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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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