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CHAPTER 10
Antitrust Law—Restraints of Trade
Chapter Goals
If instructors’ experiences correspond with the authors, generating student interest in antitrust law is a
daunting task indeed. The numbers are so big, and the scenes of action are so remote from the students'
daily lives. Dangerously simplified, people continue to face the tired, but timeless, question: Is bigness
bad? Or contrariwise, is bigness necessary for commercial success in the global market? Few questions
are more important to the study of business and to the development of good citizenship. Students must
understand that federal antitrust policy may have an enormous impact upon the total character of life in
the U.S. Students should come to appreciate the role of antitrust law as a governor of sorts of American
commercial life. Since commercial life dictates and/or reflects so much of the nature of individuals lives
generally, antitrust law should be understood for what it is—not merely turgid, arcane, applied economics,
but a primary lever of national social policy.
Chapters 10 and 11 should primarily serve as vehicles for exploring the large policy questions raised by
the continued emergence of a global market and other governments’ antitrust positions. Of course, those
positions are only a present-moment manifestation of the many decades of debate about how much
regulation is necessary and desirable in America.
Chapter Learning Objectives
After completing this chapter, students will be able to:
1. Recognize the changing goals of antitrust law.
2. Describe the key antitrust statutes.
3. Explain the meaning of “horizontal restraints of trade.”
4. Analyze when an unlawful price-fixing arrangement has been created.
5. Identify a group boycott.
6. Define resale price maintenance.
7. Explain the requirements for establishing an unlawful tying arrangement.
8. Describe the commercial advantages and disadvantages of exclusive dealing.
9. Contrast price discrimination and predatory pricing.
10. Explain how predatory pricing may be proved.
Chapter Outline
Practicing Ethics: More “Pay” For College Athletes?
Four former college athletes representing a class of more than 20,000 former college athletes sued the
National Collegiate Athletic Association (NCAA) seeking to change NCAA limits on the amount of aid that
student athletes can be granted. The athletes claimed they were denied approximately $2,500 annually
because their universities were not allowed, under NCAA rules, to pay the “full cost of attendance,” a
package that would include money for insurance, laundry, school supplies, telephone, travel, and so on, in
addition to the “full ride.”
The class action involved all those playing “major college football” and “major college basketball” since
2002. Total damages were estimated at several hundred million dollars. The lawsuit claimed that the
NCAA rules constituted a “contract, combination, and conspiracy to fix the amount of financial assistance
available to student athletes,” thus restraining trade in violation of section 1 of the Sherman Antitrust Act.
For more on this case, see www.studentathleteclassaction.com
Sources: White, Polak, Harris and Craig v. National Collegiate Athletic Association, Case No. CV 06-0999
RGK (MANx), (U.S. District Court Central District of California, Western Division). Second Amended
Complaint for Violation of Section 1 of the Sherman Act, 15 U.S.C. Section 1, p. 25, lines 3-5; and
“Settlement Raises Questions for NCAA, Inside Higher Ed, February 4, 2008
[www.insidehighered.com/news/2008/02/04/ncaa].
Part One—The Foundations of Antitrust Law
I. Antitrust—Early Goals
Antitrust is a product of changing political and economic tides. Historically, antitrust law sought to allow
every American, at least in theory, the opportunity to reach the top. More specifically, antitrust advocates
were concerned about the following issues:
The preservation of competition—Antitrust law was designed to provide free, open markets
resulting in enhanced efficiency and increased consumer welfare.
The preservation of democracy—Many businesses in competition meant that none of them could
corner economic, political, or social power.
The preservation of small businesses, or more generally, the preservation of the American
Dream—Antitrust was designed to preserve the opportunity for ordinary Americans to compete with
the giants.
An expression of political radicalism—At least for a segment of society, antitrust laws were
meant to be tools for reshaping America to meet the needs of all people, thus counteracting, to
some degree, the power of big business. [For professors’ analyses of recent antitrust
developments, see http://lawprofessors.typepad.com/antitrustprof_blog]
A. Antitrust: Balanced Enforcement?
Campaigning in 2008 for his first term, Barack Obama promised to “reinvigorate antitrust
enforcement.” The first-term Obama antitrust authorities did increase enforcement actions including
challenges to several high-profile mergers. In particular, the Justice Department’s Antitrust Division
sued to block AT&T’s proposed acquisition of T-Mobile, a deal the two companies subsequently
abandoned.
On the other hand, critics were incensed by the Federal Trade Commission’s 2013 closure of its
19-month inquiry into various Google business practices by deciding not to pursue charges stemming
from the computer giant’s market power. On balance, the Obama administration can certainly make
the case that antitrust has achieved renewed visibility and importance, although the Obama approach
might best be labeled “balanced,” with a preference for settlement over litigation.
II. Antitrust Enforcement and Statutes
The Justice Department and the Federal Trade Commission bring relatively few antitrust actions, but a
government victory sends a powerful message to the business community about the risks of
anticompetitive behavior.
The Justice Department practices a leniency policy sometimes allowing cooperating defendants to avoid
criminal prosecution. Private parties may also sue under the antitrust laws. Segments of the economy,
such as the securities industry, that are already closely regulated by the government can sometimes
successfully claim that they are immune from the antitrust laws. [For the Justice Department Antitrust
Division, see http://www.usdoj.gov/atr
A. Sherman Antitrust Act, 1890
Section 1 of the Sherman Antitrust Act forbids restraints of trade, and Section 2 forbids
monopolization, attempts to monopolize, and conspiracies to monopolize. Two types of enforcement
options are available to the federal government:
Violation of the Sherman Act opens participants to criminal penalties—the maximum
corporate fine is $100 million per violation, whereas individuals may be fined as much as $1
million and/or imprisoned for up to 10 years.
Injunctive relief is provided under civil law—the government or a private party may secure a
court order preventing continuing violations of the act and affording appropriate relief.
B. Clayton Act, 1914
The Clayton Act forbids price discrimination, exclusive dealing, tying arrangements, requirements
contracts, mergers restraining commerce or tending to create a monopoly, and interlocking
directorates.
Civil enforcement of the Clayton Act is similar to the Sherman Act in that injured parties may sue for
injunctive relief and treble damages. In general, criminal law remedies are not available under the
Clayton Act.
C. Federal Trade Commission Act (FTC)
The Federal Trade Commission Act created a powerful, independent agency designed to devote its full
attention to the elimination of anticompetitive practices in American commerce. The FTC proceeds
under the Sherman Act, the Clayton Act, and Section 5 of the FTC Act itself, which declares unlawful
“unfair methods of competition” and “unfair or deceptive acts or practices in or affecting commerce.”
The commission’s primary enforcement device is the cease and desist order, but fines may be
imposed. [For the FTC Guide to Antitrust Laws, see www.ftc.gov/bc/antitrust/index.shtm]
III. Federal Antitrust Law and Other Regulatory Systems
A. State Law
Most states, through legislation and judicial decisions, have developed their own antitrust laws. Some
states have recently become more aggressive in antitrust enforcement, as illustrated by their
resistance to the U.S. Supreme Court’s controversial Leegin decision.
B. Patents, Copyrights and Trademarks
Each of these devices offers limited, government-granted, government-shielded market strength, thus
serving to protect and encourage commercial creativity and product development. The resulting
antitrust problem essentially amounts to limiting the patent, copyright, or trademark holder to the terms
of its government-granted privilege, rather than allowing that privilege to grow into an unlawful
monopoly.
C. Law of Other Nations
Chapter 11 addresses the practical and ideological significance of international antitrust issues in this
era of globalization.
Part Two—Horizontal Restraints
When competitors collude, conspire, or agree among themselves, they are engaging in horizontal
restraints of trade. Instead of competing to drive prices down and quality up, they may be fixing prices,
restricting output, dividing territories, and the like. The various horizontal restraints are governed by
Section 1 of the Sherman Act, which forbids contracts, combinations, or conspiracies in restraint of trade.
In the Standard Oil decision of 1911, the U.S. Supreme Court articulated what has come to be known as
the rule of reason. In essence, the Court said that the Sherman Act forbids only unreasonable restraints of
trade. The reasonableness of a restraint of trade is largely determined by a detailed balancing of the pro-
and anticompetitive effects of the situation. Thus, the plaintiff must prove the existence of an
anticompetitive agreement or conduct and also prove that, on balance, the agreement or conduct harms
competition. [For an antitrust overview, see http://topics.law.cornell.edu/wex/antitrust]
Antitrust Enforcement Produces Lower Prices?
Antitrust law is often of direct value to consumers as illustrated by a 2008 settlement between the U.S.
Justice Department and the National Association of Realtors in which the NAR guaranteed that realtors
participating in the NAR-affiliated multiple listing services will allow online real estate agents to have full
access to those MLS listings.
The newer Internet-based agents claimed they had often been blocked by local MLS associations from
access to listings of houses for sale, thus restricting their ability to fully compete with the traditional
brokers. The online brokers, often achieving productivity efficiencies, are able to charge fees about one
percentage point beneath the traditional industry standard of 5 to 6 percent of the purchase price, thus
generating substantial consumer savings.
Sources: “Justice Department Announces Settlement with the National Association of Realtors,”
Department of Justice Press Release, May 27, 2008
[http://www.usdoj.gov/opa/pr/2008/May/08-at-467.html] and Eric Lichtblau, “Realtors Agree to Stop
Blocking Web Listings,” The New York Times, May 28, 2008 [nytimes.com]. Department of Justice
Antitrust Division, “Enforcing Antitrust Laws in the Real Estate Industry,”
[http://www.justice.gov/atr/public/real_estate/enforce.htm].
I. Horizontal Territorial and Customer Restraints
Principal legislation—Sherman Act, Section 1 states that every contract, combination in the form of trust
or otherwise, or conspiracy, in restraint of trade or commerce, among the several states, or with foreign
nations, is declared to be illegal...
An example of a per se violation of the Sherman Act includes an agreement between two big food
wholesalers who dominate the market in their small state agree between themselves to divide their state
geographically with one supplying the eastern half while the other supplies only the western half.
Suppliers might want to eliminate that competition among themselves, but such arrangements ordinarily
are per se violations of the Sherman Act since they attempt to nullify the powerful benefits of competition.
II. Horizontal Price-Fixing
Principal legislation—Sherman Act, Section 1 states that competitors may not lawfully agree on prices.
That principle is simple and fundamental to an efficient, fair marketplace. Establishing the presence of an
unlawful price-fixing arrangement, on the other hand, ordinarily is anything but simple.
A. Proof
The major dilemma in price fixing and all other Sherman Act Section 1 violations is the measure of
proof that satisfies the requirement of a contract, combination, or conspiracy. Evidence of collusion
arises in a variety of ways. Broadly, a showing of cooperative action amounting to an agreement may
be developed by any of the following four methods of proof:
Agreement with direct evidence—the government/plaintiff can produce direct evidence such
as writings or testimony from participants proving the existence of collusion.
Agreement without direct evidence—here the defendants directly but covertly agree, and
circumstantial evidence must be employed to draw an inference of collusion (e.g., firm
behavior).
Agreement based on a tacit understanding—in this situation no direct exchange of
assurances occurs, but the parties employ tactics that act as surrogates for direct assurances
and thus “tell” each other that they are in agreement.
Agreement based on a mutual observation—these defendants have simply observed each
other’s pricing behavior over time, and they are able to therefore anticipate each other’s future
conduct and act accordingly without any direct collusion but with results akin to those that would
have resulted from a direct agreement.
Poaching Employees
Seven of America’s most prominent high-tech companies, including Apple and Google, recently settled
a Justice Department complaint alleging that those companies agreed, among other things, not to
“cold call” each other’s employees for the purpose of hiring those employees (a practice sometimes
labeled employee poaching).
The companies agreed to cancel any such agreements. Then in 2013, a civil class action was filed by
a group of employees claiming those high-tech companies damaged the employees by violating
antitrust laws. News accounts also allege that deceased Apple cofounder Steve Jobs threatened to file
a patent lawsuit against tech firm Palm if it did not agree to refrain from poaching Apple employees.
Sources: In Re High-Tech Employee Antitrust Litigation, No. 11-CV-02509-LHK (N.D.Cal. April 18,
2012); Daniel Antalics, “Federal Court Allows Silicon Valley Employee ‘Poaching’ Suit to Proceed,”
Weil, Gotshal & Manges LLP, Antitrust Update, Spring 2012; and Reuters, “Jobs Threatened Suit to
Prevent Apple Poaching,” CNBC.COM, January 23, 2013 [www.cnbc.com].
Parallel Conduct
An unlawful conspiracy is to be distinguished from independent but parallel business behavior by
competitors. So-called conscious parallelism is fully lawful because the competitors have not
agreed either explicitly or by implication to follow the same course of action. Rather, their business
judgment has led each to independently follow parallel paths.
On the other hand, a conspiracy can sometimes be established by proof that the parallel behavior
in question was not arrived at independently, but rather was the product of a preceding agreement.
Aggressive Enforcement
Government intervention, at the federal and state levels, and damage claims by wronged
consumers are sometimes essential to maintain effective competition. Antitrust law, including
price-fixing prohibitions, is designed to protect the consumer from a variety of commercial
arrangements—some well-intentioned, some overt cheating—that nullify the favorable effects of
competition.
Consider some prominent examples. At the text’s writing in 2013, a federal judge has given
preliminary approval to a $7.2 billion settlement of an eight-year antitrust war between the plaintiffs,
a coalition of large and small merchants, and the defendants, Visa Inc., MasterCard, and their
associated banks.
The defendants are accused of engaging in a price-fixing cartel to set arbitrarily high interchange or
“swipe” fees that merchants pay to card-issuing banks and credit card companies for processing
card transactions. The settlement provides cash and temporary reductions in swipe fees for some 8
million merchants, and it allows small merchants to join together in future bargaining with Visa and
MasterCard over swipe fees
Eight companies, including LG Display Co., Sharp Corp. and Chunghwa Picture Tubes, Ltd., have
pleaded guilty or have agreed to plead guilty to federal criminal charges of conspiring to fix prices
for about $75 billion in LCD panels and will pay fines totaling over $1.4 billion.
Ending nine years of litigation over alleged conspiracies to fix corn syrup prices, Archer Daniels
Midland, A. E. Staley, and others agreed in 2004 to pay $531 million to settle a class action against
them.i [For a movie account of former ADM executive Mark Whitacre’s decision to blow the whistle
on the alleged conspiracy, see The Informant! starring Matt Damon. The trailer is available at:
www.traileraddict.com/trailer/the-informant/trailer]
Practicing Ethics: Antitrust Law and the Price of Beer
Each year college students spend about $5.5 billion on alcohol, most of that on beer. A group of
consumers in Madison, Wisconsin, home of the University of Wisconsin, sued some local bars and
the Madison-Dane County Tavern League, Inc., for price fixing. The plaintiffs pointed to a
September 2002 press release from the “Downtown Tavern Working Group” announcing that drink
specials would not be offered after 8 PM on Friday and Saturday nights for “at least a year.”
The defendants said that the press release did not reflect an agreement of any kind and thus could
not violate the law because all bar owners remained free to do as they wished.
Eventually, the Wisconsin Supreme Court held that the policy was immune from the antitrust laws
because the city effectively compelled the arrangement. Given the state legislature’s broad grant of
regulatory authority over alcohol to municipalities, the Court concluded that the legislature must
have intended the defendant taverns’ actions to be exempt from the antitrust laws.
Sources: Eichenseer v. Madison-Dane County Tavern League, 748 N.W.2d 154 (Wis. S.Ct. 2008);
and “Frequently Asked Questions about College Binge Drinking,” AlcoholPolicyMD.com
[http://www.alcoholpolicymd.com/alcohol_and_health/faqs.htm].
Cigarette Pricing
The case that follows examines alleged horizontal price fixing in the oligopolistic cigarette industry.
Legal Briefcase: Romero and Ferree v. Philip Morris, et al. 2010 N.M. LEXIS 370 (N.M.S.Ct.)
III. Refusal to Deal/Group Boycotts
Principal legislation—Sherman Act, Section I:
The refusal to deal with another raises antitrust issues in a horizontal group boycott where competitors
agree not to deal with a supplier, customer, or another competitor. A unilateral (individual) refusal to
deal by a buyer or a seller sometimes raises antitrust concerns if the firm refusing to deal is a
monopolist and harm to competition can be proven, but the Supreme Court has severely restricted the
use of the doctrine.
A recent battle among the big bank card companies illustrates refusal to deal reasoning. In 1996,
American Express decided to open its own credit card network to compete with Visa and MasterCard. No
bank was willing to deal with American Express. They did so because Visa and MasterCard had rules
forbidding their members from issuing American Express and Discover cards. As long as those banks
wanted to do business with Visa and MasterCard, they could not deal with American Express and
Discover. [For a trade regulation blog, see http://traderegulation.blogspot.com/]
Clarett Boycotted by NFL?
Antitrust shapes all dimensions of our lives, as football running back Maurice Claret learned when he tried
to enter the 2004 National Football League draft. Clarett, as a freshman, led Ohio State University to an
undefeated season in 2002. Clarett was ineligible for college football in his sophomore year because of
allegations that he accepted improper benefits and lied about doing so. Clarett then tried to enter the NFL
draft but was barred by a league rule providing that players must have been out of high school for three
seasons. Clarett sued the NFL, claiming its eligibility rules violated federal antitrust laws by, in effect,
allowing competing teams to agree among themselves to boycott certain players (including Clarett).
Clarett won at the federal district court level, but he lost on appeal when the court ruled that the eligibility
rule is exempt from the antitrust laws.
Sources: Clarett v. National Football League, 369 F.3d 124 (2d Cir. 2004) and Pete Thamel,
“Congressman Asks N.B.A. and Union to Rescind Age Minimum for Players,” The New York Times, June
4, 2009 [http://www.nytimes.com]
Part Three—Vertical Restraints
Horizontal restraints are those arising from an agreement among the competitors themselves, while
vertical restraints ordinarily are those imposed by suppliers on their buyers. Horizontal restraints, in
general, are per se unlawful while vertical restraints, in general, are to be resolved under the rule of
reason. Horizontal restraints eliminate competition thereby undermining the power of the market while
vertical restraints sometimes are harmful and sometimes are beneficial to competition and thus ordinarily
should be evaluated on a case-by-case basis.
E-Books: Apple Fixing Prices?
The Kindle e-book reader was introduced by Amazon in 2007, followed by Barnes & Noble’s Nook reader
(2009) and Apple’s iPad (2010). Amazon priced many of its e-book best sellers at a very attractive $9.99
(often below its cost) to increase demand for the Kindle, to solidify its market position, and to encourage
broader shopping at Amazon.
By some measures, Amazon’s share of digital book sales peaked as high as 90 percent of the market.
Book publishers, including HarperCollins and Penguin, apparently fearing Amazon’s power in the e-book
market, allegedly entered negotiations among themselves and with Apple to change e-book pricing from
Amazon’s “wholesale” model (where Amazon itself set e-book retail prices) to an “agency” model (where
the publishers set the retail price of books [e.g., $14.99] and the retailers, including Apple and Barnes &
Noble, kept a 30 percent share). Having achieved an agreement with Apple, the publishers allegedly were
able to compel Amazon to accept the same terms. Thereafter, Amazon’s e-book market share reportedly
fell to about 60 percent.
In April 2012, the Justice Department filed a civil complaint against Apple and five book publishers
claiming that the defendant publishers had conspired among themselves and with Apple to fix prices in
violation of the Sherman Act. In their defense, the publishers and Apple claimed they acted independently
in implementing agency pricing.
Relying principally on horizontal price-fixing reasoning, a federal judge in 2013 found Apple guilty of
colluding with the publishers to fix prices. Critics fear the government victory over Apple may restore
Amazon to its former position of complete e-book dominance. On the other hand, e-book prices fell after
the publishers began settling with the government.
Sources: Thomas Catan, Jeffrey A. Trachtenberg, and Chad Bray, “U.S. Alleges E-Book Scheme,” The
Wall Street Journal, April 12, 2012, p. A1; Daniel Crane, “DOJ E-Book Price Fixing Lawsuit Is Superficial,”
Jurist—Forum, April 23, 2012 [http://jurist.org/forum/2012/04/daniel-crane-ebook-pricing.php]; Gilbert and
Tobin, “Apple, Penguin and Macmillan File Response to US DOJ Lawsuit,” Lexology, July 31, 2012
[www.lexology.com/library/]; and Hayley Tsukayama, “Judge Rule Apple Conspired with Publishers to
Raise E-Book Prices,” The Washington Post, July 10, 2013 [www.washingtonpost.com/].
I. Resale Price Maintenance
Principal legislation: Sherman Act, Section 1; Federal Trade Commission Act, Section 5:
Manufacturers and distributors often seek to specify the price at which customers may resell their
products, a policy one might think of as vertical price fixing but that is formally called resale price
maintenance.
The primary reasons for a manufacturer or distributor to seek to influence the price at which the product is
resold are fourfold: (1) establishing a minimum price to enhance the product’s reputation, (2) helping
retailers make a profit sufficient to provide customer service, (3) preventing discount stores from pricing
beneath full-price retail outlets, and (4) preventing free riders.
A unilateral specification of a resale price, with nothing more involved, has long been permissible. Under
the Supreme Court’s 1919 Colgate decision, sellers can lawfully engage in resale price maintenance if
they do nothing more than announce prices at which their products are to be resold and unilaterally refuse
to deal with anyone who does not adhere to those prices. In 1997, the Supreme Court ruled that
agreements specifying maximum resale prices would no longer be considered per se violations and must
be evaluated under the rule of reason. In the 2007 Leegin case that follows, the Supreme Court
overturned a nearly 100-year-old precedent in the Dr. Miles case to rule that agreements specifying
minimum resale prices are no longer per se violations of the law.
Legal Briefcase: Leegin Creative Leather Products, Inc. v. PSKS, dba Kay’s Kloset 127 S.Ct. 2705
(2007)
Leegin in Practice (the Law)
The Leegin ruling seems to affirm the Supreme Court’s current preference for free market principles
and reduced judicial intervention in business practice. Accordingly, more competition and better
service should follow, but critics think the decision will allow manufacturers to pressure and cut out
discounters with the result that consumers will pay higher prices.
Leegin in Practice (the Business Response)
Some product suppliers are using the Leegin decision to impose strict pricing policies throughout
their chains of distribution.
Commonly, manufacturers are worried that price discounts will diminish the image of their products,
but they also want to discourage “free riders,” and they are concerned about the new problem of
“showrooming” in the age of the smartphone. That is, manufacturers want to protect themselves
and their chains of distribution both from discounters who free ride on the advertising and
promotion of full-service retailers and from consumers who educate themselves about products in
brick-and-mortar stores, and then often buy from an online competitor after making instant price
comparisons.
II. Vertical Territorial and Customer Restraints
Principal legislation: Sherman Act, Section I; Federal Trade Commission Act, Section 5.
Manufacturers commonly impose nonprice restraints including where and to whom their product may be
resold. Those restrictions typically afford an exclusive sales territory to a distributor. Similarly,
manufacturers may prevent distributors from selling to some classes of customers. Because price and
service competition among dealers in the same brand ordinarily benefits the consumer, the courts have
frequently struck down such arrangements.
The GTE Sylvania case enunciated those virtues and established the position that vertical restrictions are
to be judged case-by-case, balancing interbrand and intrabrand competitive effects while recognizing that
interbrand competition is the primary concern of antitrust law. Thus, the rule of reason is to be applied to
vertical territorial and customer restraints.
III. Tying Arrangements
Principal legislation: Clayton Act, Section 3; Sherman Act, Sections 1 and 2; Federal Trade Commission
Act, Section 5.
Clayton act, section 3. That it shall be unlawful for any person engaged in commerce, in the course of
such commerce, to lease or make a sale or contract for sale of goods... or other commodities ... or fix
a price charged therefore, or discount from or rebate upon, such price, on the condition, agreement, or
understanding that the lessee or purchaser thereof shall not use or deal in the goods ... or other
commodities of a competitor or competitors of the lessor or seller, where the effect of such lease, sale,
or contract for sale or such condition, agreement, or understanding may be to substantially lessen
competition or tend to create a monopoly in any line of commerce.
Tying arrangements (sometimes called “bundling”) are another form of non-price vertical restraint.
Typically, tying arrangements permit a customer to buy or lease a desired product (the tying product) only
if the customer also buys or leases another, less desirable product (the tied product).
The Law
Tying arrangements raise two primary antitrust concerns: (1) A party who already enjoys market
power over the tying product is able to extend that power into the tied product market and (2)
competitors in the tied product market are foreclosed from equal access to that market.
The basic tying violation test is as follows:
The existence of separate products
A requirement that the purchase of one of the products (the tying product) is conditioned on
the purchase of another product (the tied product)
Market power in the tying product
Substantial impact on commerce in the tied product market
Proof of all four of those ingredients establishes per se illegality. When all four ingredients cannot
be satisfied, the analysis may proceed on a rule of reason basis, weighing pro- and anticompetitive
considerations. Critics argue that tying arrangements often enhance consumer welfare and, as
such, the per se approach should be overturned, as in the Leegin case.
Cable/Satellite TV Bundling
Consumers often are frustrated because their cable and satellite television services ordinarily come
in packages of channels rather than in an “a la carte” menu where the subscriber can choose and
pay for only the subscriber’s preferred individual channels. In a recent California case, a group of
consumers sued several television networks and cable and satellite distributors, including NBC,
Fox, and Time Warner Cable claiming, among other things, that the defendants engaged in
Sherman Act violations. The plaintiff consumers claimed the practice of offering subscriptions only
in bundles was unlawful under the Sherman Act.
Source: Brantley et al. v. NBC Universal, Inc., et al., 675 F.3d 1192 (2012); cert. den. 133 S.Ct. 573
(2012).
Franchise Tying?
The following case examines tying allegations in the context of Shell and Texaco gas station
franchises. In brief, in order to establish market power in the tying product, the market itself must be
defined. In doing so, the geographic market and the product market is considered.
Legal Briefcase: Rick-Mik Enterprises, Inc. v. Equilon Enterprises, LLC, 532 F.3d 963 (9th Cir.
2008)
IV. Exclusive Dealing and Requirements Contracts
Principal Legislation: Clayton Act, Section 3; Sherman Act, Section 1.
An exclusive dealing contract is an agreement in which a buyer commits itself to deal only with a specific
seller, thereby cutting competing sellers out of that share of the market. A requirements contract is one in
which a seller agrees to supply all of a buyer’s needs, or a buyer agrees to purchase all of a seller’s
output, or both. By its nature an exclusive deal results in market foreclosure; that is, competitors are
denied a source of supply or a market for sale. Thus, antitrust issues can emerge depending ordinarily on
the market share controlled by the parties.
Gore-Tex
The top of the line in waterproof, breathable fabric seems to be Gore-Tex, but its rivals, including
Columbia Sportswear-owned OutDry, say they have better products but have difficulty marketing
them because of Gore-Tex’s exclusive dealing arrangements with outdoor clothing and sportswear
brands. Gore-Tex allegedly requires those wanting to use its products to agree not to use
competing brands.
The result is an alleged market foreclosure that allows Gore to control an estimated 70 to 90
percent of the relevant market. Gore apparently is being investigated by both the FTC and
European Commission antitrust authorities.
American Needle
In 2010, exclusive dealing concerns reached the U.S. Supreme Court when the National Football
League was accused of restraint of trade for giving Reebok in 2000 an exclusive 10-year right to
produce and market nearly all NFL-trademarked headware.
The NFL won at both the trial and federal court of appeals level with both courts ruling that the NFL
is a single entity and thus could not have conspired as the Sherman Act requires. The U.S.
Supreme Court, however, reversed the lower courts in 2010 by a 9–0 margin saying that each of
the teams is independently owned and managed and each proceeds as a separate, competing
economic enterprise pursuing separate economic interests.
The plaintiffs argue that granting the exclusive license to Rebuke created a monopoly in licensing
and manufacturing NFL team apparel, thereby harming competition and raising prices.
Condoms
Church & Dwight Co. (C & D) manufactures and distributes Trojan and other brand-name latex
condoms. C & D controls about 75 percent of the U.S. retail condom market. Mayer Labs, with less
than 1 percent of the market, raised antitrust claims against C & D.
Mayer alleged that C & D had unlawful exclusive dealing arrangements with some retail chains,
including 7-Eleven, and Mayer also argued that a C & D program granting kickbacks/rebates to
retailers based on the amount of shelf space devoted to C & D products constituted a form of
semi-exclusive dealing in that it put a ceiling or quota on the amount of shelf space competitors
could secure.
Despite C & D’s large market share, the court reasoned that Mayer failed to show that C & D had
market power because no evidence was presented of restricted output, supra-competitive prices, or
barriers to entry. The alleged exclusive dealing arrangements were of short duration, and they were
voluntary. Finally, other channels of distribution were available to competitors. Thus, competition
was not impaired.
Source: Church & Dwight v. Mayer Laboratories, No. C-10-4429 EMC, U.S. District Court, Northern
District of California (2012).
V. Price Discrimination
Principal Legislation: Clayton Act, Section 2, as amended by the Robinson–Patman Act. [For the statutory
language, see http://assembler.law.cornell.edu/uscode/15/13.html]
Price discrimination involves selling substantially identical goods (not services) at reasonably
contemporaneous times to different purchasers at different prices, where the effect is to harm competition.
A seller may resist a Robinson–Patman charge by establishing one of the following defenses: (1) The
price differential is attributable to cost savings; (2) The price differential is attributable to a good faith effort
to meet the equally low price of a competitor; or (3) Certain transactions are exempt from the act. Of
special note is a price changes made in response to a changing market.
Free-market advocates condemn price discrimination law as an attack on common, consumer-friendly
pricing practices that often result in reduced prices. From 2006 through 2010, plaintiffs won just 4 percent
of the Robinson-Patman cases brought in the federal courts; down from 35 percent in the years 1982 to
1993. Furthermore, the federal government seldom brings a Robinson-Patman action. The following case
illustrates, smaller businesses often do turn to Robinson–Patman in their ongoing struggle against what
they believe to be the unfair competition of “giants.”
Legal Briefcase: 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.
VI. Predatory Pricing
Principal legislation—Sherman Act, Section 2.
In 2009, the European Commission fined Intel $1.45 billion for predatory pricing and other alleged
misconduct. Intel was accused of reducing prices for its chips by unlawfully paying rebates/discounts to
computer manufacturers and retailers to persuade them not to use rival chips.
Intel claims the rebates had the desirable effect of saving money for consumers, but critics say consumer
choice was reduced by discouraging deals with Intel rivals, resulting in higher prices and potentially
reduced quality in the long term.
The U.S. Justice Department claimed that American Airlines engaged in predatory pricing in attempting to
monopolize air travel at the Dallas–Fort Worth Airport from 1995 to 1997. Justice argued that American
Airlines lowered its prices to drive out seven discount carriers in the expectation that it could then recover
its losses by charging monopoly prices.
A federal court of appeals, however, ruled for American Airlines, holding that the government was unable
to prove that American had priced its flights below cost (as measured by some appropriate formulation,
such as average variable cost). Thus, the government had failed to satisfy the standard U.S. two-part test
for establishing predatory pricing:
Pricing below cost
A “dangerous probability” of recouping the losses suffered from the below-cost pricing
VII. Antitrust Confronts Intellectual Property
Social and economic welfare is dependent on technological breakthroughs. In order to encourage and
protect intellectual property innovations, the law provides patents and copyrights as shields to preserve
the innovators’ rights. Preserving those rights, however, can lead to antitrust abuse since a patent or
copyright often confers market power.
Patent and copyright laws encourage innovation and protect creators’ legitimate property interests, but
there is also belief in free access to knowledge as something of a personal right and as a necessary
precondition to continued progress and prosperity. The stimulus of antitrust-protected competition to lower
prices and maximize consumer welfare is needed, and the shelter of intellectual property rights to
encourage innovation and investment is also required.
The U.S. Supreme Court has ruled that patents should not automatically be treated as monopolies. Abuse
of the market power conferred by a patent, therefore, must be proven rather than presumed. Generally,
intellectual property disputes are analyzed by the same antitrust reasoning—monopoly, exclusive dealing,
tying arrangements, etc.—as is applied elsewhere in the economy.
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