Chapter 4
The Legal and Political Environment
Prepared by John T. Drea, Western Illinois University
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Business-Related Legislation:
The Focus Is on Three Areas
1. Protect companies from each other
2. Protect consumers
3. Protect the interests of society
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Enforcement Issues
• Some agencies are independent
– Consumer Product Safety Commission,
Federal Trade Commission are two examples
of independent agencies.
• Some agencies are under the executive
branch
– Department of Health and Human Services,
Department of Justice, Department of
Agriculture are examples.
• Enforcement is often the choice of an agency
or the Department of Justice.
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Major Federal Acts that Affect Marketing
1980
Consumer Goods Pricing Act (1975)
1960
Cellar-Kefauver Act (1950)
1940
1920
Wheeler-Lea Act (1938)
Robinson-Patman Act (1936)
Clayton Act (1914) and
the Federal Trade Commission Act (1914)
1900
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Sherman Antitrust Act (1890)
• Prohibits monopolies or other acts in restraint
of trade that affect interstate or foreign
commerce.
• Allows for injunctions to stop such activities
and for anyone injured by such activities to
recover through treble damages in civil court.
– Treble damages: three times the actual loss as
a result of a violation of antitrust law.
• It provides for criminal penalties (substantial
fines, and jail time up to three years)
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Clayton Act (1914)
• A supplement to the Sherman Act.
• Corporate Officers and officials can be held
responsible, but the Clayton Act is only
applied to individuals and transactions
engaged in interstate commerce.
• The Clayton Act does exempt labor and
agricultural organizations from antitrust
legislation.
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Areas Limited by the Clayton Act (1914)
• Tying contracts
– A requirement to purchase ancillary
goods/services in order to get the offering desired.
• Exclusive Dealing
– Occurs when a seller sells to only one buyer in a
region and competition is lessened.
• Intercorporate stockholding
– Occurs when one company controls the stock of
another and exercises control to restrain trade.
• Interlocking directorates
– Occurs when firms that compete with one another
but have common members on their boards of
directors.
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Federal Trade Commission Act (1914) and
the Wheeler Lea Act (1938)
• The FTC Act established the Federal Trade
Commission to enforce previous federal acts.
• The Wheeler-Lea Act gives the FTC broader
power:
– To regulate unfair or deceptive practices
whenever the public is deceived.
• The FTC tries to minimize violations by
entering into consent decrees with potential
violators.
– Consent decree: a written agreement between
a defendant and the prosecution to avoid
undertaking an act that would violate law.
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Robinson-Patman Act (1936)
• Often described as the price discrimination act.
• Makes it illegal to induce or receive a
discriminatory price – it is particularly aimed at
large firms engaged in interstate commerce.
• Requires proportionately equal terms be made
to buyers in common market.
– Proportionately equal terms: buyers in horizontal
competition must receive substantially equal
offers. Offers may be proportioned by the volume
of business from each buyer.
– Promotional allowance must be equally available
to all customers.
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Celler-Kefauver Act (1950)
• Often called the anti-merger act.
• Broadened powers under the Clayton
Act to prevent mergers that may
substantially reduce competition.
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Celler-Kefauver Act (1950): An Example
• Question: Suppose Company A and Company B are
PC manufacturers. Overall, they have 5% and 3%
shares, respectively, in PC sales (and the market
leader has 20%)
• However, Company A also manufactures a particular
component and has a 30% market share, and
Company B has a 25% market share for the same
component. Combined, they would control over half
the market for this component.
• What would the FTC likely do?
Under the Celler-Kefauver Act, the FTC would likely order
the merged company to sell off either A’s or B’s component
business in order to approve the merger.
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Consumer Goods Pricing Act (1975)
• Repealed the Miller-Tydings Act
– Miller-Tydings had allowed fair trade
pricing (allowing manufacturers to dictate
the resale price of a product)
• CGPA prohibits price maintenance
agreements among manufacturers and
resellers
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Uniform Commercial Code (UCC)
• A standard set of laws that govern contracts
and associated case law.
• Most portions of the UCC have been adopted
by 49 of 50 states (excluding Louisiana.)
• Consistency in the UCC between states helps
with the administration and enforcement of
contracts across state lines.
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Intercorporate
Stockholding
Business
Legislation
Issues
Interlocking
Directorates
Price
Maintenance
Price
Discrimination
Resale
Restrictions
Refusal to Deal
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Intercorporate
Stockholding
Occurs when a company owns
another company in the same
market in an attempt to control
the company so that competition
is reduced.
It is not illegal necessarily for
one company to own more than
one company in the same
market.
However, it is illegal to use that
ownership to reduce competition
and choice.
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Interlocking
Directorates
Occurs when a company has
members of its board of directors
serve on the board of directors of
another company.
Companies that compete in the
same market cannot have
common directors such that
actions would lessen competition
in their markets.
A key is how you define a
“market.”
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Price
Maintenance
Occurs when a manufacturer
attempts to dictate the resale price
of an item – this is generally illegal.
A supplier is allowed some
influence on price when the supplier
contributes to the value of the
offering (e.g., providing financing for
inventory.)
This helps protect full-service
retailers from free rider retailers
Free ride retailers provide fewer
services and a reduced selling
price.
Without this protection,
consumers would likely go to full
service retailers for product
information, but purchase from 17
free ride retailers
Occurs when a company
refuses to restock or supply
associated services to a dealer
that has not followed suggested
pricing guidelines.
Refusal to deal is generally
illegal.
Courts have recognized the
right of a seller to sell or not sell
to whomever it wants to, so long
as the reason for the decision is
not to fix prices or restrain trade.
Refusal to Deal
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Occurs when a company
maintains
house accounts (customers
that are within the reseller’s
market but are served directly
by the supplier), or
limits resellers to certain
territories.
The courts have not come
down on clearly on either side of
this issue.
Resale
Restrictions
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Occurs when a supplier sells
the same product to the “same
class” of buyers at different
prices such that it reduces
competition.
Selling products at different
prices to customers that are not
in competition with one another
is not considered discriminatory.
Price
Discrimination
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Pacific Drives
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Pacific Drives
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Exhibit 4-6 Spartan Computers Enters the Market
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Major tenets of price discrimination regulation
Offerings sold
for different uses,
to separate markets,
at different times,
that are not identical,
to government agencies, or
at prices that meet a competitive threat
are generally not a violation of price regulations.
Offerings created through supplier-customer collaboration,
through partnering, or through customization for a
customers’ particular needs are not identical.
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Substantiality Test
• Business regulation is not characterized by
precision, since enforcement is discretionary.
• Violation are subject to a substantiality test –
it has three considerations:
– The size of the organizations involved (is a
large business coercing behavior from a small
business?)
– The volume of business involved (is the
volume of business large compared to the total
market?)
– Market preemption (preventing access to
markets)
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Intellectual Property: Patent
• Patent
– Protection granted by the federal
government to inventors of original
products, processes, or
compositions of matter.
– Functional patents last 20 years.
– Design patents last 14 years.
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Intellectual Property: Copyright
• Copyright
– Protection for the original works of
authors, musicians, and
photographers.
– Protects the expression of an idea, not
the underlying idea itself.
– Copyrights are granted to individuals
for their lifetimes plus fifty years.
– Copyrights automatically apply to all
work created since 1989.
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Intellectual Property: Trade Secret
• Trade Secret
– A process, technique, or competitive
advantage whose owner has chosen
not to seek legal protection to avoid
disclosure.
– It cannot be something that is
common knowledge, and the owner
must have taken reasonable efforts to
keep the trade secret a secret.
– Owners are not able to license, sell, or
trade them with the same degree of
legal protection as patents or
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copyrights