Antitrust

Does Googlehave monopoly power?

On what? Why? Why Not? Is that bad? Why?

Can you name monopolies in other industries?

Is Monopoly Power Necessarily Harmful to Society?

Why Do We Have Antitrust Laws?

Standard Oil TrustCreated the 7 Sisters

(Made Rockefeller even richer)

Sherman Antitrust Act

“Unreasonable Restraints.” U.S. Supreme Court added “unreasonable” – Restraint is greater than needed to protect legitimate business interest– Restraint poses an undue hardship on the promisor or likely injury to the general public

Contracts in Restraint of Trade. Contract or combination in restraint of trade is illegal.

Monopoly or Attempt to Monopolize. Monopolies or attempts to monopolize are illegal.

Interstate Commerce. The Sherman Act applies only to activities that have a “significant” impact on interstate commerce.

– Interstate Commerce (commerce clause).

Section 1: “Every 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…”

Presentation Case The Rule of Reason vs. Per Se ViolationsContinental Airlines v. United Airlines

Groups 16 & 11 to present

Size checker here

Presentation Case: Palmer v. BRG of Georgia, Inc. (1990) , p. 137Groups 18 & 15 to present

Horizontal Price-Fixing, Horizontal Market Division

Airline Antitrust Case

Fuel and cargo surcharges – “agreed to make a uniform policy regarding fuel surcharges” – Warren Gerig of United walked out of the meeting (SMART MOVE

WARREN!) 21 airlines agree to pay $1.7 billion in fines Criminal charges

– 4 executives sent to prison (2 for six months and 2 for 8 months)– 15 more are currently fugitives

Discovered because Lufthansa notified the Justice Department under an amnesty program (disclose problem in exchange for criminal amnesty).

MN considers joining Xcel and Target Center Article by: ERIC ROPER , Star Tribune Updated: March 30, 2013 - 10:06 PMBy competing we are leaving ….”anywhere from $25,000 to probably a maximum of $50,000 that gets left off the table pretty consistently.”

Settlement prevents intel from using threats, bundled prices or other offers to exclude or hamper competition.

EU Case: $1.45 Billion. For rebates to customers that bought less of a rival’s product allowed Intel to get 70% of EU chip market.

Section 1 of the Sherman Act Case: United States v. VISA U.S.A., Inc. (2003)End-of-Chapter Q. 4, p. 685

Market Power. Their market exceeds 70% market share

Exclusionary Rules. A bank that chooses to issue the credit cards of American Express or Discover forfeit the right to issue MasterCard or Visa.

Questions. – Should it be against antitrust laws for MasterCard and Visa to

control the industry as they do?– How would this case be judged? What’s the standard? What

would the arguments on each side be? – Who do you think won?

$2.25 Billion Visa$1.8 Billion MasterCard

Feb 2013 Price Fixing

V.

“international conspiracy to set prices at supra competitive levels.”

“…defendants met repeatedly.”

Agreed to coordinate prices “agreed at a 2004 meeting in Joinville, Brazil, to announce a global price increase of 8% to 10% with the aim of negotiating a 6% increase.”

How Judged

Per Se -so blatantly anti-competitive that it is per se a violation (limited)

Rule of Reason - it is a restraint of trade, but not an unreasonable restraint (most often the correct standard)

– Applied when an anticompetitive agreement may be justified by legitimate benefits.

– Under the rule of reason, the lawfulness of a trade restraint will be determined by the purpose and effects of the restraint.

Market Division Example. Supervalue and C&S Wholesale Groceries, Inc. “divvied up the regions so they wouldn’t have to compete against one another.”

2015 Supreme Court Case on Teeth Whitening

Law – Power to Board to Regulate. North Carolina’s Dental Practice Act provides that the State Board of Dental Examiners (the Board) is the agency to regulate dental practices.

Dentists Complained – Non-Dentists Offering Low Prices. The Board Issued Cease and Desist Order. This amounted to essentially

price fixing. Issue: Is a state board immune to antitrust law? What if the board is not

actively managed by the state? The board is made up of private professionals.

Antitrust Example: JACOBI INDUSTRIES PLEADS GUILTY TO BID RIGGING(July 2007)

Bid Rigging. The president and owner of Jacobi Industries Inc., a Medford, N.Y. company, pleaded guilty to conspiring to rig bids on U.S. Department of Defense (DOD) contracts for military tiedown equipment and cargo securing systems.

$20,000 Fine – 6 Months Prison. Jacobi has agreed to pay a criminal fine of $20,000, and to cooperate with the Department's ongoing investigation. Jacobi could also serve up to six months in prison. The terms of the plea agreement are subject to court approval. Maximum 10 years of prison and $1million fine (or twice the gain or twice the loss).

Conspiracy. Jacobi participated in the bid-rigging conspiracy from November 2001 to January 2005, during which time he and co-conspirators discussed and agreed among themselves not to compete by agreeing not to submit prices or bids against each other on certain contracts.

– Attending meetings and engaging in discussions regarding the sale of military tiedown equipment and cargo securing systems;

– Agreeing during those meetings and discussions not to compete on certain contracts with the DOD by not submitting prices or bids on those contracts;

– Submitting bids in accordance with the agreements reached;– Selling military tiedown equipment and cargo securing systems to the DOD under those agreements at collusive and non-

competitive prices; and

Hurricane Katrina Fund – Bid rigging issues

Reminders from the government to bidders– 10 years in prison - $1 million fine ($100 million for corporations) plus

restitution– Per Se Violations – not rule of reason

Schemes– Bid suppression– Complementary bidding– Bid rotation– Customer or market allocation

Suspicious indicators – what the government looks for– Identical bids on line items– Bids too high (for work being done)– Winner subcontracts to a loser– Clear gap between winner and others– Same increment between bids– Qualified bidders do not bid – why?– Prices mysteriously drop when a new bidder appears– Competitors are seen meeting.– Competitors get equal business over time– Patterns of any sort

2010 FBI Raid – Margins “Too Good”•FBI raided three US offices of Japanese auto part makers.•Profit margins appear too good and may be the product of collusion.

United States v. Maloof

Background– Sales Manager. Maloof was a sales manager for Bay Industries.– Sold Steel Buildings. Bay Industries sold steel buildings– Fiberglass Major Component. A major component of the buildings is

fiberglass insulation – Insulation prices went up

Key Fact. Maloof contacted a competitor and agreed to charge the same prices to overcome the price increase of fiberglass

– Other competitors joined in the practice Finding. Sentenced to 30 months in prison

Horizontal Price fixing

Restraints of Trade – Overview

Price Fixing– OPEC – School Milk Scam– NCAA Cap of assistant coach

salaries– Any agreement among competitors

to fix prices is a per se violation. Group Boycotts - agreement to

not deal with a vendor or third party Horizontal Market Division –

Trade Associations Joint Ventures – NEXT SLIDE

Resale Price Maintenance Agreements (rule of reason)

Territorial Restrictions– Free Rider Problem

Customer Restrictions Refusal to Deal Non-Price Restrictions

Defendants generally win non-price based vertical restraint actions

Horizontal Vertical

Presentation Case State Oil Co. v. Khan, 522 U.S. 3 (1977)Groups 20 & 33

Under a contract with a gas station lessor (Khan), State Oil would set a suggested retail price and sell gas to Khan for 3.25 cents per gallon less than that price. When State Oil terminated the contract for nonpayment of rent, Khan filed a suit alleging price fixing in violation of the Sherman Act.

The court ruled in State Oil’s favor, but was reversed on appeal. State Oil appealed to the U.S. Supreme Court.

Should all “commercial arrangements subject to the antitrust laws” be evaluated under the rule of reason?

Vertical – Retail Price Maintenance Agreement

Case Presentation: Leegin Creative Leather Products, Inc. v. PSKS, U.S. Supreme Court, p. 138Groups 22 & 31

– Leegin produced women’s fashion accessories and sold to Kay’s Kloset.

– Kay’s Kloset refused to sell at price suggested. – Leegin stopped selling to Kay’s Kloset. Kay’s Kloset sued and

won $33.6 million in lower court based on a per se violation of antitrust law.

Vertical – Retail Price Maintenance Agreement

Leegin Wallet Belt

More Price-Fixing Cases

Ice Industry 2008 Ice industry price-fixing in Detroit market Home City Ice plead guilty and faces a fine as much as

$100 million Employee, McNulty, wore a wire to get evidence at a

meeting at TGI Friday’s. Damaging quote from executive “we can’t let them play one

of us off the other, all they want is to get a better price.”

Toys R Us 2009 Consumer lawsuit (not just the gov brings these suits)

claiming Toys R Us conspired with 5 manufactures to fix prices on strollers, high chairs, care seats and breast pumps.

Chinese Vitamins 2009 article on case pending that Chinese makers of

Vitamin C obtained a dominant market share in vitamin C and then got together to conspire to raise prices –

Evidence still confidential but one bit is a conversation about prices at a convention in Las Vegas

Reaction to Leegin

Manufacturers are embracing price-fixing

Some stores fight back – “Our suppliers can set pricing policies all they want – but it’s their loss, not ours.” - Owner of Pet Supply Store. We just steer customers away from that product.

Baby-Age.com, an online retailer, says 100 of 465 suppliers now fix price.

Embraced new law - Sued for price-fixing

State Law Targets Minimum Pricing

2009•Maryland passes law that prohibits manufacturers from setting min prices•Applies to sales Maryland residents over the internet when the retailer is out-of-state.

Presentation Case, Christy Sports, LLC (P) v. Deer Valley Resort Co (D) (10th Cir 2006), p. 145.Groups 24 & 37

Trade Association

Exception to Antitrust. – Generally permissible to join a trade association – i.e. GM, Ford, and Chrysler form an association to lobby congress against increases

in CAFÉ standards Price Discussions. Don’t discuss prices or anything that affects prices,

such as costs, discounts, terms of sale or profit margins– Leave meetings immediately if the discussion turns to price– Don’t make announcements or statements about prices, either at formal or informal

function– Don’t discuss sales or production cost statistics

Inventory or Marketing Plans. – Don’t discuss the level of existing or future inventories– Don’t discuss specific marketing plans– Don’t disclose any other competitively sensitive information

Example: Standard for USB for computers

Monsanto Co. v. Spray-Rite Service Corp

Spray-Rite Sold Monsanto's herbicide– Low price distributor – Sold below other distributors

Alleged Group Boycott and Illegal Resale Price Maintenance– Monsanto terminated Spray-Rite as a distributor– Claimed failure to hire trained sales persons and failure to promote product – Spray-Rite bought herbicide from other distributors although could not get enough

(group boycott?) Standard

– Direct or circumstantial evidence needed to prove defendant and others “had a conscious commitment to a common scheme designed to achieve an unlawful objective.

Enough Evidence– Monsanto would not ship adequate supplies to price cutting distributors– Monsanto complained of the price cutting– Newsletter referred to maintaining prices

Vertical – Refusal to Deal and Group BoycottDiscuss Colgate Doctrine•Colgate – refusal to deal•Dr. Miles Medical•Parke, Davis, Co. – read quote•Leegin

In re Baby Food Antitrust Litigation, question

Three companies maintained 98% of market share– Gerber (70% market share by itself)– Heinz– Beech-Nut

Potential Price Fixing– Allegation that prices were shared in advance of actual price increase– Heinz and Beech-Nut followed Gerber’s lead so that they all benefited from

price increase with relative market shares staying the same – advanced notice of price increase was necessary to accomplish this.

Conscious Parallelism– How do you know if it’s price fixing or just a reaction to a competitor’s price

change?– Plus Factors – need more to prove price fixing

Horizontal Price fixing

Start here on Tuesdau 930

Horizontal Market Division ExampleIn re Cardizem CD, 332 F.3d 896 (6th Cir. 2003)

Facts – HMR makes a prescription drug called Cardizem CD.– HMR’s patent expired in Nov. 1992– Andrx Pharmaceuticals, Inc. developed a generic version and FDA gave Andrx

a 180 day period to sell drug without other new generic versions as competition.– HMR sued Andrx over the patent and the two parties agreed that HMR would

pay Andrx $40 million per year until case resolved in an un-appealable manner.

Issue - Buyers of Cardizem CD filed suit in antitrust law

Questions– What is the legal action?– What are the issues?– Who should win?

Price Fixing Issue: Girl Scout Cookies: $2.50 or $3.00.

Section 2 of the Sherman ActSection 2 of the Sherman Act

Section 2 condemns “every person who shall monopolize, or attempt to monopolize.”

There are two distinct types of behavior that are subject to sanction under Section 2:

Monopolization

Attempts to Monopolize

Section 2: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or person, to monopolize any part of trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”

Key Factors in Determining Monopoly•Relevant Product Market•Relevant Geographic Market

Monopolization and Attempts to Monopolize Monopolization and Attempts to Monopolize

Monopoly Power. The possession of monopoly power in the relevant market

Willful Acquisition. And the willful acquisition or maintenance of the power, as distinguished from growth or development as a consequence of

a superior product, business acumen, or historic accident.

Both Elements Required. A violation of Section 2 of the Sherman Act requires that both of these elements be established.

Attempt to Monopolize – Definition: Any activity by a firm to eliminate competition and gain

monopoly power.

American Needle v. NFL (2010 Supreme Court Case). NFL gave Reebok exclusive right to make hats, T-shirts and other gear with team logo. American Needle says that violates antitrust law – each team should be free to negotiate on its own. Drew Brees, Saints Quarterback, says if the NFL wins it will enable owners to extract total control over a multi-billion dollar business. How can the NFL do this? Should it be able to? How are consumers hurt?

MergersMergers

Horizontal. – Relevant Market. The acquisition by merger or consolidation of a

competing firm engaged in the same relevant market.– Less Competition. Will be unlawful only when a merger results in the

merging firms holding a disproportionate share of the market, resulting in a substantial lessening of competition, and if the merger does not enhance consumer welfare by increasing efficiency of production or marketing.

Vertical– The acquisition by a seller of one of its buyers or vice versa.– Will be unlawful if the merger prevents competitors of either merging firm

from competing in a segment of the market that otherwise would be open to them, resulting in a substantial lessening of competition.

Conglomerate – The acquisition of a noncompeting business

Sirius and XM radio merged in 2007 – subject to Justice Department approval as not anti-competitive.

Antitrust

Should Budweiser (AB InBev) be allowed to buy Corona (Modelo)?

InBev 39% Modelo 7% MillerCoors 25%

Heiniken 6%

Other 22%

Whole Foods and Wild Oats

•Should U.S. sue to stop this? •What is the relevant market? •How damaging is Whole Foods CEO John Mackey?

•“eliminate a competitor” and •“avoid nasty price wars.”

•"Rahodeb“ his blog name on Yahoo•"The end game is now underway for OATS.... Whole Foods is systematically destroying their viability as a business--market by market, city by city."

Summer 2007

By buying [Wild Oats] we will…avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville, and several other cities which will harm [Whole Foods'] gross margins and profitability.  By buying [Wild Oats]…we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing natural organic food chain to rival us…[Wild Oats] may not be able to defeat us but they can still hurt us….[Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space.  Eliminating them means eliminating this threat forever, or almost forever.

Nestle v. Dreyer Ice Cream: Super PremiumFTC required disposal of:•2 Dreyer’s brands: Dreamery, Whole Fruit Sorbet•1 Licensed brand: Godiva

Essential Facilities Doctrine

Anti-Monopoly – Essential Facilities Doctrine end of chapter Q 2Exclusive dealing contract with Hasbro – Toys-R-Us and K-Mart

The Clayton ActThe Clayton Act

In 1914, Congress attempted to strengthen federal antitrust laws by enacting the Clayton Act.

Fill in Gaps from Sherman Act. The Clayton Act was aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover such as:

– Price Discrimination– Exclusionary Practices– Mergers– Interlocking Directorates– Tying

More Preventative. The Clayton act is more preventative than the Sherman Act.

Private Party Action – TREBLE DAMAGES.

TyingIBM Case

Tying Case: Illinois Tool Works, Inc. v. Independent Inc., U.S. Supreme Court 2006, 656

Robinson-Patman Act – Price Discrimination(amendment to Clayton Act)

Requirements: – Engaged in Commerce– Two/more Sales– Two/more Purchasers– About the Same Time– Different Prices– Commodities– Like Grade and Quality– Injuries Competition

Defenses– Cost Justification– Market Conditions– Meeting Competition

Section 2(a) Price Discrimination. [I]t shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where such commodities are sold for use, consumption, or resale, within the Untied States.. And where he effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them…

Hypotheticals

Restricted Showroom Hours. At the Detroit auto dealer’s trade association meeting, it was proposed that auto dealers restrict their showroom hours, including closing on Saturdays. You are a mid-size Detroit car dealer. Do you go along with the proposal?

Retail Price Maintenance. Shopping for a stereo loudspeaker made by Sound Corporation, I couldn’t find a dealer who would sell it for less than the manufacturer’s suggested retail price. Isn’t that price-fixing?

Price Discrimination. I operate two stores that sell recorded music. My business is being ruined by giant discount store chains that sell their products for less than my wholesale cost. I thought there were laws against price discrimination.

Refusal to Sell. I own a retail clothing store and the brand Company refuses to sell me any of its line of clothes. These clothes are very popular in my area, so this policy is hurting my business. Isn’t it illegal for Brand to refuse to sell to me?

Price-Fixing. The gasoline stations in my area have increased their prices the same amount and at the same time. Is that price-fixing?

Section 8 – Interlocking DirectoratesSection 8 – Interlocking Directorates

Prohibits individuals from serving as directors on the boards of two or more competing companies simultaneously.

Can you serve on both Apple and Google Boards?

Enforcement of Antitrust LawsEnforcement of Antitrust Laws

Antitrust laws are enforced by:– Department of Justice – Federal Trade Commission – Private Parties, who may be awarded treble damages and

attorneys’ fees

Advisory Opinions. The DOJ and FTC have a process to seek an advisory opinion.

Compliance Program (benefits) Circumstantial Evidence

– Signaling behavior (wire spectrum case)

Exemptions from Antitrust Laws

Professional Baseball– Primarily allows MLB to stop teams

from moving– Raiders sued NFL based on antitrust

laws to move to Los Angles from Oakland

– Last major league baseball move was in 1971 since then there have been 7 NFL moves, 7 NBA and 9 NHL moves.

Labor (unions) Agricultural and Fisheries Insurance (Congress threatened to take this

away)

Foreign Trade

Joint Efforts by Businesspersons to obtain legislation

Cooperative Research and Development by small firms

All National Football League teams agree that a player will not be hired until three full football seasons after the player’s graduation from high school. Is this a violation of antitrust laws? Clarett was a star for OSU and won the national championship for OSU. Clarett v. NFL (2004)

Reach of U.S. Antitrust LawsReach of U.S. Antitrust Laws

The DOJ or the FTC and private parties may bring an action against a foreign party that has violated Section 1 of the Sherman Act.

The FTC act may also be applied to foreign trade, and foreign mergers may also be brought within the jurisdiction of U.S. courts.

Do antitrust laws place too great a burden on commerce in the global marketplace?

Antitrust Treaties with Other Countrieshttp://www.usdoj.gov/atr/public/international/int_arrangements.htm

INTEL CASE. EU accused Intel of offering rebates designed to harm rival Advanced Micro Devices. That’s an “abuse of a dominant position” and could lead to fine. The rebates offered by Intel were of such a quantity, of such an amount, that an efficient competitor would be forced to price below cost and we think that would be bad for consumers who would be buying computers. “WSJ 7-31-07

International Issues

Extra Slides

Proctor & GambleAntitrust Policy and Compliance Guidance

Antitrust laws are designed to prohibit agreements among companies that fix prices, divide markets, limit production or otherwise impede or destroy market forces. P & G’s policy is that all employees strictly comply with antitrust laws and the competition and anti-monopoly laws of all countries, states and localities in which they conduct P & G business.

Supervisors and managers are responsible for ensuring that employees under their responsibility are aware of and comply with this policy.

It is very important for employees to understand and follow this policy so that P & G avoids even the appearance of an antitrust violation.

That is why the Company’s general rule is: “NO CONTACT WITH COMPETITORS”

Membership in trade associations is permissible only if approved in advance by P & G legal counsel.

P & G: Fair Competition (I added the headers below – rest from P&G)

Compete Fairly. We believe in competing fairly because we all benefit from fair, free and open markets. We compete strictly on the merits of our products and services and make no attempt to restrain or limit trade

Do Not Discuss Price. We never discuss such matters as prices, pricing strategies, product or marketing plans or terms of sale with competitors. Should a prohibited subject come up during the course of a trade association or other meeting, we must leave the meeting and inform our leadership or legal counsel.

Do Not Agree with Competitors. We do not enter into agreements with our competitors concerning prices, production volumes, customers or sales territories.

Do Not Link Products. We do not link purchase of one product to another or compel suppliers to buy from us to retain their P & G business

Do Not Disparage Competitors. We do not disparage the products or services of a competitor

Do Not Collect Information Wrongfully. We collect competitive information through proper public and other lawful channels but do not use information that was obtained illegally or improperly by others, including through misrepresentation, invasion of property or privacy, or coercion.