Antitrust Langer Spring 2015
Framework of Antitrust Law & Policy
1. Goals of Antitrust Policy
a. Stop arrangements that interfere with economic inefficiency
i. keep prices low, quality high
b. Legislative history: an anti-big business statute based in belief that concentrated economic power was related to socialism.
c. Desire to enhance business and individual freedom
d. Jeffersonian: small business is more democratic than big ones
e. Protection of small businesses from larger business with better economies of scale.
2. Antitrust Statutes
a. Sherman Act:
i. Sec.1: Prohibits contracts, trusts or conspiracies that restrain trade or commerce
1. Prohibits only “unreasonable restraints”
2. Requires collective action
ii. Sec. 2: Prohibits monopolization or attempts to monopolize or conspire to monopolize trade.
1. Does not define what a monopoly is.
2. Does not bar all monopolies; concerned with how a monopoly has been gained or sustained–must take affirmative action.
3. Applies primarily to unilateral action
iii. Criminal Statute as well as civil; intentionally left vague; allow courts to create standards.
iv. Everything else is the result of judge-made law.
b. Clayton Antitrust Act Sec. 7:
i. Contains certain provisions that increase the effectiveness of the Sherman Act.
1. Mergers: where the effect “may be substantially to lessen competition, or tend to create a monopoly any line of commerce.”
2. Price Discrimination: Selling a product at different prices to similarly situated buyers
3. Exclusive Dealing Contracts: Sales on condition that the buyer stop dealing with the seller’s competitors.
3. The Four Level Antitrust Enforcement
a. The Department of Justice, Antitrust Division
i. Authority given by §4 of the Sherman Act
ii. Can bring suit where corporation is an inhabitant and process can be served “wherever corporation can be found” §12 of Clayton Act
iii. Need not show any damage or injury to bring suit
iv. Can bring criminal cases
1. No criminal prosecution for Clayton and Robinson-Patman violations
v. If DOJ is successful they can:
1. Give maximum fine of $10,000,000 under Sherman Act.
a. But under the Criminal Fines Improvement Act of 1987 the Defendant can be fined up to twice the gross gain or twice the gross loss
2. Maximum imprisonment is up to three years
vi. DOJ has no authority to give antitrust exemption. Any private party may always sue, regardless of DOJ approval.(not like EU – Commissions approval is authoritative)
b. The Federal Trade Commission
i. Given power by §5 of the Clayton Act
ii. Can only bring civil actions
iii. § 5 of FTCA declares unlawful all “unfair methods of competition” – very broad
iv. Gives FTC power over §1 Sherman Act.
v. If they win they can get:
1. an injunction, a cease and desist order [§5(b)] c. Private Action
i. Any business that has been hurt by unfair competition
ii. Only direct purchasers, who have been injured may sue, not remote customers, except if direct purchasers purchase pursuant to a cost plus contract.(Illinois Brick)
1. In these contracts the full amount is passed on to the customer. Contracts like this state, “will buy from you at your cost plus 10%”
2. A company can’t use the “all costs were passed on to the consumer” defense, since we want the power to sue to be concentrated and to prevent something complicated from becoming more complicated.
iii. Usually brought by class actions
iv. Can be brought wherever defendant is found
v. Joint and several liability
1. As a result the plaintiff’s atty.’s use a tactic known as whipsawing
2. Under this tactic you approach those companies that you have the least evidence against and you offer to settle for a small percentage of the damages, you warn them that if they are not the first to settle the percentage they will be on the hook for will increase
a. 1st settler: 2%
b. 2nd settler: 6%
c. 3rd settler: 10%
d. 4th settler: 30%
3. This tactic puts pressure on the defendants to settle early with the plaintiffs
vi. Plaintiffs must prove:
1. If government brings a criminal case and wins, that brings prima face evidence that defendant has violated the antitrust laws [§5 of Clayton Act] a. Plaintiff must still prove that they were injured and they will want to put all the evidence in front of a jury anyway
b. If defendant enters no contest to the government case then plaintiff can’t use that as evidence of a prima face violation
vii. Those effected receive attorney’s fees and treble damages
1. Attorney’s fees
a. Lodestar: number of hours worked by atty.’s multiplied by hourly rate adjusted by risk and result
i. Falling out of use, judges are beginning to use a % method. Roughly equal to 25%, but as damages get higher, % gets lower.
b. Since atty.’s fees are high, private sector actively enforces the antitrust laws
d. Attorney General of a State
i. Can bring suits for people residing in the state
ii. Authority comes from §4A of the Clayton Act.
4. The Need for Overlapping Enforcement
a. Why Both the FTC and the DOJ?
i. FTC is bipartisan, the DOJ is an arm of the Executive
1. As a result we have a situation where enforcement of the laws can be instantaneously increased, yet it cannot be instantaneously decreased
2. If President wants increased enforcement, he tells the DOJ to bring more cases and the FTC can’t do anything to stop him.
3. But if the President wants to decrease enforcement and the FTC does not go along, there is nothing he can do at the moment except for replacing FTC members with like minded members, which would take seven years to do.
b. Why Both Private and Public Causes of Action?
i. Compensation to encourage enforcement
ii. Beyond control of the president
iii. Effects the locus of lawmaking: Fed courts, not DOJ
iv. Shifts it from being a regulatory process to an adjudicative process
c. Why State Attorney General?
i. Make certain that executive branch does not have all the power: tilt toward enforcement.
5. Jurisdiction Over Foreign Commerce
a. Alcoa (U.S.): If foreign corp. commercial activity directly affects U.S. commerce, DOJ has jurisdiction – broad scope of authority.
b. Ahlstrom (EU): claims not to use the “effects” test (criticizes U.S. statement of jurisdiction). Did the foreign commerce “enter the EU?”
c. Decisive factor is where the agreement is implemented (where market transactions actually take place), not where it is made.
i. Not territorial à in a global economy, territoriality is ineffective for enforcement.
6. Common Law Restraints of Trade
a. Sherman Act did not codify common law, but was influenced by it.
b. Covenants not to compete
i. Some are legal since they allow buyers to purchase goodwill
1. Unless seller can make a credible commitment that he will not compete, the buyer won’t buy. Thus these covenants allow sellers to get more than the FMV for their goods. So the existence of these covenants is necessary to allow the seller to get the true market value of company (more than FMV??).
ii. Some are illegal because they are over-broad
1. You must be able to come up with a story of how third parties are injured, show that the agreements insulate from competition for no legitimate reason
2. Covenant may be over-broad due to restrictions in: time, distance, or in related employment
3. If covenant is over-broad there are two options:
a. The contract fails entirely
b. The court rewrites the contract
i. If judges are willing to rewrite overly broad contracts then you will encourage parties to write broad contracts, and since lawyers are expensive no one will bring lawsuits
7. Industries Exempt from Antitrust Laws
a. Insurance Companies
b. Labor: mixture of statutes and judge made law
c. Agriculture Collectives
d. American Manufacturer’s Export Commerce
Market Structure and the Concept of Monopolization
1. For a firm to violate § 2 prohibition on monopolization, it must:
a. (1) Possess monopoly power (2) in a relevant market and (3) take some purposeful or intentional action to (a) acquire or (b) maintain that power.
2. Why We Care Abou
ii. DuPont countered that cellophane was not a separate product market since it competed directly and closely with FPMs such as aluminum foil, wax paper, saran wrap, and polyethylene. With these goods included in the product market, DuPont’s market share fell to under 20% (below minimum monopolization threshold of 65% or more established in previous cases).
b. Issue: Whether DuPont had monopolized an alleged cellophane market in violation of § 2.
i. What is the product market in which DuPont’s market power should be measured?
c. Holding: Relevant market includes all flexible packaging materials, not only cellophane.
i. Use: Whether buyers could shift back and forth between cellophane and other FPMs
ii. Quality: DuPont sold 80% of its cellophane for packaging in the food industry which required packaging material that was transparent, low permeability, etc. Since many other FPMs had these qualities, using the larger FPM market seemed reasonable.
iii. Price: cellophane costs two or three times as much as its main competitors for flexible wrapping.
d. Dissent: “We cannot believe that buyers, practical businessmen would have bought cellophane…if close substitutes were available for one seventh to one half of cellophane’s price.”
i. Barriers to Entry were High
ii. Cites Times-Picayune as standing for proposition that cross-elasticity of demand must be very small, to the extent they are basically the “self-same product.”
e. Note: The court committed the “Cellophane Fallacy”
i. The court found that a slight increase in price caused a large decrease in customers, and defined the relevant market to include several firms.
ii. The Fallacy was that a firm with significant market power will set a price just high enough so that if it raised the price a notch, the price increase would decrease profits because of the business that would be lost.
1. Did not realize DuPont was already charging a monopolistic price (7x the market) from the beginning; if it lowered its price over time in order to get more people to buy it, it was simply lowering its monopolistic price. This lowering was not enough to compensate for the huge initial overprice.
iii. A single firm that already is maximizing profits cannot, by definition, increase profits by raising prices further.
iv. The Fallacy is taking cross price elasticity to prove that other products are in the market.
v. Bedrock case for cross-elasticity of demand despite the court’s misapplication
8. U.S. v. Grinell Corp.
a. Relevant Market: here the court focused on a vulnerable group of buyers for whom, “only central station protection will do.” They carved out a separate market because there was a well defined class of consumers and that market reflected commercial reality.
i. This definition of relevant market only works when the firm can engage in price discrimination.(Captive Consumer argument)
ii. If a firm cannot engage in price discrimination when they raise the price of their product the non-captive consumers will switch and if the firm tries to sell to captive consumers at a higher price, the non-captive consumers will sell to the captive consumers at the lower price.
iii. Where the entire market consists of captive consumers, the sellers can determine how much each consumer is willing to pay and they can charge accordingly. Since the consumers cannot resell a burglar alarm, they cannot engage in arbitrage.
1. Applied to this case: only central station service will do; the firm can discriminate in price; and consumers cannot resell. Therefore, we have a captive consumer market.