978-1285770178 Lecture Note BL ComLaw 1e IM-Ch26 Part 4

CHAPTER 26: ANTITRUST LAW 29

useful topic to explain before covering the chapter’s material in depth.

whole or in part.

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

whole or in part.

agreement might have been to require a party to buy the tied product from the maker of the tying product simply to

would the maker have done if a party had bought the competition’s product? The purpose might have related more

practically to the maker’s tying product, however—to lengthen its life, for example—but other means to achieve this

purpose might then be weighed to assess the legitimacy of the tying agreement.

REVIEWING—

 ANTITRUST LAW 

The Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit entity that organizes

Internet domain names. It is governed by a board of directors elected by various groups with commercial

interests in the Internet. One of ICANN’s functions is to authorize an entity to serve as a registrar for certain

“Top Level Domains” (TLDs). ICANN and VeriSign entered into an agreement that authorized VeriSign to

provide registry services in accordance with ICANN’s specifications. VeriSign complained that ICANN was

restricting the services that it could make available as a registrar and was blocking new services, imposing

unnecessary conditions on those services, and setting the prices at which the services were offered. VeriSign

claimed that ICANN’s control of the registry services for domain names violated Section 1 of the Sherman

Act. Ask your students to answer the following questions, using the information presented in the chapter.

1. Should ICANN’s actions be judged under the rule of reason or deemed per se violations of Section

1 of the Sherman Act? Because ICANN is at a higher level of the distribution process than Verisign, it is

imposing a vertical restraint. Since the vertical restraint that Verisign complains of involves restrictions on

services that Verisign can offer (customer restrictions) and the setting of prices at which Verisign can sell its

services (resale price maintenance agreement), ICANN’s action should be judged under the rule of reason.

2. Should ICANN’s actions be viewed as a horizontal or a vertical restraint of trade? Why? Vertical.

Because ICANN and Verisign are firms at different levels in the distribution of top-level domain names, the

actions that Verisign complains of are a vertical restraint. ICANN, which is Verisign’s superior, is allegedly

placing restrictions on what services Verisign can offer, and how much it can charge for its services. This

amounts to a vertical restraint.

3. Does it matter that ICANN’s directors are chosen by groups with a commercial interest in the

Internet? Explain. If ICANN’s leadership was chosen by those with a commercial interest in the Internet, the

directors might represent commercial interests with significant market power and restrain trade in violation of

the Sherman Act.

4. If the dispute is judged under the rule of reason, what might be ICANN’s defense for having a

standardized set of registry services that must be used? ICANN’s best defense is to assert that a

standardized set of registry services is efficient and has the effect of promoting competition rather than

suppressing it. Under the rule of reason, as long as an agreement is merely regulatory and does not

unreasonably restrain trade, it should not be considered illegal.

whole or in part.

 DEBATE THIS 

The Internet and the rise of e-commerce have rendered our current antitrust concepts and laws

obsolete. When our antitrust laws were written, the possibility of intense nationwide and even global

competition was not possible. Today, in contrast, the Internet has increased competition to such a degree

that few, if any, sellers of most products can maintain prices that are significantly higher than prices offered

by other sellers anywhere in the country. The Internet has brought to the average consumer full information

on prices, availability, and facts about most products—and at the speed of light. Also, anticompetitive

behavior is readily denounced in blogs, Web sites, tweets, and social networking sites.

While it may be true that the Internet has increased competitive forces throughout the world, we still

need old-fashioned antitrust laws and enforcement of those laws. After all, big companies have become

even bigger today. When an industry is highly concentrated, the relatively few sellers can still conspire to

raise prices. When companies are worldwide in ownership and scope, they must be monitored to make sure

that they are not using their market power to harm consumers with lower quality and/or higher prices. Over

200 years ago in The Wealth of Nations, Adam Smith pointed out that whenever producers or sellers get

together, they inevitably conspire to raise prices.



EXAMPREP—

 ISSUE SPOTTERS 

1. Under what circumstances would Pop’s Market, a small store in a small, isolated town, be

considered a monopolist? If Pop’s is a monopolist, is it in violation of Section 2 of the Sherman Act?

Why or why not? Size alone does not determine whether a firm is a monopoly—size in relation to the market

is what matters. A small store in a small, isolated town is a monopolist if it is the only store serving that

market. Monopoly in–volves the power to affect prices and output. If a firm has sufficient market power to

control prices and exclude competition, that firm has monopoly power. But monopoly power in itself is not a

violation of Section 2 of the Sherman Act. The offense also requires an intent to acquire or maintain that

power through anticompetitive means.

2. Maple Corporation conditions the sale of its syrup on the buyer’s agreement to buy Maple’s

pancake mix. What factors would a court consider to decide whether this arrangement violates the

Clayton Act? This agreement is a tying arrangement. The legality of a tying arrangement depends on the

purpose of the agreement, the agreement’s likely effect on competition in the relevant markets (the market for

the tying product and the market for the tied product), and other factors. Tying arrangements for commodities

are subject to Section 3 of the Clayton Act. Tying arrangements for services can be agreements in restraint of

trade in violation of Section 1 of the Sherman Act.

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

whole or in part.



CHAPTER 26: ANTITRUST LAW 35

whole or in part.

ANSWERS TO QUESTIONS—

 SPECIAL CASE ANALYSIS 

Case No. 26.1

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.

(a) Issue: The dispute in this case was between which parties and turned on what legal issue? The

dispute in this case arose between a distributor (seller) and a retailer (buyer and reseller) of branded fashion

accessories. The legal question on which the Court focused was whether a minimum resale price

maintenance agreement, which the distributor imposed on its buyers, should be treated as a per se violation

of the antitrust laws.

(b) Rule of Law: In resolving this dispute, what common law rule did the Court overturn and what rule

did the Court create to replace this rejected precedent? Prior to this case, the common law rule was that

a minimum resale price maintenance agreement was a per se violation of the antitrust laws. The Court

overturned the precedent and held that such agreements should be analyzed according to the rule of reason.

(c) Applying the Rule of Law: What reasons did the Court give to justify its change to the law, and

how did the new rule apply in this case? The Court first pointed out that the rule of reason is the “accepted

standard for testing whether a practice restrains trade in violation of” antitrust laws. The reasons for applying

a per se rule to minimum resale price maintenance agreements were “based on formalistic legal doctrine

rather than demonstrable economic effect.” Although vertical agreements were once treated like horizontal

agreements, which are often subject to a per se rule, recent cases considered “the appreciated differences in

economic effect between vertical and horizontal agreements.” Minimum price resale maintenance agreements

can stimulate competition in some cases, the Court explained, and they may have anticompetitive effects in

other cases. Because the application of a per se rule would “proscribe a significant amount of procompetitive

conduct, these agreements appear ill suited for per se condemnation.”

(d) Conclusion: In whose favor did the Court rule, and why? The retailer had filed a suit in a federal

district court against the distributor, who had refused to sell more accessories to the retailer, when the latter

refused to raise the retail price of the goods to a certain minimum. The court ruled in favor of the retailer,

holding that the distributor’s insistence on certain minimum prices was a per se violation of the antitrust laws.

On appeal, this ruling was affirmed, but on further appeal, the United States Supreme Court overruled its

precedent with respect to minimum resale price maintenance agreements, which were now to be analyzed

under the rule of reason, and remanded the case “for proceedings consistent with this opinion.”