Exchanges of Information—This area is concerned with trading and sharing of information by
businesses. At times, such trading may lead to anti-competitive behavior and present problems
under the antitrust laws.
Information Sharing—Inter-business exchanges of information that do not injure consumers by
leading to fixed prices or other restraints of trade are likely to be held legal. However, if there is
an enforcement mechanism, the price information will not be viewed so favorably. Also, in the
1978 case, United States Gypsum, under a rule of reason the Court did not allow competitors to
call each other to share information about price bids; that was going too far.
CASE: Todd v. Exxon (2nd Cir., 2001)—Fourteen oil companies cooperated to gather salaries
paid to their managerial, professional, and technical (MPT) employees. Company representatives
met to discuss the data and make sure it was comparable. A consultant worked with the data
further and the companies used it to help set salaries of MPT employees. Todd sued, contending
the information sharing was done to hold down salaries. The companies responded that it
allowed them to be more efficient in setting wages. Court dismissed the suit; Todd appealed.
Decision: Remanded. There is no smoking gun that shows a conspiracy to fix prices (wages), but
the court should look to consider if there is evidence of anti-competitive effects from the
Questions: 1. Wage information is often gathered and published. Why is it normally legal?
So long as it is published in a public forum, it is generally legal to join together to provide such
2. The district court held that the oil companies did not control the MPT market, but that
contention was rejected by the appeals court. Why might they see it differently?
Fourteen firms with 85% is not considered highly concentrated by traditional concentration
measures, but the court noted that labor is not something that can be held in a warehouse while
Add. Case: Goldfarb v. Virginia State Bar (S. Ct., 1975)–The Goldfarbs purchased a home in
Virginia. To secure a mortgage, the couple needed to purchase title insurance and have the title
to their property “searched” for defects (only attorneys may do that in Virginia). The Goldfarbs
tried to find an attorney who charged less than the $500 minimum fee listed in a fee schedule
prepared by the local bar and enforced by the state bar assn., but were unsuccessful. The
Goldfarbs sued the state bar, claiming that the fee schedule of prices was an illegal price fixing
scheme.
Decision: The defendant argued that the fee schedule was merely advisory to members of the
state bar, and was not a price-fixing regime. The Court found that the facts did not support this
claim. All attorneys followed the price schedule, it was enforced by the professional disciplining
Add. Info.: If a bar association (or other professional group) publishes a survey that reports fees
charged for services there would be no violation of the antitrust law. In this case, and in other
decisions, the court has made it clear that it is not illegal to report price information, so long as
the information is made public, and so long as there is no attempt to force competitors to follow
the price information in establishing their own prices. In the past three decades, professional
services are treated more like a sale of goods. For years, professional services were held to be
“different” than other services or goods, so professional associations were allowed to restrain
competition in ways that would have been illegal had the same activities been undertaken by the
sellers of soap or the providers of TV repair services. Many state legislatures continue to pass
restrictions on competition among service providers, providing official sanction for practices
that would otherwise be held to be violations of the antitrust statutes.
Add. Info: Justice and the FTC have looked at standards set by trade associations and
professional groups to see if they meet a legitimate purpose or if they are a cover for
anticompetitive behavior. One bit of evidence looked to is how open is the association to new
members—all competitors should be eligible to share in the process. The association should not
be used to boycott companies that engage in business practices, such as selling to price
discounters, that members of the association may not like. In Detroit Auto Dealers Association
(1995), the FTC found the association helped a conspiracy to limit hours of operation of car
dealerships. In New England Juvenile Retailers Assn. (1994), the FTC dissolved the association
because it was found to facilitate boycott efforts.
Conspiracy to Restrict Information—The open sharing of information among competitors is
usually held to be legal; however, the covert sharing of information for the purpose of
establishing a similar pricing structure or to restrain competition is usually held to be illegal. In
FTC v. Indiana Federation of Dentists (1986), the Supreme Court held that the professional
organization of dentists could not encourage dentists not to cooperate with dental insurance
companies that wanted to check patients’ records to guard against fraud.
Territorial Restrictions—An agreement among firms competing at the same level to divide a
market based on geography, customer type or some other term. Such agreements may violate the
antitrust laws.
Add. Case: U.S. v. Sealy (S. Ct., 1967)–Sealy was composed of independent mattress
manufacturers who produced Sealy products under a common name. The company set minimum
prices for their products and set quality control standards that the manufacturers had to follow.
Sealy also required each manufacturer to operate only in a specific territory. The government
sued Sealy alleging that it fixed prices and improperly insisted on territorial allocations of its
manufacturers.
Decision: The Court found evidence of horizontal restraints in the territorial allocations made
by Sealy. The Court found price fixing so obvious as to require a per se, not a rule of reason,
Add. Case: U.S. v. Topco Assoc. (S. Ct., 1972)–Topco was a coop of regional supermarkets.
The stores were independent of each other and did not share earnings, management, or
advertising resources. The main function of Topco was to act as a buying agent for members.
Topco would buy and distribute products (most under Topco brand names) to member stores.
Bulk buying let Topco’s members compete more effectively with chains like Safeway. Topco
members received territorial licenses from Topco, specifying how Topco brands (house brands)
could be marketed. The government brought suit alleging that the organization was a conspiracy
requiring members to sell Topco brands only within the marketing territories assigned to them,
thus restricting competition.
Decision: The Court determined that the actions involved in this case were horizontal restraints
of trade whose effect was to reduce competition. Because the Court made this finding, it
Add. Info: One firm, acting alone, cannot violate the antitrust laws, as the Court held in
Copperweld, unless the firm’s conduct “threatens actual monopolization.” The Supreme Court
reiterated this point in Spectrum Sports v. McQuillan (1993); “To demonstrate attempted
monopolization, plaintiff must prove that defendant has engaged in predatory or anti-competitive
conduct with specific intent to monopolize and that there is a dangerous probability of defendant
achieving monopoly power.”
Issue Spotter: Share and Share Alike
To try to stay legal, keep all discussions in the open and on the record. So long as information is
shared in a public forum, so that customers could have access to the information, there is little
chance of a price conspiracy violation, unlike if there is a closed door sharing of information.
You could have the industry create a website posting price information provided in member firms
about actual transaction prices or the asking price for the product. So long as the information is
truthful, and is not shown to be used to rig prices, such open posting is generally legal.
VERTICAL RESTRAINTS OF TRADE—Vertical business arrangements govern relationships
among firms at different stages of the production, distribution, and sale of the same product. For
example, General Motors might contract with Goodyear Tire for delivery to GM’s factories of
specially made tires. Likewise, GM might require by contract that its dealerships maintain
adequate service departments. In the first instance, GM contracts with an upstream supplier; in
the second instance GM contracts with downstream buyers. Any efforts to control the behavior of
suppliers or buyers are potentially subject to antitrust regulations. However, firms that combine
functions such as manufacturing, distribution, and sales internally are rarely subject to antitrust
scrutiny for these activities.
Vertical Price Fixing—Agreements between retailers, distributors, and/or manufacturers of
products to control the price at which products are sold to consumers.
Add. Case: Lowell v. American Cyanamid (11th Cir., 1999)–American Cyanamid (AC) had
rebate programs for its independent dealers. The dealers would get a rebate on sales only if they
sold products at or above prices suggested by AC, which most dealers did. A group of farmers
sued AC, claiming antitrust violations for vertical price fixing. The district court dismissed the
suit, holding that one of the dealers, as a purchaser from AC, had to be a party to the suit for
there to possibly be a valid claim. The farmers appealed.
Decision: Reversed. Plaintiffs correctly assert that they are purchasers of a product alleged to be
involved in a vertical price-fixing scheme. As such, they have standing to bring a claim under the
Resale Price Maintenance—Resale price maintenance (RPM) is an agreement between retailers,
distributors, and/or manufacturers stating that retailers will not charge less than a certain
minimum price, or will charge a specific price, for a product at the next level in the sales chain,
either to retailers or to customers. Most such arrangements are illegal restraints of trade, as the
Court explained very early.
Dr. Miles Case. Dr. Miles sold patented medicines to wholesalers. The retail price for Dr. Miles’
products was fixed by the company. One wholesaler, John D. Park, wanted to cut the price. Dr.
Miles argued that because it held patents on its medicines it could control the resale price of
these items, and that regardless of whether they were patent holders or not, they should be able to
contract with distributors to control the resale price of their products. The Court rejected Dr.
Miles’ arguments; manufacturers cannot restrain trade by fixing retail prices of its products. The
Court held “agreements or combinations between dealers, having for their sole purpose the
destruction of competition and the fixing of prices, are injurious to the public interest and void.”
This case established the principle that sellers cannot attach conditions that have anti-competitive
effects to the resale of their products.
Pros and Cons of Resale Price Maintenance. Producers of quality, well-known goods and small
retailers tend to favor RPM agreements—the producers so they can control distribution, and the
retailers so they face less price competition from discounters. Large retailers and producers of
lesser-known goods tend to oppose RPM—the retailers because they specialize in low price, low
service merchandising; the lesser-known producers because low price is the main appeal of brand
names not well known.
Add. Case: Acquaire v. Canada Dry (2nd Cir., 1994)–Canada Dry (CD), like other soft drink
companies, sells its products to distributors who deliver them to retailers. The distributors
collect a commission on sales. CD had a promotional program that provided special discounts
for retailers. The discount was a price reduction that the retailers could capture. To insure the
distributors passed on the price discounts, CD required distributors to give them signed receipts
from all sales at the lower price. The amount collected by the distributors in commission was not
cut, but the receipt ensured that distributors did not pocket some of the savings by selling at the
same or at a price that did not reflect the discount CD offered. Distributors sued, claiming they
were forced to participate in an illegal resale price maintenance scheme.
Decision: The appeals court held that so long as participation in the promotional discount
scheme was voluntary by the distributors, there was no violation. CD’s requirement that the
Add. Info: The FTC and 50 state attorneys general signed an agreement with Reebok to settle
claims that Reebok and Rockport tried to fix the retail prices of their shoes. According to the
complaint, Reebok forced retailers to charge certain minimum prices, which caused some
retailers to raise their price by 30%; discounting below the minimum retail price was not
allowed. Reebok agreed not to engage in such practices and paid $10 million in damages.
Vertical Maximum Price Fixing—Maximum price-fixing arrangements were prohibited under
the antitrust laws until the Supreme Court reversed that rule in the 1997 case, State Oil Co. v.
Khan. A gasoline distributor restricted how many cents per gallon its retail gas stations could
mark up their gas; a dealer sued. The Court held that the restriction on retail mark-up was not
anticompetitive as it kept prices lower for consumers. That explicitly reversed the 1966 Albrecht
case that held that vertical maximum price controls were illegal.
Vertical Minimum Price Fixing—After years of struggling with the issue, the Supreme Court
approved resale price maintenance under a rule of reason analysis when it can be shown that
interbrand competition is helped even if intrabrand competition is reduced.
CASE: Leegin Creative Leather Products v. PSKS (Sup. Ct., 2007)—Leegin makes leather
products sold to independent clothing stores. It would not sell to stores that refused to follow its
suggested retail price list. Its strategy was to give independents a product unique that would not
appear in large chain stores. Kay’s Kloset, which sold Leegin products, consistently discounted
the goods. Leegin refused to sell to Kay’s for that reason. Kay’s sued for Sherman Act Section 1
violation for fixing resale prices. Jury awarded $1.2 million damages, trebled. Leegin appealed.
Decision: Reversed. Dr. Miles is overruled. Vertical price restraints are to be judged by a rule of
Questions: 1. Assuming resale price maintenance to be generally legal, what kind of companies
do you think would benefit the most from the practice?
Presumably it will be smaller retailers and producers of high-end or nitch market products. Mass
2. The overturned a rule set in a case almost 100 years ago. Should courts overturn old rulings?
Sure. The common law is flexible and antitrust law is largely common law since the Sherman
Vertical Nonprice Restraints—Vertical non-price restraints involve arrangements by
manufacturers, distributors, and/or retailers to limit sales of products by territorial, locational, or
customer restrictions. Vertical non-price restraints are subject to a rule of reason review by the
courts, as opposed to being per se illegal.
Add. Case: Business Electronics v. Sharp Electronics (S. Ct., 1988)–Business Electronics
(BE) was appointed by Sharp to be its (only) retailer in Houston. Four years later, Sharp
appointed another retailer to sell Sharp products in Houston. Sharp published a list of suggested
retail prices, but did not require retailers to follow the prices. BE undersold the second retailer,
who demanded Sharp terminate its sales to BE, or it would stop carrying Sharp products. Sharp
terminated BE, which then sued, alleging a conspiracy under §1 of the Sherman Act.
Decision: The Court held that a presumption in favor of a rule of reason standard exists in cases
involving vertical restraints of trade. There was no evidence in this case that Sharp and the
Add. Case: Continental T.V. v. GTE Sylvania (S. Ct., 1977)–To increase its tiny share of the
market for televisions, Sylvania decided to limit the number of retailers it sold to. Allowing each
Sylvania dealer to be the only dealer in its area gave each incentives to push Sylvania’s products
and led to an increase in Sylvania’s market share. One retailer, Continental T.V., was cut off by
Sylvania in favor of another dealer in the area. Continental sued, alleging the territorial
restrictions were violations of §1 of the Sherman Act.
Decision: The Court, applying a rule of reason analysis to the territorial restraints, determined
that Sylvania’s actions were not illegal. The Court noted that “vertical restrictions promote
interbrand competition by allowing the manufacturer to achieve certain efficiencies in the
Exclusionary Practices—These are certain business practices designed to exclude competitors
from a particular market. These practices include tie-in arrangements, exclusive-dealing
agreements, and boycotts. These arrangements may be subject to the provisions of the antitrust
acts if found to be anti-competitive.
Tying Arrangements—An agreement by one party to sell a product (the tying product) only on
the condition that the purchaser also buy another product (the tied product). Where monopoly
power exits, tying arrangements are deemed illegal under the antitrust laws. Harmless tie-ins,
such as buying a bag of chips for less if you buy a certain soft drink, are not illegal because there
is no monopoly power over either product.
Rule of Reason Applied to Tie-In Cases. Tie-in arrangements are illegal when few alternatives or
no alternatives to the products at issue exist. However, courts apply a rule of reason test when
competitive alternatives to products do exist, as in the Fortner and Hyde cases. When there is
product or service competition, tie-ins will likely pass the rule of reason test.
Add. Case: U.S. Steel Corp. v. Fortner Enterprises (S. Ct., 1977)–U.S. Steel had a division
that produced prefabricated housing (the Home Division). U.S. Steel also operated Credit Corp.,
a company that provided financing to entities buying from U.S. Steel. Fortner received a loan
from Credit Corp. to buy land that he was to develop for placement of homes purchased from the
Home Division. Fortner’s venture failed and he then claimed that his contract with Credit Corp.
was a violation of the Sherman Act because its tie-in to purchase of their mobile homes
restrained trade.
Decision: The Court, applying a rule of reason test, determined that U.S. Steel did not hold
monopoly power in the prefabricated housing market. Both the prefabricated housing market
Add. Case: Jefferson Parish Hospital District No. 2 v. Hyde (S. Ct., 1984)–Hyde, an
anesthesiologist, applied for hospital privileges (admission to staff) at a hospital in Louisiana.
He was denied admission because the hospital already had contracted with a medical
corporation that performed all anesthesia at the hospital. Hyde sued, alleging that this exclusive
arrangement (tying surgery at the hospital to the use of a single provider of anesthesia) violated
§1 of the Sherman Act.
Decision: The Court focused on the market involved and the amount of power that the hospital
held in the market. Since patients may choose to use various hospitals other than East Jefferson,
International Perspective: China’s Anti-Monopoly Law
The PRC adopted an Anti-Monopoly Law (AML) in 2008. It functions more like EU antitrust
law than U.S. law, although both concern vertical and horizontal practices. There are no criminal
penalties. Enforcement, as in the EU, affects multinationals with operations in the country. As
happens in other countries, the law may be used to restrict the ability of foreign firms to establish
strong positions in the country by merging with a local firm.
Vertical Restraint Guidelines—The Department of Justice issued a set of guidelines that specify
when a court is likely to impose a per se rule of illegality in cases of vertical restraints. To be per
se illegal, three conditions must be met: 1) the seller must have market power in the tying
product; 2) tied and tying products must be separate; and, 3) there must be evidence of
substantial adverse effect in the tied product market. In all situations the rule of reason standard
is applied, as in Kodak.
Add. Case: Eastman Kodak v. Image Technical Services (S. Ct., 1992)–Kodak sold copiers
and micrographic equipment and replacement parts for them (some of which are produced only
by Kodak). It also provides service for its products. Independent service organizations (ISOs)
service and repair Kodak products, often at a price lower than what Kodak charges. Kodak
began a policy that it would only sell replacement parts to persons who bought Kodak equipment
and Kodak service. It became difficult for ISOs to obtain replacement parts for Kodak
equipment. A group of ISOs sued, alleging that Kodak illegally tied its sale of equipment and
service to its sale of parts.
Decision: Kodak argued a) that it did not have “appreciable market power” in the tying market
and b) that its activities did not constitute a tying arrangement (because service and sale of parts
were not separate products). The Court rejected Kodak’s claim that no tying arrangement existed
Add. Info: Kodak spawned a slew of similar suits, but victories are not automatic. As the 9th
circuit noted in Datagate v. Hewlett-Packard, to bring a per se violation action, one must show
that the commerce affected is “not insubstantial,” which depends on the facts surrounding
individual cases. Kodak lost one case in 1995 for $80 million (treble damages).
Add. Info: Exclusive Dealing—This is a contractual arrangement between buyer and seller in
which the seller agrees to sell a product to the buyer on the condition that the buyer not
purchase the products of the seller’s competitors. These arrangements are prohibited by §3 of the
Clayton Act when they “substantially lessen competition or tend to create a monopoly.”
Applying a rule of reason analysis to exclusive dealing arrangements, a court considers: the line
of commerce involved; the area of effective competition in this line of commerce; and, whether
or not the arrangement at issue forecloses competition that constitutes a substantial share of the
relevant market. Suits are not common in this area.