978-1285770178 Lecture Note BL ComLaw 1e IM-Ch26 Part 2

whole or in part.

in about half of the states.

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12 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

ARKANSAS CODE OF 1987 ANNOTATED

TITLE 4. BUSINESS AND COMMERCIAL LAW

SUBTITLE 6. BUSINESS PRACTICES

CHAPTER 75. UNFAIR PRACTICES

SUBCHAPTER 2. UNFAIR PRACTICES ACT

4-75-201 Title.

This subchapter shall be known and designated as the “Unfair Practices Act”.

4-75-202 Purpose.

The General Assembly declares that the purpose of this subchapter is to safeguard the public against the

creation or perpetuation of monopolies and to foster and encourage competition by prohibiting unfair and

discriminatory practices by which fair and honest competition is destroyed or prevented.

4-75-203 Construction.

This subchapter shall be literally construed so that its beneficial purposes may be subserved.

4-75-204 Penalties.

Any person, firm, or corporation, whether as principal, agent, officer, or director, for himself, or itself, or for

another person, or for any firm or corporation, or any corporation who or which shall violate any of the

provisions of this subchapter is guilty of a misdemeanor for each single violation and upon conviction shall be

punished by a fine of not less than one hundred dollars ($100) nor more than one thousand dollars ($1,000)

or by imprisonment not exceeding six (6) months, or by both a fine and imprisonment in the discretion of the

court.

4-75-205 Forfeiture of charter, rights, etc. — Proceedings.

(a) Upon the third violation of any of the provisions of this subchapter by any corporation, it shall be the duty

of the Attorney General to institute proper suits or quo warranto proceedings in any court of competent

jurisdiction for the forfeiture of its charter, rights, franchises, or privileges and powers exercised by the

corporation, and to permanently enjoin it from transacting business in this state.

(b) If in such action the court finds that the corporation is violating or has violated any of the provisions of this

subchapter, it must enjoin the corporation from doing business in this state permanently or for such time as

the court shall order, or must annul the charter or revoke the franchise of the corporation.

4-75-206 Contracts violating subchapter illegal.

Any contract, express or implied, made by any person, firm, or corporation in violation of any of the

provisions of this subchapter is declared to be an illegal contract and no recovery thereon shall be had.

4-75-207 Destruction of competition by price discrimination prohibited.

(a) It shall be unlawful for any person, firm, or corporation doing business in the State of Arkansas and

engaged in the production, manufacture, distribution, or sale of any commodity or product or of service or

output of a service trade of general use or consumption or of the product or service of any public utility with

the intent to destroy the competition of any regular established dealer in the commodity, product, or service,

or to prevent the competition of any person, firm, private corporation, or municipal or other public corporation

who or which in good faith intends and attempts to become a dealer to discriminate between different

sections, communities, or cities or portions thereof, or between different locations in the sections,

communities, cities, or portions thereof in this state, by selling or furnishing the commodity, product, or

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whole or in part.

service at a lower rate in one section, community, or city or any portion thereof, or in one location in the

section, community, or city or any portion thereof, than in another, after making allowance for difference, if

any, in the grade, quality, or quantity and in the actual cost of transportation from the point of production, if a

raw product or commodity, or from the point of manufacture, if a manufactured product or commodity.

(b) The inhibition of this section against locality discrimination shall include any scheme of special rebates,

collateral contracts, or any device of any nature whereby such discrimination is, in substance or fact, effected

in violation of the spirit and intent of this subchapter.

(c) This subchapter shall not be construed to prohibit the meeting in good faith of a competitive rate, or to

prevent a reasonable classification of service by public utilities for the purpose of establishing rates.

4-75-208 Secret payments or allowance of rebates, refunds, etc. — Penalty.

(a) The secret payment or allowance of rebates, refunds, commissions, or unearned discounts, whether in

the form of money or otherwise, or secretly extending to certain purchasers special services or privileges not

extended to all purchasers purchasing upon like terms and conditions, to the injury of a competitor and

where the payment or allowance tends to destroy competition, is an unfair trade practice.

(b) Any person, firm, partnership, corporation, or association resorting to such trade practice shall be

deemed guilty of a misdemeanor and on conviction shall be subject to the penalties set out in § 4–75-204.

4-75-209 Sale at less than cost or with intent to injure competitors.

(a)(1) It shall be unlawful for any person, partnership, firm, corporation, joint-stock company, or other

association engaged in business within this state, to sell, offer for sale, or advertise for sale any article or

product, or service or output of a service trade, at less than the cost thereof to the vendor, or to give, offer to

give, or advertise the intent to give away any article or product, or service or output of a service trade, for the

purpose of injuring competitors and destroying competition.

(2) Any person or entity so doing shall be guilty of a misdemeanor, and on conviction shall be subject to the

penalties set out in § 4–75-204 for any such act.

(b)(1) The term “cost” as applied to production is defined as including the cost of raw materials, labor, and all

overhead expenses of the producer; and, as applied to the distribution, “cost” shall mean the invoice or

replacement cost, whichever is lower, of the article or product to the distributor and vendor plus the cost of

doing business by the distributor and vendor.

(2) The “cost of doing business” or “overhead expense” is defined as all costs of doing business incurred in

the conduct of the business and must include without limitation the following items of expense: labor, which

includes salaries of executives and officers, rent, interest on borrowed capital, depreciation, selling cost,

maintenance of equipment, delivery cost, credit losses, all types of licenses, taxes, insurance, and

advertising.

(c) In establishing the cost of a given article or product to the distributor and vendor, the invoice cost of the

article or product purchased at a forced, bankrupt, closeout sale, or other sale outside of the ordinary

channels of trade may not be used as a basis for justifying a price lower than one based upon the

replacement cost as of date of the sale of the article or product replaced through the ordinary channels of

trade, unless:

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whole or in part.

(1) The article or product is kept separate from goods purchased in the ordinary channels of trade; and

(2) The article or product is advertised and sold as merchandise purchased at a forced, bankrupt, or closeout

sale, or by means other than through the ordinary channels of trade, and the advertising states the

conditions under which the goods were so purchased, and the quantity of the merchandise to be sold or

offered for sale.

(d) In any injunction proceeding or in the prosecution of any person as officer, director, or agent, it shall be

sufficient to allege and prove the unlawful intent of the person, firm, or corporation for whom or which he

acts.

(e) Where a particular trade or industry of which the person, firm, or corporation complained against is a

member has an established cost survey for the locality and vicinity in which the offense is committed, the

cost survey shall be deemed competent evidence to be used in proving the costs of the person, firm, or

corporation complained against within the provisions of this subchapter.

(f) The provisions of this section shall not apply to any sale made:

(1) In closing out in good faith the owner’s stock or any part thereof for the purpose of discontinuing his trade

in the stock or commodity, and, in the case of the sale of seasonal goods or to the bona fide sale of

perishable goods, to prevent loss to the vendor by spoilage or depreciation, if notice is given to the public

thereof;

(2) When the goods are damaged or deteriorated in quality, and notice is given to the public thereof;

(3) By an officer acting under the orders of any court;

(4) In an endeavor made in good faith to meet the legal prices of a competitor as herein defined selling the

same article or product, or service or output of a service trade, in the same locality or trade area.

(g) Any person, firm, or corporation who performs work upon, renovates, alters, or improves any personal

property belonging to another person, firm, or corporation shall be construed to be a vendor within the

meaning of this subchapter.

4-75-210 Liability of directors, officers, agents, etc. — Proof of unlawful intent.

(a) Any person who, either as director, officer, or agent of any firm or corporation or as agent of any person

violating the provisions of this subchapter, assists or aids, directly or indirectly, in the violation shall be

responsible therefore equally with the person, firm, or corporation for whom or which he acts.

(b) In the prosecution of any person as officer, director, or agent, it shall be sufficient to allege and prove the

unlawful intent of the person, firm, or corporation for whom or which he acts.

4-75-211 Remedies — Witnesses and documents — Immunity.

(a) Any person, firm, private corporation, or municipal or other public corporation, or trade association, may

maintain an action to enjoin a continuance of any act or acts in violation of this subchapter and, if injured

thereby, for the recovery of damages.

(b)(1) If, in such action, the court shall find that the defendant is violating or has violated any of the provisions

of this subchapter, it shall enjoin the defendant from a continuance thereof.

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whole or in part.

(2) It shall not be necessary that actual damages to the plaintiff be alleged or proved.

(3) In addition to injunctive relief, the plaintiff in the action shall be entitled to recover from the defendant

three (3) times the amount of the actual damages, if any, sustained.

(c)(1) Any defendant in an action brought under the provisions of this section or any witness desired by the

state may be required to testify under the provisions of §§ 16–43-211 and 16-43–701.

(2) In addition, the books and records of any such defendant may be brought into court and introduced, by

reference, into evidence.

(3) However, no information so obtained may be used against the defendant as a basis for a misdemeanor

prosecution under the provisions of §§ 4-75-204 and 4-75-207–4-75-210.

(d) The remedies prescribed in this subchapter are cumulative and in addition to the remedies prescribed in

the Public Utilities Act, § 23-1-101 et seq., for discrimination by public utilities. If any conflict shall arise

between this subchapter and the Public Utilities Act, § 23-1-101 et seq., the latter shall prevail.

1. Monopoly Power

Monopoly refers to control by a single entity. Monopoly power is the power to control prices or

exclude competition. If a firm has sufficient market power to affect prices and output, it may be a

monopoly even though it is not the sole seller in the market. To define a firm’s market power, courts

look to its share of the relevant market.

CASE SYNOPSIS—

Case 26.2: E.I. du Pont de Nemours and Co. v. Kolon Industries, Inc.

E.I. du Pont de Nemours and Co. makes and sells para-aramid fiber. Only three producers of the fiber—

DuPont (based in the United Stated), Teijin (Dutch), and Kolon (based in South Korea)—sell it in the U.S.

market. DuPont filed a suit in a federal district court against Kolon, a new entrant to the market, for

misappropriation of trade secrets. Kolon counterclaimed that DuPont monopolized and attempted to

monopolize the para-aramid market in violation of Section 2 of the Sherman Act. DuPont filed a motion to

dismiss the counterclaim, which the court granted. Kolon appealed.

The U.S. Court of Appeals for the Fourth Circuit reversed. Kolon alleged sufficient facts to overcome the

motion to dismiss. DuPont controls over 70 percent of the U.S. para–aramid fiber market—this shows its

monopoly power. DuPont imposed multiyear agreements on its high-volume customers, thereby limiting the

other producers’ ability to compete. “DuPont’s conduct has had a direct, substantial, and adverse effect on

competition. Further, DuPont’s conduct has constrained the only potential entrant [Kolon] to the United States

in decades from effectively entering the market.”

………………….………….………………………………..………………………….………………...…………………

Notes and Questions

How might the imposition of multiyear contracts on DuPont’s customers benefit consumers? If the

contracts cause the customers to buy more fiber than they otherwise might, the purchases will likely lead to

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whole or in part.

the manufacture of more fiber-based products. And increases in output generally result in lower prices to

consumers. The customers might even be induced to find other uses for the fiber, which could lead to more

products, or improved products, or other economic efficiencies.

How might the imposition of multiyear contracts on DuPont’s customers harm consumers?

Consumer benefits might not result if the customers are induced to buy more fiber but do not use the excess

to produce more output or to find other uses for it. Also, any increase in purchases from DuPont could offset

purchases from DuPont’s competitors, which is exactly what Kolon alleged in this case.

ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?”

QUESTION IN CASE 26.2

Suppose that DuPont had 45 percent of the market and Kolon and numerous other competitors

had the remaining 55 percent. Would the appellate court have ruled the same way? Why or why not?

Probably not. Most Section 2 Sherman Act claims that succeed involve companies that have over 50 percent

of market share. A plaintiff must prove both monopoly power and an intent to monopolize to succeed. If there

had been numerous competitors, the court would have been hard pressed to agree that DuPont’s actions had

created or attempted to create a monopoly in the para-aramid fiber market. There would have been

insufficient evidence that the firm had monopoly power such that it could control prices or restrict output.

ADDITIONAL CASES ADDRESSING THIS ISSUE —

Other cases including claims of monopolization include the following:

• PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101 (2d Cir. 2002) (in a cola syrup manufacturer’s suit against a

competitor, alleging in part monopolization based on the defendant’s distributorship agreements with

independent food service distributors (IFD) that prohibited the IFDs from delivering the plaintiff’s products to

any of their customers, the competitor lacked market power to support the claim when it had only a 64–

percent share of the total fountain syrup sales by the three largest suppliers).

• Tate v. Pacific Gas & Electric Co., 230 F.Supp.2d 1072 (N.D.Cal. 2002) (a natural gas utility had

monopoly power in the market of supplying specialized natural gas technologies in its service area, for the

purpose of antitrust claims asserted by the seller of portable gas liquefaction devices, even though the utility

was not yet in the business of selling such devices, because the essence of the seller’s claim was that the

utility had acted to protect its existing business and to clear the way for its future entry into the liquefied gas

supply business).

• General Cigar Holdings, Inc. v. Altadis, S.A., 205 F.Supp.2d 1335 (S.D.Fla. 2002) (there was no

dangerous probability that a Spanish cigar manufacturer would be successful in achieving a monopoly, for

purposes of an attempted monopolization claim, where the manufacturer had only a 39–percent market share

in the markets for cigars and non-Cuban premium cigars, and there were no barriers to entry in markets).

• Geneva Pharmaceuticals Technology Corp. v. Barr Laboratories, Inc., 201 F.Supp.2d 236 (S.D.N.Y.

2002) (a supplier of raw material for a drug manufacturer’s product lacked power in the relevant market, for

whole or in part.

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whole or in part.

Corporation for Assigned Names and Numbers (ICANN), to oversee the distribution of domain names. At that

time, NSI’s domain name registration service was divided into two separate units: a registrar and a registry

(the Registry).a

The registrar unit continues to register domain names although it is now only one of eighty or so

accredited registrars in operation. The Registry, in contrast, is the only entity of its kind. It maintains a

centralized “WHOIS” database of all domain names using the “.com,” “.org,” and “.net” top level domains,

regardless of whether the names have been registered by NSI or one of the other accredited registrars. The

Registry’s WHOIS database allows all registrars to determine almost instantaneously which domain names

are already registered and therefore unavailable to others. The public can also access the Registry’s WHOIS

database.

At the time Smith brought his suit, the WHOIS database included approximately 163,000 expired domain

names—names that had been registered but belonged to registrants who had failed to pay the required

registration renewal fees. NSI’s policy was to give registrants a “grace period” of two to three months in which

they could renew their expired registration. In the meantime, the names remained on the WHOIS database

and were unavailable for others.

WHAT IS THE RELEVANT PRODUCT MARKET?

Smith claimed that by failing to make expired domain names available to himself and others, NSI had

intentionally maintained an unlawful monopoly over expired domain names in violation of Section 2 of the

Sherman Act. The court, however, concluded that the relevant product market was not expired domain names

but all domain names—and NSI did not have monopoly power over all domain names. The court reasoned

that “the relevant market includes those commodities or services that are reasonably interchangeable.”

Because of the “virtually limitless” supply of domain names, said the court, “there will always be reasonable

substitute names available for any given name kept out of circulation.”b

FOR CRITICAL ANALYSIS

Do you agree that the relevant market for domain names should include all domain names and not

just those that have expired? Why or why not?

a. In 2000, NSI became a wholly owned subsidiary of VeriSign, Inc., and the Registry was subsequently renamed VeriSign Global

Registry Services. Both NSI and VeriSign were defendants in this case.

b. Smith v. Network Solutions, Inc., 135 F.Supp.2d 1159 (N.D.Ala. 2001).

b. Relevant Geographic Market

The geographic market is that section of the country within which a firm can increase its price a

bit without attracting new sellers or without losing many customers to alternative suppliers

outside that area.

3. The Intent Requirement

a. Why Intent Is Required

The acquisition of monopoly power is not an antitrust violation if it results from—

• Business acumen—good management and efficiency.

• The development of a superior product.

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whole or in part.

• An historic accident.

b. Inferred from Anticompetitive Conduct

If a firm possesses market power as a result of some purposeful act to acquire or to maintain

that power through anticompetitive means, it is a violation of Section 2.

4. Unilateral Refusals to Deal

Refusals to deal involve manufacturers who refuse to deal with retailers or dealers who cut prices to

levels substantially below the manufacturers’ suggested retail prices. A refusal to deal is not a

violation of Section 1, although it may violate Section 2, depending on the monopoly power of the

firm refusing to deal and the anticompetitive effect on the market.

B. ATTEMPTS TO MONOPOLIZE

This offense may involve predatory pricing (defined above) or predatory bidding—the acquisition and

use of monopsony power (market power on the buy side). This occurs when a buyer bids up the price of

an input too high for competitors to pay, forcing them out of the market. Cases involving attempts to

monopolize require proof of—

• Anticompetitive conduct.

• Intent to exclude competitors and garner monopoly power.

• A dangerous probability of success—a serious threat of monopolization—which exists only when a

party has some degree of market power.

IV. The Clayton Act

The Clayton Act targets specific practices that substantially reduce competition or could lead to monopoly

power but are not clearly prohibited by the Sherman Act. The U.S. Department of Justice and the Federal

Trade Commission (FTC) enforce the act. Private parties may also sue for treble damages and attorneys’

fees.

A. SECTION 2—PRICE DISCRIMINATION

Price discrimination occurs when a seller charges different prices to competitive buyers.

1. Required Elements

• The seller must be engaged in interstate commerce.

• The goods must be of like grade or quality.

• The goods must have been sold to two or more buyers.

• The effect of the price discrimination must be to substantially lessen competition or create a

competitive injury.

2. Defenses

• Cost justification—a buyer’s purchases saved a seller costs in producing and selling goods.

• Meeting a competitor’s prices—when a lower price is charged temporarily and in good faith to

meet another seller’s equally low price to the buyer’s competitor.

• Changing market conditions—changing conditions affected the market for or marketability of

the goods.

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whole or in part.

ADDITIONAL BACKGROUND—

State Antitrust Laws

All fifty states have adopted their own antitrust laws, many of which are nearly identical federal antitrust

statutes. For this reason, state courts often rely on the decisions of federal courts in interpreting and applying

state antitrust laws. State courts vary in their interpretations, however, when there is a difference between

federal and state statutes or policy. The following is a state predatory-pricing statute that is similar to those