Chapter 46
Antitrust Law
Business Law
Legal, E-Commerce, Ethical, and International Environments
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Antitrust Laws
A series of laws enacted to limit
anticompetitive behavior in
almost all industries, businesses,
and professions in the United
States.
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Federal Antitrust Laws
• Sherman Act of 1890
• Clayton Act of 1914
• Federal Trade Commission
Act of 1914
• Robinson-Patman act
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Antitrust Enforcement
• The federal antitrust statutes are
broadly drafted to:
– reflect the government’s
enforcement policy
– allow the government to respond to
economic, business, and
technological changes
• Each administration adopts an
enforcement policy for antitrust
laws.
• Antitrust laws are enforced more
stringently at some times than at
other times.
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Antitrust Penalties
• Federal antitrust laws provide
the following penalties:
– Criminal sanctions
• Individuals may be fined up to
$350,000 and three years in prison
• Corporations may be fined up to
$10 million
– Civil penalties
• Treble damages
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Antitrust Penalties (continued)
– Private civil actions
• Clayton Act
– Consumers must have dealt
directly with violators
– Treble damages, plus costs
and attorneys’ fees
– Plaintiff has four years to bring
action
» Tolled during suit by federal
government
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Antitrust Penalties (continued)
• Effects of Government
Judgment
– Prima facie evidence of liability
in private civil treble damage
action
• Defendants often enter a
nolo contendere plea or
enter into a consent decree
– Defendant does not admit guilt
but is subject to penalty
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Restraints of Trade
• Section 1 of the Sherman Act
prohibits contracts, combinations,
and conspiracies in restraint of
trade.
• To violate Section 1, the restraint
must be found to be
unreasonable under either of two
tests:
– Rule of reason
– Per se rule
• Requires the concerted action of
two or more parties
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Rules to Determine Lawfulness of a
Restraint
Rule of Reason
• A rule that holds that only unreasonable
restraints of trade violate Section 1 of the
Sherman Act.
Per se Rule
• A rule that is applicable to those restraints
of trade considered inherently
anticompetitive.
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Horizontal Restraints of Trade
• Occurs when two or more
competitors at the same level of
distribution enter into a contract,
combination, or conspiracy to
restrain trade.
– Most fall under the per se rule; some
examined under the rule of reason
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Horizontal Restraint of Trade
Competitor
No. 1
Agreement
to restrain trade
Competitor
No. 2
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Horizontal restraints of trade include:
• Price-Fixing – occurs where
competitors in the same line of
business agree to to set the price of
the goods they sell. A per se violation.
• Division of Markets – occurs when
competitors agree that each will
serve only a designated portion of
the market. A per se violation.
• Group Boycott – occurs when two or
more competitors at one level of
distribution agree not to deal with
others at another level of distribution.
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Group Boycott by Sellers
Seller
Competitor
No. 1
Agreement
not to deal with
a customer
Seller
Competitor
No. 2
Boycotted
Customer
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Group Boycott by Purchasers
Boycotted
Supplier
Purchaser
Competitor
No. 1
Agreement
not to deal with
a supplier
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Purchaser
Competitor
No. 2
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Other Horizontal Agreements
• Reasonable restraints are
lawful
• Examined under rule of
reason
• Unreasonable restraints are
violation of Section 1 of
Sherman Antitrust Act
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Vertical Restraints of Trade
• Occurs when two or more parties
on different levels of distribution
enter into a contract,
combination, or conspiracy to
restrain trade.
• Court applies both per se rule and
rule of reason.
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Vertical Restraint of Trade
Supplier
Agreement to
restrain trade
Customer
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Vertical restraints of trade include:
• Resale Price Maintenance
(vertical price- fixing) – occurs
when a party at one level of
distribution enters into an
agreement with a party at
another level to adhere to a price
schedule that either sets or
stabilizes prices.
– A per se violation of Section 1 of the
Sherman Act.
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Vertical restraints of trade include:
(continued)
• Nonprice Vertical Restraints – are
unlawful under Section 1 of the
Sherman Act if their
anticompetitive effects outweigh
their pro-competitive effects.
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Defenses to Section 1 of the
Sherman Act
• Unilateral Refusal to Deal
– A unilateral choice by one
party not to deal with another
party.
– This does not violate Section 1
of the Sherman Act because
there is no concerted action.
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Defenses to Section 1 of the
Sherman Act (continued)
• Conscious Parallelism
– Occurs when two or more firms act
the same but without concerted
action.
– This does not violate Section 1
because there has been no
concerted action.
• Noerr Doctrine
– Two or more parties may petition the
government to enact laws or to take
other action.
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Monopolization
• Section 2 of the Sherman Act
• Prohibits the act of
monopolization as well as
attempts and conspiracies to
monopolize.
– Can be violated by the conduct of
one firm
• The following elements are
necessary to prove a defendant
in violation of Section 2:
– Relevant market
– Monopoly power
– Act of monopolizing
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Defining the Relevant Market
• Includes substitute products or
services that are reasonably
interchangeable with the
defendant’s products or services.
• Relevant geographical market is
the area in which the defendant
and its competitors sell the
product or service.
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Monopoly Power
• The power to control prices or
exclude competition.
• Measured by the market share the
defendant possesses in the
relevant market.
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Willful Act of Monopolizing
• A required act for there to be a
violation of Section 2 of the
Sherman Act.
– Predatory pricing
• Possession of monopoly power
without such an act does not
violate Section 2.
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Defenses to Monopolization
• Superior Business Acumen
– Monopoly that is acquired by
superior skill, foresight, or
industry.
• Natural Monopoly
– Monopoly that is thrust upon
the defendant.
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Mergers
• Section 7 of the Clayton Act
provides that it is unlawful for a
person or business to acquire the
stock or assets of another “where in
any line of commerce or in any
activity affecting commerce in any
section of the country, the effect of
such acquisition may be
substantially to lessen competition,
or to tend to create a monopoly.”
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Mergers (continued)
• The following elements are
necessary to prove a violation of
Section 7:
– Line of commerce – the market
that will be affected by the
merger.
– Section of the country –
geographical market that will
be affected by the merger.
– Probability of a substantial
lessening of competition.
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Types of Mergers
Horizontal
Mergers
Vertical Mergers
Conglomerate
Mergers
Market Extension
Mergers
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Horizontal Mergers
• A merger between two or
more companies that
compete in the same
business and geographical
market.
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Vertical Mergers
• A merger that integrates the
operations of a supplier and
a customer.
– Backward vertical merger
– Forward vertical merger
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Market Extension Mergers
• A merger between two
companies in similar fields
whose sales do not overlap.
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Conglomerate Mergers
• A merger that does not fit
into any other category.
• A merger between firms in
totally unrelated businesses.
• Section 7 examines the
lawfulness of such mergers
under the:
– Failing company doctrine
– Small company doctrine
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Defenses to Section 7 Actions
The Failing
Company
Doctrine
The Small
Company
Doctrine
Prentice
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Hall,
Prentice
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Tying Arrangements
• A tying arrangement is a restraint
of trade where a seller refuses to
sell one product to a customer
unless the customer agrees to
purchase a second product from
the seller
• Section 3 of the Clayton Act
prohibits tying arrangements
involving sales and leases of
goods.
– Tangible personal property
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Tying Arrangements (continued)
• Section 1 of the Sherman Act
prohibits tying arrangements
involving goods, services,
intangible property, and real
property.
• A tying arrangement is lawful if
there is some justifiable reason for
it.
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Price Discrimination
• Sellers often offer favorable terms
to their preferred customers.
• Price discrimination occurs if the
seller does this without just cause.
• Unlawful trade practices under
Section2 of the Clayton Act,
otherwise known as the RobinsonPatman Act.
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Direct Price Discrimination
• Section 2(a) of the Robinson-Patman Act
prohibits direct and indirect price
discrimination by sellers of a commodity
of a like grade and quality where the
effect of such discrimination may be to
substantially lessen competition or to
tend to create a monopoly in any line of
commerce.
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Direct Price Discrimination
(continued)
•
To prove violation, you must
prove these elements:
1)
The defendant sold commodities of like
grade and quality,
to two or more purchasers at different
prices at approximately the same time,
and
the plaintiff suffered injury because of
the price discrimination.
2)
3)
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Indirect Price Discrimination
• Sophisticated ways to
provide discriminatory prices
to favored customers.
• Illegal under RobinsonPatman.
– Favorable credit terms
– Freight charge reductions
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Defenses to Section 2(a) Actions
Cost Justification
Changing Conditions
Meeting the
Competition
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Cost Justification
• Seller’s price discrimination is
not unlawful if price
differential is due to
differences in cost of
manufacture, sale, or
delivery.
– Bulk shipping rates that vary
depending upon amount
transported
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Changing Conditions
• Price differentials that are a
result of changing market
conditions are not illegal.
– Reducing prices that reflect the
deterioration of perishable
goods
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Meeting the Competition
• A seller may lawfully engage
in price discrimination to
meet a competitor’s price.
– Seller must meet but not beat
competitor’s price.
– Rockport shoes meeting price
of Great Lakes Shoe Co. in
Michigan and Wisconsin only.
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Unfair Methods of Competition
• Section 5 of the FTC Act
prohibits unfair methods of
competition.
– Broader than other antitrust
laws.
– Covers conduct that violates
any provision of the Sherman
Act or the Clayton Act, violates
the spirit of those acts, fills the
gap in those acts, and offends
public policy.
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Exemptions From Antitrust Laws
• Statutory Exemptions – Exemptions
from antitrust laws that are
expressly provided in statutes
enacted by Congress.
• Implied Exemptions – Exemptions
from anti-trust laws that are
implied by the federal courts.
• State Action Exemptions – Business
activities that are mandated by
state law are exempt from federal
antitrust laws.
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State Antitrust Laws
• Most states have enacted antitrust
statutes.
• State statutes are usually
patterned after the federal
antitrust statutes.
• State antitrust laws are used to
attack anti-competitive activity
that occurs in intrastate
commerce.
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