978-0077733711 Chapter 49 Lecture Note

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Chapter 49 – Antitrust: The Sherman Act

CHAPTER 49

ANTITRUST: THE SHERMAN ACT

I. OBJECTIVES:

This chapter is designed to acquaint students with the sociohistorical origins of the federal

antitrust laws, the nature of the current antitrust policy debate, and the fundamental attributes of

the Sherman Act. After reading the chapter and attending class, a student should:

A. Understand the social forces and policy assumptions that produced the Sherman Act.

B. Have a general grasp of the difference between “Chicago School” antitrust policy and

traditional antitrust policy views.

C. Understand the necessary prerequisites for federal antitrust jurisdiction and the basic

penalties for Sherman Act violations.

D. Understand the difference between per se and rule of reason analysis in antitrust cases.

E. Be able to identify the basic types of business behavior that can violate Sections 1 and 2 of

the Sherman Act and the legal standards applicable to such behavior.

In addition, see the Learning Objectives that appear near the beginning of the chapter.

II. ANSWERS TO INTRODUCTORY PROBLEM:

A. No, not without additional facts tending to indicate that XYZ’s decision to have its prices

parallel those of a competitor were the result of joint action (e.g., an implied agreement) on

the part of XYZ and the competitor. As phrased, the question seems to refer only to unilateral

action on XYZ’s part. Unilateral action does not violate Sherman Act § 1.

B. In either instance (competitors agree to charge a certain maximum price or competitors agree

to charge a certain minimum price), there would be horizontal price-fixing, a per se violation

of Sherman Act § 1.

C. If XYZ and its dealers agree on a maximum price, there would be vertical maximum price-

fixing, which receives rule of reason treatment. This means that there might–or might not–

be a violation of Sherman Act § 1, depending on whether the justifications for the agreement

outweigh the harm to competition. Until very recently, however, if XYZ and its dealers had

agreed on a minimum price, there would have been a per se violation of § 1. See the Leegin

decision, which appears later in the chapter. There, the Supreme Court overruled a

longstanding precedent and held that vertical minimum price-fixing is to be judged under the

rule of reason. After Leegin, all vertical price-fixing receives rule of reason treatment.

D. If XYZ and its dealers agree on exclusive sales territories within which the dealers will

operate, a vertical restraint on distribution (a vertical non-price restraint) has occurred. This

behavior receives rule of reason treatment, which means that there might–or might not–be a

violation of Sherman Act § 1, depending on whether the justifications for the agreement

outweigh the harm to competition.

E. The “you must also buy product #2 if you want to buy product #1” scenario involves a tying

agreement, which violates Sherman Act § 1 (and sometimes Clayton Act § 3) if certain

necessary elements described in the text are present.

F. If XYZ and other widget makers agree on exclusive geographic areas of operation, there

would be a horizontal division of markets. Most divisions of this nature are classified as per

se violations of Sherman Act § 1.

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Chapter 49 – Antitrust: The Sherman Act

G. If XYZ and other widget makers agree not to purchase materials from a certain supplier, they

have agreed on a horizontal boycott. Although group boycotts generally are classified as per

se violations of Sherman Act § 1, the reality is that some boycotts receive per se treatment

whereas others receive rule of reason analysis. Horizontal boycotts, however, seem more

likely than vertical boycotts to be considered per se violations.

H. No. Having monopoly power is not a violation of Sherman Act § 2. That statutory section

prohibits monopolization. The minimal facts set forth in the question indicate that XYZ

would have acquired monopoly power on the merits of its reputation for producing high-

quality widgets, rather than on some anti-competitive basis. Hence, XYZ would not have

committed monopolization.

III. SUGGESTIONS FOR LECTURE PREPARATION:

A. Introduction

1. Discuss the sociohistorical forces that led to the passage of the Sherman Act. Note the

economic populism inherent in the traditional antitrust assumption that fragmented

market structures are a prerequisite of competition.

a. Note also the paradox inherent in the passage of the antitrust laws: free markets must

be regulated if they are to be preserved.

b. Note also that critics who agree with traditional antitrust assumptions could argue

that the antitrust laws have been unsuccessful in achieving their basic goals, given the

concentration that typifies many industries. Of course, one can only speculate about

the structure industry would have assumed in the absence of antitrust regulation.

B. The Antitrust Policy Debate

1. Contrast “Chicago School” analysis with traditional antitrust thinking.

2. What forces have contributed to the rise of Chicago School theories? Some candidates

are:

a. Concerns over the competitive position of the U.S. in world markets. This may

explain the Chicago School emphasis on economic efficiency.

b. The fact that conservative administrations were in power at the federal level during

much of the past two decades.

c. The perceptions of many critics that antitrust law had taken a wrong turn during the

1960s and 1970s.

d. The fact that Chicago School approaches seek to legitimize certain business

behaviors that previously were held to be contrary to antitrust policy. In other words,

Chicago School critics have said a number of things that many people have wanted to

hear.

3. You may wish to discuss the extent to which the prevailing political winds may help

shape antitrust policy and the level of aggressiveness (or lack thereof) with which the

government takes antitrust enforcement action. Note the role the federal judiciary plays

in influencing the directions in which antitrust law moves. Over the past three decades,

many judges who are receptive to Chicago School views have been appointed to the

federal bench.

C. Jurisdiction, Types of Antitrust Cases, and Standing

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Chapter 49 – Antitrust: The Sherman Act

1. Discuss the basic prerequisite for federal antitrust jurisdiction: some significant impact

on interstate commerce or on our foreign commerce. Note the constitutional basis for

this limitation on the power of the federal government to regulate business behavior.

a. Point out how easy it is to demonstrate some interstate commerce nexus for most

business behavior, given the nature of our national economy.

Example: Summit Health Ltd. v. Pinhas, 500 U.S. 322 (1991) (Los Angeles hospital’s

actions with regard to peer review system had sufficient connection with interstate

commerce to support federal antitrust jurisdiction).

b. Note the international reach of our antitrust laws. Stress the fact that before the

activities of foreign firms, or of U.S. firms in foreign markets, will be subject to

antitrust scrutiny, some impact either on our domestic or foreign commerce must be

shown. United States v. Hsiung, a text case that appears later in the chapter (see p.

1345), furnishes an example. You may also wish to point out that attempts to expand

the international scope of our antitrust laws present a potential conflict between our

antitrust policy and our foreign policy. If you wish to go into greater detail at this

point, you may consider assigning the foreign commerce material in the next chapter.

2. Discuss the types of antitrust cases, noting the essential differences between criminal

cases and civil cases. Also note that either the government or a private plaintiff may bring

a civil suit.

a. Note the role of nolo contendere pleas in resolving certain criminal antitrust cases.

Explain the similar role played by consent decrees in many civil antitrust cases

brought by the government.

b. Discuss the basic penalties for criminal violations of the Sherman Act. Note the

recent trend toward tougher antitrust penalties.

c. Discuss the potentially available remedies in civil antitrust litigation. Note courts’

broad-ranging injunctive powers. Stress the treble damages remedy for successful

private plaintiffs–a remedy that virtually assures a fair amount of civil antitrust

litigation even during those periods when the prevailing political winds contemplate a

less-than-aggressive enforcement posture by the federal government. What do

students think about proposals to limit the recovery of treble damages to cases

involving per se violations of the Sherman Act?

3. Discuss the standing requirement for private antitrust plaintiffs: they must show that they

have suffered a direct antitrust injury as a result of the challenged behavior.

a. Discuss the Illinois Brick decision limiting standing to “direct purchasers,” and the

Court’s reasons for denying standing to “indirect purchasers.” Illinois Brick has been

quite controversial. In California v. ARC America Corp., 490 U.S. 93 (1989) the

Supreme Court held that state statutes allowing indirect purchasers to recover

damages for antitrust violations were not preempted by Illinois Brick. In Kansas v.

Utilicorp United, Inc., 497 U.S. 199 (1990), however, the Court resolved a split

among the circuits and refused to recognize an exception to Illinois Brick that would

have allowed public utility customers to recover overcharges by utility suppliers,

despite the argument that regulated utilities passed along the entire amount of the

overcharges.

Example: Problem Case #1 (no antitrust injury proven).

D. Section 1–Restraints of Trade

1. Discuss the language and intent of Section 1: the statute is aimed at joint action in

restraint of trade. Its basic policy is that there should be no cooperation among

competitors in making basic competitive decisions. Hence, the requirement of proof of

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Chapter 49 – Antitrust: The Sherman Act

concerted action is a prerequisite to Section 1 liability. This confronts antitrust enforcers

and plaintiffs with two basic dilemmas:

a. How separate must two entities be before their supposedly joint actions will be

subject to Sherman Act scrutiny? You may wish to discuss Copperweld Corp. v.

Independence Tube Corp., 467 U.S. 752 (1984), and the demise of the

“intra-enterprise conspiracy doctrine” at this point. The lower federal courts have

differed on the reach of Copperweld. For instance, compare Wilcox Dev. Co. v. First

Interstate Bank, 605 F. Supp. 592 (D. Or. 1985) (Copperweld does not prevent

finding of conspiracy among “sister companies” that were subsidiaries of same parent

company) with Greenwood Utils. Comm’n v. Mississippi Power Co., 751 F.2d 1484

(5th Cir. 1985) (Copperweld bars finding of conspiracy among “sister companies”).

Copperweld, of course, received extensive consideration in American Needle, a text

case discussed below.

b. When will parallel business behavior justify the inference that a conspiracy exists in

violation of Section 1? Note that pure “conscious parallelism,” standing alone, is not

enough to prove a statutory violation. Point out the difficulties of proving something

more than conscious parallelism in oligopolistic markets.

Example: Problem Case #5.

c. American Needle, Inc. v. National Football League (p. 1341): The Supreme Court

holds that the NFL, the 32 NFL teams, and the NFLP (the licensing entity from

whose efforts the NFL teams benefit financially) were capable of concerted action for

purposes of Sherman Act § 1, and that the rule of reason would apply to the concerted

action complained about by the plaintiff.

Points for Discussion: Have a student summarize the basic facts, including the

history of licensing efforts by the NFL. Note the creation of the NFLP and the

financial stake that all NFL teams have in it. Why, according to the Court, is this

situation different from the parent-subsidiary in Copperweld. (There, because the

parent controlled decision-making, the parent and subsidiary were part of an

enterprise in which there was a single center of decision making. That was not the

case here. The teams were competitors, both on and off the field, and were separate

profit-making enterprises. They fact that the teams and the NFL set up a legally

separate entity to handle licensing doesn’t mean that the teams, the league, and the

NFLP constituted a single enterprise (unlike the situation in Copperweld.) Note that

the Court applies a substance-over-form approach. The form is that of a separate

legal entity, but the substance indicates that the otherwise-competing teams are

working together. The NFLP operated to eliminate competition regarding licensing

when the teams would be competing in that regard if not for the NFLP. What about

the defendants’ argument that pro football effectively wouldn’t exist if the teams and

the league couldn’t handle licensing through the NFLP? Isn’t that a bit overblown

(as the Court seems to suggest)? And the Court’s decision doesn’t say that the

defendants can’t continue doing what they have been doing regarding licensing, does

it? After all, the Court says that the rule of reason will be the controlling mode of

analysis. This means that there won’t be § 1 liability if the justifications for the

arrangement outweigh the harm to competition. So what does this decision really

mean? (That the defendants can’t avoid liability on lack-of-joint-action grounds and

that they will have to show sufficient justifications for their behavior in order to

avoid liability—but that they may ultimately be held not to have violated § 1.)

2. Per Se versus Rule of Reason Analysis. Note that even though the language of Section 1

condemns all contracts, combinations, and conspiracies in restraint of trade, the Court has

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Chapter 49 – Antitrust: The Sherman Act

long held (since the 1911 Standard Oil decision) that Section 1 applies only to behavior

that “unreasonably” restrains trade. Of course, any contract “restrains trade” to some

extent (if I contract with A, I’m not contracting with B or C). Contrast the “per se” and

“rule of reason” analyses. In particular, explain defendants’ ability to offer justifications

for their behavior when rule of reason treatment applies, and defendants’ inability to do so

when per se treatment applies. Note the current trend in favor of moving away from per

se analysis. This trend is a definite result of the influence of Chicago School antitrust

thinking. Although per se and rule of reason are the two judicial treatments that dominate

Section 1 cases, a third treatment is occasionally applied. Known as “quick look”

treatment (see the discussion at p. 1344 of the text), this intermediate form of analysis

calls for the court to presume that the behavior in question is anti-competitive unless the

defendants demonstrate some pro-competitive effect stemming from the behavior. Upon

such a showing by the defendants, rule of reason analysis triggered. If no such showing

is made by the defendants, the behavior receives per se treatment. See

3. Price-Fixing. Distinguish between horizontal price-fixing and vertical price-fixing.

Note that horizontal price-fixing is per se unlawful but that vertical price-fixing is now

judged under the rule of reason.

a. Note the wide variety of behavior that may be classified as horizontal price-fixing.

Remind the students that an express agreement to fix prices need not be shown by the

government or a private plaintiff. An implied agreement is sufficient. Also note that

price-fixing may be committed by both sellers and buyers. Note the recent price-

fixing examples discussed at pp. 1344-45.

1) Note that horizontal price-fixing is likely to be classified as per se illegal for the

foreseeable future. Chicago School theorists do not object to this, because it fits

with their argument that antitrust policy should be anticonspiracy policy. The

only point of departure concerns agreements to fix maximum prices. Some

Chicago School theorists argue that such agreements can, in some cases, result in

savings to consumers. Nevertheless, the Supreme Court has continued to adhere

to the per se rule for horizontal price-fixing, regardless of whether minimum or

maximum prices are fixed.

United States v. Hsiung (p. 1345): The U.S. Court of Appeals for the Ninth

Circuit holds that a foreign price-fixing conspiracy had a sufficient nexus to the

United States to support prosecution in the U.S. because the products that were

the subject of the price-fixing were targeted for the U.S. The court also holds that

the presence of foreign conduct in a horizontal price-fixing scheme does not

warrant the application of rule of reason analysis. Rather, the controlling mode of

analysis if the per se treatment customarily extended to horizontal price-fixing.

Points for Discussion: Ask the students why, in view of the facts, the defendants

could be prosecuted in the U.S. even though they were companies and

individuals form outside the U.S. and the bulk of the relevant meetings occurred

outside the U.S. (Because at least one of the acts in furtherance of the conspiracy

occurred in the U.S., and because the conduct that occurred outside the U.S. had

a substantial and intended effect in the U.S.) Ask why the defendants thought

rule of reason treatment should apply, and why the court showed no inclination to

depart from the usual per se rule regarding horizontal price-fixing.

Further example: Problem Case #4.

b. Discuss vertical price-fixing (resale price maintenance) and the reasons why

manufacturers have significant incentives to gain control over the price at which their

products are resold. Controlling minimum resale price may maintain a product’s

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Chapter 49 – Antitrust: The Sherman Act

image, encourage dealers to furnish service or promotional activities they may be

unwilling to furnish in an environment of vigorous price competition, and encourage

dealers to continue to sell the manufacturer’s product (something they may be

unwilling to do if competition forces prices to unprofitable levels). Control of

maximum resale prices prevents dealers who are isolated from competition from

exploiting this situation by raising prices (and thereby selling fewer units).

1) Point out that despite the reasons why manufacturers might wish to control resale

prices, vertical price-fixing received per se treatment for many years. The

Supreme Court chipped away at the rule in 1997 by holding, in State Oil Co. v.

Khan (discussed below), that vertical maximum price-fixing will be examined

under the rule of reason analysis, and finished the job in 2007 with Leegin

Creative Leather Products v. PSKS, Inc., which subjected vertical minimum

price-fixing to the rule of reason. After Leegin, all vertical price-fixing receives

rule-of-reason analysis.

State Oil Co. v. Khan (noted at p. 1348 of the text): Accepting the invitation of

the Seventh Circuit Court of Appeals, the Supreme Court overrules a

longstanding precedent and requires the use of the rule of reason analysis–

instead of per se treatment–in cases involving vertical fixing of maximum prices.

Points for Discussion: If not for the then not-yet overruled Albrecht decision, the

Seventh Circuit would have dumped the per se rule and opted for the rule of

reason approach in vertical maximum price-fixing (VMPF) cases. The Seventh

Circuit’s opinion, written by Judge Posner, showed why Albrecht‘s per se

classification for VMPF had been undercut by later decisions. The Supreme

Court agreed with Judge Posner’s analysis. In addition, the Court concluded that

the rationales supporting rule of reason treatment for vertical non-price restraints

seemed generally applicable in VMPF cases. Finally, as the Court confessed, it

was no longer convinced that VMPF invariably possessed the pernicious effects

necessary to justify the per se classification. Agreeing that the time had come to

change the governing rules, the Court officially overruled Albrecht and

established rule of reason treatment as the controlling analysis in VMPF cases.

Now that rule of reason analysis applies to VMPF, some of the previously

discussed reasons why manufacturers wish to control resale prices may become

relevant to the necessary process of balancing justifications for the behavior

against the harm to competition resulting from it. Ask the class to identify other

possible justifications for VMPF (e.g., benefit to consumers, etc.). Now that rule

of reason treatment has been extended to VMPF, are other forms of vertical

price-fixing likely future candidates for a similar switch in form of analysis?

What about horizontal maximum price-fixing? Conclude the discussion by

emphasizing/re-emphasizing an important message: that with the exception of

VMPF, every variety of price-fixing–whether vertical or horizontal–continues to

receive per se treatment.

Leegin Creative Leather Products v. PSKS, Inc. (p. 1348): The Supreme Court

holds that rule of reason treatment should be extended to vertical minimum price-

fixing. In so holding, the Court overrules the near 100-year-old Dr. Miles

precedent, which had classified vertical minimum price-fixing as a per se

violation of Sherman Act § 1.

Points for Discussion: The court comments that a brand may add value through

vertical price restraints by ensuring the product is sold only in places that have a

reputation for selling higher-quality merchandise. Is that value? Isn’t the court

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Chapter 49 – Antitrust: The Sherman Act

nodding approvingly toward a perverse conspicuous-consumption ethic that

regards a higher-priced good as a better one? Doesn’t this rather tautological

model of “value” serve the producer entirely at the consumer’s expense, and the

wealthy consumer at the expense of the poor one? Did the Supreme Court make

convincing arguments for overruling Dr. Miles? Is Justice Breyer right when he

says, in his dissent, that Leegin will simply lead to higher prices for consumers to

pay?

2) Discuss the unilateral refusal to deal (the “Colgate doctrine”) as a device for

lawfully controlling resale price. Note that the Court has closely policed this

Section 1 “loophole” by insisting that the defendant’s actions be purely unilateral.

The Colgate rule is partly the product of the Section 1 emphasis on concerted

action, but is also a manifestation of the traditional solicitude shown for the

freedom of independent businesspersons to choose those with whom they deal.

Plainly, when a manufacturer is successful in controlling resale price via

unilateral refusals to deal, the economic harm is identical to that resulting from a

per se illegal resale price maintenance agreement.

4. Division of Markets. Differentiate between horizontal and vertical division of market

schemes.

a. Horizontal division of markets agreements traditionally has been treated as per se

unlawful. Note, however, the tendency of some of the lower federal courts to respond

to critics of the Topco decision by distinguishing between “naked” and “ancillary”

restraints, condemning the former to per se illegality but treating the latter under the

rule of reason.

Examples: Problem Case #2, plus Palmer v. BRG of Georgia, Inc., 498 U.S. 46

(1990) (giving per se treatment to horizontal geographical division of markets for bar

review course services).

b. Most vertical nonprice restraints are governed by the rule of reason, thanks to

Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (U.S. Sup. Ct. 1977).

1) In that case, a manufacturer’s franchise system that included location restrictions

on franchisee sales was upheld under the rule of reason. In so holding, the Court

overruled a 1967 decision that had placed vertical nonprice restraints in the per se

category. In Sylvania, the Court observed that per se illegality should be applied

only to practices that always have a negative effect on competition and can never

be justified. Vertical market restrictions do not meet this test even though they

restrict intrabrand competition (e.g., competition among Sylvania dealers),

because they can be used to promote interbrand competition (e.g., competition

between Sylvania dealers and dealers of other brands). By allowing franchisees

some freedom from intrabrand competition, manufacturers may be able to attract

more competent franchisees and induce franchisees to participate in promotional

and service activities in which they might otherwise refuse to take part. The

Court therefore held that vertical market restraints should henceforth be judged

under the rule of reason.

2) Point out that some kinds of vertical market restraints may still be unlawful under

the rule of reason. In particular, vertical market restraints imposed by

manufacturers enjoying a large market share or significantly favorable product

differentiation would still appear to be in jeopardy, given the aggravated effect of

restricting intrabrand competition in such cases and the small likelihood of any

offsetting positive impact on interbrand competition (manufacturers in such a

position don’t need any help). What are the “real world” effects of Sylvania? It

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Chapter 49 – Antitrust: The Sherman Act

should be tougher for discounters to get brand-name goods (assuming that the

manufacturer is serious about the vertical restraint on distribution). Also,

individual dealers have lost a measure of freedom in terms of deciding to whom

to sell and where to sell. Although preserving such freedom was a basic theme of

classic cases such as Colgate and G.E. (on consignment dealing), that theme gets

lost in the shuffle here. Perhaps the Court is saying that business efficiency is

simply more important today than this species of dealer freedom. On the other

hand, one could argue that Sylvania ultimately preserves dealer freedom by

removing the incentives manufacturers might otherwise have to vertically

integrate their operations.

5. Group Boycotts. Concerted refusals to deal have long been held to constitute per se

violations of Section 1. For a classic case, see Klor’s, Inc. v. Broadway-Hale Stores, 359

U.S. 207 (U.S. Sup. Ct. 1959). Recently, however, several cracks have appeared in this

per se analysis.

a. Discuss Monsanto and Sharp (noted in the text).

b. Discuss Northwest Wholesale Stationers (noted in the text), focusing on the Court’s

extension of rule of reason treatment to the particular horizontal boycott before it as

well as on the Court’s apparent reluctance to mandate rule of reason analysis for all

horizontal boycotts. In his opinion for the Court (as edited by the authors for a

previous edition of the textbook), Justice Brennan commented on prior group boycott

cases and provided general guidance for when the per se rule should be applied:

“Cases to which this Court has applied the per se approach have generally

involved joint efforts by a firm or firms to disadvantage competitors by either

directly denying or persuading or coercing suppliers or customers to deny

relationships the competitors need in the competitive struggle. In these cases, the

boycott often cut off access to a supply, facility, or market necessary to enable the

boycotted firm to compete, and frequently the boycotting firms possessed a

dominant position in the relevant market. In addition, the practices were

generally not justified by plausible arguments that they were intended to enhance

overall efficiency and make markets more competitive. Under such

circumstances the likelihood of anticompetitive effects is clear and the possibility

of countervailing procompetitive effects is remote.”

According to the Court, “not every cooperative activity involving a restraint or

exclusion will share with the per se forbidden boycotts the likelihood of

predominantly anticompetitive consequences.” Justice Brennan then observed that

wholesale purchasing cooperatives such as the one at issue in Northwest Wholesale

Stationers are not likely to result in predominantly anticompetitive effects. Instead,

such cooperative arrangements appeared to be designed to increase economic

efficiency and render markets more competitive by enabling smaller retailers to

compete more effectively with larger retailers. Moreover, the Court reasoned that the

purchasing cooperative’s expulsion of a member (what gave rise to this case) would

not necessarily produce an anticompetitive effect unless the purchasing cooperative

possessed “market power or exclusive access to an element essential to effective

competition. Absent such a showing with respect to a cooperative buying

arrangement, courts should apply a rule of reason analysis.”

You may also wish to note two other Supreme Court decisions involving horizontal

boycotts. In FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986), the Court

upheld an FTC cease and desist order against a dentists’ organization that had

promulgated a policy requiring its members to withhold x-rays from dental insurers

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Chapter 49 – Antitrust: The Sherman Act

seeking to evaluate patients’ benefits claims. The Court found the challenged

behavior to be a violation of Section 1 of the Sherman Act, and hence an unfair

method of competition in violation of Section 5 of the FTC Act. Significant, for our

purposes, is the fact that the Court applied a rule of reason analysis rather than a per

se approach. In FTC v. Superior Court Trial Lawyers Association, 493 U.S. 411

(1990), however, the Court required application of the per se rule to a group boycott

by Washington, D.C. attorneys who regularly represented indigent criminal

defendants. The boycotting attorneys agreed among themselves not to accept new

cases until D.C. authorized higher hourly rates of pay for their services. Two factors

seem to explain the Court’s insistence on the per se rule rather than the rule of reason

option chosen in Northwest Wholesale Stationers and Indiana Federation of Dentists:

(1) the attorneys’ agreement arguably fit within Justice Brennan’s description, in

Northwest Wholesale Stationers, of the sorts of boycott cases for which per se

treatment was appropriate; and (2) the attorneys’ agreement also had attributes of

horizontal price-fixing, which receives per se treatment.

Additional Example: Problem Case #3.

6. Tying Agreements. Explain the nature of a tying agreement and identify the harm to

competition traditionally associated with such agreements. The seller’s competitors in the

sale of the tied product are foreclosed from competing for the share of the market covered

by the seller’s tying agreements. From an economic standpoint, the seller is attempting to

extend its market power in the tying product into the market for the tied product. Note

also that there is no legitimate reason why a buyer would want to enter into a tying

arrangement. This latter fact helps explain why tying agreements traditionally were

treated fairly harshly.

a. Note that tying contracts may also violate Section 3 of the Clayton Act if they involve

commodities.

b. Point out that the Court has made it more difficult for plaintiffs to win tying cases by

insisting on a higher degree of proof of the seller’s market power in the tying product

and by recognizing, particularly in franchise cases, that what may at first appear to be

two separate products may in fact be integral components in a single business system.

Illinois Tool Works, Inc. v. Independent Ink, Inc. (p. 1354): The Supreme Court

reinstated the trial court’s grant of summary judgment in favor of the alleged

bundler, a patent holder. In light of congressional circumscription of the patent

misuse doctrine, the Court held that for purposes of a tying claim, possession of a

patent no longer gives rise to a presumption of market power concerning the

tying product.

Points for Discussion: The Court’s opinion hinges on an amendment to the Patent

Act, which provides that when a patent holder is alleged to have engaged in

patent misuse, the mere existence of a patent does not necessarily give the patent

holder the requisite market power. Thus, the Patent Act now contemplates a

possible situation in which a patent holder does not have market power. Because

the presumption that a patent gives rise to market power had migrated from

patent law to the analysis of tying cases, it would not make sense to retain the

patent-as-conferring-market-power presumption in the tying setting when the

Patent Act had eliminated it for purposes of patent misuse cases. Also, note the

emphasis placed by the Court on the apparent judicial trend toward viewing tying

arrangements more favorably than had once been the case.

c. Students sometimes ask how much in terms of sales of the tied product is necessary

to satisfy the “not insubstantial” amount of commerce element. The seminal case on

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Chapter 49 – Antitrust: The Sherman Act

this point is the Supreme Court’s 1947 opinion in International Salt Co. v. United

States, which suggested $500,000 per year in sales of the tied product as the

appropriate figure. Given inflation, this figure is obviously suspect. The tying cases

decided since International Salt, however, have involved amounts as low as

$200,000, and in one case, $61,000.

d. Discuss the recognized justifications for (or defenses to) tying liability.

1) New Business. Note that this defense is available only for a limited time. See

Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971).

2) Quality Control/Protection of Goodwill. This defense is rarely successful

because, in most cases, the seller’s legitimate objectives could be lawfully

achieved by requiring customers to use products of a specified grade or quality

rather than by requiring them to purchase such products from the seller. The

Siegel case cited above addresses this point also.

e. Discuss the Chicago School criticisms of the traditional judicial treatment of tying

contracts.

Example: United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (reversing

the district court’s holding that Microsoft unlawfully tied its Internet Explorer

Browser to its Windows operating system).

7. Discuss reciprocal dealing agreements, the threat they pose to competition under

traditional analyses, and the approach that the courts have traditionally taken to judging

their legality.

8. Discuss exclusive dealing agreements and requirements contracts. Note that while the

potential harm to competition from such agreements is similar to that involved in tying

contracts, exclusive dealing and requirements contracts can sometimes benefit both

parties. The legal standards applicable to such agreements are discussed in detail in the

next chapter.

Example: Problem Case #6.

9. Discuss joint ventures, noting that they can sometimes amount to contracts in restraint of

trade in violation of Section 1. Note the impact of the National Cooperative Research

and Production Act on joint venture enforcement. Discuss the concerns that motivated

Congress to enact the statute to facilitate joint research ventures and later to amend the

statute to facilitate joint production ventures.

E. Section 2–Monopolization

1. Note that the language of Section 2 does not outlaw monopolies–-it outlaws the act of

“monopolizing.” A single firm can be guilty of “monopolizing” or “attempting to

monopolize” under Section 2. Refer the students to the discussion of this point at the

beginning of the chapter.

2. To prove monopolization, the plaintiff must show that the defendant had both an intent to

monopolize and monopoly power.

a. Monopoly power has been defined as the power to fix prices or exclude competitors.

It is ordinarily proven by demonstrating that the defendant has captured a high

percentage share of the relevant market (roughly 70% or more). There are two

components to the relevant market test: the relevant geographic market and the

relevant product market.

1) Relevant geographic market–This part of the test is determined by economic

realities. Where do the sellers of the product in question compete and to whom

may buyers turn for alternative sources of supply?

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Chapter 49 – Antitrust: The Sherman Act

2) Relevant product market–This part of the test is proven by demonstrating what

products, if any, are functionally interchangeable with the defendant’s product.

The idea here is that the defendant’s power to raise prices is limited by the

availability of substitute products. This concept is related to the basic economic

concept of cross- elasticity of demand. Discuss the DuPont case mentioned in the

text.

b. Early Section 2 cases, most notably the Court’s opinion in the Standard Oil case,

required a showing that the defendant either acquired monopoly power by predatory

or coercive means or abused monopoly power once it was acquired. Under this

approach, would-be monopolists were free to acquire monopoly power so long as

they acted “reasonably” in doing so. This approach emasculated Section 2 and paved

the way for the Clayton Act.

c. In 1945, Judge Learned Hand’s decision in the Alcoa case provided the modern

definition of monopoly power: the willful acquisition or maintenance of monopoly

power in a relevant market, as opposed to growth as a consequence of superior

product, business acumen, or historical accident. If a defendant intentionally

acquires monopoly power, or consciously tries to maintain it after acquiring it, intent

to monopolize has been proven.

United States v. Microsoft Corp. (p. 1360): The D.C. Circuit Court of Appeals

affirms the federal district court’s determination that Microsoft engaged in

monopolization of the worldwide market for Intel-compatible operating systems.

Points for Discussion: This case almost certainly has been the most-publicized

antitrust litigation in history. The edited version that appears in the text is longer than

other cases in the book because professors may wish to have the added detail

available in order to facilitate class discussion of the legal and public policy issues

present in the case.

Discuss each of the elements the government had to prove in order to establish that

Microsoft engaged in monopolization: (1) that Microsoft possessed monopoly power

in the relevant market; and (2) that Microsoft exhibited intent to monopolize. Ask the

class what factors caused the district court and the D.C. Circuit to define the relevant

market as the worldwide licensing of Intel-compatible operating systems. Note the

significance of the applications barrier to entry. In addition, note the huge share of the

relevant market allegedly possessed by Microsoft–95 percent.

Regarding the second element of the monopolization claim, ask the class what

conduct by Microsoft was considered to be predatory, exclusionary, or otherwise anti-

competitive and therefore evidence of intent to monopolize. Note the D.C. Circuit’s

discussions of Microsoft’s actions with regard to software vendors and developers of

middleware applications. Discuss the court’s comments on Microsoft’s attempts to

combat the browser threat through its commingling of browser and non-browser code

and through its dealings with PC manufacturers, Internet access providers, and Apple

Computer. Note the court’s discussion of the means used by Microsoft to counteract

the threat posed by Java. What do your students think of the court’s assessment

Microsoft’s conduct as a whole? Do they agree that Microsoft “placed an oppressive

thumb on the scale of competitive fortune, thereby effectively guaranteeing its

continued dominance in the relevant market”? (The quoted language comes from the

district court’s opinion.) What do your students think of Microsoft’s contention that

the firm had revolutionalized the state of computing and had greatly benefited

consumers and society, but was now being penalized for its success?

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Chapter 49 – Antitrust: The Sherman Act

As noted in the Cyberlaw in Action box that appears at p. 1366 of the text, the D.C.

Circuit concluded that the district court’s order of divestiture was not the appropriate

remedy for the monopolization engaged in by Microsoft. Note the matters raised in

the Cyberlaw box’s discussion of the settlement agreement later reached by Microsoft

and the U.S. government.

The Global Business Environment box that appears earlier in the chapter (at p. 1359)

reveals that Microsoft has faced similar legal action in the European Union, and has

been fined substantially for its repeated failures to comply with the European

Commission’s injunctions.

Additional Examples: Problem Cases #8 and #9. You may also want to discuss the

Supreme Court’s decision in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472

U.S. 585 (1985). There, the Court affirmed a Tenth Circuit holding that the

defendant, the operator of three of the four downhill ski slopes in Aspen, Colorado,

monopolized the market for downhill skiing services by denying the plaintiff (the

operator of the fourth slope) continued access to a multi-area ticket that allowed

skiers to ski on any of the slopes. Although it recognized that a firm with monopoly

power has no general duty to engage in joint marketing with a competitor, the Court

observed that “the absence of an unqualified duty to cooperate does not mean that

every time a firm declines to participate in a cooperative venture, that decision may

not have evidentiary significance, or may not give rise to liability in certain

circumstances.” Influential factors in the Court’s decision included the strong

consumer demand for the multi-area ticket and the adverse impact the denial of

access to it had upon consumers, the plaintiff’s loss of market share subsequent to the

denial of access, and the lack of any efficiency justification for the defendant’s

conduct.

3. Discuss attempted monopolization and what must be proven to establish a violation of

this portion of Section 2.

a. Note the importance of establishing the boundaries (geographic and product-related)

of the relevant market as to which attempted monopolization occurred. The

government’s failure to establish those boundaries was a key reason why the D.C.

Circuit, in the Microsoft case, reversed the district court’s holding that Microsoft had

attempted to monopolize the Web browser market. (See the text’s discussion, at p.

1366, of this aspect of Microsoft.) Additional example: Problem Case #11.

b. Note the Supreme Court’s skepticism in recent years regarding predatory pricing

claims–another indication of the impact of Chicago School ideas on the Court. You

may wish to refer at this point to Brooke Group Ltd. v. Brown & Williamson Tobacco

Corp., a Chapter 50 case that addresses predatory pricing claims under the Robinson-

Patman Act but contains discussion relevant to predatory pricing allegations under

Sherman Act Section 2. See also the Ethics in Action box that appears in the text at

p. 1367.

4. Discuss conspiracy to monopolize and the disagreement among the lower federal courts

concerning the elements of proof required for a violation of this portion of Section 2. The

Supreme Court precedent alluded to in the text’s discussion is Spectrum Sports v.

McQuillan, 506 U.S. 447 (U.S. Sup. Ct. 1993). Although Spectrum Sports was an

attempted monopolization case rather than a conspiracy case, it nonetheless would seem

to shed light on the proper resolution of this disagreement among the lower courts. An

approach that deemphasizes the need for proof of the relevant market may be vulnerable

to criticism, after Spectrum Sports (which appears as Problem Case #11).

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Chapter 49 – Antitrust: The Sherman Act

IV. RECOMMENDED REFERENCES:

A. PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW.

B. PHILLIP E. AREEDA & LOUIS KAPLOW, ANTITRUST ANALYSIS: PROBLEMS, TEXT, CASES.

C. HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY.

D. ROBERT BORK, THE ANTITRUST PARADOX.

E. Norman W. Hawker, Maximum Resale Price Maintenance Under the Rule of Reason, 51

BAYLOR L. REV. 441 (1999).

F. Herbert Hovenkamp, Market Power in Aftermarkets: Antitrust Policy and the Kodak Case, 40

UCLA L. REV. 1447 (1993).

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