Chapter 16 – Regulating Competition—Antitrust Laws
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Chapter 16
Regulating Competition—Antitrust Laws
Learning Objectives
This chapter introduces the student to antitrust law. The purpose of the chapter is to familiarize
the student with basic antitrust laws, the Sherman Act, the Clayton Act, and the Federal Trade
Commission Act. Students should understand that these antitrust laws were enacted to make the
U.S.’s competitive economic system work. Students will discover why laws approximately 100
years old are still relevant in today’s market. The antitrust sanctions will be emphasized as well
as when antitrust laws are not applicable to protect certain business endeavors. Students should
become familiar with the fundamental aspects of the Sherman Act, its exemptions, and typical
violations of this act. Furthermore, students should gain an appreciation of how Congress and the
courts attempt to close loopholes left by the Sherman Act. This understanding is gained through
the study the Federal Trade Commission activities along with the study of the Clayton Act and
the FTC Act.
References
Ewing, K.P., Competition Rules for the 21st Century: Principles from America’s
Experience. Kluwer Law International (2003)
Gordon, R.L., Antitrust Abuse in the New Economy: The Microsoft Case. Edward Elgar
(2002).
Greider, K., The Big Fix: How the Pharmaceutical Industry Rips Off American Consumers.
Public Affairs (2003).
Haas-Wilson, D., Managed Care and Monopoly Power: The Antitrust Challenge. Howard
University Press (2003).
4th edition. West Publishing (2006).
Holmes, W.C., Antitrust Law Handbook, 2006 Edition. West Publishing (2006).
Hovenkamp, H., The Antitrust Enterprise: Principle and Execution. Harvard University
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G.P. Putnam’s Sons (2004).
Press (2005).
Wells, W.C., Antitrust and the Formation of the Postwar World. Columbia University
Press (2002).
Teaching Outline
I. Introduction
A. Historical Development (LO 16-1)
Emphasize:
The definition of a trust.
How the trust device was used to form some of the first monopolies. Explain that trusts
still have many legal uses such as in estate planning.
The meaning of the term “antitrust law.”
The reasons for the adoption of the Sherman Act.
The reasons for the adoption of the Clayton Act.
The reasons for the adoption of the Federal Trade Commission Act.
That the Justice Department and the FTC enforce the antitrust laws on behalf of
Validity of the assumption made in defining “workable competition.”
II. The Sherman Act, Section 1—Agreements in Restraint of Trade (LO 16-2)
Emphasize:
Section 1 of the Sherman Act and what it states.
The restraints in trade imposed by section 1.
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The concept of price fixing.
Figure 16.1—”Horizontal Restraints”
Figure 16.2—”Vertical Restraints”
The Rule of Reason
Emphasize:
The provision that is stated in Sherman Act Section 1.
That the United States Supreme Court has held that Congress did not really mean it
when it used the word every.
How the rule of reason was announced in Standard Oil Co. v. United States case.
Per Se Illegality
Emphasize:
How agreements falling within the per se category represents cases of clearly
wrongful conduct.
How courts distinguish between rule of reason and per se illegality.
That Sherman Act cases must satisfy an interstate commerce element.
Case for Discussion:
1. A physician claimed that a hospital and its medical staff conspired to misuse a
congressionally regulated peer review process to exclude him from the market for
ophthalmological services in Los Angeles.
Issue: Is there a sufficient nexus with interstate commerce to support federal
jurisdiction under Section 1 of the Sherman Act?
may have a general impact on the market. Summit Health Ltd. v. Pinhas, 111 S.Ct.
1842 (1991).
Additional Matter for Discussion:
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in a private enforcement action, the plaintiff can recover only actual damages—triple
damages are not allowed.
A. Horizontal Price Fixing
Describe:
The concept of horizontal price fixing and what it involves.
The per se rule makes price fixing illegal whether the parties to it have control of the
market or not and whether or not they are trying to raise or lower the market price.
That even the fixing of reasonable prices is illegal. It is illegal to agree to: raise or lower
prices; charge a fixed price; not charge above a stated price; or limit supply.
Table 16.1—“Examples of Horizontal Price-fixing Cases”
Cases for Discussion:
1. Plaintiffs, beer retailers, brought suit alleging that their wholesalers had engaged in an
unlawful conspiracy to restrain trade by refusing to sell beer unless plaintiffs paid cash
in advance or at the time of the delivery. The wholesalers had an agreement that none of
them would grant short-term credit although such credit had been extended in the past.
Issue: Is the agreement illegal per se?
2. The National Society of Professional Engineers adopted a rule in its code of ethics
which prohibited competitive bidding by members. This was done to minimize the risk
that competition would result in inferior engineering work which would endanger the
public safety. The United States brought a civil suit to nullify the canon of ethics.
Issue: Is the canon a violation of Section 1 of the Sherman Act?
assault on the basic policy of the Sherman Act. Even assuming occasional exceptions to
the presumed consequences of competition, the statutory policy precludes inquiry into
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the question of whether competition is good or bad. National Society of Professional
Engineers v. U.S., 98 S.Ct. 1355 (1978).
3. Plaintiffs contracted to buy a home in Fairfax County, Virginia. They were unsuccessful
in finding a lawyer who would perform the required title examination for less than the
fee prescribed in a minimum-fee schedule published by the Fairfax County Bar
Association and enforced by the Virginia State Bar. They brought a class action suit
seeking injunctive relief and damages alleging that the minimum-fee schedule
constituted price fixing, in violation of Section 1 of the Sherman Act.
Issue: Are minimum-fee schedules subject to Section 1 of the Sherman Act?
shield that allows it to foster anticompetitive practices for the benefit of its members.
Goldfarb Et Ux v. Virginia State Bar, Et Al., 95 S.Ct. 2004 (1975).
B. Vertical Price Fixing
Emphasize:
The terms vertical price fixing or resale price maintenance.
Why retailers resort to such efforts.
That although resale price-maintenance schemes can run afoul of the Sherman Act, it is
possible for a manufacturer to control the resale price of its products.
The Colgate Doctrine.
Cases for Discussion:
1. Barkat U. Khan and his corporation entered into an agreement with State Oil Company
to lease and operate a gas station and convenience store owned by State Oil. The
agreement provided that Khan would obtain the station’s gasoline supply from State Oil
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terminate the agreement and commenced a state court proceeding to evict. Khan sued
State Oil claiming that State Oil has engaged in price fixing in violation of § 1 of the
Sherman Act by preventing Khan from raising or lowering retail gas prices. The District
Court found that the allegations in the complaint did not state a per se violation of the
Sherman Act because they did not establish the sort of “manifestly anticompetitive
implications or pernicious effect on competition” that would justify per se prohibition of
State Oil’s conduct. The Court of Appeals reversed.
Issue: What is the appropriate standard of antitrust analysis when judging the legality of
vertical maximum price fixing?
118 S. Ct. 275, (1997).
2. Monsanto manufactures agricultural herbicides. Spray-Rite was an authorized Monsanto
distributor. Monsanto canceled Spray-Rite’s distributorship after receiving complaints
from other distributors that Spray-Rite was cutting prices. Spray-Rite sued for triple
damages. Monsanto contended that the distributorship was terminated because Spray–
Rite had failed to hire trained salespeople and promote sales adequately, not because of
the complaints.
Issue: Is proof of termination following a competitor’s complaint enough to make the
conduct illegal per se?
complaints is needed to prove price-fixing. Note: The evidence here was sufficient to
prove the violation. Monsanto Co. v. Spray–Rite Service Corp., 104 S.Ct. 1464 (1984).
3. Union Oil requires lessees of its retail service stations to sign “consignment” agreements
which allow Union Oil to set the prices at which the retailer sells gasoline. The
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agreement provides that title to the gas remain in Union Oil until sold by the retailer and
that all property taxes be paid by Union Oil. Retailers were then to be paid by a
commission on sales made and had to pay all the costs of operating the station.
Simpson, a retailer of Union Oil gasoline, sold gasoline at 2 cents below the price set by
Union, and because of this, Union refused to renew his lease. Simpson sued for triple
damages claiming the consignment contract violated the Sherman Act.
Issue: Should Simpson recover?
setting prices. Their return is affected by the rise and fall of market price. These
agreements allow Union Oil to impose noncompetitive prices on retailers by the use of
coercive consignments. Simpson v. Union Oil Co., 377 U.S. 13 (1964).
4. Parke Davis announced that it would sell its products only to those wholesalers and
retailers who observed minimum resale prices suggested by Parke Davis. To promote
compliance, Parke Davis refused to sell to any wholesaler who supplied its products to
any retailer who did not observe the suggested minimum retail prices. Several retailers
continued to sell Parke Davis vitamins at a discount, and when their names were
furnished to the wholesalers, both Parke Davis and the wholesalers refused to fill their
orders for any of the manufacturer’s products.
Issue: Were these actions a violation of the Sherman Act?
U.S. 29 (1960).
C. Indirect Price Fixing
Emphasize:
The indirect attempts to fix prices by businesspersons.
Case for Discussion:
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1. The only two daily newspapers of general circulation in Tucson, Arizona, the Citizen
and the Star, signed a joint operating agreement. Under this agreement, each paper
retained its own news and editorial department and its corporate identity. Tucson News,
Inc. (TNI), owned equally by both parties, was formed to manage all other departments
for each paper. The agreement eliminated competition between the parties through three
control devices: (a) price-fixing—distribution, sales and placement of advertising were
all handled by TNI, while subscription and advertising rates were set jointly; (b) profit
pooling—all profits were commingled and distributed pursuant to an agreed ratio; and
(c) market control—neither paper nor its stockholders could engage in the other
competing business, that is, publishing, in the Tucson metropolitan area.
Issue: Is this arrangement illegal?
Co. et al. v. United States, 89 S.Ct. 927 (1969).
D. Territorial Agreements
Emphasize:
The reasons why companies competing with each other enter into a horizontal territorial
agreement.
That this is illegal under the Sherman Act.
A vertical territorial agreement.
Horizontal territorial agreements are illegal per se; vertical territorial restrictions are
subject to the rule of reason.
Case for Discussion:
1. A manufacturer of television sets marketed its products through a retail franchise system
that required franchisees to sell its products only from the locations at which it was
franchised. A disenchanted franchisee claimed that defendant had violated Section 1 of
the Sherman Act by entering into and enforcing these agreements.
Issue: Are vertical territorial restrictions per se violations?
Chapter 16 – Regulating Competition—Antitrust Laws
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as to the harm, if any, on competition are required. Continental T.V., Inc. v. GTE
Sylvania, Inc., 97 S.Ct. 2549 (1977).
E. Concerted Activities
Emphasize:
The meaning of the term “concerted activity.”
That concerted activities may be beneficial to society even if competition is reduced.
Some medical research is an example.
Other examples of the benefits of concerted activity.
The National Cooperative Research Act, 1984.
The National Cooperative Production Amendments Act does not protect joint
production ventures from all possibilities of antitrust violations.
Case 16.2—“American Needle, Inc. v. National Football League”
Sidebar 16.1—“Basic Provisions of National Cooperative Production Amendment Act”
Additional Matters for Discussion:
The National Cooperative Research Act.
II. The Sherman Act, Section 2—Monopolization (LO 16-3)
Explain:
The purpose of Sherman Act, Section 2 in regulating monopoly.
The two ways in which a plaintiff can prove that a defendant violated the law.
The concept of predatory behavior of organizations.
The concept of predatory pricing.
Case 16.3—“Kolon Industries Inc. V. E.I. DuPont de Nemours & Co.”
Sidebar 16.3—“Proving an Illegal Monopoly Exists”
Case for Discussion:
1. Through a series of relationships and transactions, Spectrum Sports, Inc. became the
national distributor for sorbothane (a patented elastic polymer) in athletic shoes. Sorboturf,
Inc., which had been a distributor of sorbothane, failed as a business. Sorboturf, Inc. sued
Spectrum Sports, Inc. for violating § 2 of the Sherman Act. The jury found that Spectrum
Sports, Inc. was “monopolizing, attempting to monopolize, and/or conspiring to
monopolize.” The court of appeals upheld the jury’s verdict ($1,743,000 to be tripled plus
almost $100,000 in attorney’s fee) even though there was no specific finding by the jury as
to Spectrum’s precise violation.
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Issue: Is a jury required to focus on the alleged violator’s intent to monopolize a particular
(relevant) market?
Additional Matters for Discussion:
The concept of predatory conduct.
Sidebar 16.1—“Example of Monopoly”
A. Analysis in Antitrust Law
Emphasize:
The rule of reason and the concept of per se illegality. Note that if an activity is per se
illegal, all that is required is proof of the activity. Proof of anticompetitive effect is not
required.
Case for Discussion:
1. Through its Code of Ethics and local dental societies, the California Dental Association,
a nonprofit organization, attempted to limit the amount of advertising dentists could do.
The Federal Trade Commission alleged that the CDA unreasonably restricted
advertising of discounted fees and of the quality of dental services. The FTC found the
CDA’s restrictions were an unreasonable restraint of trade under the Sherman Act (and a
violation of § 5 of the FTC Act). The FTC used an abbreviated rule-of-reason (quick-
look) analysis. The 9th Circuit affirmed the FTC’s findings and conclusions.
Issue: What type of antitrust analysis is appropriate in this case?
look analysis used by the FTC is not sufficient. California Dental Association v.
Federal Trade Commission, 119 S.Ct. 1604 (1999).
III. Sherman Act Sanctions and Exceptions (LO 16-4)
A. Sanctions