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CHAPTER 20
ANTITRUST LAW
THE ANTITRUST STATUTES—Three broadly-written federal statutes aimed at preventing
such anti-competitive behavior as monopolization, price discrimination, tie-in sales, and other
restraints of trade. The statutes are the Sherman Antitrust Act (1890), the Clayton Act (1914), and
the Federal Trade Commission Act (1914).
Add Info: Antitrust Common Law—Under common law, before the statutes, restraints of trade
(an agreement that restricts competition) were considered illegal when they were
“unreasonable.” Common law could not prevent anti-competitive behavior; its main role was to
deny enforcement of contracts in restraint of trade. When someone came to court attempting to
enforce an anti-competitive contract, the court would throw out the case, as in this case.
Add. Case: Craft v. McConoughy (Sup.Ct., Ill., 1875)--Four grain dealers in Illinois agreed,
by contract, in 1869 to fix prices. They met secretly, divided the market, and agreed on prices.
After one merchant died, his son took over the business and opted out of the agreement. He
began to compete with the others. They sued to force the son to abide by the contract with his
father.
Decision: Although the contract entered into by the merchants had the appearance of a
partnership that could not be unilaterally terminated, in fact, the object of the contract was to
The Sherman Act—The original antitrust legislation. Its two most important sections a) forbid
contracts, business combinations or conspiracies to restrain trade or commerce, and b) forbid and
criminalize attempts to monopolize. The Act was passed partly in response to fears that the
Standard Oil Trust was monopolizing the petroleum industry and that other large trusts, such as
the sugar trust, would monopolize other markets.
The Clayton Act—Legislation passed in 1914 to augment the Sherman Act. The Clayton Act is
designed to give government the ability to challenge business activities that “substantially lessen
competition or tend to create a monopoly.” The most important sections of the Act are §§2, 3, 7
and 8 concerning, respectively, price discrimination (Robinson-Patman), tying sales and
exclusive dealing, mergers or acquisitions of competitors, and interlocking directorates.
The Federal Trade Commission Act—This legislation created the FTC and empowered it to
investigate violation of and enforce the antitrust laws. Unfair methods of competition are
forbidden by §5 of the Act.
Exemptions —As a result of successfully lobbying Congress, the following businesses and/or
activities are exempt from the antitrust laws, or have a lesser standard under the laws: non-profit
organizations; certain agricultural and horticultural organizations; certain exporters (Export
Trading Act); bank mergers (regulated by banking regulators); insurance companies (regulated
by state insurance commissions under McCarran-Ferguson); most activities of labor unions
(NLRA); state government regulation of businesses in the “public interest,” such as utilities,
public transportation, and numerous professions (Parker doctrine or state action doctrine).
Add. Case: Flying J v. Van Hollen (E.D. Wisc., 2009)-- A Wisconsin law, the Unfair Sales Act,
has long required that retail gasoline be marked up at least 9.18% over wholesale price. When
gas went over $4 a gallon in 2008, the law required the price to be increased at retail by about
38 cents more. Flying J, which runs travel plazas, sued to contest the law, as it did not wish to
mark-up its gas or diesel that much. The state contended that it was immune from antitrust
actions.
Decision: The state is not entitled to antitrust immunity. The statute mandating a minimum
mark-up on gas is a per se violation of Section 1 of the Sherman Act as a restraint of trade. The
law violated the Supremacy Clause of the Constitution and is unconstitutional. Hence, a
Add. Case: Credit Suisse Securities (USA) LLC v. Billing (Sup. Ct., 2007)--A group of
investors filed antitrust suits against investment banks. During a three-year period, the banks
had acted as underwriters and had formed syndicates to help market initial public offerings
(IPO). The plaintiffs claimed this was monopolization of the IPO market that exploited investors
by requiring them to buy shares at inflated prices, pay above-normal commissions, and tied the
sale of one security to other securities. The district court dismissed the suit, but the appeals
court reinstated the action, holding that the suit was not precluded by securities law. Defendants
appealed.
Decision: Reversed. The securities law are “clearly incompatible” with antitrust law. The
securities laws implicitly preclude antitrust claims. The SEC supervised the activities in question
Add. Case: Neo Gen Screening v. New Eng. Newborn Screening (1st Cir., 1999)--Mass.
requires newborn infants to be tested for various diseases. The program was run by U. Mass. for
the Dept. of Public Health. Neo Gen, a Pa. company specializing in newborn testing, solicited
hospitals in Mass., offering a more comprehensive screening program at half price. The Dept. of
Public Health issued a rule preventing any hospital from using any seller of screening services
except U. Mass. New Gen sued for monopolization of the “newborn screening services” market.
The court dismissed the suit as prohibited by the 11th Amendment. Neo Gen appealed.
Decision: Affirmed. Under the 11th Amendment, states are generally immune from suits, unless
the state waives its immunity, or Congress overrides it. The Sherman Act does not apply to state
Add. Case: FTC v. Hospital Bd. of Lee Co. (11th Cir., 1994)--The Florida legislature created
the county hospital board “to establish and to provide for the operation and maintenance of a
public hospital” in Lee County. The board was to operate its facilities for “public and county
purpose.” Lee Memorial is a public hospital that had 49% of the market for hospital services in
the county and most of the Medicaid and indigent patients. The board approved Lee’s acquisition
of a private hospital. The FTC sued to enjoin that as a violation of Sec. 7 of the Clayton Act
because the number of hospitals in the county would drop from 4 to 3 and Lee would increase its
market share above 49%. Court ruled for the board under the state action (Parker) doctrine.
Decision: Affirmed. Antitrust does not apply to the anti-competitive conduct of a state acting
through its legislature. To obtain immunity “an entity must show 1) that it is a political
Enforcement—The antitrust laws are enforced by private parties or by the government. Most
actions are private. However, the Antitrust Division of the Justice Department (which brings
criminal antitrust actions) and the Federal Trade Commission also bring many cases, as may state
attorneys general.
Sherman Act—The severe penalties of the Sherman Act include: criminal felonies; substantial
fines; injunctive orders; and treble damage awards for plaintiffs (including court costs and
attorney’s fees).
Clayton Act—Enforcement is usually by the FTC which issues cease and desist orders.
Administrative orders may require a business to discontinue or modify its actions. Criminal
sanctions are also available.
FTC Act—Penalties range from orders preventing proposed mergers to substantial civil
penalties. Actions may be initiated administratively, reducing the need to prosecute in the federal
court system.
Add. Info: Agencies have broad discretion to decide how to enforce the antitrust laws and if to
enforce the laws. Justice and the FTC have issued the industry-specific guidelines governing
competitive practices. The guidelines hold that mergers of hospitals with less than 100 beds will
not be challenged and that joint ventures by hospitals to share expensive medical technology will
not be challenged.
Remedies Available—Private parties or the government may bring an action to halt certain
conduct. Remedies include: restraining a company from certain conduct; forcing a company to
divest a part of its operation into a separate company; canceling or modifying contracts; and
others. Plaintiff must have proper legal standing to sue -- For a court to hear an antitrust case, the
plaintiff bringing the suit must (1) have suffered harm or the likelihood of harm that is (2) the
kind of harm the antitrust laws are meant to prevent. A plaintiff whose losses are unrelated to an
antitrust violation by the defendant may not sue the defendant under antitrust law.
Add. Case: Brunswick v. Pueblo Bowl-O-Mat (S. Ct., 1977)--As the profitability of bowling
alleys declined, Brunswick, a large bowling-alley operator, bought several near-bankrupt alleys
to try to keep them open. The plaintiffs operated bowling alleys in Pueblo, Colorado, that
competed with alleys purchased by Brunswick. Plaintiffs argued that, had Brunswick not bought
the near-bankrupt alleys, they would have gone out of business and the plaintiffs’ profits would
have thereby increased.
Decision: The Supreme Court held the injury inflicted by Brunswick on plaintiffs was caused by
increased, not less, competition. If Brunswick had not bought the bowling alleys, the plaintiffs’
Add. Case: RSA Media v. AK Media Group (1st Cir., 2001)--AK controls over 90% of
billboards in Boston. RSA was a new entrant into the outdoor ad market. The market is regulated
by federal, state and local rules that make it nearly impossible to obtain a permit to build a new
billboard, so the number is nearly fixed. Besides a permit, one must get a lease with the owner of
the property on which the billboard sits. RSA sued AK for monopolizing the billboard market,
contending that AK was aggressive in maintaining its share of the market. If a property owner
discussed leasing to RSA instead of AK, AK would tell the landlord that it would tear down its
billboard, which usually meant that there could not be another one erected, since AK owned the
permit to have a billboard at that location. The court dismissed the suit; holding that RSA lacked
standing.
Decision: Affirmed. To determine whether a plaintiff has standing to bring an antitrust action, a
court considers: “(1) the causal connection between the alleged antitrust violation and harm to
the plaintiff; (2) an improper motive; (3) the nature of the plaintiff’s alleged injury and whether
the injury was of a type that Congress sought to redress with the antitrust laws; (4) the directness
Per Se Rule and the Rule of Reason—A rule that certain business agreements, arrangements, or
activities will automatically be stricken as illegal by the courts. That is, there is no defense for
such activities because they are held to be so clearly anti-competitive. In contrast, under a rule of
reason, a court will examine the facts surrounding a specific agreement, arrangement, or activity
before determining whether it helps or hinders competition; analyzed on a case- by-case basis.
MONOPOLIZATION—Antitrust is much concerned with monopolization, but the statutes are
vague about what that is. Hence, the courts determine much of the substance of what constitutes
a violation. Increasingly, the concern is protecting competition, not protecting competitors.
CASE: Spanish Broadcasting System v. Clear Channel (11th Cir., 2004)—SBS owns
Spanish-language stations in many markets. Its larger competitor is Hispanic Broadcasting,
partly owned by Clear Channel, the largest radio network in the U.S. SBS sued Hispanic and CC
for monopolization, contending they conspired to make it difficult for SBS to enter markets.
Court dismissed, holding that SBS did not meet the standards to make an antitrust suit
reviewable. SBS appealed.
Decision: Affirmed. Even if CC and Hispanic worked together, as claimed by SBS, it has
provided no evidence that would matter. The focus is on damage done to competition, not the
Questions: 1. The court focused on damage to competition in the market. What is the relevant
product market that was under consideration?
The market is the Spanish-language radio station market, which is primarily supported by
2. If it is true that HBC lured away SBC employees, which weakened its ability to compete, why
was the court not concerned?
Employment is at will. If there were breach of contract claims, those would be separate matters.
merger.
Add. Case: Standard Oil Co. of New Jersey v. U.S. (S. Ct., 1911)--In 1870, John D.
Rockefeller began merging his oil company with other oil companies to form the Standard Oil
Trust. (Note that the trust was a contract that joined various firms together in a partnership-like
arrangement.) The Trust, in combination with some other firms, controlled all aspects of the
petroleum business. The Trust itself controlled approximately 90% of this business. The
government asserted that prices of oil were fixed and a monopolization of the petroleum industry
occurred. The government sued to break up the Trust and force competition among its
component parts.
Decision: The Court found that Rockefeller’s actions in forming the Trust provided a prima facie
presumption of intent to monopolize and restrain trade. §§1 and 2 of the Sherman Act had been
Add. Case: U.S. v. United States Steel (S. Ct., 1920)--U.S. Steel was formed by the merger of
smaller companies. It was sued for restraint of trade and monopolization by the mergers that
created it, and for many business practices. The company responded that large organizations
were needed to be able to build the sophisticated entities needed to produce steel efficiently on a
large scale.
Decision: U.S. Steel was not a monopoly nor did it engage in price fixing. It engaged in vigorous
competition. No evidence of any restraints of trade was introduced. Even if the company hoped
to become a monopoly, there was no evidence it did. U.S. Steel introduced evidence that it
Determining Market Power—To help business and regulators determine when a merger will
likely be challenged, the FTC and Department of Justice have issued merger guidelines (latest
revision 1992). The guidelines seek to prevent the creation or enhancement of market power that
will injure competition. Market power is determined by market share, which is, in turn,
determined by both product and geographic markets.
Add. Case: Adidas America v. NCAA (D. Kan., 1999)--Adidas sued the NCAA for violating the
Sherman Act by restraining trade by having NCAA schools act as a cartel to restrict the sale of
NCAA promotional rights. “This intentional restriction of promotional rights artificially limits
the price and quality options available to apparel manufacturers as consumers of promotional
space, forces manufacturers to pay additional amounts for billboard space or other advertising,
decreases the selection of apparel offered to the end consumer, increases the price of the apparel
for end consumers, and financially benefits the NCAA and its member institutions.” The NCAA
replied that Adidas failed to define the relevant market, so the suit should be dismissed.
Decision: Suit dismissed. “The first step in an antitrust analysis is defining the relevant market
or markets.” Adidas asserts “that NCAA promotional rights are excellent advertising vehicles
for increasing demand for athletic apparel and footwear. They do not, however, establish that
Product and Geographic Markets—A company’s market share is the percentage of a relevant
market that it controls; there are different way to measure shares, such as sales and profits.
Product market is the segment of an industry or industries in which a company’s products
compete. Geographic market is either the local, regional, national or international market of a
particular product. It depends on the nature of a product (e.g., the market for computer chips is
international, while the market for mixed concrete is local).
Add. Case: Michigan Division-Monument Builders of North America v. Michigan Cemetery
Assn. (6th Cir., 2008)--Independent monument builders and a trade association of monument
buildings sued 20 cemetery operators and the Michigan Cemetery Association for an unlawful
combination and conspiracy to restrain trade and engage in unlawful tying arrangements in the
sale and installation of burial plots to the sale of memorials and monuments. The district court
dismissed the action; appeal was filed.
Decision: The proposed geographic market of each individual cemetery in Michigan was too
narrow to support the builders’ claims. A geographic market must correspond to the commercial
realities of the industry and be economically significant. While each cemetery has market power
when it works with a client, there is competition in the industry. The case will be remanded to
district court largely on procedural grounds.
Add. Case: FTC v. Coca-Cola (Dist. D.C., 1986)--DP Holdings, owner of Dr. Pepper, arranged
with an investment banking firm, to put the company up for sale. Coca-Cola, the primary
competitor of Dr. Pepper, offered to buy the company for $470 million. The government
challenged the purchase, alleging that it would violate §7 of the Clayton Act.
Decision: The court focused on the line of commerce--carbonated soft drink market (as opposed
to “all ... beverages” as Coke argued) on a national and regional scale. This market is
competitive and highly concentrated, with controlled distribution channels and significant
Potential Competition—Courts may block mergers even if the companies involved do not
produce similar products in a similar market area if the companies could compete with each
other in a non-merged state. The El Paso Natural Gas case is an example. A pipeline company
with a larger share of the California market wanted to merge with a geographically distinct
pipeline company in the Northwest. The Supreme Court blocked the merger because the
company in the Northwest served as a potential competitor for the California market. Similarly,
P&G was not allowed to merge with Clorox, even though P&G was not in the bleach market.
