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Chapter 40
ANTITRUST
A. Sherman Act
1. Restraint of Trade
a. Standards
b. Horizontal and Vertical Restraints
c. Concerted Action
d. Price Fixing
e. Market Allocations
f. Boycotts
g. Tying Arrangements
2. Monopolies
a. Monopolization
b. Attempts to Monopolize
c. Conspiracies to Monopolize
B. Clayton Act
1. Tying Contracts and Exclusive Dealing
2. Mergers
C. Robinson-Patman Act
1. Primary-line Injury
2. Secondary- and Tertiary-line Injury
3. Cost Justification
4. Meeting Competition
D. Federal Trade Commission Act
Cases in This Chapter
American Needle, Inc. v. National Football League
Leegin Creative Leather Products, Inc. v. PSKS, Inc.
Eastman Kodak Co. v. Image Technical Services, Inc.
Hospital Corporation of America v. FTC
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Describe and explain horizontal restraints of trade.
Describe and explain vertical restraints of trade.
Explain monopolization, attempts to monopolize, and conspiracies to
monopolies and why they are illegal.
Explain the Clayton Act and its rules governing (a) tying contracts, (b)
exclusive dealing, (c) horizontal mergers, (d) vertical mergers, and (e)
conglomerate mergers.
Describe (a) the Robinson-Patman Act and the various defenses to it
and (b) the Federal Trade Commission Act.
TEACHING NOTES
Although the public’s interest is best served by free competition in trade and
industry, most businesses would prefer to eliminate competition and enjoy
control over the price of their goods and the quantity they produce. The
A. SHERMAN ACT
The Sherman Act gives the federal district courts power to issue injunctions
restraining violations; and anyone injured by a violation is entitled to recover
treble damages in a civil action. Section 1 prohibits contracts, combinations,
and conspiracies that restrain trade, and Section 2 precludes monopolies or
attempts to monopolize.
The Supreme Court previously stated the purpose of the Sherman Act as
follows:
The Sherman Act was designed to be a comprehensive charter of economic
liberty aimed at preserving free and unfettered competition as the rule of
trade. It rests on the premise that the unrestrained interaction of
competitive forces will yield the best allocation of our economic resources,
the lowest prices, the highest quality and the greatest material progress,
Restraint of Trade
Section 1 of the Sherman Act provides that “[e]very 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 hereby
declared to be illegal.” Because the language of the section is so broad,
judicial interpretation has played a signiticant role in establishing the
elements that constitute a violation.
Standards — Includes unreasonable restraints of trade. The Rule of Reason
test is a =exible standard to determine if practice unreasonably restricts
competition; the test considers the makeup of the industry, the defendants’
positions within the industry, ability of the defendants’ competitors to
respond to the challenged practice, and the defendants’ purpose in adopting
the restraint. Certain categories of restraints are unreasonable by their very
nature, that is, illegal per se.
CASE 40-1
AMERICAN NEEDLE, INC. v. NATIONAL FOOTBALL
LEAGUE
Supreme Court of the United States, 2010
560 U.S. 183, 130 S.CT. 2201, 176 L.ED. 2D 947
http://scholar.google.com/scholar_case?case=7494086478657562944&q=American+Needle,+Inc.+v.
+National+Football+League&hl=en&as_sdt=2,34&as_vis=1
Stevens, J.
[Originally organized in 1920, the National Football League (NFL) is an unincorporated
association that encompasses 32 separately owned professional football teams. Each team
has its own name, colors, and logo, and owns related intellectual property. Prior to 1963, the
teams made their own arrangements for licensing their intellectual property and marketing
trademarked items such as caps and jerseys. In 1963, the teams formed National Football
Between 1963 and 2000, NFLP granted nonexclusive licenses to a number of vendors,
permitting them to manufacture and sell apparel bearing team insignias. American Needle,
Inc., was one of those licensees. In December 2000, the teams voted to authorize NFLP to
grant exclusive licenses, and NFLP granted Reebok International Ltd. an exclusive ten-year
license to manufacture and sell trademarked headwear for all thirty-two teams. It thereafter
declined to renew American Needle’s nonexclusive license.
American Needle filed this action in the Northern District of Illinois, alleging that the
agreements between the NFL, its teams, NFLP, and Reebok violated Sections 1 and 2 of the
Sherman Act. In their answer to the complaint, the defendants asserted that the teams, NFL,
and NFLP were incapable of conspiring within the meaning of Section 1 “because they are a
* * *
We have long held that concerted action under §1 does not turn simply on whether the
parties involved are legally distinct entities. Instead, we have eschewed such formalistic
distinctions in favor of a functional consideration of how the parties involved in the alleged
anticompetitive conduct actually operate. * * *
Conversely, there is not necessarily concerted action simply because more than one
legally distinct entity is involved. * * *
* * *
* * * The key is whether the alleged “contract, combination …, or conspiracy” is
concerted action—that is, whether it joins together separate decisionmakers. The relevant
inquiry, therefore, is whether there is a “contract, combination … or conspiracy” amongst
Directly relevant to this case, the teams compete in the market for intellectual property.
To a firm making hats, the Saints and the Colts are two potentially competing suppliers of
valuable trademarks. When each NFL team licenses its intellectual property, it is not
pursuing the “common interests of the whole” league but is instead pursuing interests of
each “corporation itself,” [citation]; teams are acting as “separate economic actors pursuing
separate economic interests,” and each team therefore is a potential “independent cente[r] of
decisionmaking,” [citation]. Decisions by NFL teams to license their separately owned
trademarks collectively and to only one vendor are decisions that “depriv[e] the marketplace
of independent centers of decisionmaking,” [citation], and therefore of actual or potential
competition. [Citation.] * * *
* * *
The question whether NFLP decisions can constitute concerted activity covered by §1 is
closer than whether decisions made directly by the 32 teams are covered by §1. This is so
both because NFLP is a separate corporation with its own management and because the
record indicates that most of the revenues generated by NFLP are shared by the teams on an
equal basis. Nevertheless we think it clear that for the same reasons the 32 teams’ conduct is
covered by §1, NFLP’s actions also are subject to §1, at least with regards to its marketing of
including their decisions as the NFLP, there would be nothing to prevent each of the teams
from making its own market decisions relating to purchases of apparel and headwear, to the
sale of such items, and to the granting of licenses to use its trademarks.
* * * Thirty-two teams operating independently through the vehicle of the NFLP are not
like the components of a single firm that act to maximize the firm’s profits. The teams
remain separately controlled, potential competitors with economic interests that are distinct
from NFLP’s financial well-being. [Citation.] Unlike typical decisions by corporate
shareholders, NFLP licensing decisions effectively require the assent of more than a mere
majority of shareholders. And each team’s decision reflects not only an interest in NFLP’s
profits but also an interest in the team’s individual profits. [Citation.] The 32 teams capture
If the fact that potential competitors shared in profits or losses from a venture meant that
the venture was immune from §1, then any cartel “could evade the antitrust law simply by
creating a ‘joint venture’ to serve as the exclusive seller of their competing products.”
[Citations.] However, competitors “cannot simply get around” antitrust liability by acting
“through a third-party intermediary or ‘joint venture.’” [Citation.]
* * * The fact that NFL teams share an interest in making the entire league successful
and profitable, and that they must cooperate in the production and scheduling of games,
provides a perfectly sensible justification for making a host of collective decisions. But the
conduct at issue in this case is still concerted activity under the Sherman Act that is subject
to §1 analysis.
Other features of the NFL may also save agreements amongst the teams. We have
recognized, for example, “that the interest in maintaining a competitive balance” among
“athletic teams is legitimate and important.” [Citation.] While that same interest applies to
the teams in the NFL, it does not justify treating them as a single entity for §1 purposes
Accordingly, the judgment of the Court of Appeals is reversed, and the case is remanded
for further proceedings consistent with this opinion.
*** Chapter Outcomes ***
Describe and explain horizontal and vertical restraints of trade.
Horizontal and Vertical Restraints — Trade restraints are horizontal if
they involve competitors at the same level, while vertical agreements
include those between parties who are not in direct competition and are at
di3erent levels of the chain of distribution.
Concerted Action — Section 1 does not prohibit unilateral (solitary)
conduct; rather, it forbids concerted action. Thus, one person or business by
CASE 40-2
LEEGIN CREATIVE LEATHER PRODUCTS, INC. v. PSKS,
INC.
Supreme Court of the United States, 2007
551 U.S. 877, 127 S.Ct. 2705, 168 L.Ed.2d 623
http://scholar.google.com/scholar_case?case=15925807009998997000&q=127+S.Ct.+2705&hl=en&as_sdt=2,34
Kennedy, J.
Petitioner, Leegin Creative Leather Products, Inc. (Lee-gin), designs, manufactures, and
distributes leather goods and accessories. In 1991, Leegin began to sell belts under the brand
name “Brighton.” The Brighton brand has now expanded into a variety of women’s fashion
accessories. It is sold across the United States in over 5,000 retail establishments, for the
most part independent, small boutiques and specialty stores. Leegin’s president, Jerry Kohl,
also has an interest in about 70 stores that sell Brighton products. Leegin asserts that, at least
for its products, small retailers treat customers better, provide customers more services, and
Respondent, PSKS, Inc. (PSKS), operates Kay’s Kloset, a women’s apparel store in
Lewisville, Texas. Kay’s Kloset buys from about 75 different manufacturers and at one time
sold the Brighton brand. It first started purchasing Brighton goods from Leegin in 1995.
Once it began selling the brand, the store promoted Brighton. For example, it ran Brighton
advertisements and had Brighton days in the store. Kay’s Kloset became the destination
retailer in the area to buy Brighton products. Brighton was the store’s most important brand
and once accounted for 40 to 50 percent of its profits.
A year after instituting the pricing policy Leegin introduced a marketing strategy known
as the “Heart Store Program.” It offered retailers incentives to become Heart Stores, and, in
exchange, retailers pledged, among other things, to sell at Leegin’s suggested prices. Kay’s
In December 2002, Leegin discovered Kay’s Kloset had been marking down Brighton’s
entire line by 20 percent. Kay’s Kloset contended it placed Brighton products on sale to
compete with nearby retailers who also were undercutting Leegin’s suggested prices.
Leegin, nonetheless, requested that Kay’s Kloset cease discounting. Its request refused,
Leegin stopped selling to the store. The loss of the Brighton brand had a considerable
negative impact on the store’s revenue from sales.
PSKS sued Leegin in the United States District Court for the Eastern District of Texas. It
alleged, among other claims, that Leegin had violated the antitrust laws by “enter-[ing] into
agreements with retailers to charge only those prices fixed by Leegin.” Leegin planned to
The Court of Appeals for the Fifth Circuit affirmed. * * * We granted certiorari to
determine whether vertical minimum resale price maintenance agreements should continue
to be treated as per se unlawful.
* * *
The rule of reason is the accepted standard for testing whether a practice restrains trade
in violation of §1. [Citation.] “Under this rule, the fact finder weighs all of the circumstances
of a case in deciding whether a restrictive practice should be prohibited as imposing an
unreasonable restraint on competition.” [Citation.] Appropriate factors to take into account
include “specific information about the relevant business” and “the restraint’s history,
The rule of reason does not govern all restraints. Some types “are deemed unlawful per
se.” [Citation.] The per se rule, treating categories of restraints as necessarily illegal,
eliminates the need to study the reasonableness of an individual restraint in light of the real
market forces at work, [citation]; and, it must be acknowledged, the per se rule can give
clear guidance for certain conduct. Restraints that are per se unlawful include horizontal
agreements among competitors to fix prices, [citation], or to divide markets [citation].
Resort to per se rules is confined to restraints, like those mentioned, “that would always
or almost always tend to restrict competition and decrease output.” [Citation.] To justify a
per se prohibition a restraint must have “manifestly anticompetitive” effects, [citation], and
“lack … any redeeming virtue,” [citation].
* * *
The reasons upon which Dr. Miles relied do not justify a per se rule. As a consequence, it
is necessary to examine, in the first instance, the economic effects of vertical agreements to
fix minimum resale prices, and to determine whether the per se rule is nonetheless
appropriate. [Citation.]
* * *
The justifications for vertical price restraints are similar to those for other vertical
restraints. [Citation.] Minimum resale price maintenance can stimulate interbrand
competition—the competition among manufacturers selling different brands of the same
Absent vertical price restraints, the retail services that enhance interbrand competition
might be underprovided. This is because discounting retailers can free ride on retailers who
furnish services and then capture some of the increased demand those services generate.
[Citation.] Consumers might learn, for example, about the benefits of a manufacturer’s
product from a retailer that invests in fine showrooms, offers product demonstrations, or
hires and trains knowledgeable employees. [Citation.] Or consumers might decide to buy the
product because they see it in a retail establishment that has a reputation for selling
high-quality merchandise. [Citation.] If the consumer can then buy the product from a
Resale price maintenance, in addition, can increase interbrand competition by facilitating
market entry for new firms and brands. “[N]ew manufacturers and manufacturers entering
new markets can use the restrictions in order to induce competent and aggressive retailers to
make the kind of investment of capital and labor that is often required in the distribution of
products unknown to the consumer.” [Citations.] New products and new brands are essential
to a dynamic economy, and if markets can be penetrated by using resale price maintenance
there is a procompetitive effect.
Resale price maintenance can also increase interbrand competition by encouraging
retailer services that would not be provided even absent free riding. It may be difficult and
inefficient for a manufacturer to make and enforce a contract with a retailer specifying the
While vertical agreements setting minimum resale prices can have procompetitive
justifications, they may have anticompetitive effects in other cases; and unlawful price
fixing, designed solely to obtain monopoly profits, is an ever present temptation. Resale
price maintenance may, for example, facilitate a manufacturer cartel. [Citation.] * * *
Vertical price restraints also “might be used to organize cartels at the retailer level.”
[Citation.] A group of retailers might collude to fix prices to consumers and then compel a
lower cost structures would be prevented from charging lower prices by the agreement.
[Citations.]
A horizontal cartel among competing manufacturers or competing retailers that
decreases output or reduces competition in order to increase price is, and ought to be, per se
unlawful. * * *
Resale price maintenance, furthermore, can be abused by a powerful manufacturer or
retailer. A dominant retailer, for example, might request resale price maintenance to forestall
innovation in distribution that decreases costs. A manufacturer might consider it has little
choice but to accommodate the retailer’s demands for vertical price restraints if the
manufacturer believes it needs access to the retailer’s distribution network. * * *
Notwithstanding the risks of unlawful conduct, it cannot be stated with any degree of
* * *
Resale price maintenance, it is true, does have economic dangers. If the rule of reason
were to apply to vertical price restraints, courts would have to be diligent in eliminating their
anticompetitive uses from the market. * * *
* * *
The rule of reason is designed and used to eliminate anticompetitive transactions from
* * *
The judgment of the Court of Appeals is reversed, and the case is remanded for
proceedings consistent with this opinion.
It is so ordered.
Market Allocations — Horizontal market divisions are illegal per se, while
vertical restrictions are evaluated in accordance with the rule of reason.
Boycotts — Although sellers can refuse to sell to a particular buyer, an
Cooperative arrangements “designed to increase economic eBciency and
render markets more, rather than less, competitive” are subject to the rule of
reason.
