978-0078023866 Chapter 10 Internet Exercise and Supplements Part 1

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Chapter 10 – Antitrust Law—Restraints of Trade

Internet Exercise and Supplements

Answers to Internet Exercise (p. 463)

The following answers are found at

http://www.smallbusinessnotes.com/managing-your-business/frequently-asked-questions.html]

1. The question is whether there was agreement between the manufacturer and the dealers, which

would be a violation, as opposed to the manufacturer simply establishing a policy that its dealers

2. This would be illegal if the refusal was based on an agreement between the seller and the

3. If the wholesale price differences between the writer and their competitors are not justified on the

Student Project

1. Find a website illustrating a topic discussed in this chapter. Explain precisely the restraint of trade

Answers

Answers to ‘Practicing Ethics: More “Pay” for College Athletes?’ Questions (p.

435)

1. The case was settled in early 2008, subject to approval by a federal district court. Ten million

dollars from the NCAA in supplemental money will be available to athletes participating in Division

2. Plaintiff Athletes: Fairness from a free market perspective requires all to be able to market their

talents to the highest bidder. The athletes pointed to colleges bidding freely, sometimes in excess

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Chapter 10 – Antitrust Law—Restraints of Trade

a. The Justice Department thinks the scholarship policy might violate Sherman I as a horizontal

restraint of trade. Are the NCAA member schools in effect conspiring among themselves to

b. The NCAA says the scholarships are a “merit” award and annual review allows directing the

4. Antitrust Today elaborated: “As in other Section I suits where ‘rule of reason’ analysis is used,

NCAA’s rules tend to be upheld when they relate most closely to legitimate goals apart from

Answers to ‘Poaching Employees’ Questions (p 440)

1. High-tech companies are particular about employee poaching because employees may be privy

to some unique technology offered by the company, the knowledge of which may put the

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Chapter 10 – Antitrust Law—Restraints of Trade

2. The plaintiffs would raise antitrust claims like violation of Section 1 of the Sherman Act by entering

3. The plaintiffs may ask for a certain amount (even millions) for compensation of the damages. The

Answers to ‘Practicing Ethics: Antitrust Law and the Price of Beer’ Questions

(p. 442)

1. This is an opinion-based question. Students’ answers may vary depending on different

perspectives. From an egoist point of view, an agreement entered among competitors should be

2. This case reached the Wisconsin Supreme Court and resulted in a 30-page opinion, suggesting

that the Wisconsin judicial system found issues of considerable merit. Those issues, however,

3. In the long term it is expected of all consumers to gradually learn more and, in effect, “get

smarter” about their consumption decisions. The market is an effective disciplinarian and

a. Apparently, the ban had very little effect. A University of Wisconsin press release cited in the

Supreme Court opinion indicated that “downtown disorderly conduct violations increased 38

b. The plaintiffs called the ban a “naked, per se price-fixing conspiracy.” The defendants

agreed, in effect, to raise prices thereby hoping to reduce consumption. Agreeing to eliminate

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Chapter 10 – Antitrust Law—Restraints of Trade

Answers to ‘Clarett Boycotted by NFL?’ Questions (p. 447)

1. and 2. are discussion based questions. Clarett’s petition for review by the Supreme Court was

denied. 125 S. Ct. 1728 (2005).

a. Cohen reportedly said: “There’s something wrong with keeping kids, who are more likely to

be African-American than not, from playing professional basketball and football when they

b. The rule is arguably a restraint of trade in the form of price fixing and group boycotting, but

c. This is an opinion-based question. Students’ answers may vary. In addition to the arguments

noted in 3.a., Cohen said that young players clearly have the ability to play successfully in

Answers to ‘Refusal to Deal/Group Boycotts’ Questions (p. 447)

1. No, said the district court. Defendants, with 15% of the referral market, lacked the market power

2. The Supreme Court reversed in favor of NYNEX. It held the per se group boycott rule does not

apply to a single buyer’s decision to buy from one seller rather than another. Further, this case

Answer to ‘Resale Price Maintenance’ Question (p. 452)

1. Leegin seems to have had the immediate, predictable effect of raising some prices with one

expert saying that 5,000 companies implemented MAP policies after the decision. (Joseph

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Chapter 10 – Antitrust Law—Restraints of Trade

Answers to ‘Cable/Satellite TV Bundling’ Questions (p. 454)

1. Although not definitively addressed in the opinion, the plaintiffs apparently took the conventional

position that the premium channels constitute the tying product while the less desirable channels

are the tied products. The plaintiffs argued that the defendants employ “the coercive power of

2. The defendants won this case because, according to the court’s reasoning, the plaintiffs had been

unable to show harm to the competitive process as required in Rule of Reason tying cases. The

Case and Answers

Romero and Ferree v. Philip Morris, et.al 2010 N.M. LEXIS 370 (N.M. S.Ct) (p.

443)

Syllabus

Plaintiffs are “[p]ersons in the State of New Mexico… who purchased cigarettes indirectly from

Defendants, or any parent, subsidiary or affiliate thereof, at any time from November 1, 1993 to the

date of the filing of this action [April 10, 2000].” The original Defendants were Philip Morris, R.J.

Reynolds (“RJR”), Brown & Williamson (“B&W”), Lorillard, and Liggett.

Philip Morris had been steadily losing market share to discount and deep discount cigarettes since

1980, when Liggett pioneered the development of generic cigarettes. In an attempt to regain market

share, Philip Morris announced Marlboro Friday on April 2, 1993, “a nationwide promotion on Marlboro

that reduced prices at retail by approximately 20 percent, an average of 40[cents] per pack.” In

response, RJR and B&W instituted similar promotions. As a part of its strategy, Morris announces

similar reduction on all premium brands, discount brands, and deep discount brands. RJR and B&W

also followed the same. They later on began to increase their wholesale list prices on premium and

discount cigarettes in near lock-step fashion.

Even with these increases, wholesale list prices did not exceed pre-Marlboro Friday until August 1998.

Defendants then competed regarding promotions resulting in a direct reduction of the retail prices of

cigarettes. Plaintiffs filed this class action lawsuit alleging violations of New Mexico antitrust and

consumer protection laws. In granting the motion for summary judgment for the defendants, the district

court held that Plaintiffs had met their initial burden of showing a pattern of parallel behavior, but failed

to meet their second burden of showing the existence of plus factors that would tend to exclude the

possibility that the alleged conspirators acted independently.

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Chapter 10 – Antitrust Law—Restraints of Trade

In reviewing Plaintiffs’ plus factors, the district court properly granted summary judgment. The

judgment being reversed.

Answers to ‘Romero and Ferree v. Philip Morris, et.al’ Questions (p. 445)

a. The five dominant tobacco firms include: Philip Morris, RJR, B & W, Lorillard, and Liggett. In

the tobacco industry, the five companies manufacture more than 97% of the cigarettes sold

b. The Court of Appeals ruled in favor of summary judgment for Lorillard and Liggett because

c. Yes, parallel pricing in and of itself does not violate the antitrust laws. It often constitutes a

rational strategy of following a pricing leader.

a. Federal court decisions have required evidence tending to exclude the possibility of mere

parallel behavior. In looking at the facts, the Court concluded that price increases were just

b. Broadly, the plus factors were rejected because they did not convincingly exclude the

3. The tobacco companies won this case because (1) “fierce retail competition… undermined the

plausibility of a price-fixing agreement” and (2) “wholesale price remained lower than

4. Perhaps not. They could, of course, walk across the street and lawfully achieve the same result

on their own. The majority in United States v. Container Corporation of America, 393 U.S. 333

(1969), arguably articulated a per se standard; but in his concurring opinion, Justice Fortas said,

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Chapter 10 – Antitrust Law—Restraints of Trade

a. Warner and Polygram were charged with violating Section 5 of the Federal Trade

Commission Act which in this case was treated as a violation of Section One of the Sherman

b. Free rider definition: A firm or individual benefits from the work of another without paying; the

c. Violation of Section 5 of the Federal Trade Commission Act. Employing the Sherman Act

analysis, the Circuit Court found that the agreement was inherently suspect given its price

a. No. A contract, combination, or conspiracy must be proven.

b. Federal law would not apply because the firms do not substantially affect interstate

c. The defense would succeed if there is no evidence of price fixing and some aspect of

Leegin Creative Leather Products, Inc. v. PSKS, dba Kay’s Kloset, 127 S.Ct.

2705 (2007) (p. 449)

Syllabus

Leegin, a manufacturer of “Brighton” products, instituted a retail pricing and promotion policy to refuse

to sell to retailers that discounted its goods below suggested prices. Kay’s Kloset (PSKS), a women’s

apparel store and seller of Brighton products, refused to change its discounted prices, and Leegin

stopped selling to the store. Kay’s Kloset sued Leegin for violation of antitrust law by entering into

agreements with retailers to sell Brighton products at prices it fixed. The federal district court jury

agreed and awarded $1.2 million to PSKS. The Fifth Circuit Court of Appeals affirmed. The United

States Supreme Court overruled the per se rule and determined that vertical price restraints were to

be judged using the rule of reason. The rule of reason was the appropriate standard to judge vertical

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Chapter 10 – Antitrust Law—Restraints of Trade

price restraints and vertical minimum resale price maintenance agreements because, despite the risk

anticompetitive use, resale price maintenance cannot be said to always or almost always restrict

competition. The Court reversed the appellate court’s judgment.

Answers to ‘Leegin Creative Leather Products, Inc. v. PSKS, dba Kay’s Kloset’ Questions (p.

451)

a. The following considerations were cited by the court—stimulate interbrand competition by

b. The potential anticompetitive considerations cited by court include—may lead to price fixing

by facilitating a manufacturer cartel; may also discourage manufacturers from cutting prices

2. Leegin holds that resale price maintenance cases will be decided by the rule of reason standard

3. Absent market power, a retailer who objects to a resale price maintenance agreement

Rick-Mik Enterprises, Inc. v. Equilon Enterprises, LLC, 532 F.3d 963 (9th Cir.

2008) (p. 454)

Syllabus

Equilon Enterprises, LLC (“Equilon”) does business as Shell Oil Products. Equilon‘s standard franchise

agreement requires Shell and Texaco gasoline stations to use Equilon to process credit-card

transactions. In addition to payment for sales of petroleum products, Equilon allegedly gets transaction

fees or another type of “kickback” from unidentified banks that process the transactions, or both.

Rick-Mik Enterprises, Inc., Mike M. Madani, and Alfred Buczkowski (collectively “Rick-Mik”) are

Equilon franchisees who allege that Equilon violated antitrust laws by illegally tying two distinct

products (the franchises and the credit-card processing services). Rick-Mik argued that franchisees

could pay lower transaction fees from others for credit-card processing. The district court dismissed

the antitrust and related state law counts from Rick-Mik’s complaint. The Ninth Circuit Court of Appeals

affirmed, holding among other things that (1) Rick-Mik did not allege market power in the relevant

market; (2) the credit-card processing services are not a product distinct from the franchise itself.

Answers to ‘Rick-Mik’ Questions, Inc. v. Equilon Enterprises’ Questions (p. 456)

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Chapter 10 – Antitrust Law—Restraints of Trade

a. The tying product in this case would be gasoline station franchises and the tied product is

the credit card processing services.

b. The plaintiff described how Equilon was large with 13% of the market and 9,000 retail

2. The claimed harm to Rik-Mik came primarily in being deprived of the opportunity to contract with

3. Proof of economic power must be derived, the court said, from the market, not from a contract.

4. The defendants won the case because: (a) The plaintiff provided insufficient proof of market

power in the tying product. The plaintiff failed to show market power in the franchise market by

5. The California federal district court dismissed the tying claims in October 2009 saying essentially

that “[t]he increased convenience of using the [iPod and iTunes music] together due to

a. No, the packaging does not constitute a tying arrangement.

b. It is lawful, unless the plaintiffs are able to prove that network has a strong market power and

inhibit healthy competition at the same time.

7. The plaintiffs who were a group of independent audio dealers argued that since Chrysler includes

Though the plaintiffs tried to prove that Chrysler’s new conditions seemed to affect their business,

they, however, failed to bring in sufficient evidence on the same. Because there isn’t any strong

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Chapter 10 – Antitrust Law—Restraints of Trade

Drug Mart Pharmacy Corp. v. American Home Products, U.S. District Court for

the Eastern District of New York, 2012 U.S. Dist. LEXIS 115882 (p. 459)

Syllabus

The plaintiffs are a number of individually-owned retail pharmacies. Plaintiffs allege that defendants,

five manufacturers of brand name prescription drugs (“BNPDs”), offered discounts and rebates to

plaintiffs’ competitors but not to plaintiffs, and that this constitutes price discrimination in violation of the

Robinson-Patman Act. After Judge Glasser dismissed the claims of the designated parties,

approximately 3,700 individual retail pharmacy plaintiffs remained. Confronted with Judge Glasser’s

decision these remaining plaintiffs devised a plan to gather evidence in discovery that might show “that

specific plaintiff pharmacies lost sales of BNPDs manufactured by defendants to any specific favored

purchaser.”

No matter how analyzed, the matching process identified only a de minimis number of lost customers

and transactions. A Robinson-Patman claim requires a showing of substantial competitive injury and

that the de minimis sales identified by the matching process are insufficient to establish such an injury.

A plaintiff seeking to recover damages on a Robinson-Patman claim must establish an antitrust injury.

Because they are essentially unable to match up a significant number of the customers they lost with

those the favored purchasers gained, plaintiffs have failed to demonstrate antitrust injury. Defendants’

motion for summary judgment is granted.

Answers to ‘Drug Mart Pharmacy Corp. v. American Home Products’ Questions (p. 460)

1. The retail pharmacies lost this case because a Robinson-Patman claim requires a showing of

a. This is an opinion-based question. Students’ answers may vary according to different

b. No, the loss does not constitute to an antitrust wrong unless plaintiffs can claim an injury

under the Robinson-Patman Act.

3. In enacting Robinson-Patman, “Congress sought to target the perceived harm to competition

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Chapter 10 – Antitrust Law—Restraints of Trade

4. Texaco argues that though different prices were arranged, it does not “discriminate in price” within

the meaning explained in the Act. They explained that Gull and Dompier were wholesalers and

5. Utah Pie claimed that Carnation, Pet, and Continental were charged under the violation of §§ 1

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