#17018 - Outline 3 - Antitrust Law

Introduction to Antitrust

1. Central tension of antitrust law – we want firms to compete and succeed, but monopoly is not illegal

   1. We punish illegal acquisition of maintenance of monopoly power

2. At the time of passage, antitrust laws were meant to protect small businesses; prevent them from being beholden to large trusts who provided transport for goods and inputs

3. Over time, rationale evolved as people become uncomfortable with the consequences of punishing large corporations

   1. Recognize tension between efficiency and equity

4. Competitive outcome is one where the output is being maximized and everyone who is willing to pay the cost of the product can buy it

   1. Marginal cost pricing

   2. Link between number of firms competing and competitiveness not very tight

5. Antitrust Statutes

   1. Sherman Act §1 – horizontal restraints – where we get felony convictions

   2. Sherman Act §2 – monopolizing conduct

      1. “monopolize” not interpreted literally

      2. limits unilateral conduct

      3. civil fines, injunctions, behavioral mandates, treble damages in private suits

   3. Clayton Act §7 – comprehensive statute for mergers

      1. Ripe for debate about interpretation

6. Trans-Missouri Freight Association (1897)

   1. No exception in the Sherman Act for reasonable restraints of trade

   2. Not up to the Court to determine whether the anticompetitive effects are within the zone of reasonableness

7. United States v Addyston Pipe & Steel Co. (6th Cir. 1898)

   1. Contracts that are unreasonable restraints of trade at common law are not criminal, just void

   2. Very hesitant to make things previously voided and turning them into a lot of harm and damages

   3. Covenants in partial restraint of trade generally upheld as valid

   4. Legitimate ancillary restraints of trade may actually enhance competition

Antitrust Injury

1. Basic question of antitrust is who can sue? On what basis can they sue?

   1. Government – statutory parens patriae standing

   2. Private litigants? Direct/indirect purchasers?

2. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. (1977)

   1. Case brought under §4 of the Clayton Act

   2. CoA held that private plaintiffs only needed to show that the merger would in some way negatively affect them.

   3. Antitrust law requires a showing of antitrust injury for standing – injury of the type that antitrust laws were intended to prevent and that flows from what makes defendant’s conduct illegal

3. Cargill, Inc. (Excel) v. Monfort of Colorado, Inc. (1986)

   1. Does §16 of the Clayton allow equitable relief in cases where such relief is not allowed under §4?

      1. Statute says that plaintiff is entitled to injuctive relief for threatened loss or damage by a violation of the antitrust law

   2. Holding - §4 and §16 best understood to provide complementary remedies for single set of injuries and therefore must still plead an antitrust injury

      1. Alternative would allow competitors to seek an injunction any time a competitor threatens to cut prices to increase market share.

      2. This is precisely the behavior antitrust law seeks to encourage

   3. Court refuses to adopt a per se rule “denying competitors the standing to challenge acquisitions on the basis of predatory pricing theories”

4. What is the right type of plaintiff? – Illinois Brick Co. v. Illinois (1977)

   1. Previously Court held in Hanover Shoe that indirect purchasers are not the parties injured by an antitrust violation.

   2. Court does not want to complicate the damage calculations to trace the effects on the overcharge throughout a supply chain.

   3. Allowing offensive but not defensive use would create serious risk of multiple liability.

   4. Cannot justify unequal treatment of plaintiffs and defendants

   5. Comments

      1. Direct purchasers may have no incentive to sue because they can often pass on the increased price.

      2. Supreme Court has ignored indirect purchaser suits.

      3. Large number of states have repealed the effect of this rule in their state antitrust statutes

Antitrust Standing

1. Must be some degree of sufficient nexus between the plaintiff and defendant – hard time getting standing if you are neither the competitor nor the customer of the defendant.

2. Blue Shield of Virginia v. McCready (1982)

   1. Allegation that Blue Shield conspired with psychiatrists to lock out psychologists from reimbursement

   2. Sufficient nexus does exist for a consumer to challenge because they are directly harmed by the conspiracy – unable to pay for psychologist services

3. Associated General Contractors

   1. Association encouraging people to do business with non-union contractors

   2. Unions do not have standing to challenge because they are neither the purchaser of contracting services nor a competitor

Section 1 of Sherman Act

1. Horizontal Restraints

   1. Generally – composed of price agreements and output restrictions

      1. Reduce competition

      2. Cartels exist, all the time

         1. Notoriously unstable, though may last for some period of time

         2. Larger number of competitors, low barriers to entry may make more unstable, different profit maximizing output, different cost structures

         3. Per se illegal – proof of conduct is proof of the violation

   2. Standard Oil

      1. Overrules Trans-Missouri Freight – overly restrictive rule

      2. Sherman Act meant to bring in the rule of reasonableness, articulated this rule in a case here where everyone agrees on the outcome

      3. Certain category of restraints are so likely to do harm on their face that they are per se unreasonable restraints

      4. Test:

         1. Agreement/combination of some kind?

         2. Does it necessarily or inherently restrain trade without benefit? – If so, per se illegal.

         3. If not, balance the harms and benefits.

            1. “harmful purpose” – intent is probative of effects

            2. If there is evidence that conduct is undertaken with a particular intent to harm the market, then we will generally believe that it harmed consumers.

   3. Antitrust Guidelines

      1. Some collaboration between competitors may be a good thing.

      2. Firms may look to the guidelines to know what is okay and what isn’t.

      3. Small groups of firms serving a small market getting together could not actually ever fix price due to small market share.

         1. Existence of a per se rule makes the conduct still illegal.

         2. Safe harbor – if total share is 20% or less, within the safe zone – government will not prosecute and courts will usually dismiss the case

      4. Relevant market – both geographic and product dimensions

   4. Chicago Board of Trade v. US (1918)

      1. Grain exchange – majority of grain bough and sold through this exchange

      2. Rule passed preventing members of the Board from buying or selling “to arrive” grain during a period after the “call” session and before the exchange opened the next day at a price other than the one established as the closing price at the end of each call session.

         1. “to arrive” grain is that which had not yet arrived in Chicago but were enroute and would be ready for delivery upon arrival

      3. Rule enacted in response to number of buyers would stay out of the “call period” forcing prices and supply lower

         1. The rule froze prices at end of the call market, forcing buyers into the market.

      4. DOJ sues under a per se theory – alleging that the rule restrains bidding and competition during the off-hours, preventing formation of that market

      5. Holding

         1. True test of legality is whether the rule regulates (promotes) competition or suppresses competition

         2. Prong 2 unmet, no harmful purpose for Prong 3

         3. Not really a price fix, more a rule about what hours pricing may take place

   5. US v. Trenton Potteries Co. (1927)

      1. Members of trade association controlling 82% of the sanitary pottery fixtures in the United States charged with price fixing of bathroom pottery.

      2. Justification was that the market would be more stable and more competitors would stay in the market, prices already reasonable

      3. Holding – not the kind of benefit antitrust law recognizes, no agreement may limit price or quantity no matter how good the agreement is

      4. Comments

         1. Remains good law

         2. Agreements with an incidental effect on prices are less likely to be treated under the per se illegality

   6. Appalachian Coals, Inc. v. United States (1933)

      1. 137 produces of coal entered into an arrangement to establish an exclusive selling agent, prices set by selling agent.

      2. All 137 producers combined accounted for 12% of production east of Mississippi, but 74% of Appalachian territory.

      3. Must examine the historical economic conditions of the industry, the purposes in each case – “close and objective scrutiny of particular conditions and purposes is necessary in each case”

         1. Hard to reconcile with Trenton Potteries

         2. History of injurious practices is remedied by this price fix

      4. Comments –

         1. Case would come out the same way today under the safe harbor or under the precompetitive rationale of reducing transaction costs

         2. Case creates much confusion because of the contrast with Trenton Potteries.

   7. United States v. Socony-Vacuum Oil Co. (1940)

      1. Oil companies convicted for coordinating purchases of gasoline in spot markets to raise retail prices.

      2. Oil companies justify behavior by stating that there is too much gasoline supply on a market. They bought up supply and hoarded it as a way of restraining price decreases.

      3. Holding

         1. Does not matter how “ruinous” competition is – if it is bad, you should lobby Congress, not the Court.

         2. Sherman Act is supposed to promote competition.

         3. Trenton Potteries is restored, and Appalachian Coals is limited to its facts.

   8. Fee Schedules – Kiefer-Stewart Co. v. Joseph E. Seagram & Sons (1951)

      1. Issue is whether it was a violation of §1 for two distillers to agree on the maximum resale prices that they would permit distributors to charge.

      2. Holding – per se unlawful even to agree to a maximum price

      3. Reasoning

         1. Could...