978-0077733711 Chapter 50 Lecture Note Part 1

Unlock access to all the studying documents.

View Full Document

Chapter 50 – The Clayton Act, the Robinson–Patman Act, and Antitrust Exemptions and Immunities

CHAPTER 50

THE CLAYTON ACT, THE ROBINSON-PATMAN ACT,

AND ANTITRUST EXEMPTIONS AND IMMUNITIES

I. OBJECTIVES:

This chapter is designed to familiarize students with the Clayton and Robinson-Patman Acts, and

with the various statutory and judicially created exemptions and immunities from antitrust

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

A. Understand the origins of both the Clayton and Robinson-Patman Acts.

B. Be familiar with the elements of Sections 3, 7, and 8 of the Clayton Act, the types of business

behavior at which each section is aimed, and the manner in which each section is applied by

the courts.

C. Be familiar with the various forms of price discrimination prohibited by the

Robinson-Patman Act, the proof required to prove a violation in each instance, and the

defenses to liability available under each section of the Act.

D. Be able to identify and explain the various exemptions and immunities from antitrust liability,

including their scope and origins in history and policy.

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

II. ANSWERS TO INTRODUCTORY PROBLEM:

A. If XYZ charges different prices to different wholesale dealers, XYZ may be at risk of liability

under the Robinson-Patman Act, depending on whether all elements of a Robinson-Patman

claim can be made out. If XYZ charges a wholesale dealer less than XYZ charges a retail

dealer, XYZ may be able to point to the role of a functional discount as a way of avoiding

potential Robinson-Patman liability.

B. If XYZ is merely seeking to meet the competitor’s price, XYZ would be entitled to the

protection of the meeting competition defense against Robinson-Patman liability. The

meeting competition defense, however, would not entitle XYZ to beat the competitor’s price.

C. The merger could violate Clayton Act § 7, if its effect would be to substantially lessen

competition or tend to create a monopoly. The possible merger referred to in the question

would be classified as a horizontal merger.

D. The possible merger dealt with in this question would be classified as a vertical merger. It

could violate Clayton Act § 7, if its effect would be to substantially lessen competition or tend

to create a monopoly.

E. No. The Noerr–Pennington doctrine would protect XYZ against antitrust liability.

F. Questions may include ones dealing with good faith, disclosure, and manipulation of the

competitive process.

III. SUGGESTIONS FOR LECTURE PREPARATION:

A. Introduction

1. Discuss the Clayton Act’s origin as an enactment that resulted from Congressional

dissatisfaction with judicial applications of the Sherman Act.

50-1

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 50 – The Clayton Act, the Robinson–Patman Act, and Antitrust Exemptions and Immunities

2. Point out the Clayton Act’s preventive thrust. Note this thrust’s consequences in terms of

the level of proof required for a violation and the penalties that flow from a violation.

3. Note the shared responsibility of the Justice Department and the FTC in the enforcement

of the Clayton Act.

B. Clayton Act Section 3

1. Discuss the statutory language of Section 3. Note that it is considerably more detailed

than the language of Section 1 of the Sherman Act. Note the overlap between the two

statutes: tying contracts and exclusive dealing contracts are covered by both statutes, but

the Clayton Act has a narrower focus due to its being limited to agreements involving

commodities.

2. Discuss tying agreements and their treatment under Section 3. Note the controversy over

the required elements of proof necessary to establish tying liability under Section 3.

Emphasize, however, that the trend appears to be toward requiring the same elements in

Clayton Act-based tying contract cases as in Sherman Act-based tying contract cases. You

may wish to note that some lower courts have added an additional element of proof in

tying cases: proof that the party imposing the tie has an “economic interest” in the tied as

well as the tying item. See, e.g., Sandburg Village Condominium Ass’n v. First

Condominium Development Co., 758 F.2d 203 (7th Cir. 1985) (defendant condominium

developer could require purchasers of condominiums to use specific management service

in which defendant had no economic interest). Example: Problem Case #1.

a. Note also that the “new business” and “quality control/protection of goodwill”

defenses available under Section 1 of the Sherman Act are also available in Section 3

cases. Example: Problem Case #1. For classic decisions rejecting business

justification defenses because of the availability of less restrictive alternatives, see

International Salt Co. v. United States, 332 U.S. 392 (1947), and International

Business Machines Corp. v. United States, 298 U.S. 131 (1936).

3. Explain the nature of exclusive dealing arrangements. Discuss the apparent conflict

between the Supreme Court’s approaches to dealing with such arrangements, as set forth

in the Standard Oil and Tampa Electric cases. Note also that despite the Court’s holding

in Tampa Electric, longer-term contracts are generally more likely to be struck down than

are shorter-term contracts. This is because shorter-term contracts, all other things being

equal, necessarily involve less harm to competition.

Example: Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380 (7th Cir. 1984).

In Roland Machinery, the plaintiff (a construction equipment dealer of defendant

Dresser’s equipment) had been given a notice of termination by Dresser after the plaintiff

became a distributor of the equipment of a Dresser competitor. The plaintiff claimed that

Dresser had imposed an exclusive dealing agreement that violated the Clayton Act. The

district court granted the plaintiff a preliminary injunction to prevent termination pending

the outcome of its suit against Dresser. The Seventh Circuit reversed, noting that it was

doubtful whether the plaintiff could prove the existence of an agreement of an exclusive

dealing nature between it and Dresser. In addition, the Seventh Circuit concluded that

even if such an agreement existed, it would not unreasonably restrain trade and thus

would not violate Tampa Electric‘s qualitative (effectively rule of reason) standard. The

Seventh Circuit stressed that its “read” of the Supreme Court was that if the Court were

determining which approach–Standard Oil‘s or Tampa Electric‘s–to follow in evaluating

exclusive dealing arrangements, the Court would be much more likely to choose the

Tampa Electric approach.

50-2

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 50 – The Clayton Act, the Robinson–Patman Act, and Antitrust Exemptions and Immunities

C. Clayton Act Section 7

1. Discuss the statutory language of Section 7. As initially enacted by Congress, Section 7

was seriously flawed, because it applied only to stock acquisition mergers between or

among competitors. The current statutory language is the product of the Celler-Kefauver

Amendment of 1950, which broadened the statute’s scope to include asset acquisitions

and non-horizontal mergers.

a. Note that the plain anticoncentration thrust of Section 7 means that its future

evolution is uncertain, given recent years’ trend toward increased influence of

Chicago School theories on antitrust enforcement and the lesser importance those

theories attach to concentration. Recent administrations have given conflicting

indications as to whether they will slow this trend. As mentioned in the text at p.

1375, a moderately more aggressive regulatory posture regarding mergers seemed to

be present as of the time the 16th edition of the text went to press in 2014. Note the

recent examples in that discussion.

2. Note how important the relevant market determination is in a Section 7 case. Only those

mergers that may have an anticompetitive effect are outlawed by Section 7. Whether a

challenged merger is likely to have such an effect can only be determined after examining

the relevant market affected by the merger.

a. “Line of commerce” (relevant product market) determinations. Courts traditionally

have employed a functional interchangeability test similar to that employed under

Section 2 of the Sherman Act to make this determination. The federal government’s

merger guidelines (a recent joint effort of the Justice Department and the FTC) also

adopt this test by including within the relevant market products that consumers view

as good substitutes at prevailing prices. The guidelines also include products to

which a significant percentage of current consumers would shift in the event of a

small but significant and non-transitory increase in the price of the products of the

merged firms..

b. “Section of the country” (relevant geographic market) determinations. Discuss the

traditional test employed by courts to make this determination: where will the effects

of the merger on competition be “direct and immediate”? Note the potentially more

expansive nature of the federal merger guidelines’ approach, which adds the markets

of suppliers who would be induced to enter the market by a small but significant and

non-transitory increase in the price of the product in question. This approach

recognizes the fact that the isolation from competition that flows from a merger may

be only temporarily sustainable if the merged firms seek to exploit it by raising

prices.

3. Discuss the application of Section 7 to horizontal mergers. Stress that such mergers

traditionally have been subjected to the most rigorous scrutiny because of their obvious

impact on concentration in the relevant market. To determine the legality of such a

merger, courts look at the market share of the resulting firm. In the Philadelphia

National Bank case discussed in the text, the Court indicated that a horizontal merger

producing a firm with an “undue percentage share” of the relevant market would be

presumptively illegal absent convincing evidence that no anticompetitive effect would

result.

a. Discuss the other factors traditionally examined by the courts in horizontal merger

cases: a trend toward concentration in the relevant market; the competitive position

of the merging firms; a past history of acquisitions by the acquiring firm; and the

nature of the acquired firm.

50-3

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 50 – The Clayton Act, the Robinson–Patman Act, and Antitrust Exemptions and Immunities

b. The Warren Court (the Supreme Court from the mid-1950s to 1969) plainly agreed

with the anticoncentration thrust of Section 7, and sometimes struck down mergers

whose potential anticompetitive effect was dubious at best. For an example, see

United States v. Von’s Grocery Co., 384 U.S. 270 (1966), a case that may represent

the high-water mark of Section 7 enforcement.

c. Although the Burger Court (the Court from 1969 to 1986) did not expressly overrule

any of the Warren Court’s major merger decisions, United States v. General

Dynamics, 415 U.S. 486 (1974), signaled an intent to insist on more in the way of

proof of probable anticompetitive effect. Several lower court opinions that followed

evidenced a similarly increased tolerance for horizontal mergers. The Rehnquist

Court did not show any tendency to curb this trend, and it seems unlikely that the

current Roberts Court will. In Cargill, Inc. & Excel Corp. v. Monfort of Colorado,

Inc., 479 U.S. 104 (1986), the Court stopped short of holding that competitors lack

standing to challenge mergers under section 7. Instead, the Court held that the

plaintiff-competitor had failed to demonstrate that the proposed merger posed a threat

of antitrust injury, and that losses or damage flowing from increased competition do

not constitute such an injury. The dissenters, Justices Stevens and White, argued that

the practical effect of the Court’s decision was to prevent private parties from

obtaining injunctive relief against a horizontal merger unless they could demonstrate

that the actual or probable conduct of the merged firms would violate the Sherman

Act. They argued that by emphasizing the post-merger conduct of the merged firms,

the Court “reduces to virtual irrelevance the related but distinct issue of the legality of

the merger itself.”

d. Discuss the approach to horizontal mergers adopted by the federal government’s

merger guidelines.

1) Note the obvious need to examine the degree of concentration in the existing

market and the increase in concentration that would result from the proposed

merger.

2) Discuss the nonmarket share factors that the Justice Department and the FTC

will consider in deciding whether to challenge a merger: the existence of barriers

to the entry of new competitors into the relevant market; the prior conduct of the

merging firms; and the probable future competitive strength of the acquired firm

(is it a “failing company” or a firm with competitive disadvantages that are not

reflected in its present market share?). Note also the potential for federal

regulators to consider economic efficiency claims as justifications for a

horizontal merger. The Warren Court, in Philadelphia National Bank, clearly

rejected the notion that enhanced efficiency could ever justify a horizontal

merger that would result in a probable harm to competition. The merger

guidelines, however, do not foreclose such a conclusion by federal regulators

when they decide whether to challenge a particular merger.

ProMedica Health System, Inc. v. FTC (p. 1377): The U.S. Court of Appeals

upholds the FTC’s determination that a merger between ProMedica and one of its

rivals (St. Luke’s) likely would substantially lessen competition in the market for

acutee care services, and thus violated Section 7 of the Clayton Act. The Sixth

Circuit also upholds the FTC’s order that ProMedica divest itself of St. Luke’s.

Points for Discussion: Have the students identify the relevant geographic markets

and the relevant product markets. Walk the students through the analysis the

court uses in identifying (as did the FTC) the relevant product markets as (1)

primary services (except for OB) and secondary inpatient services, and (2) OB

50-4

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 50 – The Clayton Act, the Robinson–Patman Act, and Antitrust Exemptions and Immunities

services. Then, without moving too deeply into the HHI weeds, note the court’s

discussion of likely concentration effects the merger would have regarding the

relevant product markets. Ask the students how consumers would benefit from

this merger. (They wouldn’t, the court indicated—or at least ProMedica

furnished no evidence that consumers would benefit.) Note the role that credible

consumer-benefit arguments might have played if ProMedicaa had been able to

make them. Finally, note the deference the court paid to the FTC regarding the

remedy of divestiture. The court displayed the fairly standard disinclination to

second-guess the FTC’s determination regarding the appropriate remedy once the

agency has properly identified a statutory violation.

Federal Trade Commission v. Staples, Inc. (p. 1381): Holding that the FTC

demonstrated a likelihood of success on its Clayton Act Section 7 claim, the

United States District Court for the District of Columbia grants a preliminary

injunction against a planned merger between the nation’s largest office supply

superstore chains, Staples and Office Depot.

Points for Discussion: This case illustrates a number of issues that arise in

horizontal merger cases. Begin discussion with the relevant market issues. Ask

the class why the court concluded that the relevant product market was

consumable office supplies sold at office supply superstores, when consumable

office supplies were also sold at many other outlets such as Wal-Mart and the

like. (The opinion contains considerable discussion of evidence indicating that

Wal-Mart and other non-office supply superstores were not really important

competitors of office supply superstores–and thus did not meaningfully affect the

competitive decisions and behaviors of the superstores.) Ask the class why

Staples and Office Depot would have wanted the relevant market to be simply

consumable office supplies, regardless of which sorts of stores sold them.

(Because the combined Staples-Office Depot share of such a market would have

been much smaller. In that event, the planned merger would have had a

significantly better chance of clearing the antitrust hurdle posed by the Clayton

Act.)

With the relevant market defined as consumable office supplies sold by office

supply superstores in 42 metropolitan areas, note the huge market shares that a

combined Staples-Office Depot would have had (100 percent in 15 metropolitan

areas, and shares ranging from 45 percent to 94 percent in the other 27

metropolitan areas). Note the significance of the fact that only three genuine

office supply superstore chains existed at the time of the proposed merger

between Staples and Office Depot (Staples, Office Depot, and OfficeMax).

Although there had been numerous entrants into the office supply superstore field

in relatively recent years, nearly all had failed to survive. Additional new entrants

seemed unlikely to the court. Moreover, the possibility that entities such as Wal-

Mart might expand their office supply offerings seemed rather remote and

unlikely to have any meaningful competitive effect even if the possibility became

reality. Ask the class about the economic efficiencies/cost savings argument

raised by Staples and Office Depot, and why the court rejected it. (The court

thought the cost savings projections were unrealistically large.)

Additional Example: Problem Case #2.

4. Discuss the application of Section 7 to vertical mergers.

a. Note the various potential anticompetitive effects that have traditionally been thought

to be associated with some vertical mergers.

50-5

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 50 – The Clayton Act, the Robinson–Patman Act, and Antitrust Exemptions and Immunities

1) Vertical mergers may foreclose competitors from a share of the relevant market.

Point out that this harm is similar to, but more serious than, the threat to

competition posed by tying, reciprocal dealing, and exclusive dealing contracts.

Here, competitors are being excluded by a structural change in the market

resulting from the merger, rather than by a contractual arrangement that is subject

to change in the future.

2) Vertical mergers may result in increased barriers to entry for new competitors.

3) Vertical mergers may eliminate potential competition by depriving the relevant

market of the moderating influence of a potential entrant “waiting in the wings,”

or by obviating the benefits that would otherwise result from such a firm’s entry

via internal expansion or a “toehold” acquisition. A Chicago School critique of

this view of vertical mergers would argue that it may be more efficient

economically to enter a new market by acquiring an existing and well-established

competitor than by doing so via internal expansion or a toehold acquisition.

From a traditional antitrust policy standpoint, however, either of the latter two

strategies can result in a decrease in concentration in the relevant market that

would not result from the acquisition of a well-established existing competitor.

b. Discuss the courts’ traditional approach to judging the legality of a vertical merger:

look at the share of the relevant market foreclosed to competition; if this is more than

de minimis, then look at other economic and historical factors. For a classic example

of this approach, see Brown Shoe Co. v. United States, 370 U.S. 294 (1962). For an

example employing both foreclosure and elimination of potential competition

approaches, see Problem Case # 3.

c. Discuss the approach to vertical mergers adopted by the federal government’s merger

guidelines. Note that federal regulators are likely to be more inclined to consider

economic efficiency justifications in vertical merger cases than in horizontal merger

cases. In recent years, the Justice Department has tended to view elimination of

potential competition theories as a primary focus of vertical merger inquiries. The

Department will, however, consider other objective factors such as the degree of

concentration in the relevant market, the existence of barriers to entry, and the market

share of the acquired firm.

5. Discuss the application of Section 7 to conglomerate mergers.

a. Define conglomerate mergers and identify the two major types of such mergers:

product extension mergers and market extension mergers.

b. You may wish to discuss some of the reasons why firms decide to pursue

conglomerate mergers:

1) diversification of product lines.

2) enhancement of corporate growth image.

3) elimination of start-up costs (it may be cheaper to acquire needed technology,

diversify operations, or enter new geographic markets by merger than by internal

development or expansion).

c. Supporters of conglomerate mergers argue that they do not increase concentration

and that they may enhance efficiency by means of the threat they represent to

inefficient corporate managers, who may lose their jobs if their laggard performance

depresses stock prices and encourages a takeover.

d. Critics of conglomerate mergers argue that they:

1) Increase aggregate concentration in the economy, resulting in a decline in the

number of independent centers of business decisionmaking. This, they argue,

50-6

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 50 – The Clayton Act, the Robinson–Patman Act, and Antitrust Exemptions and Immunities

may produce inefficiencies due to longer chains of decisionmaking, the exodus of

trained managers from the acquired firm because of their resentment of their loss

of independence, and the increased chance of “ripple effects” throughout the

economy as a result of the bad decisions of a few major firms.

2) May reduce efficiency by diverting management attention away from corporate

operations in favor of strategies designed to avoid hostile takeovers (e.g., “going

private” or making acquisitions designed to make them less attractive to a

prospective suitor).

e. However one comes out on these arguments, there is widespread sentiment that

Section 7 was not designed to deal with conglomerate mergers and that new

legislation is necessary if conglomerate merger activity is a legitimate focus of public

concern.

f. Discuss the theories that courts traditionally have used to attack conglomerate

mergers under Section 7. Note that some conglomerate mergers may not be covered

by any of these theories.

1) Potential reciprocity. The seminal case on this point is FTC v. Consolidated

Foods Corp., 380 U.S. 592 (1965), the first clear conglomerate merger case

decided by the Supreme Court.

2) Elimination of potential competition. This theory was adopted by the Court in

FTC v. Procter & Gamble Co., 386 U.S. 568 (1967). Note that the Court’s later

decisions in the Falstaff and Marine Bancorporation cases (cited in the text)

made these theories more difficult to advance.

3) Entrenchment (or “Unfair Advantage”). This theory was also adopted in Procter

& Gamble. Note that it would not be applicable to a “toehold” acquisition.

g. Note that in recent years, the Justice Department has focused on elimination of

potential competition theories as the primary modes of analysis in conglomerate

merger cases. This stance, when combined with the difficult burdens of proof the

Supreme Court has required in such cases, signals an apparent lessening of

governmental concern over the economic effects of conglomerate mergers. Note that

the lack of recent pronouncements by the Court on conglomerate merger issues

leaves us somewhat in the dark about the Court’s current thinking on these issues.

One suspects, however, that the Court, the Justice Department, and the FTC may be

on basically the same track.

h. The Global Business environment box at p. 1386 of the text discusses the European

Union’s approach to merger issues.

50-7

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.