Fixed

Fixed

Business Law GroupworkEMBA11 – Group 2Stanelle, Tari, Estep, Nguyen, Mildren

Any price charged could be illegalLower than your competitors could be predatoryHigher than your competitors could be gouging Same as your competitors could be price-fixing

Horizontal Price FixingVertical Pricing FixingPrice GougingAntitrust Cartels and MonopolyPredatory PricingPrice DiscriminationTying of Products

Created in reaction to a public outcry over trusts (late 19th century corporate monopolies that dominated U.S. manufacturing and mining)

Trusts took their name from the device of business incorporation called trusteeship

(this consolidated control of industries by transferring stock in exchange for trust certificates)

Rapid industrialization in the late 1800’s increased market competition and rivals sought greater security and profits in cartels (mutual agreements to fix prices and control output)

Creation of trusts brought entire industries under the control of a few powerful people(e.g. Oil and steel lay in the hands of the corporate giants John D. Rockefeller and J. P. Morgan)

By the 1880’s, abuses by the trusts brought demands for reform

The 1890 Sherman Act Prohibits contracts, combinations, and conspiracies in restraint of trade and monopolizationIncludes criminal penalties when enforced by the governmentViolation can result in substantial fines and, for individual transgressors, prison termsIn addition, court orders restraining future violations are also availableEnforced primarily by the Antitrust Division of the Justice Department

The 1914 Clayton ActAmended in 1936 by the Robinson-Patman Act and in 1950 by the Celler-Kefauver Antimerger ActDeals with exclusive dealing arrangements, tie-in sales, price discrimination, M&A, interlocking directoratesCarries only civil penaltiesJointly enforced by the Antitrust Division and the Federal Trade Commission (FTC)FTC in practice has responsibility for anticompetitive price discriminationEstablishes triple damages in private suits

The 1914 Federal Trade Commission ActEstablished a new government agency with broad authority to regulate unfair and deceptive business practicesThe agency can issue a cease and desist order telling firms that certain practices must be stoppedLess cumbersome than court processes (strict rules of evidence and juries)Firms can still appeal an FTC order to a courtSomewhat a catch all enactment that gives even broader powers than the Sherman Act

Not all countries have Antitrust Laws(Complete list can be found at www.justice.gov)

International guidelines established byOECDWorld Trade OrganizationInternational Competition Network

European UnionCovers - Cartels, Monopolies, Mergers, State AidEnforced by Directorate-General for Competition – but managed by national agencies UK, Office of Fair Trading and Competition Commission France, Conceal de la Concurrence

Map Illustrating Global existence of Antitrust laws – Source Anti trust blog

Horizontal price fixing is an agreement between competitors or businesses at the same level of competition arranging to set a common price. It is the most direct way to reduce competition. Includes:

Setting prices (including maximum prices)Setting the terms of saleSetting quantity/quality of goods to be manufactured or made available for saleRigging bids

Price fixing can be prosecuted as a criminal offense under Section 1 of the Sherman Antitrust Act

Can be viewed as a per se violation of Sherman Act – regardless of impact or efficiency of the act

The reason why collusion is treated as a paramount offense is it could lead to monopoly-like outcomes, including monopoly profits shared by colluding parties

Courts broadly define price fixing. Credit terms and discounts cannot be fixed since inextricably related to price

But it is permitted in some markets; where allowed, referred to as resale or retail price maintenance

Criminal penalties for price fixing 1890-1990

2007 – British Airways and Korean Air Lines fined over $1 Billion for fixing fuel surcharges from 2004-20062008 – LG, Chungwa Picture Tubes, and Sharp plead guilty and agree to pay $585 Million in criminal fines for colluding to fix prices of LCD panels

The EU has stipulations similar to the US against horizontal price fixing and collusion

In the EU, rare exceptions are made when they benefit consumers from technological innovation

International price fixing by private entities can be prosecuted under the antitrust laws of many countries

Before 1995, less than 1% of firms accused of price fixing were foreign firms; after 1997, foreign firms account for over 50%

In addition to formal agreements, the law also covers activities that have price fixing effects, i.e. merely discussing pricing plans with competitors (conscious parallelism)Competitors must be careful about even giving the appearance of collusion. Be prepared to show facts supporting the exercise of an individual business judgment in making a pricing decisionBusinesspeople with advanced degrees, such as MBAs, should expect more severe penalties, such as longer prison sentences, as they "should know better”In addition to fines, civil actions (especially class actions) can have serious financial consequences. Litigation for price fixing is not uncommon

U.S. Justice Dept. views collusion as a “hard crime” punishable by prison sentencesLiability for antitrust violations is joint and several, i.e. each conspirator could be liable for the losses caused by all of the violatorsFines/Prison Sentences Imposed in U.S. DOJ Price Fixing Cases

Vertical Price Fixing refers to the manipulation and control of pricing in the supply or distribution chain

Unless a manufacturer sells its product directly through its own retail outlet, it has very little control of the end customer pricing

Manufacturer’s desire to control end customer pricingTo protect their brand image To avoid consumer “free riding” from full service retailers and buying at discount retailers. e.g. test driving a car at Gainesville Ford and then buying from a discount online dealer in TexasTo avoid price gouging on new highly sought after products, e.g. new iPhone

Also referred to as Resale Price MaintenanceA manufacturer cannot legally dictate the end customer price charged by a retailerManufacturers can however establish

A Manufacturers Suggested Retail Price (MSRP) A Maximum RetailA Minimum Retail Price (RPM)

Some argue that Resale Price Maintenance has less to do with Price fixing and more to do with management of retailer incentivesA Minimum Price maintenance allows alignment of interests of retailers and manufacturersRestricting price at the retail level enhances other forms of non-price competition – brand identity, serviceThe fact that a retailer is following the MSRP is not enough to show price fixing; the plaintiff must show actual agreement of the pricing

1911 Supreme Court determines minimum retail pricing is illegal under the 1890 Sherman Act1919 United States v. Colgate Co. established the right of a company to go beyond announcing its MSRP and refusal to deal with wholesalers and retailers who do not conform to such prices2007 Leegin Creative Leather Products, Inc. v. PSKS, Inc. Supreme Court overturned previous ruling on minimum price fixing. The law now requires that courts use the “rule of reason” to decide on a case by case basis if manufacturers demanding minimum prices for their goods are violating federal antitrust lawsAttempts were made by legislators to reverse the Leegin decision with the 2009 Discount Pricing Consumer Protection Act (now thought to be abandoned)

The EU, Canada and Australia have very similar rules to the USAn example of long term vertical price fixing comes from a “cozy” arrangement in the UKStarting January 1st 1900 the main UK book publishers refused to sell to booksellers that discounted their MSPRThis process continued until 1962 when it was evaluated by the restrictive practices court. The court determined it was to the benefit of the industry that important, but low volume works were subsidized by best sellersThis practice continue until the early nineties, when the practice was finally challenged by large retailers - Dillons and Waterstones

Law from the 2007 Leegin Creative Leather Products, Inc. v. PSKS, Inc. case is new and untested

Concerns that it might conflict with prior contracts, franchise laws and even state law

Horizontal price fixing remains illegal and manufacturers must be careful to avoid minimum price requests from groups of dealers as this could lead to the manufacturer becoming embroiled in the dealer groups’ horizontal pricing conspiracy

In 2004, Hurricanes Charley, Frances, Jeanne, and Ivan devastated FloridaIn the midst of the recovery, price gouging profiteers preyed upon hurricane victims

Over 6,000 reports of price gouging were confirmed by the Attorney General’s Office during the declared state of emergency covering these hurricanesFortunately, Florida's price gouging law protected these consumers

Typically defined as a sharp increase in the price of basic necessities over a short period of time either immediately prior to or following a natural disaster, to a level that is higher than is considered reasonable or fair

Florida Statute 501.160 states that during a state of emergency, it is unlawful to sell, lease, offer to sell, or offer for lease essential commodities, dwelling units, or self-storage

facilities for an amount that grossly exceeds the average price for that commodity during the 30 days before the declaration of the state of emergency, unless the seller can justify the price by showing increases in its prices or market trends

Following the Hurricane Andrew disaster in Florida and Louisiana, there were widespread reports of price gouging at many retailers, by contractors and other individuals

Bob Crawford, Florida’s Commissioner of Agriculture and Consumer Services said of Hurricane Faye:

“We had quite a bit of price gouging during Hurricane Andrew, but it seems to be more rampant this time.”“Bottled water will be $0.75 one day, and then the next day it will be $3 or $4.”“We’ve had complaints of plywood marked up 200 to 300 percent.”

Most countries outside the US have little protection of consumers for price-gouging, regardless of the cause

To date, 31 states have enacted Anti Price-Gouging legislation

In general 12 of the remaining 19 states have either taken enforcement action without Anti Price-Gouging laws or considered an Anti Price-Gouging bill that ultimately failed

Price gouging, at its worst, prevents those without the ability to pay from obtaining the most basic of needs, including food, water, shelter and medicine

This leaves the question, how much should prices be able to increase to compensate merchants for additional costs and risks, before gouging occurs

No clear answer exists to this question, with many states implementing 10% to 25% limits for price increases during states of emergency

A cartel is an agreement among competing firms. It is an organization of producers or manufacturers that agree to fix prices, marketing, and productionA monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it

Competition law, known in the United States as antitrust law, are laws that promote or maintain market competition by regulating anti-competition conductIssues associated with cartels and monopolies:

Limiting SupplyPredatory PricingPrice DiscriminationRefusal to Deal & Exclusive DealingTying & Product Bundling

Laws governing competition can be traced back over 2,000 years to the Roman empire and medieval times

In the US the Sherman Antitrust Act outlawed all contracts, combinations andconspiracies that unreasonably restrain interstate and foreign trade. This includes cartel violations, such as price fixing, bid rigging and customer allocation.

The EU’s competition law explicitly forbids cartels and related practices in its article 81 of the Treaty of Rome. Since The Treaty of Lisbon came into effect, the 81 EG is replaced by 101 AEUV.In the public cartel, a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actionsA government-granted monopoly (also called a “de jure monopoly”) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to the sole provider of a good or serve

It has been suggested that for a cartel or monopoly to be formed, government assistance, whether overt or covert, is required

Increased competition from free trade puts significant pressure on cartels and monopolies

“Predatory prices are an investment in a future monopoly, a sacrifice of today’s profits for tomorrow’s. The investment must be recouped. If a monopoly price later is impossible, then the sequence is unprofitable and we may infer that the low price now is not predatory.” – Judge Easterbrook

Pricing below cost to injure rival firms and thus induce their exit:Predator sets price very low (below marginal cost)Rival firms cannot compete and exits the marketPredator firm becomes a monopolist and increases price to monopoly price

Cases involving allegations of unfair, predatory pricing have been tried in the US courts system as:Monopolization cases under the Sherman ActPrice discrimination cases under the Clayton Act

Many economists believe predatory pricing is unsustainable long term

The question becomes - When is a low price “predatory” and when is it “competitive”

In Brooke Group v. Brown & Williamson Tobacco, Supreme Court defined two fundamental prerequisites that plaintiffs must satisfy in predatory pricing cases:1. Prices were set below some "appropriate measure" of its costs (The Court failed to state explicitly what the measure would be)

2. Reasonable expectation that predator would subsequently be able to recoup its investment in those below-cost prices

The Court has repeatedly shown its skepticism about cases of predatory pricing

Predatory pricing schemes are rarely triedEven when tried, they are even more rarely successful

1970 Matsushita Electronic Industrial Co. v. Zenith Radio Corp.Zenith claimed that the seven firms were pricing their TVs and other electronic appliances below cost in the US marketThe Supreme Court said that the plaintiff’s arguments did not make sense economically with respect to the industry’s market structureFirms did not possess significant market powerUnlikely for predators to recoup losses from predationNo evidence of conspiracy

Brooke Group v. Brown & Williamson TobaccoPlaintiff accused Brown & Williamson of charging below-cost prices in the market for generic (low-priced) cigarettesIn the case the Supreme Court established two fundamental prerequisites for predatory pricing cases

A case often presented by detractors of the predatory pricing laws is the case of Dow Chemicals1904 Herbert Dow invented a cheaper way of producing BromineHe started exporting and competing against the German Brominkartel The Germans retaliated by discounting their products tin the USDow outsmarted his competitors by buying much of the discounted Bromine and sold it back to the Germans at a discounted price

In 2000 Germany's federal cartel office found Wal-Mart guilty of predatory pricing practicesIt had sold household staples like milk, flour and butter below its wholesale costsRecouping of investment was not consideredRegulators acted to prevent Wal-Mart and other big chains from using ''unfair'' tactics to devastate smaller stores

Predation is a very costly way in which to enhance market power

If firms are pricing below cost, the cost of predation can be

Severe for the predatorProfits for predator would be higher under normal competition versus under possible predation

There are three other reasons why firms would still proceed with predation:

Low-cost signalingBuild a reputationStunt growing markets

Price Discrimination in Anti-Trust pricing is defined as the illegal charging of different prices to different purchasers of goods or services that are of “like grade and quality”, when the price differences are not justified by cost differences The Robinson-Patman Act, established in 1936, was intended to curb monopolization and preserve competition

Price discrimination occurs if the different prices charged result in substantial injury to:1. Buyers' competition (injury in the secondary line) - The

buyers must compete geographically and on the same functional level. If both purchasers are ultimate consumers and do not compete in resale of the product, no violation can be found

2. Sellers' competition (injury in the primary line) – The lower discriminatory (predatory) price damages the seller’s competitors by making them lose business

Section 2 of the Clayton ActThe Robinson-Patman Act

Interesting Cases:Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc.Feesers v. Michael Foods and Sodexho

Recent Supreme Court rulings emphasis: To satisfy the competitive injury requirement, plaintiff must prove

that the different purchasers are competing in the same bid markets, and that the defendant’s illegal price discrimination has injured the plaintiff’s ability to compete

Article 82 of EU law focuses on combating illegal price discrimination

Unlike the US, Article 82 requires that the party engaging in price discrimination has some form of dominant market power

Managers need to be aware:Similar pricing should be used when goods of “like grade and quality” are sold to different customers of the same geographical area and functional level Lagging or resentful rivals may use the RP Act as a misguided and wasteful way to battle a leading competitor

Bundling is a legal marketing strategy where a company offers several products for sale as one combined productOccasionally, bundling can represent an unfair use of market power and be used to limit consumer choiceTying is making the sale of one good conditional on the customer purchasing a second (perhaps unrelated) good

Industry examples: Software suites, Cable/Internet services, Fast Food (value meals), Printers & Ink, Razors & Razorblades

Horizontal Tying – conditional sale of unrelated goodsVertical Tying – conditional sale of related goodsEconomic Power – seller’s degree of market influence

Four conditions to establish unlawful tying:1. Two separate products/services involved2. Purchase of good A is conditional upon the additional

purchase of good B3. Seller has sufficient market or economic power4. Affects a substantial amount of interstate commerce in

the product category

Most states have laws against tyingSherman AntiTrust ActClayton ActBank Holding Company Act Amendments of 1970 Magnuson-Moss Warranty Act

Interesting Cases:Jefferson Parish Hospital District v. Hyde, 466 U.S.Illinois Tool Works v. Independent InkUnited States v. Microsoft

Article 102 of the Treaty on the Functioning of the European UnionSection 2(d) addresses TyingNo “unconnected supplementary obligations”Microsoft’s Windows Media Player - €497 million fine

Use caution when constructing bundled packages of goods and servicesBe particularly careful if a package includes unrelated productsWatch out for broad discrepancies between product margin realizationLoss leaders are acceptable under certain circumstancesGenerally, package solutions should not exploit market power to limit competition or consumer choice