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Chapter 49 – Antitrust: The Sherman Act

49-1

CHAPTER 49

ANTITRUST: THE SHERMAN ACT

I. OBJECTIVES:

This chapter is designed to acquaint students with the sociohistorical origins of the federal antitrust

laws, the nature of the current antitrust policy debate, and the fundamental attributes of the

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

A. Understand the social forces and policy assumptions that produced the Sherman Act.

B. Have a general grasp of the difference between “Chicago School” antitrust policy and

traditional antitrust policy views.

C. Understand the necessary prerequisites for federal antitrust jurisdiction and the basic penalties

for Sherman Act violations.

D. Understand the difference between per se and rule of reason analysis in antitrust cases.

II. ANSWERS TO INTRODUCTORY PROBLEM:

of Sherman Act § 1.

outweigh the harm to competition. Until very recently, however, if XYZ and its dealers had

behavior receives rule of reason treatment, which means that there might—or might not—be a

E. The “you must also buy product #2 if you want to buy product #1” scenario involves a tying

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F. If XYZ and other widget makers agree on exclusive geographic areas of operation, there

violations of Sherman Act § 1.

G. If XYZ and other widget makers agree not to purchase materials from a certain supplier, they

III. SUGGESTIONS FOR LECTURE PREPARATION:

A. Introduction

1. Discuss the sociohistorical forces that led to the passage of the Sherman Act. Note the

economic populism inherent in the traditional antitrust assumption that fragmented market

structures are a prerequisite of competition.

the structure industry would have assumed in the absence of antitrust regulation.

B. The Antitrust Policy Debate

1. Contrast “Chicago School” analysis with traditional antitrust thinking.

2. What forces have contributed to the rise of Chicago School theories? Some candidates

are:

much of the past two decades.

c. The perceptions of many critics that antitrust law had taken a wrong turn during the

1960s and 1970s.

3. You may wish to discuss the extent to which the prevailing political winds may help shape

antitrust policy and the level of aggressiveness (or lack thereof) with which the

federal bench.

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

C. Jurisdiction, Types of Antitrust Cases, and Standing

1. Discuss the basic prerequisite for federal antitrust jurisdiction: some significant impact on

interstate commerce or on our foreign commerce. Note the constitutional basis for this

actions with regard to peer review system had sufficient connection with interstate

commerce to support federal antitrust jurisdiction).

1345), furnishes an example. You may also wish to point out that attempts to expand

the international scope of our antitrust laws present a potential conflict between our

2. Discuss the types of antitrust cases, noting the essential differences between criminal

cases and civil cases. Also note that either the government or a private plaintiff may bring

a civil suit.

brought by the government.

b. Discuss the basic penalties for criminal violations of the Sherman Act. Note the

recent trend toward tougher antitrust penalties.

less-than-aggressive enforcement posture by the federal government. What do

students think about proposals to limit the recovery of treble damages to cases

3. Discuss the standing requirement for private antitrust plaintiffs: they must show that they

have suffered a direct antitrust injury as a result of the challenged behavior.

for antitrust violations were not preempted by Illinois Brick. In Kansas v. Utilicorp

United, Inc., 497 U.S. 199 (1990), however, the Court resolved a split among the

Example: Problem Case #1 (no antitrust injury proven).

D. Section 1—Restraints of Trade

1. Discuss the language and intent of Section 1: the statute is aimed at joint action in

restraint of trade. Its basic policy is that there should be no cooperation among

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

competitors in making basic competitive decisions. Hence, the requirement of proof of

concerted action is a prerequisite to Section 1 liability. This confronts antitrust enforcers

and plaintiffs with two basic dilemmas:

a. How separate must two entities be before their supposedly joint actions will be subject

to Sherman Act scrutiny? You may wish to discuss Copperweld Corp. v.

Independence Tube Corp., 467 U.S. 752 (1984), and the demise of the

“intra-enterprise conspiracy doctrine” at this point. The lower federal courts have

case discussed below.

b. When will parallel business behavior justify the inference that a conspiracy exists in

violation of Section 1? Note that pure “conscious parallelism,” standing alone, is not

enough to prove a statutory violation. Point out the difficulties of proving something

more than conscious parallelism in oligopolistic markets.

Example: Problem Case #5.

action complained about by the plaintiff.

Points for Discussion: Have a student summarize the basic facts, including the history

of licensing efforts by the NFL. Note the creation of the NFLP and the financial stake

that all NFL teams have in it. Why, according to the Court, is this situation different

from the parent-subsidiary in Copperweld. (There, because the parent controlled

substance-over-form approach. The form is that of a separate legal entity, but the

substance indicates that the otherwise-competing teams are working together. The

NFLP operated to eliminate competition regarding licensing when the teams would be

competing in that regard if not for the NFLP. What about the defendants’ argument

to competition. So what does this decision really mean? (That the defendants can’t

avoid liability on lack-of-joint-action grounds and that they will have to show

sufficient justifications for their behavior in order to avoid liability—but that they may

ultimately be held not to have violated § 1.)

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2. Per Se versus Rule of Reason Analysis. Note that even though the language of Section 1

condemns all contracts, combinations, and conspiracies in restraint of trade, the Court has

for their behavior when rule of reason treatment applies, and defendants’ inability to do so

when per se treatment applies. Note the current trend in favor of moving away from per se

for the court to presume that the behavior in question is anti-competitive unless the

defendants demonstrate some pro-competitive effect stemming from the behavior. Upon

3. Price-Fixing. Distinguish between horizontal price-fixing and vertical price-fixing. Note

that horizontal price-fixing is per se unlawful but that vertical price-fixing is now judged

under the rule of reason.

a. Note the wide variety of behavior that may be classified as horizontal price-fixing.

Remind the students that an express agreement to fix prices need not be shown by the

1) Note that horizontal price-fixing is likely to be classified as per se illegal for the

foreseeable future. Chicago School theorists do not object to this, because it fits

with their argument that antitrust policy should be anticonspiracy policy. The

United States v. Hsiung (p. 1345): The U.S. Court of Appeals for the Ninth

Circuit holds that a foreign price-fixing conspiracy had a sufficient nexus to the

warrant the application of rule of reason analysis. Rather, the controlling mode of

analysis if the per se treatment customarily extended to horizontal price-fixing.

Points for Discussion: Ask the students why, in view of the facts, the defendants

could be prosecuted in the U.S. even though they were companies and individuals

Further example: Problem Case #4.

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b. Discuss vertical price-fixing (resale price maintenance) and the reasons why

manufacturers have significant incentives to gain control over the price at which their

products are resold. Controlling minimum resale price may maintain a product’s

image, encourage dealers to furnish service or promotional activities they may be

unwilling to furnish in an environment of vigorous price competition, and encourage

dealers to continue to sell the manufacturer’s product (something they may be

unwilling to do if competition forces prices to unprofitable levels). Control of

maximum resale prices prevents dealers who are isolated from competition from

exploiting this situation by raising prices (and thereby selling fewer units).

price-fixing to the rule of reason. After Leegin, all vertical price-fixing receives

rule-of–reason analysis.

State Oil Co. v. Khan (noted at p. 1348 of the text): Accepting the invitation of

the Seventh Circuit Court of Appeals, the Supreme Court overrules a longstanding

classification for VMPF had been undercut by later decisions. The Supreme Court

agreed with Judge Posner’s analysis. In addition, the Court concluded that the

rationales supporting rule of reason treatment for vertical non-price restraints

seemed generally applicable in VMPF cases. Finally, as the Court confessed, it

relevant to the necessary process of balancing justifications for the behavior

against the harm to competition resulting from it. Ask the class to identify other

possible justifications for VMPF (e.g., benefit to consumers, etc.). Now that rule

of reason treatment has been extended to VMPF, are other forms of vertical price-

treatment.

Leegin Creative Leather Products v. PSKS, Inc. (p. 1348): The Supreme Court

holds that rule of reason treatment should be extended to vertical minimum price-

fixing. In so holding, the Court overrules the near 100-year-old Dr. Miles

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of Sherman Act § 1.

wealthy consumer at the expense of the poor one? Did the Supreme Court make

convincing arguments for overruling Dr. Miles? Is Justice Breyer right when he

says, in his dissent, that Leegin will simply lead to higher prices for consumers to

pay?

Plainly, when a manufacturer is successful in controlling resale price via unilateral

refusals to deal, the economic harm is identical to that resulting from a per se

illegal resale price maintenance agreement.

4. Division of Markets. Differentiate between horizontal and vertical division of market

schemes.

a. Horizontal division of markets agreements traditionally has been treated as per se

unlawful. Note, however, the tendency of some of the lower federal courts to respond

rule of reason.

Examples: Problem Case #2, plus Palmer v. BRG of Georgia, Inc., 498 U.S. 46

(1990) (giving per se treatment to horizontal geographical division of markets for bar

review course services).

b. Most vertical nonprice restraints are governed by the rule of reason, thanks to

be justified. Vertical market restrictions do not meet this test even though they

restrict intrabrand competition (e.g., competition among Sylvania dealers),

because they can be used to promote interbrand competition (e.g., competition

between Sylvania dealers and dealers of other brands). By allowing franchisees

the rule of reason.

2) Point out that some kinds of vertical market restraints may still be unlawful under

the rule of reason. In particular, vertical market restraints imposed by

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

manufacturers enjoying a large market share or significantly favorable product

differentiation would still appear to be in jeopardy, given the aggravated effect of

restricting intrabrand competition in such cases and the small likelihood of any

offsetting positive impact on interbrand competition (manufacturers in such a

position don’t need any help). What are the “real world” effects of Sylvania? It

should be tougher for discounters to get brand-name goods (assuming that the

manufacturer is serious about the vertical restraint on distribution). Also,

individual dealers have lost a measure of freedom in terms of deciding to whom to

integrate their operations.

5. Group Boycotts. Concerted refusals to deal have long been held to constitute per se

violations of Section 1. For a classic case, see Klor’s, Inc. v. Broadway-Hale Stores, 359

U.S. 207 (U.S. Sup. Ct. 1959). Recently, however, several cracks have appeared in this

per se analysis.

cases and provided general guidance for when the per se rule should be applied:

“Cases to which this Court has applied the per se approach have generally

involved joint efforts by a firm or firms to disadvantage competitors by either

directly denying or persuading or coercing suppliers or customers to deny

likelihood of anticompetitive effects is clear and the possibility of countervailing

procompetitive effects is remote.”

According to the Court, “not every cooperative activity involving a restraint or

exclusion will share with the per se forbidden boycotts the likelihood of

purchasing cooperative’s expulsion of a member (what gave rise to this case) would

not necessarily produce an anticompetitive effect unless the purchasing cooperative

possessed “market power or exclusive access to an element essential to effective