizes free rider defense as a legitimate objective of a system of distribution.(p. 177)

ii. Holding: This is OK1. Ancillary restraint/ partial integration

a. This is an ancillary restraint that results in productivity and output.b. Like Topco, this is limited to particular goods not all goods. The fact that it is limited to the cooperative activity is a si

that it is not a cartel, but a type of partnership (partial integration)

2. Quick look testa. On its face, it does not look like a cartel. One way to tell this is by looking at market share (plus the fact that the

restrictions are limited to only part of the market or brand)

3. WHAT DO YOU DO WITH THESE CASES?a. What is the law today?

Mkt Division Horizontal Per Se Rule

1st generation Topco: Nothing matters except whether there is a market division

Didnt care if there were efficiencies (opposite of the N. Pacific case that classifies per se as arrangement as one with

negative effects) Rationale

A rule is a rule

Judges are not good at economics

Its worth it to have an overbroad rule, so that there is consistency (the costs are minor)

2nd generation (if it exists) 1st generation rule is too overbroad and too harsh

Rationale:

Judges are sophisticated enough to engage in economic analysis (characterize)

The costs of the overbreadth of the rule are too high Court characterizes the mkt division

Look to see if ancillary

Quick look

i. We dont know for sure. The last word was Topco (decided under the old regime). Not sure how the new court would horizontalrestraints today. In every other area, they have cut back on the per se rule, so perhaps they would do that in this area too.

b. Is there really a 2nd generation rule at all?i. Polkis not the equivalent of the other per se rule cases b/c it is not Supreme Court

1. InPolk, the judge (Easterbrook) can be bold in his statements b/c it will cannot be appealed to the SC2. We dont know whether the SC would agree with this case, or knock it down

ii. Last case isPalmer v. Bar Review of GA(p. 377) (1990)1. This case has an element of partial integration2. SC holds that horizontal market division is unlawful per se.

a. Does this mean thatPolkwas wrong?c. Is Topco still good law?

i. Argument that it is not

1. Been decayed by other decisions. The court has not said that it is wrong, but newer cases have totally different approachesa. This is the point you would make if you were arguing thatPolkwas rightb. Maybe Easterbrook is just anticipating the court

2. What do you do with thePalmercase?a. Distinguish it. The facts are different. Here, Barbri had control of the market (combined had 100% of market, Topco onl

had 16%). It is essentially a monopolistic merger b/w 2 large companies. You stay out of mine and Ill stay out of yourand well split the profits.

i. Taft (in Addyston Pipe) would say that this merger was so big that the restraint becomes the purpose. What would ban innocent restriction for a small company, is unlawful for a large one

b. Arthur doesnt think that SC really got to this issuei. The case was decided per curiam w/o argument, briefs, or anything

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ii. This is a poor opinion. This is not an attractive case for the court to try to cut back on the per se rule.ii. Argument that it is

1. The court clearly has not overruled it.a. It is not the role of the lower courts to overrule it

2. Would argue thatPalmeris the most recent case and it reaffirms Topco (in 1990). Even after all of the other cases, in 1990 thcourt reaffirms that per se rule in Topco

d. What do you do with a client in this area?i. This area is not so clear. Probably would be hesitant to let your client have an arrangement like Topco

1. Must advise your client that this is risky. Your opponent could say that it is per se illegal if they follow Topco.2. All you can really do is tell them Its your business decision on how much risk you want to take.

ii. Arthur thinks that one day the SC will adopt the Polkapproach. However, until that decision is written, the lower courts can dowhatever they want to do in this area until your circuit decides its opinion1. Lower court judges prefer thePolkapproach.

E. Boycotts/ Concerted Refusal to Deal

1. OVERVIEWa. In general, an individual is free to choose those with whom he wishes to deal, except when such a refusal amounts to monopolization or

attempt to monopolize (discussion below)

b. BUT when a group of competitors agrees not to deal with a person or firm outside the group, deal only on certain terms, or coercesuppliers/customers not to deal with the boycotted competitor, there is a combination in restraint of trade in violation of 1.

c. Great deal of confusion surrounds the proper treatment of group boycotts under 1 i.e., whether to apply per se rule of illegality, or toanalyze them under rule of reason

i. Cts generally analyze the objectives and effects of the agreement and the market power of the firms engaged in the concerted condubefore drawing a conclusion whether agreement is reasonable orper se illegal.

2. DEVELOPMENT OF 1st GENERATION PER SE ANALYSIS: Collective agreements aimed at competitors

a. Paramount(1930)i. Importance: implies that good intentions and moderate means do not matterii. Facts: Distributors would license their pictures to exhibitors. Each studio negotiated with the theatres. Studios wanted a faster wa

to deal with disputes arbitration. FTC worked with them to get an arbitration clause that was fair. If someone marks through theclause, they all agree that NONE of them will work with them (boycott).

1. 2 main parties:a. Distributors (studios like RKO) 60%b. Exhibitors (theaters like AMC)

iii. Holding: illegal1. Even if you have a good purpose and moderate means, it does not give you the authority to do this

a. Cant take away business peoples right to negotiate the termsb. This is unusual and unnatural

2. This is like price fixing/cartel, but instead of fixing prices they are fixing the terms

a. Make an analogy: what if they had said we wont deal with you unless you take 5%.b. Individually, they do not have enough power to make people follow this restrictionb. FDGA (1941) Fashion

i. Facts: People are making knock-offs of FDGAs designs. Designers get together and say that they will not deal with stores whowork with the copiers. The textile suppliers also agree to cut them off. This makes the store have to boycott the pirates.

1. Difference in this case:a. Every other case has been a collusion want everyone in the market together to effect an outside partyb. Here, someone in the same level is the target and is being left out. Used to exclude

ii. FDGAs rationale1. Good purpose. These people are copying us.2. We are being reasonable and efficient.3. There is due process (can appeal to the board to show not an infringement)

iii. Holding: Agreement is NOT allowed1. Opinion reads a lot like the per se price fixing opinion. Doesnt matter if you dont have control, reasonable, etc. None of the

things matter

2. Doesnt specifically say that it is illegal per se, but it hints at it3. Is it really true that power doesnt matter? Here, the numbers are very large and there is power. Perhaps, this is something tha

concerns the court. Maybe the real rule is that those with power in the industry are not allowed to do this.

c. Klors (1959)i. Importance: Knocks out market power and actual market effects as defensesii. Facts: K alleges in his complaint that the Broadway chain of department stores was using its power to get GE, etc not to sell to K o

only sell on unfavorable terms. Argues that he has been cut off.

1. Ds argument: There is no effect on the customers. People can still get these goods from many other places. No publicinjury/effect

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iii. Holding: A concerted refusal to deal by competitors was per se unlawful.1. This is inherently anti-competitive and illegal2. Clear that there is power if these manufacturers actually did agree3. The effect does not matter (although usually power and effect are linked)4. The case does not talk about good purpose (but Paramont and FDGA do)

d. AP(1945)i. Importance: suggested that pro-competitive justifications were not okayii. Facts: Clear that they are not a cartel. Agreed that members can only sell their stories to other members (more than 1200

newspapers). Developed b/c there are huge economies of scale.

1. This is not a naked restraint b/c there is a huge amount of integration.

2. Ds defensesa. Not necessary to have AP (essential facilities doctrine)i. NY Mirror was not AP and was very successful

b. There could be more than 1 association. Nothing here to stop that3. Holding : illegal

a. Sidenote: most of this case was decided on summary judgmentiii. Compared to Topco

1. Restrictions are very similar to those in Topco. They essentially have territories2. Both are meant to give exclusivity and a competitive advantage

a. Competitive advantages are not always bad, but can be more difficult to protect when people are working together to get iiv. Courts reasoning

1. Unlawful on its face and no less unlawful just b/c they have not yet achieved a monopoly.a. Courts seems to imply that smaller group (a couple of newspapers) could agree to share news and that would be reasonabl

Market power might make a different case...

2. Case suggests that pro-competitive justifications were not a defensea. Ways to get around this: Maybe its just b/c the group was too big here (like a news trust)

v. Lawyers do not know what to do about this case1. Should you just let everyone be members? Thats the result of this case and it ran the competitors out of business2. AP has language of other 1st generation cases

a. Justice Black seems to say that this is as bad as FOTA, etc, but he never tells you why1st generation per se rule

None of these affirmative defenses matter Good intentions

Moderate means

Mkt power (ability to cause effects)

Actual market effects

Pro-competitive justifications

Cases that knocked these out FOGA and Paramount implied that good intentions/moderate means do not matter

Private parties cannot come in to regulate the market (compared to law)

Klors

Knocks out market power and actual market effects (the SC later says that these 2 are so intertwined that if you have 1, yo

dont have to prove the other) AP pro-competitive justifications

This is a tougher one to knock out as a defense

b. Hard to tell what the rule i

3. 2nd GENERATION CASES THAT MOVE TO RULE OF REASONa. NWWS(1985)

i. Importance: Must characterize boycotts first to see if illegal per se. The court rejected, except for a narrow category of cases, the

per se categorization for concerted refusals to deal. (p. 164)1. This is the 3rd case that the court would quote to say that we can no longer use the per se rule of Topco2. Gives 3 semi-requirements before per se rule applied

ii. Facts: Cooperative buying agency comprising of various retailers. Kicked 1 out for not telling about change in board, but P says iwas b/c they were wholesalers.

1. This does not look like a cartel and are not normally bad things. This should make a difference. Instead, like Topco, etc. it halegitimate purposes.

2. Restraint: they were kicked out b/c they violated a rule. This is allowed.a. Being a member is not essential to succeed in the business

iii. Return to categorization and ROR1. Just like BMI, Brennan says if its a per se rule, there has to be a refusal to deal with pernicious effect

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a. BMI quote: Per se rule depends on whether practice facially appears to restrict competition or instead increased efficiencb. Bottom line: You have to categorize. Otherwise, the rule is too broad.

i. Look on the face to see if harm and no countervailing efficiencyii. Brennan is trying to fix the bad law here

2. Holding: Apply rule of reason, not per se rulea. Not all concerted refusals to deal are predominantly anticompetitiveb. When P challenges expulsion from a joint buying cooperative, some showing must be made that the cooperative possesse

market power or unique access to a business element necessary for effective competition

iv. Synthesis of old cases where court applied the per se rule against boycotts1. 3 main points/ requirements

a. Generally: Cut offcompetitors access to supply, facility, market needed to competei. CitesAP, Klors, Silver v. Stock Exchange, Radiant Burnersii. Goal is exclusion

b. Frequently: Ds with dominant position (dominant market power)i. Citing Silver, AP, FOGA

c. Generally: No procompetitive justificationi. Citing NOTHING, but could have citedKlors, FOGA

2. If P can establish all 3 of these things, it looks like they will wina. Suggests that you need more than a facial look

3. Problems with the new rulea. Fudge words: generally and frequently not every case has done this.b. Will future cases require all 3?

i. Brennan seems to want that, but is stuck with precedent. Allows for future cases where there are not all 3. But stillsticks to No. Pacific standard (pernicious effect)

v. More guidance from later cases1. Discon adds that horizontal boycott rule requires a horizontal boycott (not vertical)2. Superior Trial Lawyers/Dentist: Boycott is not exclusionary (aimed at a competitor) instead it is to coerce the customers

a. Dentist Did not apply per se rule b/c it was not aimed at a competitorb. Indiana Federation of Dentists (1986)

i. Importance: if a boycott does not exclude competitors and is aimed only at customers, it is not illegal per se.ii. Facts: Conspiracy among dentists to refuse to submit x rays to dental insurers

1. This is not within the per se boycott rule, but was illegal under RORiii. Reasoning

1. Not aimed at a competitora. This is the express reason of the courtb. Suggests that this is a necessary element to get the per se rule

2. No efficiency reason should leave it up to consumers

a. CitesProfessional Engineer. Defenses are restricted to competitive effects, not just if generally good.3. The per se rule is not applied here, but the rule of reason is still a short analysis here b/c it is a naked restraint (doesnt do them

much more good)

iv. Lawyers Assn (1990)p. 4131. Facts: Trial lawyers boycott to get more money. Horizontal arrangement among lawyers to withhold legal services and increa

hourly wage represented a naked restraint on price and output.

a. This is also a cartel-like boycott. Not allowed.2. Does this case change the Indiana Dentist analysis?

a. Arthur thinks that this is not really a boycott case just price fixing/cartelb. Occams razor get rid of superfluous reasonsc. This is not a clean case of boycotts, so it really doesnt give us much help in this area

Must be a group of competitors (must be horizontal) Discon:

Arthur thinks that this case should not have even gone to the SC

Company chose to buy from a different supplier even though they had a higher price (no rational business reason)

Arthur says that this does not equal to a boycott of the other suppliers though. This is not an antitrust problemno restraint

3 elements inNW Stationers not clear if you really need all 3 though... 3 elements

Aimed at competitor (exclusionary), depriving it of something needed to compete effectively

Cut offcompetitors access to supply, facility, market needed to compete

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Boycotter has dominant position (dominant market power)

No procompetitive/efficiency justification

2 ways to readNW Stationers (Brennan)

Read it rule-like

If all 3 ofNW Stationers elements = illegal per se It is the core case

Looser standard: Dont get so caught up in the elements. The earlier cases that were brought up meet this test. Should

really be looking at anti-competitive effects/ redeeming values

Make this less rule like. Compared toInternational Shoe This is a confusing area and there is no set rule in this area.

4. WHAT DOES A P HAVE TO SHOW TO GET THE PER SE RULE?a. Other points The future: What will the court require?

i. Thus in a concerted refusal to deal context, the FACTS of a given case will likely dictate whether the court applies a per se or RORapproach to the alleged restraint. As Brandeis noted in Chicago BOT, the true test of legality is whether the restraint imposed issuch as merely regulates and perhaps promotes competition or whether it is such as may suppress or even destroy competition. Ifsimilar to NW Stationers and shows promotion of competition OK. If not competitive, more likely to be seen as naked and per sillegal. (p. 167-168)

1. What do you do with this as an attorney? You have to mess with this its a bit up in the airii. Instead of exclusionary boycott, what if we have collusive boycott (even naked restraint)??

1. I.e., not exclusionary b/c not trying to knock competitor out of business; functionally operates like a cartel (e.g., Paramountwont deal unless theatre signs agreement for arbitration)

2. IFD case suggests NO not illegal per se

a. Dentists arrangement has dominant position, and no efficiency justification, but is not exclusionary Ct says per se ruledoes not apply (examines restriction under rule of reason)

b. THUS, suggests either all 3 are needed, or at least #1 is needed!3. BUT there is also the suggestion that such agreements will not be illegal per se UNLESS the boycott is to affect price fixing

(Superior Ct Trial Lawyers).

F. The Modern ROR in Horizontal Restraints

1. ROR IS A BALANCING TEST(from NCAA, Prof E, IFD)a. Anticompetitive effects (actual orpotential/predictable) Ps burden of proof

First 2 constitute Quick look

i. Inherently anticompetitive on its face (suggested byPE, NCAA, andIFD) ORii. Actual effects (NCAA,IFD) ORiii. Market power + restraint => suggests potential/predicted effects

VS.

b. Procompetitive (productive efficiency) justifications Ds burden of proof / affirmative defensesi. Productive efficiency/lower cost if proved, D wins as matter of law ORii. Productive efficiency/better product if proved, D wins as matter of law

c. HOWEVER: Professional Engineers suggested that even under rule of reason, didnt mean anything goes2. FULL BLOWN v. QUICK LOOK

a. Cts began making a distinction b/w full blown rule of reason vs. quick lookb. Full blown extensive market analysis

i. Includes definition of market, assessment of market power, and actual effectsii. Involves role of expert witnesses, testimony of those in the field (requires evidence)

c. Truncated/quick look i. No need to do full market analysis IF there are actual effects, or restraints are inherently anticompetitive on their face.ii. Deals less with actual market analysis and testimony based mostly on papers

1. Think: the kind of thing you can decide on summary judgment

iii. Almost likeper se rules if the case is close enough that you werent quite sure it was per se illegal, ct might not have to go infull blown analysis

1. If the restraint has effects on its face, you can avoid full blown analysis and go to truncated analysis3. California Dentists (1999)p. 272

a. Importance:i. This is the last case from the SC about the rule of reason. Focuses on the fact that this is a professional organization.

Requires more than a truncated analysis (sliding scale).

b. Facts: Dentists join together to restrict deceptive advertising. Also covered price advertising, etc unless extensive disclaimers.i. Holding: Not illegal per se (just by looking at it). Remanded for fuller analysis?

c. Procedure:

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i. P showed1. Actual Effect: Restricts consumers ability to price shop2. Inherently Anticompetitive on its face

ii. Shifts to D to show justification1. Try to argue that making the choice for consumers (regulation) results in more efficiency (more allocative

efficiency)This case is very similar toProf EngandIFD

d. Majority v. dissent (importance of professional assoc)i. Majority thinks that this kind of restraint does not necessarily have anticompetitive effects when it comes to a professional

association

1. Price wont be AS important when we talk about prof services, as opposed to actual goods

e. What kind of analysis to use?i. No bright line1. Ct suggested there is no bright line test for the depth of analysis that must be taken i.e., it must be done on case-by-case

basis, depending on the industry

ii. Ct says truncated analysis is appropriate when an observer with even a rudimentary understanding of economics couldconclude that the arrangements in question would have anticompetitive effect on customer and markets

1. Need more than that here, but not sure how muchf. Levels of uncertainty created by this decision

i. What type of look is required?1. Requires something more than a truncated analysis BUT Arthur says: we dont know what it does require!!2. Ct seems to indicate that the dichotomy of truncated OR full-blown analysis is not as much of a rule as it is more of a

standard

a. Not really one or the other more of a sliding scaleb. Its hard to know how much evidence will be enough => encourages lawyers to be safe and throw in as much eviden

as they can!ii. Limited just to professional industries?iii. Welfare efficiency

1. Argument like inProf Engthat this restraint is better for social welfare was previously rejected b/c not an efficiencyargument

a. Now, it is being used as an efficiency argumentModern Rule of Reason Analysis Use p. 7 analysis first

Plaintiffs Prima Facie Case P must show ACTUAL or likelihood of anti-competitive effects

3 options

Inherently anticompetitive on its face (Prof. E) OR NCAA, IFD: If it looks like it facially restricts output b/c of its command, then it must have a justification

Actual Anticompetitive effects (lower output, higher prices, unresponsive market) OR

NCAA, IFD: actually reduced the amount of sports on TV/ dentists Proof of market power + restraint

No clear amount. Have to look at whether its feasible to go to another market

Shows predicted anticompetitive market effects

Ways to judge

Full blown analysis OR

Truncated/full blown analysis if (First 2 options above) Conduct is inherently anticompetitive or suspect on its face OR

Note: this is usually a clear price restraint or market division (things that used to be under per se

rule) P shows actual anticompetitive effects

Defendants Affirmative Defenses

Rebut - Claim that allegations arent true (didnt do it)

Affirmative Defenses Show that alleged restraint is reasonably tailored to achieve: Productive Efficiencies

Cutting Costs

Improving Products

Choosing for other people is not ok (Prof Eng)

Beneficial Private Regulations Social or public interest removing bad competition (Depends on Prof Eng)

Curing a market failure OR

Improving allocative efficiencies (CDA)

Plaintiffs rebuttal:

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Rebut Factual bases of Defendants affirmative defenses

Assert that even if Defendants affirmative defenses are true, there are less restrictive (yet equally effective?) alternatives.

2. Whether social welfare kinds of arguments will be accepted is iffy => Arthur says probably not outside of professionalindustries

III. Vertical Restraints

A. Overview1. Vertical restraints = agreements b/w firms at different levels in the production or distribution chain

a. Also subject to scrutiny under antitrust lawsb. BUT vertical agreements are less likely to be inherently anticompetitive cts are more tolerant of these kinds of agreements

i. Sometimes hard to determine if vertical or horizontal thoughii. Court is mostly concerned with preserving interbrand competition intrabrand is ancillary.

2. Price or non-price OVERRULED BY LEEGINa. Distinction b/w price and non-price restraints is crucial

i. Vertical agreement setting minimum price per se violation of 1ii. Vertical agreement setting maximum price or non-price restraint rule of reason analysis

3. Since vertical agreements are evaluated under 1 of Sherman Act, threshold issue is whether agreement exists.4. 2 main terms for intrabrand restraints

a. Incentive: gives incentive to move the producti. Give the dealer the freedom to make his own judgment on how to do thisii. Guaranteed mark-ups: If high, they will push your product

b. Partial vertical integration

B. Intrabrand Restraints: Resale Price Maintenance/Setting Minimum Vertical Prices

1. Dr. Miles (1911) OVERRULED BY LEEGINa. Importance: Originates that RPM isper se prohibited.b. Facts: Manufacturer sets minimum prices for its vendees. Can only sell at 1 price and can only sell to those who have agreements

inside the system. Miles is controlling the product, even though they are not employees. The retail druggists have to sign agreementhat they will only resell it to customers at printed price. They wont sell to Park and the agreements keep anyone else from sellingthem either.

a. Holding: violates the Sherman Acti. Clear that it is a restraint of trade. Retailers are not free to sell to 3rd parties at any price...

b. 3 defenses offered by Milesi. Intellectual property: gives us a right to do this, even if it normally would not be ok. TM and trade secretii. Colgate doctrine : Our property. The greater right (not to sell at all) includes the lesser right (to sell with restrictions)

1. Court says not necessarily. This is not your typical restraint on alienation.2. Colgate (1919): Court says that a company is allowed to chose its customers and could announce beforehand that they di

not sell to discounterssee section C for more info

a. Allows RPM if it can be achieved through unilateral conducti. Can be hard to determine when unilateral though

iii. Reasonable restraint: Ancillary restraint1. Court disagrees. Looks narrowly at the definition of ancillary restraint. This is not sale of goodwill, etc. There is nolegitimate purpose here.

a. Addyston Pipe (6th cir. and not binding) Taft just gave those as examples the field could grow and more could beincluded as ancillary

2. Arthur believes that ancillary doctrine also includes working together/integration (not just sales)a. Miles could have argued this. They are acting as if they are part of the same company (and this would be ok if they

were the same company). Miles could argue that they are essentially the same things as a company b/c of the K(partial integration). Does the form of the transaction make the difference?

b. If they were Miles actual drug stores, he could legally control them3. Court compares this to a cartel

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a. If the retailers all got together to set a price, it is a cartel. Court sees no difference b/w this situation and this case. Nbetter than a horizontal agreement

c. Hughes dissenti. Miles is making their dealers rich at their own loss by controlling the retail price. Why would they do this? It builds in an

incentive for them to move the product. It is already branded and advertised with a large mark-up.

1. Ad budget: What does it have to do with the minimum price?2. Will give better placement to the product that has the highest mark-up3. Rationale: the resale price maintenance will encourage extra promotion for it

ii. Free rider problem1. If you are the one who has been doing the marketing and the sales go to someone else it lowers the incentive to push th

goods.

2. Unilateral refusal to deal as a means to enforce vertical RPM:the Colgate doctrinea. U.S. v. Colgate & Co. (1919)

i. Another method of controlling resale prices is for manufacturer to announce a suggested resale price and to refuse to deal wiretailers who do not adhere to those prices.

1. Why does this circumvent antitrust liability?? To find 1 violation, there must be evidence pricing arrangement wasproduct ofcontract, combination, or conspiracy.

ii. Issue: whether the dictates ofDr. Miles extended to seller who announced desired resale prices and refused to deal with thosewho did not adhere to those prices

1. Ct said:per se rule did NOT apply b/c, under the Sherman Act, sellers were free to deal with whomever they wished andwere similarly free to announce in advance what circumstances they would refuse to deal.

iii. THUS: Colgate doctrine allows RPM if it can be achieved through unilateral conduct1. Problem then becomes determining when events have gone far enough to permit the reasonable inference that the conduct

is no longer unilateral

b. U.S. v. Parke Davis & Co. (1960)i. Like other cases to come afterColgate, suggested that doctrine was only available as a defense when a firm had literally done nmore than indicate its wishes and refused to deal with those who did not go along

ii. This case: similar to Colgate scheme, except one step further spy network to root out retailers who cheated and charged loweprices; if retailers promised never to do it again, Parke Davis gave them another chance

iii. Ct found this to be tacit agreement crossed the line of protection afforded by Colgate1. I.e., Parke Davis went beyond Colgate by using the threat of refusal to deal as the vehicle to gain the wholesalers

participation in the program to maintain resale prices.

2. Ct concluded that unlawful combination under 1 is not just one that arises from actual agreement such combination isalso organized if producer secures adherence to his suggested prices by means which go beyond his mere declination to seto customer who will not observe his announced policy.

3. Khan: Court holds that vertical MAXIMUM price fixing is decided under ROR, not per sea. Chops away at Dr. Miles more

C. Intrabrand Restraints: Nonprice Restraints

1. Continental TV v. GTE Sylvania (1977)a. Importance: Vertical non-price restraints are never illegal per se, but are all rule of reason

i. First case to cut back on the per se rule.1. I.e. first clear signal that economic analysis was to be the Cts guiding methodology in antitrust matters.2. However, only interested in economic effects (not other social benefit arguments as a way to condemn the restraints)

a. Social cannot be used as a defense or as a way to attack these restraintsb. Facts: Could only sell Sylvania TVs from approved location (to shield Sylvania from other dealers and encourage dealers to

compete aggressively and promote Sylvania). GTE moved another competitor into Continentals area.

c. Evolution of the rationalei. Dr. Miles

1. If retail price restriction (RPM) is illegal under Dr. Miles, shouldnt this be?a. Location clauses effectively eliminate all competition...(like bottlers) isnt this worse? So why is it allowed?b. Although its reasoning seemed to undermineDr. Miles, Ct made clear thatper se rule against vertical minimum RPM

was undisturbedc. If were going to say that Dr. Miles is right, then anything more restrictive SHOULD be illegal, but other things are

not as bad and should be allowed

d. Holding: rule of reason applies to vertical non-price restrictionse. Reasoning

i. The distinction in Schwinn b/w selling and consigning was too formalistic1. Judges are finding distinctions to go around Schwinn anyway

ii. Look to Northern Pacific no showing of pernicious effect on competition or lack any redeeming value1. This is an essentially economic test, but there are also social benefits (the court is not concerned with these to condemn

restraints)

f. What about market power?

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i. One of the plausible interpretations is that vertical restraints are lawful when the firm imposing them has little market power anthat, when market power is higher, the interbrand and intrabrand effects are to be addressed.

1. I.e., there is little utility in addressing the offsetting competitive effects if the firm is unlikely to have the power to have anultimate anticompetitive impact

ii. NOTE: to date, there is no settled approach to how critical a detailed market analysis is to the determination of validity ofvertical non-price restraints.

g. New Rulei. If vertical and non-price restriction it is the rule of reason.

1. Per se rule has been eliminated for non-price2. If you are a plaintiffs lawyers, you would get around this by trying to say that it is horizontal OR that it is unreasonable

ii. Only price is still per se illegaliii. Telling the difference is the hard part when the impact is the same

D. Intrabrand Restraints: Internal Distinctions

1. DEALER TERMINATION/REFUSAL TO DEALa. Overview

i. Vertical restraint issues are typically litigated after a dealer has been terminated, allegedly for noncompliance with the restrain1. Terminated dealer generally asserts that the termination was caused by its failure to adhere to vertical restraints imposed b

the mfr or supplier

ii. Typical dealer termination case raises the same characterization issues as other types of restraints1. I.e., whether the requisite agreement can be established, whether the agreement is horizontal or vertical, and whether the

agreement was for price or non-price purpose.

b. Colgate Defense (1919)i. Importance: As long as unilateral, you are allowed to pick/terminate your customers (219). OK to announce beforehand and

then refuse to deal with those who dont want that price.

ii. Facts: Colgate named desired retail prices, etc, but did not require them. Court holds that there is no agreement (1- K,combo, conspiracy)

iii. Used as a defense in termination/refusal to deal cases1. The defense is available as long as the refusal to deal is unilateral and not in furtherance of conduct from which an

agreement could be inferred or motivated by monopolistic purpose

a. Can be hard to determine unilateral conduct2. No pressure: When decision to terminate is imposed by supplier through an inducement or pressure from other dealers or

franchisees, however, it will be closely scrutinized in order to determine whether the termination was in fact unilateral.

iv. 2 ways to read the case1. Narrow: Tacit agreement does not equal an agreement

a. You can announce in advance who the customers are and then do it.i. Allowed: Can say I dont deal with price cutters and then say Youre not a price cutter are you?

2. Broad like indictment

a. As long as not written, you can do whatever you want. Can do things in addition to announcing who you will dealwith (listen to complaints, bickering with the prices). Can choose your customers. This was beforeParke Davisv. Putting Colgate and Sylvania together...

1. Read together, Colgate and Sylvania appear to require that a terminated dealer must show:a. (1) That there was a qualifying agreement andb. (2) That this was a price, rather than a non-price, agreement.

2. NOTE: if plaintiff fails to show (1), the termination is legal. If the plaintiff fails to show (2), the termination will beanalyzed under the rule of reason, and D will probably win.

c. Parke, Davis (1960)i. Importance: The court seems to suggest that the broad reading of Colgate is not okay (cant do anything as long as its not in

writing anymore). Only follows the last paragraph.

ii. Facts: Had a spy network so people would inform on their competitors. Cutting off people who dont stick to the price. Parkwould not allow bootlegging

d. Monsanto (1984)

i. Importance: Revived Colgate. Complaints from other dealers are not enough to prove that termination was not the product oindependent action allowable under the Colgate doctrine.

1. Must have direct or circumstantial evidence of a conscious commitment to a common scheme2. Seems to allow discussion b/w manufacturers and dealers, even about price, as long as there is no agreement on price. (22

ii. Why did they lose?1. Lost b/c they cut off one of their companies that they had been receiving complaints about. Lost b/c they met with the

people that they cut off (looks like a conspiracy). Dont let your salesmen talk about this

iii. What evidence is required? Enough to show not unilateral1. More than complaints required

a. Powell, however, says that we shouldnt assume that just b/c they are receiving complaints, that does not make it badIt is just staying in touch with the marketplace.

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b. Complaints and a termination are not enough. But, the moment that you tell the dealer why you have gone too far2. Direct or circumstantial evidence...

a. Thus, this case holds that evidence must tend to exclude the possibility that the manufacturer and non-terminateddistributors were acting independently

b. What kind of evidence is required to meet this standard?i. Direct or circumstantial evidence of a conscious commitment to a common scheme to achieve an unlawfu

objective

ii. I.e., the manufacturer sought the distributors acquiescence or agreement, and the distributor communicated sucacquiescence or agreement

e. Business Electronics v. Sharp Electronics (1988)i. Importance: Narrows per se rule. Agreement to terminate someone b/c of price cutting is not illegal pre se unless it includes

some agreement on actual price or price levels. (p. 224). Treats vertical price fixing more narrowly than horizontal (must bemuch more specific).

1. Presumption in favor of RoR standard. Departure only if there is a demonstrable economic effect rather than formalisticdistinctions.

2. Arthur believes that they have done everything EXCEPT get rid of the Dr. Miles rule.ii. Facts: H complains that BE is underselling them. H tells Sharpe if you dont stop selling to them, then we wont carry your

product. Wanted to get rid of free rider. Clear that there is an agreement to cut off BE b/w H and S. This kills intrabrandprice competition is this price fixing?

1. If same rationale as Socony, it would be yes, but that is not the case hereiii. Holding: This is not price fixingiv. For vertical price fixing, must name specific price or price level

1. They are treating the vertical price-fixing rule more narrowly than horizontal. The agreement must name a specific price price level.

a. This amends the Dr. Miles rule even more (still not overturned)2. Not enough that the agreement has the purpose or effect of eliminating price competitiona. ANY restriction is going to have an effect on price. Non-price restrictions can have a price effect.b. As long as not explicit, then not per se. Court wont assume that there is no redeeming value.

i. It is hard to really determine whether it is price or not it is essentially arbitrary but it makes a HUGEdifference in the outcome of the case.

v. Important facts:1. Not forced to adhere to price

a. Even though there was a suggested manf retail price, the favored dealer didnt always adhere to it and wasnt requireto.

b. Looks like there is a difference b/w those who cut a bit and those who cut a lotc. The court says that there wasnt any agreed price

2. This is an agreement, but is a NON-price agreementa. Facts: There are clearly complaints to S from the preferred dealer. However, S did not simply terminate BE, but the

gave the other company an assurance that they would cut off BE.i. Adding this case to Monsanto: It becomes safe to do more

b. In the old days (Monsanto), BE would have won. This case makes a big difference.f. SUMMARY

i. What is allowed?1. Narrow form of Colgate is allowed Can say Will not fill orders from tire dealers who sell below ___ or use it as a loss

leader. (unilateral)

2. After Monsanto, before they can get into real trouble, they must do more than listen to complaints (problem if you talk tothe people that you are cutting off)

a. What about soliciting complaints? Like Parke Davis says that this is a combination. Monsanto seems to say that you dont recruit them, but just receive the unsolicited complaints this is just natural and allowed. STILL cant com

back and say Ill do something about that.

b. These are all fine lines to draw3. Safest if you dont suggest a specific resale price

a. If you dont suggest one, better off if you dont make your favored dealer adhere to itb. This is all form over substance. This is still a murky area.

4. Advice not to get sued: Dont suggest a retail price and dont terminate any dealers.ii. These cases and their interpretations greatly narrow theper se rule against prohibiting minimum vertical price fixing thus,

decreases even further the possibility that a terminated dealer could mount a successful action against the manufacturer

2. WHAT ABOUT DUAL DISTRIBUTION?a. What is dual distribution?

i. Dual distribution: Manf sells some of its products to retailers who can sell to any one, but the manf also sells to restrictedcustomers. No Q that the manf is the one putting the restraints.

1. Ex: like car manf wears 2 hats by selling to dealers and police

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a. Why isnt this horizontal? Court hasnt given a clear answer. Doesnt look like a cartel b/c its limited to brandii. Horizontal or vertical?

1. Makes a big differencea. Horizontal: per se condemnedb. Vertical: ROR

b. Approaches from lower courts to determinei. (1) Source of the restraint rule

1. Attempts to determine whether restraint was initiated by competitors on the same level of the distribution chain or whetheit was initiated primarily by mfr for purpose of achieving efficient distribution system

a. Ex: GM dealers: dealers had location clauses but started selling to discounters out of area (Sams Club).

i. 1966 Court held that this was a dealer cartel b/c they were the ones that wanted the restriction (horizontal) b/c itdidnt help the manfii. (2) Focus on actual competitive impact rather than whether vertical or horizontal aspects of the system predominate.

1. Weighs intrabrand restriction against potential for enhancing interbrand competition, regardless of horizontal features

Approach for Intrabrand Restrictions

3. Is there an agreement on the restraint?a. If no not illegalb. If there is an agreement, go to step 2c. What about a tacit agreement? In a cartel situation, Ct has said that tacit agreement counts as enough evidence to get to the jury

(people in a boardroom)i. 2 theories: there is a tacit agreement that has the effects of an explicit agreementii. Will let the jury infer from small amounts of evidence that there is an agreement, even if the evidence of an explicit agreement

only circumstantial

1. Is it this easy with vertical? Not necessarilya. Depends on Colgate/Parke Davis distinction

d. After BE, there must be an agreement on price levels4. Horizontal or vertical agreement?

a. Sylvania: Horizontal are illegalper se (see rules on price fixing, boycott, etc)b. Vertical goes to the next stepc. Tricky situations Dual distribution

5. VerticalRule of Reason Applies (Leegin) Regardless of Price or Non-Price (D prob wins)i. Prima Facie Case (Monsanto/Sharp/Leegin)

1. Defendant holds market power (i.e. high % of market, if there are many brands, then intrabrand competition will not mattso much usually, i.e. the price stay consistent due to interbrand competitors), AND

2. Anticompetitive Effects other than higher price (output will likely be down, but this is difficult to show)a. Leegin says consider number and percentage of market of manufacturers using VPR. Also, consider whether the

manufacturer or dealer instigated the VPR. There may be a retailer Cartel, or a dominant retailer, or a manufacturerwith substantial market power using it for anticompetitive effects. (hard to show dominant dealer)

ii. Defenses courts will likely accept them, appear not to care about intrabrand comp as much1. Refute plaintiffs prima facie case2. Affirmative Defenses

a. Promotes more effective product distributioni. Cheaperii. More Efficient

b. No substantially less restrictive alternatives

E. Interbrand Restraints: Exclusive Dealings

1. OVERVIEWa. What are exclusive dealings?

i. Suppliers buyer is precluded by contract, either directly or indirectly, from purchasing from suppliers competitors.ii. These are essentially restraints on the customer

1. The competitive process and consumer welfare are arguably compromised b/c outlets for the suppliers competitors aredenied and the consumer is limited in his range of choices.

b. 2 kinds of interbrand restraintsi. Exclusive dealing.

1. Comes up in 2 scenarios

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a. Requirements contract : Customer agrees to purchase all of its requirements from the supplierb. Classic exclusive contract: Says you wont buy anyone elses products. Doesnt limit it to just requirements

(although its essentially the same thing)

ii. Tying (bundling/packaging)c. 2 situations where this occurs

i. Involve middle man/retailer : Standard Station: SoCal filling station retail customer1. Standard is ultimately trying to reach the end consumer and the filling station is just a means to an end.

ii. Involves end user: Tampa Elec/ Nashville Coal (p. 501)1. Usually a requirements contract. Buyer wants an assured supply at a set price. In return, the seller wants a guarantee that

they will buy it all.

d. Clayton and Sherman Actsi. Exclusive dealerships are governed by both Clayton Act 3 and Sherman Act 1ii. 3 Clayton Act standard of analysis conduct is unlawful if its effect may be to substantially lessen competition or tend to

create monopoly in any line of commerce

1. Burden of proof is easier for P to meet under 1 of Sherman Act2. Burden of proof: not mere possibility but probability competition will be les

antitrust outline jb 01

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