Antitrust Legislation

Competition Holds down prices and increases choices

Basic to faith that a free economy best promotes the public weal is that goods must stand the cold test of competition; that the public, acting through the market’s impersonal judgment, shall allocate the nation’s resources and thus direct the course its economic development will take.

Times-Picayune Co. v. United States 345 U.S. 594 (1953)

Competition More competitors means more competition

Many people believe that possession of an unchallenged economic power deadens initiative, discourages thrift, and depresses energy; that immunity form competition is a narcotic, and rivalry is a stimulant, to industrial progress; (and) that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone. United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945

Chicago School

Chicago School Theories: (economic efficiency)

A. Laws should protect competition not competitors

B. Focus should be anti-conspiracy rather than anti-competition.

C Markets by their nature, tend toward efficiency and market imperfections are generally transitory and self-correcting

Post Chicago School

A. Markets are largely imperfect and not self-correcting.

B. Firms can and do take advantage of market imperfections.

C. Market imperfections (information asymmetry) are pervasive and used to exploit the market

Federal Antitrust Statutes

1. Sherman Anti-trust Act (1890)

2. Clayton Act (1914)

3. Federal Trade Commission Act (1914)

4. Robinson-Patman Act (1936)

Sherman Antitrust Act

Section 1:“Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade of commerce among the several states, or with foreign nations is declared to be illegal”

Requires an agreement, either express or implied

“Conscious parallelism”, standing alone is insufficient

Sherman Antitrust Act

Requires unreasonable restraint of trade

Tests applied:– A. Per se violations – presumed to be unlawful

– B. Rule of Reason - Balances harm to competition with justifications

Sherman Antitrust Act

Per se Violations1. Horizontal Price-Fixing– A. Direct agreements regulating price– B. Agreements to limit quantity

Agreement by major oil refiners to purchase and store excess production of small refiners to affect market price by artificially limiting available supply

United States v. Socony-Vacuum Oil Co. 310 U.S. 150, 1940

Sherman Act

Vertical Price-FixingResale price maintenance agreements -- an agreement between a supplier and a dealer that fixes the minimum resale price of a product -- is a clear-cut antitrust violation. It also is illegal for a manufacturer and retailer to agree on a minimum resale price.

The antitrust laws, however, give a manufacturer latitude to adopt a policy regarding a desired level of resale prices and to deal only with retailers who independently decide to follow that policy or to stop dealing with a retailer who breaches the resale price policy.

Sherman Act

Consignment Sales – Agreements whereby retailer is agent.

Not covered by Sherman Act

Recent cases indicate such arrangements may be illegal if the primary purpose is resale price maintenance.

Sherman Act

Unilateral Refusals to Deal are not unlawful (United States v. Cogate & Co.)

Lawful unless Manufacture enlists the aid of dealers who are not price-cutting to help enforce the pricing policy

Sherman Act

Horizontal Divisions of Markets

Agreements among competitors to divide sales territories or allocate customers -- essentially, agreements not to compete -- are presumed to be illegal.

Boycotts

A group boycott -- an agreement among competitors not to deal with another person or business -- violates the law if it is used to force another party to pay higher prices. Boycotts to prevent a firm from entering a market or to disadvantage a competitor also are illegal.

Sherman Act

Tie-in salesThe sale of one product on condition that a customer purchase a second product,which the customer may not want or can buy elsewhere at a lower price, is a tie-in. Requirements like these are illegal if they harm competition. A

Exclusive dealing agreements

Requires buyers to buy exclusively from a particular seller

Sherman Act Penalties

Civil– Injunctions– Treble damages plus court costs and attorney’s fees

Criminal

Fine – Individuals - Up to $350,000

Corporations – Up to $10 million per violation

Imprisonment – Up to 3 years

Clayton Act

Violations only require the showing of a probability of a significant anticompetitive effect in dealings involving commodities.

Primarily targets two behaviors– Tying agreements

– Exclusive dealing agreements

Tying Agreements

Tying agreements that may “substantially lessen competition or tend to create a monopoly” are prohibited.

Most federal courts require essentially the same elements of proof for a violation of the Sherman Act.

Tying Agreements

A challenged agreement most– Involve two separate products,

– Sale of the tying product must be conditioned on an accompanying sale of the tied product

– Seller must have sufficient economic power in the market for the tying product

– Arrangement must restrain a not insubstantial amount of commerce in the tied product market

Excusive Dealing Agreements

Agreement wherein the seller forbids a buyer to purchase products from the seller’s competition.

Robinson – Patman Act

Prohibits seller, in certain instances, form discriminating in price between different purchasers of commodities of like grade or quality if such sale will substantially lessen competition to tend to create a monopoly in any line of commerce or will injure or destroy competition with any person who grants or receives benefit or such discrimination,or with the customers of either of them.

(1936, Robinson-Patman Act amended section 2 of the Clayton Act)

Robinson – Patman Act

[t]he major legislative purpose behind the

Robinson- Patman Act was to provide some

measure of protection to small independent

retailers and their independent suppliers from

what was thought to be unfair competition from

vertically integrated, multi-location chain stores.

Boise Cascade Corp., 107 F.T.C. 76, 210 (1986)

Robinson - Patman Act

Seller must have made two or more sales to different purchasers at different prices of commodities of equal quality.

Robinson - Patman Act

In order to bring the Act into play, there must 1.two or more consummated sales,

2.reasonably close in point of time,

3.of commodities,

4.of like grade and quality,

5.with a difference in price,

6.by the same seller,

7.to two or more different purchasers,

8.for use, consumption, or resale within the United States or any territory thereof,

9.which may result in competitive injury.

Robinson - Patman Act

Act applies only to commodities; it does not apply to intangible

products.

Electricity has been classified as a commodity subject to the Act, because

"[e]lectric power can be felt, if not touched. It is produced, sold, stored in small quantities, transmitted, and distributed in discrete quantities." (Metro Communications v. Ameritech Mobile Com., 984 F.2d at 745)

The Act does not apply to intangible products such as cellular telephone service and cellular telephone activation service; the printing of comic books; newspaper advertising; real estate leases; long distance voice telecommunications services; and cable television service.

When a transaction involves both the sale of goods and the sale of services, the

Act applies "only if the 'dominant nature' of the transaction is a sale of goods."20

Robinson - Patman Act

The effect of the discrimination "may be substantially" to

1. lessen competition...in any line of commerce; or

2. tend to create a monopoly in any line of

commerce; or

3. injure, destroy, or prevent competition with any

person who grants or knowingly receives the

benefit of the discrimination, or with the

customers of either of them.

Injury

Two types of possible injury are most commonly alleged:

Primary line injuryInjury is to competition between the seller granting the

discriminatory discount and other sellers

Secondary line injury Injury to competition between the favored customer of the seller

who receives the discriminatory price and the seller's disfavored

customers.

DEFENSES

A. Cost Justification

B. Changing Conditions

C. Meeting Competition

D. Availability

E. Functional Discounts

Cost Justification

A. Cost Justification –

Permits price differentials that do no more that reflect differences in the cost of manufacture, sale, or delivery resulting from differing methods or quantity.

Changing Conditions

B. Changing Conditions

Different prices may reflect changing

conditions in the market or the marketability

of the goods

Perishable goods

Declining market for seasonal goods.

Meeting Competition

C. Meeting Competition

Discriminatory lower price may be lawful if price is

charged in good faith to meet an equally low price of a

competitor.If a seller has a good reason to believe that competing firms

Are charging lower prices in a particular market, it may

respond with comparably low prices on a territorial basis [that

is, throughout the market], rather than on a customer-by

customer basis. Seller may reduce prices in order to secure

new customers, as well as to retain old ones.

Availability

D. Availability

Seller may offer two prices (a normal price and a reduces price) if the reduced price is realisticly available to all customers

Functional Discounts

E. Functional Discounts

Payments or reductions to customers for services provided by the customer.

Indirect price discrimination

Provide discriminating services to competing customers such as display cases or demonstration kits

A Buyer who knowingly induces or receives a discriminatory price violates the Act

Current Issues /Antitrust and Intellectual Property

In recent decades, there has been increasing

recognition on the part of antitrust enforcers and

the courts that intellectual property and antitrust

law share the common purpose of promoting

dynamic competition and thereby enhancing

consumer welfare.

Intellectual property / Antitrust law

Intellectual property law provides incentives for innovation and its dissemination and commercialization by establishing enforceable property rights in new products and processes and original works of expression.

Antitrust law promotes dynamic competition and consumer welfare by prohibiting certain conduct by market participants that unreasonably constrains the competitive process.

Issues

bundling of intellectual property rights through means such as package licensing.

grant backs, which require a licensee to grant back to the licensor a right to use the licensee's patented improvements to the licensor's invention, can also have procompetitive effects, but can adversely affect competition in some instances

Refusal to license patents and copyright

Licensing agreements that are conditioned on other actions, such as dealing exclusively with the patentee, cross-licensing another patent, or purchasing other products.

Patent pooling

Standard settingThe standard setting process generally requires that competitors come together to coordinate on a technological standard. In such a setting, there are opportunities for anticompetitive behavior as companies exert their influence over the process.After a standard has been established, there are many issues regarding access to the technology embodied in the standard; limited access could restrict the number of competitors in a market and severely inhibit entry

International

What "exceptional circumstances" may justify compulsory access to intellectual property?

World Trade Organization

The Agreement on Trade-Related Aspects of Intellectual Property Rights ("TRIPs"),

– TRIPs, authorizes Member countries to legislate exceptions to the rights of legitimate patents.

– Article 7 lists the objective of TRIPs is to protect and enforce intellectual property rights so as to promote technological innovation, and to share information to the collective benefit of both producers and users. The sharing and promotion of technological innovation should be done in a manner conducive to social and economic welfare while providing an equal balance of rights and obligations.

8(1) "Members may, in formulating or amending their national laws and regulations, adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided such measures are consistent with the provisions of this Agreement.