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Antitrust
University of Kansas School of Law
Lushing, Peter

GOALS
What is it trying to accomplish?
Development and history?
How the law has fluxuated?.
Identify and categorize business practices and whether the antitrust law applies?
Rule of reason perse rule
Anti compet, compet or ambiguous.
Think about the rational economic reasons for why this is going on? Is this useful
Who and what antitrust is trying to prevent? What are the evils?
What are the best means to accomplish these problems that it is trying to prevent?
Who has standing to sue?
Criminal vs civil antitrust law?
Who has the stake in the outcome of the litigation; the competitor and/or the consumer?
How can we measure?
 
DEFINITION OF ANTITRUST?
Late 1800’s coined in connection with a ban on trusts. A trust was a combination in a single org that made decisions in an entire industry. A concern over the accumulation of the wealth in forming these trusts?
 
WHAT’S WRONG WITH MONOPOLISTIC BEHAVIOR?
If they can maintain the scheme, you are distorting people’s freedom of choice for those items.
Consumers pay more and get less.
Quality decreases
 
 
The Sherman Act
 
The first 25 years under the Sherman Act 1890 to 1914
 
JURISDICTION AND SCOPE OF THE ACT
“Manufacturing is not commerce among the states”
 
United States v. E.C. Knight Company USSC (1895)
 
Facts: In 1892 the American Sugar Refining Company had acquired all but one sugar refining company that were in the Philadelphia area by exchanging their shares. Prior to this the four firms had been in competition with ASRC and had collectively produced 33% of the total amount of sugar refined in the U.S.
 
Prior to the merger the one firm, refined 2% of the U.S sugar in Philadelphia.
 
After the merger, the amount that it did not refine rose to 10%. Therefore it’s market share began to drop.
 
They owned 98% of the market. The price fell, the quantity went up, and the market share fell to 90% by the time of the lawsuit.
 
Arguments: The government sought a declaration that the transactions illegal and sought an injunction. Claimed they breached §1 & §2 of the Sherman Act.
 
§1 The trust restrained trade or commerce among states.
 
Question: Whether there is a trust and whether it restrained trade or commerce among states? Do we have a transaction that passes state lines? Is it commerce among the states.
 
Held: It is not among the several states. Manufacturing alone is not commerce among the several states. There is no manufacturing in another state.
 
Fuller CJ:
Federal government has the power to regulate and redress the evils inherent from the trust because the power to control the manufacture of refined sugar is essential to life and interstate commerce is essential to its enjoyment (the enjoyment of the sugar).
 
However, we should concentrate on the effect of the monopolization of the manufacture of the sugar and not merely the control of its disposition.
The fact that commerce is generally attached to this should be of secondary concern.
 
Therefore, commerce is incidental to the monopoly over manufacturing because the monopoly is restricted to a geographical location and it does not follow that because you control the manufacturing, you’re attempting to control interstate commerce
 
Control over the primary source of the goods did not necessarily affect commerce because it is just the initial step in the chain of commerce.
 
Limited control
Geographically limited
 
Held: Motion dismissed. Sherman Act does not apply to contracts which are incidental to interstate commerce and trade. Refining sugar did not directly relate to commerce between States but dealt with manufacture.
 
The attempt to monopolize or the actual monopoly of the manufacture of refined sugar does not mean that they intended to monopolize commerce even though the instrumentality of commerce was necessarily invoked.
 
Harlan J (Dissenting)
 
The federal government has the power under the commerce clause to regulate and protect the people of the U.S under the commerce clause from the evils perpetuated in this case.
 
He states that the power is available because the monopoly over the sugar mills affects the entire U.S population because the combination of companies into one can affect the price or may affect the price by its control over the manufacturing.
 
Therefore, it is implicit in his opinion, unlike Fuller CJ, that manufacturing cannot be separated from commerce and falls under the commerce clause.
 
 
HORIZONTAL COMBINATIONS IN RESTRAINT OF TRADE
 
It is a model other than a monopoly.
It is between companies that compete with another (cartel – OPEC – restrict output and raise prices).
 
Vertical
Schemes are between those who buy and sell from one another.
 
Oligopoly
Industry with a small number of competitors that are trying to become a monopoly.
Unlike a single entity, they need agreement to limit production.
 
Issues when dealing with Horizontal combinations
Are there ways to cheat, secretly without the others knowingly?
Are there mechanisms designed to police it?
What situations are likely to support the oligopoly whereas those that do not?
 
 
United States v. Trans-Missouri Freight Association (horizontal price fixing)
 
“All contracts means all contracts in restraint of trade and it covers agreements for price fixing whether the prices are reasonable or not”
 
Facts: Bunch of railroads formed the TMFA all agreeing to be subject to its articles. All competitive traffic was to be included within a certain sphere.
 
Committee was established to create rates and regulations affecting freight traffic.
It would set rates
File rate reductions
In advance
It is a voluntary association
They are some what restricted by the regulation
 
They are not free to work together because of the nature of railroads – contracting with several railroads for right of ways in exchange for prices. There must be a freight rate for the entire haul. You pay one and they divide it up.
 
The procedure was that proposed rate reductions had to be submitted to the committee five days before the meeting.
 
If approved, they would be instituted immediately otherwise subject to arbitration. Could give notice that the prices despite approval would be instituted 10 days later.
 
The association reserved the right to match the rate reductions.
 
Any member could match a rate of a competitor that was not a member without pre-approval of the price. If it was not done in good faith to meet competition, the offending railroad would need to pay a fine.
 
Action: Government filed a complaint alleging prior to the agreement were common carriers and were in competition. Now they were unjustly and oppressively increasing rates and this was anti-competitive. The complaint sought an injunction and the prevention of further rate hikes.
 
Arguments from the defendants: The Act was not intended to reach contracts relating to traffic rates by competing common carriers but those engaged in the manufacture or sales or articles of commerce and those that were engaged in affecting the price. We need to get together to comply with the ICC. We are not preventing the admission of changing rates. Thus we have not violated the Sherman Act.
 
The announcing in advance scares those from raising their prices. This chocks price competition.
 
Held: Argument Rejected. Railroads are engaged in interstate commerce.
 
Arguments from the defendants: The agreement in question is authorized by the Commerce Act. The more specific act trumps the affect of the general Sherman Act.
 
Held: Rejected, the Commerce Act does not authorize the current contract either.
The purpose of the Commerce Act was not directed to securing of uniformity of rates among competing companies.
 
Admitted that they were engaged in interstate transportation of persons and property. Argued that they were not subject to the Sherman Act but the Interstate Commerce Act.
 
They also alleged that they continued to provide competitive lines of transportation and communication.
 
Stated that they were not trying to increase rates unjustly, and denied that the agreement destroyed, prevented or illegally limited or influenced competition.
 
Denied charging arbitrary rates.
 
Said that the effect of the association was to establish and maintain reasonable rates, regulations on all freight traffic.
 
Question: Whether the Sherman Act applies to the railway price fixing and if so, is it in violation of the statute?
 
Peckham J: (motion dismissed)
 
1st do we have an agreement?
Yes.
 
Held: The Sherman does not apply to all contracts in restraint of trade because in some cases, the forming of trusts maintains reasonable prices for the services performed. However, it is trade among the several states and is therefore covered under the Sherman Act.
 
Every means every contract
The reasonableness of the price is not relevant. Does it prevent trade? Yes it does.
 
Does the Sherman Act apply to this instance?
Yes, it is commerce because it is transportation among states.
 
But does it relate to commerce?
 
Congress did intend to cover railroads and the commerce act does not.
 
Why should the prohibitation of Sherman for agreeing to set prices?
 
It is a restraint of trade to get together to set prices. The price they set is legally relevant. The reasonableness of the prices are irrelevant.
Every contract that restrains trade is prohibited.
 
They did state that price fixing can be in restraint of trade and therefore the Sherman Act would apply, just not in this case.
 
Price fixing means a price enhanced than would otherwise had been the case if free competition were the rule. Or a price lower that would have the effect of driving out competition.
 
In this case, if the market was left to its own device, it would result in the destruction of both railroads and congress could not have possibly intended this.
 
Thus the railroad was free to exercise the monopoly.
 
What is the true construction of the statute?
Settles the question that the Sherman Act applies to every contract in restraint of trade; it applies to all contracts.
 
Why is the railroad contract reasonable?
The success of a railroad depends on moving goods, anything, all the time. It is an industry that depends on frequency.
If you force competition, each carrier would continue to cut prices, leading to all financial ruin, leading to no benefit to the public, competition causes the dead weight loss.
The contract is to prevent financial ruin; the price fixing is attempting to maintain volume
 
LECTURE TWO
 
Monopolist
He faces the real demand curve. He makes it on the marginal revenue and marginal cost.
 
Questions
What do we do?
What kind of regulation?
To what extent are we to chill competitive practices?
What’s the cost of getting the rule of law? They don’t always produce the right result? Economic rules are difficult for the law to apply and harder for the businesses to follow?
 
Alternative to regulatory scheme?
Let the market do it.
If the market is running properly you really don’t want to regulate it.
The perfect equilibrium results from the operation of the market.
 
For a monopoly, what will happen? We want to make sure that the barriers to market entry are removed.
Economists say that they will enter the market without the so-called barriers to entry (cannot recover more than you invest).
The concern is what you cannot recover for (specialized machines, government licenses).
 
Efficient markets cannot solve these:
 
You must assume that there are no barriers.
 
It cannot solve efficient scale. Natural monopoly.
The cheapest way is for one company to make it. MC declines as demand increases.
 
What do you do about this natural monopoly?
It generally leads to regulation like utilities?
 
Why do we care about antitrust law?
 
It is still enforced.
In certain industries it is frequent (health care, hospitals, trade associations).
 
 
 
Mitchel v. Reynolds
 
Facts: Contract to buy bakehouse with a time limitation and a geographic limitation on the ability to bake.
 
Question: Whether the restraint of trade was reasonable and therefore the contract was useful?
 
Key is that he was not prevented from making a living.
 
Why is a monopoly bad? Why are they concerned with the monopoly and why?
 
Concerned about one contracting themselves out of a livelihood and thus their liberty.
 
Why uphold the agreement? What is the benefit of permitting it?
 
Concerned with allowing them to benefit. The only way that the seller of the business can absorb the benefit of the business is that they must allow restrictions for the value of their work.
It is thus a contingency prevention to preserve the value of the business otherwise no one will pay for the transfer.
 
Held: We will allow it due to their benefit under the circumstances of allowing it to be reasonable.
 
Was the court right?
We need more information to determine whether the court was right from a competitive standpoint.
 
If the court had not have enforced the provision?
No baker or a new person would have to start the business again which would result in the loss of the efficiency of the good will that had emerged.
 
There were risks either way
There was the risk of Loosing the value of the business if the K was not enforced.
If K enforced there were risks of restraining trade; it might produce barriers.
Thus there are risks if you uphold or quash the contract.
 
SHERMAN ACT
1.      Broad and vague language – E.g. “Every contract?”
a.       Work it out is British common law
b.      American law prior to the Sherman Act.
c.       Legislative History.
d.      Plain language of the statute.
e.       American History to contend with – it was the background of the Sherman Act (Railroad building, beginning of large corporations, need for an efficient capital market).
 
Legislative History
The congress was concerned with:
1.      Preventing and controlling combinations made to prevent competition or for the restraint of trade or to increase profits at the cost of the consumer.
2.      They were concerned with consumer welfare but were not anti-corporation.
3.      Sherman provided that the courts would play a vital role. The statute gives us general principles but does not lay out any particular points, the federal courts come up with the clarity of the points.
 
LECTURE THREE
Why treble damages?
Anyone can sue under Sherman under §7 and they get treble damages. The act provides for punitive damages.
 
1.      Concerned with the difficulty to detect and therefore if we pay more we get right deterrence.
2.      Incentive to bring suits.
 
§4(a) is no longer in the Sherman but is in the Clayton Act.
 
 
Statutory interpretation
1.      Read the plain language. What does “every” mean with (contract, combination and conspiracy) – it is some form of agreement.
2.      What is in restraint of trade and commerce among the several states?
3.      Legislative History – the purpose of the Sherman Act? Legislative intent?
4.      What was going on at the time, do the phrases mean something particular at the time of the passage of the act?
 
EVERY DOES NOT MEAN EVERY
 
United States v. Addyston Pipe & Steel Co (1898) (merger)
 
A contract in restraint of trade is valid if it is merely ancillary to protect the covenantee in the enjoyment of the legitimate fruits of the contract or to protect him from the dangers of a unjust use of those fruits by the other party.
 
“The common law and thus the Sherman Act allows restrictions that were ancillary to the purpose of the contract. (ancillary)”
 
Protection is determined by the purpose of the Act
 
 
Facts: In essence they predetermined the winner of the bid. U.S filed suit against 6 manufacturers of cast-iron pipe who were allocating among themselves the right to serve particular customers. The companies are big and have a huge market share.
 
The arrangement is as follows:
 
In reserved cities one company was granted the right to make all pipe sales and the other 5 firms agreed to bid higher to make the scheme look legal.
Firms who won bids would pay certain bonuses into a pool to be divided among all the others.
If they sold outside their own ter

interstate trade and commerce. In this case they did, and we cannot prescribe another formula to measure a contract, conspiracy or a combination thereof.
 
Brewer J (dissenting):
 
Every means?
 
We are not adopting reasonableness. We don’t care about intent nor the magnitude of the restraint of trade and commerce especially when dealing with railroads.
 
Concurring Opinion
Every does not mean every but reasonableness. He has an additional requirement of intent in that if there was intent to restrain trade and commerce then there is a violation.
 
Intent can be inferred from acts (especially 100% ownership of a company by purchasing stocks).
Because the Sherman Act is a criminal act, there is an element of intent.
 
Held: There was not a single investor involved in the purchase of shares but a combination of individuals which had the effect of restraining trade and commerce between the several states.
 
Holmes J:
He wants to limit the Sherman Act, to K in restraint of Trade and commerce under the common law but to narrow cases.
 
Implications of the dissent
If they had not bought the railroad, there may be a monopoly? What will improve or decrease competition in this case?
 
The philosophy is that you want two railroads.
In this case it would have increased competition.
 
Further implications of the case
Before the analysis, you must work out who is competing because if you do not know the market, you may be decreasing competition.
 
You can K to run the two railroads. However, it would be inefficient to do so. Thus inefficiency removes the K route.
 
 
INTENT AND PURPOSE
 
Standard Oil Company of New Jersey v. United States SC (1911) (first time seen unreasonableness)
 
Over-rules Trans-Missouri Railway in that every is not every but an unreasonable restraint of trade and outlines what is unreasonable restraint of Trade under §1 of the Sherman Act.”
 
Those §1 K can be in restraint of trade and commerce even if not inherently unreasonable if there is an “evident purpose” (infer) or the “inherent effect” is to restrain trade
 
On §2:
 
The unification of power and control over petroleum products is a prima facie presumption of intent and purpose to form a monopoly
 
Swift – you need a dangerous probability of creating a monopoly.
 
Facts: Rockefeller had nothing. He had an oil refinery in Cleveland, and needed to grow it. He made arrangements with the railroads made a deal where
He got discounts for shipping on their tracks
He then pooled with other refiners for more discount and
A drawback – whoever, not a member and paid a higher price, the railroads got paid.
Thus the result is they need to join the group to compete.
In the end, everyone needs to join the group to get the discount
 
Then once you’re in the group they divide up the market, and that is linked to production.
 
They had 90% of the market.
 
By 1911 their market share drops to 64% and decreases further to 50% in 1920 because of supply increases resulting from discovery of oil.
 
Rockefeller also vertically integrated (he is taking oil, refining it, building pipelines and thus, he is controlling several steps of the industry).
 
From 1870 to 1882, John D. & William Rockefeller and several others who prior to 1870, composed 3 separate partnerships in refining crude oil, organized their efforts through the corporation of Standard Oil Company of Ohio.
 
They transferred interests in this company to the partnerships, becoming stockholders in the company. They also transferred property to the corp or others to be held for their benefit.
 
Due to the large power from the arrangement, it was alleged that by 1872, they had acquired all but 3 or 4 of the 35-40 oil refineries in Cleveland Ohio.
 
They also acquired refineries in New York, Pennsylvania, Ohio and elsewhere. The properties acquired were controlled through the Standard oil company of Ohio and their affiliates.
They also had control over pipelines available for transporting oil from the oil fields to the refineries in: Cleveland, Pittsburgh, Titusville, Philadelphia, New York and New Jersey.
 
Thus, they controlled 90% of producing, shipping, refining and selling petroleum and its products, fixing prices.
 
2nd period 1882 to 1899 the interests in the Standard Oil Company of Ohio (stock of 40 companies) was vested in the trustees and held jointly.
 
After this, they organized the SOC of New Jersey and SOC of New York.
 
SC of Ohio action brought against them. It was held that the trust was void because it created a monopoly.
 
The parties then transferred their interests in the trust to other companies in which they held interests and it was alleged that the same 9 trustees basically remained in control of the interests.
 
Contempt proceedings were issued.
 
1899 the charter of the SOC of NJ was amended which basically said that the company intended to conduct business outside the state of NJ.
 
Capital stock in the SOC of NJ increased from $10m to $110m and the individuals remained majority BOD.
 
Alleged that during the 2nd and 3rd period:
Rebates, preferences and other dis practices took place
Restraint and monopolization by control of pipe lines & unfair practices against competing pipelines
K with competitors in Restraint of Trade.
Unfair methods of competition – price cutting to supp competition, espionage, holding companies, rebates on oil.
Dividing the U.S into districts thus reducing compet between the companies
Huge profits.
 
Held in circuit court: In this case, they fail to abide by a court decision. Combining of the stocks in various companies into the SOC of NJ in 1899= A violation of §1 of the Sherman Act because:
 
The transfers destroyed the “potentiality of competition” which would have existed but for the transfer.
 
An attempt to monopolize and a monopoly existed and thus violated §2 of the Sherman Act.
 
Gov Argued: The purpose of the company was to unlawfully acquire wealth by oppressing the public and destroying the just rights of others.
 
Question: To what extent is this beyond fair competition? (secret rebates) but where do we draw the line?
 
Defendants: It accumulated the wealth legally through exceptional economic tools. That although it has a concentration of wealth, it stimulated and increased production to provide petroleum at a cost below that which would otherwise be the case and thus this benefited the public.
 
White CJ:Appeal court decision affirmed.
 
§1 The “Every” issue is unreasonableness: