Management Chapter 16 Agreement were cast in suggestive rather than binding

Chapter Sixteen

Antitrust

A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE

Illegal Price-Fixing or Just Good Customer Service

Issue Presented: Are there any kinds of resale price maintenance that can withstand per se

condemnation under Section 1 of the Sherman Act?

The legal issue raised by the first three proposals brought forward by ET’s marketing

specialists is that they all deal explicitly with price. Although the U.S. Supreme Court has

greatly increased the plaintiff’s burden of proving an unlawful agreement by requiring some

As for proposal c, ET can argue that there was no price-fixing agreement, but simply an

agreement to maintain loyalty to ET’s products by giving consumers a rebate if prices went

above a certain level. This argument would probably be unpersuasive, because the essence of

the agreement remains to ensure that prices remain within a fixed range. Even so, proposal c

will be judged by the rule of reason.

Proposal d has a good chance of withstanding judicial scrutiny because it permits

wholesalers to charge any price they want. The arrangement does provide wholesalers an

inducement not to advertise a price less than ET’s minimum advertised price, but wholesalers

can decide whether the profit earned on the marginal business gained by advertising a lower

price will offset the loss of marketing funds.

QUESTIONS AND CASE PROBLEMS

Question 1

Issue Presented: When do conversations involving sales representatives from competing

firms constitute illegal horizontal price-fixing?

Federal law prohibits horizontal price-fixing. It is illegal per se. Because it can be proved

Question 2

Issue Presented: Does a pattern of exclusive distributorship in a market violate the Sherman

Act?

In Paddock Publishing, Inc. v. Chicago Tribune Co., 103 F.3d 42 (7th Cir. 1996), the U.S.

Court of Appeals for the Seventh Circuit found that the exclusive distribution agreements were

The court noted that tacit collusion among the news services could be a source of

monopoly profits and injury to consumers. Some distribution arrangements might be

objectionable if they facilitated such collusion. But collusion requires some horizontal

cooperation, or at least forbearance from vigorous competition among rivals. The court found

no such cooperation or forbearance in this case.

The Herald’s arguments would have been stronger if the exclusive agreements were

long-term agreements. Noting that all of the contracts between the services and newspapers

were terminable at will or on short notice (usually thirty days), the court cited Theatre

Enterprises, Inc. v. Film Distributing Corp., 346 U.S. 537 (1954), in which the U.S. Supreme Court

concluded that even exclusive dealing contracts (which, unlike the contracts at issue in this case

require a firm to obtain all of its inputs from a single source) are lawful if limited to a year’s

duration.

Question 3

Issue Presented: Is it a violation of section 2 of the Sherman Act for a competitor to break a

commitment to a standard-setting organization to license certain patents on “fair, reasonable,

and nondiscriminatory” terms?

In order to establish a violation of section 2 of the Sherman Act, Research in Motion

(RIM) was required to prove two elements: “(1) possession of monopoly power in the relevant

market, and (2) that the monopolist achieved or is maintaining monopoly power through

anticompetitive conduct.” Research in Motion Ltd. v. Motorola, Inc., 644 F. Supp. 2d 788 (N.D. Tex.

2008).

The court next concluded that Motorola’s role as a “gatekeeper” by virtue of being

owner of an essential patent gave it the power to eliminate, and thus to harm, competition.

Question 4

Issue Presented: Is evidence that competitors shared price information proof that they

engaged in a price-fixing conspiracy illegal under Article 1 of the Sherman Act?

Price-fixing agreements are typically characterized as per se violations of the Sherman

Act. However, if there is evidence only of exchanges of information, this evidence must be

evaluated under a rule of reason analysis. Exchanges of information are not per se violations

In In re Baby Food Antitrust Litigation, 166 F.3d 112 (3d Cir. 1999), the court found that the

evidence presented by the plaintiffs established only that the defendants exchanged

information, not that they engaged in a conspiracy to fix prices. In reaching this conclusion, the

court considered that defendants had not established an organized system to exchange

information; rather salespeople sporadically and informally exchanged the information in a

manner that was common in the baby food industry.

The appeals court agreed with the district court that the evidence presented did not

support an inference of conspiracy to fix prices. The court found that defendants’ actions

reflected their effort to determine what their competitors were doing with respect to pricing,

Question 5

Issues Presented: Will a dealer who sells a manufacturer’s products in an exclusive territory

be able to successfully sue the manufacturer under the Robinson Bateman Act if the

manufacturer is offering lower prices to dealers in other exclusive territories?

A dealer who sells a manufacturer’s products in an exclusive territory may bring an

actionable claim under the Robinson Bateman Act if the manufacturer offers lower prices to

dealers in other exclusive territories.

(1) the relevant [sales] were made in interstate commerce; (2) the [goods] were of

Question 6

Issue Presented: May evidence of horizontal facilitating practices support an inference of a

predatory pricing conspiracy?

In Matsushita Elec. Industrial Co. v. Zenith Radio, 475 U.S. 574 (1985), the U.S. Supreme

Court held that when plaintiffs in an antitrust case proceed on a theory that has little or no

foundation in economic reality, summary judgment is appropriate unless there is actual

Thus, in the present case, even assuming the plaintiffs’ evidence suggests that the

defendants were engaging in facilitating practices, i.e., practices designed to fix or raise prices in

violation of the Sherman Act, there is no evidence that the defendants’ conduct will harm or has

Question 7

Issues Presented: Under what circumstances can a manufacturer justify minimum vertical

resale price maintenance under the rule of reason?

PSKS alleged that Leegin, in setting and enforcing suggested retail prices for its

“Brighton” brand products, had entered into illegal vertical resale price maintenance (RPM)

agreements. In order for PSKS to state a valid antitrust claim for anticompetitive RPM, PSKS

was first required to “define the relevant product and geographic markets.” PSKS, Inc. v. Leegin

Here, PSKS alleged two alternative product markets in which Leegin exercised its

anticompetitive RPMs: the “retail market for Brighton’s women’s accessories” and the

“wholesale sale of brand–name women’s accessories to independent retailers.” The court first

found “‘women’s accessories’ . . . too broad and vague a definition to constitute a market.”

Furthermore, the court found it hard to imagine that Leegin had power over the entire

“women’s accessories” market. In order for anticompetitive uses of RPM to create concern, the

relevant entity must have market power. The court next determined that “wholesale sale” did

not adequately define the relevant market, “because the relevant market definition must focus

on the product rather than the distribution level.” Furthermore, PSKS failed to allege why

Brighton goods were not interchangeable with non-brand name products.

Question 8

Issue Presented: Under what circumstances will a group boycott by an athletic league violate

the antitrust laws?

The Supreme Court has upheld certain athletic league rules against antitrust challenge

on the basis that “[w]hen ‘restraints on competition are essential if the product is to be available

at all,’ per se rules of illegality are inapplicable, and instead the restraint must be judged

according to the flexible Rule of Reason.” American Needle v. National Football League, 130 S. Ct.

By refusing to characterize the NFL and its independently owned franchisees as a single

entity incapable of entering into a contract or conspiracy to market the teams’ intellectual

property in violation of the antitrust laws, the Supreme Court has made it easier for parties,

including the players, to challenge concerted action by an athletic league. It remains to be seen

how the law will develop. In American Needle v. NFL: An Opportunity to Reshape Sports Law, 119

Yale L.J. 726 (2010), Michael A. McCann states:

Like the NFL, the NBA clearly supports the single entity defense, which would

insulate the NBA’s exclusive licensing deals from section 1 scrutiny. Single entity

Given the Supreme Court’s decision in American Needle, the prudent course

would be to limit concerted league action to matters that would survive scrutiny

under the rule of reason and not assume that the single entity defense will be

available.