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Chapter 47
Antitrust Law
See Separate Lecture Outline System
INTRODUCTION
The basis of antitrust legislation is a desire to foster competition. Antitrust legislation was initially created, and
continues to be enforced, because of our belief that competition leads to lower prices, more product information, and a better
distribution of wealth between consumers and producers.
ADDITIONAL RESOURCES—
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VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 47.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
are “meeting the competition,” “changing conditions,” and “cost justification.”
ADDITIONAL BACKGROUND—
Origins of Federal Antitrust Legislation
Despite condemning anticompetitive agreements on the basis of public policy, the common law proved to be an
ineffective means of protecting free competition. These shortcomings became acutely obvious during the latter half of
the 1800s as a concentrated group of powerful individuals began to acquire unrivaled market power by combining
competing firms under singular control.
After the Civil War ended, the nation renewed its drive westward. With the movement westward came the
expansion of the railroads and the further integration of the economy. The growth of national markets also witnessed
the efforts of a number of small companies to combine into large business organizations, many of which gained
considerable market power. These later type of organizations became known as trusts, the most famous—or
infamous—being John D. Rockefeller’s Standard Oil Trust. Participants transferred their stock to a trustee for trust
certificates. The trustee made decisions fixing prices, controlling production, and determining the control of exclusive
geographical markets for all trust members. As used by Standard Oil and others around the turn of the century, a trust
was a device used to amass market power. Members could compete free from competition with other members. Also,
a trust might wield such economic power that companies outside the trust could not compete effectively.
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In some cases, an entire industry was dominated by a single organization. The public perception was that the
trusts used their market power to drive small competitors out of business, leaving the trusts then free to raise prices
virtually at will. Many states attempted to control these consequences by enacting statutes outlawing trusts (which is
why all laws regulating economic competition today are referred to as antitrust laws). Congress initially dealt with the
railroad monopolies by attempting regulation rather than an outright assault on monopoly power. The result was the
Interstate Commerce Act of 1887.
Congress next attempted to deal with trusts in a direct, unified way by passing the Sherman Act in 1890. The
Sherman Act, however, failed to end public concerns over monopolies. The United States Supreme Court initially
construed the statute too narrowly to give it much effect and subsequently applied it so rigorously as to make the act
unworkable. Lackluster enforcement also contributed to the public’s dissatisfaction. Concern over the trust problem
CHAPTER OUTLINE
I. The Sherman Antitrust Act
The Sherman Act is proscriptive rather than prescriptive. It is the basis for policing, rather than regulating, business
conduct.
A. MAJOR PROVISIONS OF THE SHERMAN ACT
Sections 1 and 2, which are excerpted in the text, contain the main provisions.
B. DIFFERENCES BETWEEN SECTION 1 AND SECTION 2
The differences between the two are noted briefly: Section 1 requires two or more persons; one person alone can
violate Section 2. Section 1 cases are often concerned with agreements that restrain trade; Section 2 cases deal
with the structure of a monopoly. Both sections seek to curtail practices that result in undesired monopoly
behavior, but Section 2 requires that a “threshold” or “necessary” amount of monopoly power already exist.
C. JURISDICTIONAL REQUIREMENTS
Any activity that substantially affects commerce falls under the act, which also extends to U.S. nationals abroad
who engage in activities that have an effect on U.S. foreign commerce.
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ENHANCING YOUR LECTURE—
THE SHERMAN ANTITRUST ACT OF 1890
THE STANDARD OIL TRUST
By 1890, the Standard Oil trust had become the foremost petroleum refining and marketing combination in the
United States. Streamlined, integrated, and centrally and efficiently controlled, its monopoly over the industry could
not be disputed. Standard Oil controlled 90 percent of the U.S. market for refined petroleum products, and small
manufacturers were incapable of competing with such an industrial leviathan.
The increasing consolidation occurring in U.S. industry, and particularly the Standard Oil trust, came to the
attention of the public in March 1881. Henry Demarest Lloyd, a young journalist from Chicago, published an article in
the Atlantic Monthly entitled “The Story of a Great Monopoly.” The article discussed the success of the Standard Oil
Company and clearly demonstrated that the petroleum industry in the United States was dominated by one firm—
Standard Oil. Lloyd’s article, which was so popular that the issue was reprinted six times, marked the beginning of the
U.S. public’s growing awareness of, and concern over, the growth of monopolies.
THE PASSAGE OF THE SHERMAN ANTITRUST ACT
APPLICATION TO TODAY’S WORLD
The Sherman Antitrust Act remains very relevant to today’s world. The widely publicized monopolization case
brought by the U.S. Department of Justice and a number of state attorneys general against Microsoft Corporation is
just one example of the relevance of the Sherman Act to modern business developments and practices.
a. 21 Congressional Record 2456 (1890).
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II. Section 1 of the Sherman Act
The text divides trade restraints into two categories: horizontal and vertical. Those that are blatantly anticompetitive
are per se violations; those that are not so blatant are analyzed under the rule of reason.
A. PER SE VIOLATIONS V. THE RULE OF REASON
Factors that a court might consider in a rule-of-reason analysis include the purpose of an arrangement, the
powers of the parties, the effect of their actions, and whether a less restrictive means might have accomplished
the same result.
CASE SYNOPSIS—
Case 47.1: American Needle, Inc. v. National Football League
The National Football League (NFL) teams formed National Football League Properties (NFLP) to develop, license,
and sell trademarked items, such as caps and jerseys. Until 2000, the NFLP granted nonexclusive licenses to a number
of vendors, including American Needle, Inc. When the teams authorized the NFLP to grant exclusive licenses, the NFLP
The United States Supreme Court reversed and remanded for review of the decision of the NFL teams to license
exclusively through the NFLP. “Each of the teams is a substantial, independently owned, and independently managed
business. . . . The teams compete with one another, not only on the playing field, but to attract fans. . . . 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; teams are acting as separate economic actors pursuing separate economic
interests, and each team therefore is a potential independent center of decision-making. Decisions by NFL teams to
license their separately owned trademarks collectively and to only one vendor are decisions that deprive the
marketplace of independent centers of decision-making, and therefore of actual or potential competition.”
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Notes and Questions
What type of activity is prohibited by Section 1 of the Sherman Act? What type of activity is prohibited by
Section 2 of the Sherman Act? Section 1 prohibits agreements that are anticompetitively restrictive—that is,
agreements that have the wrongful purpose of restraining competition. Section 2 prohibits the misuse, and attempted
misuse, of monopoly power in the marketplace.
In what circumstance would a court be unlikely to challenge an agreement such as the deal at the center
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of this case, or at least be unlikely to order that it be undone? If an agreement does not undercut competition, it
would not likely be challenged. This is the most important circumstance in determining whether an action violates the
antitrust laws. If an action undercuts competition, a court will not allow a party to undertake it.
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 47.1
What did the Court mean when it stated that “the agreement is likely to survive the Rule of Reason”? Not
all restraints of trade that allegedly violate Section 1 of the Sherman Act are illegal. Under a rule of reason analysis, if a
court finds that a restraint on trade is reasonable, it is not illegal. In the NFL case, the Court found that the NFL’s
conduct constituted concerted activity under Section 1 of the Sherman Act and was thus subject to Section 1 analysis.
The Court indicated, however, that the per se rules of illegality were inapplicable and that the restraint must be
judged under the rule of reason. The Court also noted that the agreement at issue was “likely to survive the Rule of
Reason.” In other words, on remand, the court would likely be able to justify the restraint. The court noted that
ANSWER TO “THE ECONOMIC DIMENSION” QUESTION IN CASE 47.1
Does the Court’s ruling mean that the NFL activities with respect to the marketing of their intellectual
property through the NFLP were illegal? Explain. The Court did not hold that the NFL agreement at issue violated
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B. HORIZONTAL RESTRAINTS
Horizontal restraints result from concerted action by direct competitors.
1. Price Fixing
2. Group Boycotts
4. Trade Associations
Generally, the rule of reason is applied to trade association actions. Like other anticompetitive actions
subject to the rule of reason, if a trade association practice that restrains trade benefits the association and
the public, it may be deemed reasonable.
ENHANCING YOUR LECTURE—
CAN REALTOR ASSOCIATIONS
LIMIT LISTINGS ON THEIR WEB SITES?
Like almost every other product, homes are now being sold via the Internet on hundreds of thousands of Web
sites. The most extensive listings of homes for sale, though, are found on the multiple listing services (MLS) sites that
are available for every locality in the United States. An MLS site is developed through a cooperative agreement by real
estate brokers in a particular market area to pool information about the properties they have for sale. Today, the
majority of residential real estate sales involve the use of MLS. Although MLS sites offer convenience by combining
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BOARDS OF REALTORS HAVE ATTEMPTED TO LIMIT LISTINGS ON THEIR WEB SITES.
In a given market area, the MLS listings are put together by the members of a local real estate association, typically
called a Board of Realtors®, for the members’ exclusive use. In many areas, Boards of Realtors® have attempted to
restrict the homes that can be listed on the official MLS Web site. In particular, the boards have tried to prevent
discount brokers from listings the homes they have for sale.
The FTC’s Bureau of Competition filed a complaint for violation of antitrust laws against the Board of Realtors® in
Austin, Texas, which had a rule prohibiting discount brokers from listing on its MLS site. After several months of
negotiations, the FTC prevented the Austin board from adopting and enforcing “any rule that treats different types of
real estate listing agreements differently.” The FTC is now pursuing similar negotiations in other cities including
Cleveland, Columbus, Detroit, and Indianapolis.
THE NAR TRIES TO RESTRICT VIRTUAL BROKERS.
The National Association of Realtors (NAR) represents more than 1 million individual member brokers and their
affiliated agents and sales associates. Its policies govern the conduct of its members throughout the United States. In
the 1990s, many members of the NAR began to create password-protected Web sites through which prospective
known as VOW-operating brokers. Because they had no need of a physical office, their operating expenses were lower
franchisors, respectively, expressed concern that VOW-operating brokers would put downward pressure on brokers’
commissions.
THE U.S. DEPARTMENT OF JUSTICE ENTERS THE FRAY.
The Antitrust Division of the U.S. Department of Justice, however, contended that the opt-out policy was
anticompetitive and harmful to consumers. When the Justice Department indicated that it would bring an antitrust
action against the NAR, the association modified its policy and eliminated the selective opt-out provision aimed
specifically at VOW-operating brokers. Nevertheless, the revised policy still allowed brokers to prevent their listings
from being displayed on any competitor’s Web site. Thus, under the new policy, traditional brokers could still prevent
VOW-operating brokers from providing the same MLS information via the Internet that traditional brokers could
provide in person. The policy also permitted MLS sites to lower the quality of the data feed they provide brokers,
thereby restraining brokers from using Internet-based features to enhance the services they offer customers.
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the court denied the NAR’s motion to dismiss the case.a.
FOR CRITICAL ANALYSIS
Why couldn’t discount brokers simply create their own Web sites to list the houses they have for sale?
5. Joint Ventures
Generally, the rule of reason applies (unless price fixing or market divisions are involved).
1. Territorial or Customer Restrictions
2. Resale Price Maintenance Agreements
A resale price maintenance agreement, in which a manufacturer tells a retailer at what price the retailer can
sell the manufacturer’s products, is considered subject to the rule of reason.
CASE SYNOPSIS—
Case 47.2: Leegin Creative Leather Products., Inc. v. PSKS, Inc.
, Leegin Creative Leather Products, Inc. (Leegin), designs, makes, and distributes a line of leather goods and
accessories under the brand name “Brighton.” When Leegin learned that PSKS, Inc. (PSKS), which operates Kay’s Kloset,
was marking down Brighton goods by 20 percent, Leegin stopped selling to the store. PSKS filed a suit in a federal
district court against Leegin, alleging antitrust violations. The court entered a judgment against Leegin. The U.S. Court
of Appeals for the Fifth Circuit affirmed. Leegin appealed.
The United States Supreme Court reversed and remanded, holding that the rule of reason applied to such resale
price maintenance agreements. “Resort to per se rules is confined to restraints * * * that would always or almost
always tend to restrict competition and decrease output. * * * [T]he per se rule is appropriate only after courts have
had considerable experience with the type of restraint at issue, and only if courts can predict with confidence that it
would be invalidated in all or almost all instances under the rule of reason.” Resale price maintenance may have
anticompetitive effects or represent an attempt to obtain monopoly profits. But they can instead stimulate
competition and offer advantages to consumers.
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Notes and Questions
In what ways do minimum resale price maintenance agreements facilitate interbrand competition? The
Court explained that without such agreements “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. 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
service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would
Such agreements may actually increase interbrand competition. On this point, the Court cited “facilitating market
entry for new firms and brands. New 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. 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 [otherwise] . . . . It may be difficult and inefficient for a manufacturer to make and enforce a contract
with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and
threatening termination if it does not live up to expectations may be the most efficient way to expand the
manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and
experience in providing valuable services.”
How are “the interests of manufacturers and consumers . . . aligned with respect to retailer profit
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margins”? The Court explained, “The difference between the price a manufacturer charges retailers and the price
retailers charge consumers represents part of the manufacturer’s cost of distribution, which, like any other cost, the
ANSWERS TO QUESTIONS AT THE END OF CASE 47.2
1. Should the Court have applied the doctrine of stare decisis to hold that minimum resale price
maintenance agreements are still subject to the per se rule? Why or why not? The Court explained that the
2. What factors might the courts consider in applying the rule of reason to minimum resale price
maintenance agreements? The Court acknowledged that “[r]esale price maintenance, it is true, does have economic
dangers.” As factors to consider in applying the rule of reason to such agreements, the Court listed, as examples, “the
number of manufacturers that make use of the practice in a given industry” and “[t]he source of the restraint,” and
added “that a dominant manufacturer or retailer can abuse resale price maintenance for anticompetitive purposes may
not be a serious concern unless the relevant entity has market power.”
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases considering resale price maintenance agreements include the following.
• Ozark Heartland Electronics, Inc. v. Radio Shack, A Division of Tandy Corp., 278 F.3d 759 (8th Cir. 2002)
(there is no violation of the antitrust laws, which proscribe unreasonable price maintenance agreements, if the plaintiff
is merely the agent of the defendant, not a buyer and reseller of the defendant’s product).
• Chavez v. Whirlpool Corp., 93 Cal.App.4th 363, 113 Cal.Rptr.2d 175 (2 Dist. 2001) (there is no violation of state
antitrust laws, which like their federal counterparts proscribe unreasonable price maintenance agreements, if a
dishwasher manufacturer announces its resale prices in advance and refuses to deal with those who fail to comply).
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III. Section 2 of the Sherman Act
Section 2 proscribes monopolization and attempts to monopolize.
A. MONOPOLIZATION
There are two elements to a Section 2 violation: (1) possession of monopoly power in the relevant market and (2)
willful acquisition or maintenance of that power.
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.
ADDITIONAL BACKGROUND—
A Monopolist Charging Lower Prices?
2. Relevant Market
The relevant market consists of: (1) a relevant product market and (2) a relevant geographic market. A firm
generally is considered to have monopoly power if its share of the relevant market is 70 percent or more
(although this number is arbitrary).
a. Relevant Product Market
In determining the relevant product market, the key issue is the degree of products’ interchangeability.
Decisions on this issue can often be interpreted as arbitrary.
ENHANCING YOUR LECTURE—
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WHAT IS THE RELEVANT PRODUCT MARKET
FOR DOMAIN NAMES?
Most attempts to measure monopoly power involve quantifying the degree of concentration in a relevant market
and/or the extent of a particular firm’s ability to control that market. Accordingly, defining the relevant market is a
necessary step in any monopolization case brought under Section 2 of the Sherman Act. Thus, when Stan Smith
brought a monopolization case against Network Solutions, Inc. (NSI), a domain name registrar, for not allowing Smith
and others to register for expired domain names, a threshold question before the court was the following: What is the
relevant product market for domain names?
THE REGISTRY
At one time, NSI was the only registrar for domain names in this country. In 1998, however, the federal
government opened domain name registration to competition and set up a nonprofit corporation, the Internet
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”
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?
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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 Geographical Market
The geographical 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
If a firm possesses market power as a result of some purposeful act to acquire or to maintain that power
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
The requirements for this violation are intent and probability of success. The primary difficulty in developing
standards for assessing alleged attempts to monopolize is distinguishing anticompetitive conduct from legitimate
competition. This difficulty is encountered in almost every area of antitrust law, but identifying attempts to
monopolize is one area in which the problem is particularly acute.
CASE SYNOPSIS—
Case 47.3: Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co.
Weyerhaeuser Co. owned six mills processing 65 percent of the red alder logs in the Pacific Northwest. Ross-
Simmons Hardwood Lumber Co. operated a single competing mill. When the prices of the logs rose and those for the
lumber fell, Ross-Simmons suffered heavy losses. Several million dollars in debt, the mill closed. Ross-Simmons filed a
suit in a federal district court against Weyerhaeuser, alleging attempted monopolization under Section 2 of the
Sherman Act. Ross-Simmons claimed that Weyerhaeuser used its dominant position in the market to bid up the prices
of logs and prevent its competitors from being profitable. Weyerhaeuser argued that the test for predatory pricing
applies to a claim of predatory bidding and that Ross-Simmons had not met this standard. From a judgment in the
plaintiff’s favor, affirmed by the U.S. Court of Appeals for the Ninth Circuit, Weyerhaeuser appealed.
The United States Supreme Court vacated and remanded. The test that applies to a claim of predatory pricing also
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Notes and Questions
How might a predatory-bidding scheme benefit consumers? The Court pointed out, “In the first stage of a
predatory-bidding scheme, the predator’s high bidding will likely lead to its acquisition of more inputs. Usually, the
acquisition of more inputs leads to the manufacture of more outputs. And increases in output generally result in lower
prices to consumers.”.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT” IN CASE 47.3
Logs represent up to 75 percent of a mill’s total costs. Efficient equipment can increase the speed at
which lumber can be recovered from a log and the amount of lumber recovered. The Court noted that “Ross–
Simmons appears to have engaged in little efficiency–enhancing investment.” If Ross-Simmons had invested
in state-of-the-art technology, how might the circumstances in this case have been different? If Ross-Simmons
had installed technology that allowed it to process more logs more quickly, with a greater production of lumber from
each log, the firm might have been able to survive the downturn in the market, or at least compete longer. This ability
may have discouraged Weyerhaeuser from attempting predatory bidding (if in fact it did).
ANSWER TO “THE ECONOMIC DIMENSION” QUESTION IN CASE 47.3
Why does a plaintiff alleging predatory bidding have to prove that the defendant’s “bidding on the buy side
caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs”?
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to be offset by a long-term gain.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent 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
• 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 purpose of the
manufacturer’s monopolization claim, where the material was available from multiple sources and the manufacturer
was not “locked–in” to dealing with the supplier).
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