Antitrust, Professor MeyersFall 2000

OUTLINE

I. Chapter 1 – Introduction to the Competition ModelA. Antitrust is the law of competition Antitrust laws regulate how businesses can compete. Some forms of

competition are encouraged, others discouraged, others illegal. Competitive behavior that goes too far is unlawful. Instead of beating out competitors in lawful ways (procompetitive conduct), actually destroy competition (anticompetitive conduct). Fine line.1. Natural for some businesses to fail. Failed business is not evidence of antitrust violation.

2. Antitrust laws protect competition rather than competitors – This sentence is worth 5 pts on exam!!

3. Determine whether conduct adversely affects competition by looking at economic models.a. Spectrum – No competition (fixed prices) = unlawful. Excess competition (predatory pricing) = unlawful.

(1) Predatory pricing – pricing products below cost until drive out competition. Once competition gone, increase prices.

Essential questions – What is proper conduct? What is improper conduct? What do antitrust laws do w/ improper conduct?

B. Antitrust Laws1. 4 Federal Antitrust Laws

a. § 1 Sherman Act – prohibits every K, combination, conspiracy in unreasonable restraint of tradeb. § 2 Sherman Act – prevents monopolization, attempts to monopolize, or consp to monopolizec. § 3 Clayton Act – unlawful to fix prices, or otherwise sell goods (does not apply to services) in manner

that substantially lessens competition or tends to create monopoly.d. § 5 of Federal Trade Commission Act – prohibits unfair methods of competition in or affecting

commerce & unfair or deceptive practices in or affecting commerce.

2. Antitrust laws are construed similarly to constitutional provisions.

3. State Antitrust Laws – OK has its own antitrust law. Arkansas, Vermont, & Pennsylvania are the only states that do not have antitrust laws.

4. Enforcementa. Fed gov agencies:

(1) DOJ antitrust division – criminal or civil enforcement; (2) FTC – enforce only civil violations.

b. Attorneys general of the several states. Ie., if OK citizens wronged, Drew Edmondson may bring action on behalf of people for civil remedy. Potentially, could enforce state antitrust law for criminal enforcement but not under fed law.

c. Private individuals may enforce civil suit.(1) Incentives for private individuals to bring suit:

(a) mandatory treble damages (even if innocent, good faith violation). Reversible error to tell jury that award will be trebled. That is why treble antitrust case is always better than punitive tort case. In tort, jury knows it will award punitives when assessing actual & other damages so that may take punitives into consideration & assess actual damages lower than otherwise. Two reasons for treble: (1) incentive to bring suit; (2) deter antitrust violations

(b) one way attorney fees award - If P wins, D must pay reasonable atty fees – not a prevailing party statute – D cannot recover atty fees if D wins.

(2) 90% of enforcement of Sherman Act is by private individuals but public enforcement varies greatly depending on who is in White House. Public enforcement is politically driven.

5. US v. Addyston Pipe (US, 1899) – important for several reasons: a. D argued Sherman Act taken from common law, under which only remedy was injunction – no damages so

that Sherman Act should be construed as not allowing damages. By virtue of Sherman Act, antitrust laws proactive & allow affirmative relief.

b. Justice Taft discusses covenants b/w competitors that are validated at common law:

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Covenants in partial restraint of trade are generally upheld as valid when they are agreements (1) by seller of property or business not to compete w/ buyer in such way as to derogate from value of property or business sold; (2) by a retiring partner not to compete w/ firm; (3) by partner pending partnership not to do anything to interfere, by competition or otherwise, w/ business of firm; (4) by buyer of property not to use same in competition w/ business retained by seller; & (5) by assistant, servant, or agent not to compete w/ his master or employer after expiration of time of service.

How does Sherman Act treat these? Covenants not to compete generally upheld if reasonable in duration & location & especially where covenant is ancillary to another agreement, such as selling business. Covenant not to compete that is not ancillary to another K violates Sherman Act. Ancillary covenants upheld if reasonable.

c. Introduces concept of Rule of Reason – Ct makes clear distinction b/w naked restraints (always unlawful) & restraints ancillary to otherwise lawful agreement (sometimes OK). If ancillary restraint, apply concept of reasonableness.

II. Chap 4 – Cartels & Other Joint Conduct by CompetitorsA. Horizontal Restraints – interbrand competitors agree to restrain trade thru price fixing, output reduction, bid fixing,

group boycotts, etc.1. Development of Analytical & Evidentiary Rules – judicially created:

a. Per se – applies to conduct so inherently anticompetitive that it is unlawful on its face & has not beneficial effect. Applying per se ends inquiry; once restriction proven to exist, D does not have opportunity to respond. Judicial economy – some restraints so patently pernicious that no need to waste judicial time to determine reasonableness. Applied to restraints that ct has had some experience w/ in past to know that type of restraint is seldom justified – no redeeming value.

b. ROR – Balancing Test – whether conduct has (1) unlawful purpose or (2) anticompetitive effect. Jury determines if D’s activities are more pro- or anti-competitive – whether reasonable or unreasonable. Evidence comes thru fact witnesses, experts – Experts more persuasive.

B. Price Fixing - generally receives per se analysis, but some exceptions1. Foundation Cases

a. Chicago Board of Trade v. US (US, 1918) – good law today. ROR applies where conduct – even horizontal price fix – enhances or facilitates competition.(1) Held – ROR – whether restraint merely regulates & perhaps promotes competition or whether it may

suppress or even destroy competition. To determine that, ct must consider: business to which restraint applied; conditions before & after restraint; nature of restraint & its effect.

(2) Purpose of “to arrive” rule was to stop price differentials once bd closed for the day. Ct found some rules needed for bd to exist at all & that existence of bd facilitates trading & benefits competition. Upheld price fixing b/c: (a) no fixing occurred during open trading period each day; (b) only small % of nat’l grain market affected; (c) no appreciable effect on price or output.

(3) Effect on competition judged by whether restriction affects (1) price; &/or (2) output. If restrict output, price will probably rise due to supply & demand. If affects price or output, apply per se.

(4) Gov tried case as per se & did not introduce evidence for ROR analysis – when Sup Ct held not per se, no evidence in gov’s favor under ROR.

(5) Cts take ROR approach to situations where rules deemed necessary for trade (Bd of Trade, Stock Exchange, college football, etc.)

b. US v. Trenton Properties (US, 1927) – Reasonableness or fairness of price not a defense to per se price fixing violation. Held – power to fix prices, whether reasonably exercised or not, involves power to control market & fix arbitrary & unreasonable prices. Reasonable prices fixed today may, through economic & business changes, become unreasonable tomorrow. Agreements that create such price fix may be held per se illegal w/o ROR inquiry. (1) Horizontal price fixing per se illegal – direct holding of case. How important to per se rule is showing

of market power? Monopoly power? Question leads to Apalachian Coals.

c. Apalachian Coals v. US (US, 1933) – 137 coal producers selling at same price b/c agreed to use same agent. Had not agreed on specific price but understood coal would be sold at same price. (1) Market share – nationwide, not regional, market share at issue here. Discussion leads to inquiry of

whether market share is an actual consideration.(2) Historic perspective – Great Depression – coal producers saw necessity to enter agreement in order to

survive Depression. Engaged in cost saving efforts.

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(3) Homogeneous product – coal is coal is coal – no individual selling method necessary b/c everyone’s product is same.

(4) Willingness to adapt Sherman Act to current economic conditions. Construed Act in almost constitutional analysis – Act is “charter of freedom” – must be adaptable to current conditions. Ct not worried about competition among competitors but competition generally. Applied ROR. Held price fixing reasonable mainly b/c of Depression & also b/c output not reduced.

d. Summary of Price Fix – normally apply per se analysis to agreements that fix price – but if can argue that agreement has purpose & effect of making market function more competitively or of creating efficiencies, effect on prices may be viewed as merely an ancillary restraint & subject to ROR.

2. Supply or Output Restrictionsa. U.S. v. Socony-Vacuum Oil Co. (US, 1940) –Agreement for major oil producers to buy gas from indeps –

less gas on market & gas price could go up. Ct looked at arrangement & determined that although not explicit price fix, unlawful per se. Purpose of agreement was to eliminate excess gas from market. Initially, affecting output w/ hope/expectation of affecting price.(1) Held – “Under Sherman Act combination formed for purpose & w/ effect of raising, depressing,

fixing, pegging, or stabilizing price of commodity . . . is illegal per se.”(2) FN 59 – distinction b/w civil & criminal violation. Intent – requirement of specific intent for criminal

violation. May be guilty of conspiracy but not violation generally & still be held liable under Sherman Act. Really look at power to restrict output or affect price – not actual restriction.

(3) Ruinous competition no defense to antitrust violation. If ruinous competition were relevant, Congress would make it so thru legislation.

3. Agreements Limiting Price Competitiona. Kiefer-Stewart Co. v. Joseph E. Seagram & Sons (US, 1951) – agreements that establish max prices

illegal per se w/o further inquiry. Setting max price, no less than setting minimum price, cripples freedom of traders & restrains ability to sell in accordance w/ own judgment.

b. Goldfarb v. Virginia State Bar (US, 1975) – Held- professional services come w/in Sherman Act –min fee schedule for attys, as set by state bar (acting as trade assoc), violated Act as collaboration among competitors to fix prices.(1) Reasoning – was not an advisory fee schedule, but mandatory – enforced thru disciplinary procedures.

Coercive horizontal price fixing. Not only violation to fix max price but also to fix min price.(2) Suggested in fn that in applying Act to profession (rather than to individual/business), profession

should receive more leniency. Disapproved in later cases – no distinct treatment of professions.

c. Commercial cooperation & coordination among competitors can take many forms. One of keys to analysis is measuring how attenuated agreement at issue is from explicit price fixing agreement. Cts generally agree that agreement on term or condition, inseparable or related to commercial component of price or sale, should be classified as price fixing.

4. Data Dissemination & Info Exchange – what legit business, if any, do competitors have for exchanging info? (a) Illegit – dividing territory, fixing prices. (b) Legit – sharing info thru trade associations.a. Trade Assocs exchange info “for public good & safety.” Trade assocs don’t begin w/ goals of violating

antitrust, but often result in such violations. DOJ & FTC enforce & private Ps believe that more often than not trade assocs spin out antitrust violations at same rate as safety, etc. Early cases focused on Ds. Now, factors include market structure & nature of info exchanged (past, present, or future data). Higher share of market trade assoc members hold, more likely sharing info will violate.(1) Question to ask – How does this Trade Assoc advance the industry? In pro- or anti- competitive

ways?

(2) Amer. Column & Lumber Co. v. US (US, 1921) – Trade assoc devised “open competition plan” – compete but share all info – perhaps watered down competition. Exchanged sales, production, & purchase info daily. Also used monthly meetings that urged high prices.(a) Held – per se violation of Sherman Act – getting together under guise of trade assoc that has

stabilizing effect on price. Some competitive advantage in secrecy – not sharing all info w/ all competitors.

(3) Maple Flooring Mfgs v. US (US, 1925) – Held – Trade assoc that openly & fairly gathers & disseminates info as to cost, volume, & actual price, & meets & discusses such info & stats – w/o

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reaching or attempting to reach any agreement or concerted action w/ respect to prices, production, or restraining competition – does not engage in unlawful restraint of commerce. Difference from Amer. Column – sales info on past transactions, not current transactions. (a) ROR – Ct looked at each alleged restraint & determined exchange of info was OK. Cost info

exchange – no showing of improper things happening in marketplace. Distribution of freight rate book – not sensitive info, serves useful purpose to quote prices quickly, & no showing of misuse. Trade stats – past info & no showing of inappropriate use.

(4) U.S. v. Container Corp of Amer (US, 1969) – looks at market structure & hints at applying ROR rather than per se.(a) Significant factors – (1) Ds accounted for 90% of sales. (2) Products were all essentially the same.

(3) Demand inelastic – does not change much. (4) Market not truly competitive – excess capacity – Ds could manufacture more product than demand necessitated (excess capacity is key that price will decline). (5) Low entry barriers for competitors to enter market

(b) Oligopoly – market w/ few sellers. Oligopoly has characteristics that markets w/ many sellers will not have – stabilized markets result from oligopoly in market of homogenous products. Oligopolist market where homogenous product & excess capacity – problematic. Price stability expected, but where excess capacity & prices do not decline, usually evidence of impermissible conduct.

(c) Held – Voluntary exchange on most recent prices charged had effect of stabilizing prices (under ROR). “Inferences irresistible that exchange of info had anticompetitive effect – price being too critical, too sensitive a control.”

(d) Example – gas stations w/ large signs that display prices are not committing antitrust violations for charging same prices b/c they are acting independently & not conspiring to fix prices.

(5) US v. Citizens Bank (US, 1975) – Confirmed Container application of ROR – disclosure or exchange of price info is not a per se violation; must be proof (based on market structure) that “practice resulted in unreasonable restraint of trade.”

(6) US v. Gypsum Co. (U.S., 1978) – Competitors freely exchanging sensitive info on daily basis. Homogenous product in oligopoly market – prices stabilized.(a) Rule – Socony-Vacuum – per se violation to affect prices so as to stabilize market.(b) D’s Defense – Compliance w/ Robinson-Patman Act. R-P Act prevents price discrimination –

violation for seller to discriminate b/w buyers in price. Defense in R-P Act for good faith meeting competition.

(c) Held – R-P is no defense – cannot violate Sherman Act b/c R-P Act “made you” engage in conduct. Also, price info discovered in legitimate ways indirectly through customers is not a violation, but direct inter-seller communication is.

(d) Also held – Intent is element of criminal antitrust offense. Must be established by evidence & cannot be based on legal presumption of wrongful intent from proof of effect on price. Criminal conviction requires proof of criminal intent & anticompetitive effect. Criminal intent requires “knowledge of probable consequences”; specific intent not required.

(e) Footnote 13 – probably wrong – cts have not followed it. Suggested that intent may play important role in divining actual nature & effect of anticompetitive conduct in civil action.

(f) Footnote 16 – When evaluating exchange of competitor’s info, will use ROR.

(7) Indirect Means of Stabilizing Prices that are Generally Allowed:(a) Price Signaling – taking out newspaper ads listing prices;(b) Price Discipline – punishing competitor for lowering price. Usually large powerful “price leader”

stabilizes price by cutting price even further to teach competitors a lesson. Not unlawful unless price leader drops price below his cost (then becomes predatory pricing).

5. Meaning & Scope of RORa. Number of incidents for applying ROR has declined but application has expanded. Early years of Sherman

Act, many violations evaluated under per se rule. But realization that difficult to categorize conduct per se. Shifted to ROR. Per se approach used b/c of judicial economy. ROR not judicially economic. ROR based on assumption that judicial resources can be expended on this case.

b. Is there a ground in b/w per se & ROR? Adopt “quick look” rule? Per se does not look at reasons; ROR takes long look at reasons; “quick look” would take only a short look at the reasons & save judicial time.

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Perhaps, “quick look” rule quashed by FTC v. Calif Dental Assoc – Sup Ct case that disapproved quick look rule used by TC & app ct. Quick look rule is talked about a lot but not clear when to apply it.

c. National Society of Professional Engineers v. US (US, 1978) – Engineering bd declared it unethical to bid on engineering projects. Bid merely on experience, performance, references, but not price. Price negotiated after accepted as engineer for the job.(1) Practice of not negotiating price violated Sherman Act w/o causing price fixing. In fact, price made

irrelevant such that a new engineer would likely not get a project. Price is “central nervous system of economy” – engineers had neutralized price.

(2) Held – ROR does not support defense based on assumption that competition itself is unreasonable. Elimination of price as factor is anticompetitive on face & per se violation.

(3) Rationale – Contrary to its name, ROR is not a rule that questions whether activity makes sense or is reasonable. Instead, focuses directly on challenging restraint’s impact on competitive conditions. Balancing of competitive impact.

d. Is competition conducive to ethical behavior? Meyers volunteers that competition is not entirely conducive to ethical behavior. You may be unethical & still not violate Sherman Act.

e. BMI. v. CBS (US, 1979) – clearing house – blanket licenses w/ broadcasters (like CBS, ABC, etc.) so that broadcasters could use any music owned by BMI or ASCAP for a flat fee. (1) Held – Blanket license not per se illegal b/c no practical way to negotiate license agreement w/ each

composer. Instead, subject to ROR, but ct did not reach decision under ROR inquiry.(2) Rationale – “Price prohibitive.” ROR – composers knowingly agree to license nonexclusive

agreement – nothing prevents CBS from directly negotiating w/ composer. Price competition not eliminated. ASCAP/BMI can only sell blanket licenses. Agreement among competitors was necessary.

(3) See “exclusivity” in NCAA TV contract. If “exclusivity” present, horizontal (1) price fixing; (2) blanket license – different product capacity lost w/o clearing house type services.

(4) “Joint venture” or “Cooperative venture” – horizontal competitors getting together w/ consent to provide a product not available on individual basis. Such ventures may be necessary at times.

f. Catalano, Inc. v. Target Sales, Inc. (US, 1980) – Liquor retailers brought suit against wholesalers alleging

conspiracy to eliminate short term trade credit formerly granted on beer purchases.(1) Held – Wholesalers’ agreement to eliminate credit terms per se illegal price fixing b/c credit terms

directly impact price. Socony-Vacuum. “Agreement among competing wholesaler to refuse to sell unless retailer makes payment in cash either in advance or upon delivery is ‘plainly anticompetitive’ . . . [and] lack[s] any ‘redeeming virtue;’ hence, conclusively presumed illegal w/o ROR.”

(2) 9th Cir. had held no per se violation – horizontal agreement among competitors to fix credit terms does not necessarily contravene antitrust laws. Agreement might enhance competition by: (1) removing barrier to entry; (2) increasing visibility of prices. Ct rejected 9th Cir justifications: (1) making market more attractive to new entrants inconsistent w/ prior case law & (2) increased price visibility does not justify restraint on individual wholesaler’s freedom to select own prices.

g. Arizona v. Maricopa County Medical Society (US, 1982) – Price fixing of medical fees. Medical Society argues per se rule does not govern b/c agreements are horizontal & fix maximum prices, are among members of profession, are in industry w/ which judiciary has little antitrust experience, & have procompetitive justifications.(1) Held – Per se price fixing of medical fees. Actual effect was to raise insurance premiums paid by end

users. Fixing price on horizontal basis controlled by competitors. (2) Rationale – Anticompetitive potential inherent in all price fixing agreements justifies facial

invalidation even if procompetitive justifications are offered for some.(3) But see – vertical agreement for maximum price fixing judged under ROR.

h. FTC v. Calif Dental Assoc (in supplement) – Dentists could advertise but not false or deceptive & must encourage esteem in public. FTC said restricting advertising violates § 5 of FTC Act. ALJ found unfair business practice – can’t put restrictions on advertising. Did not do full ROR inquiry – put on empirical studies that show restricting advertising restrains trade. Evidence FTC put on was not market specific, called no expert witnesses. Said would have put on more evidence had it been a ROR case. (1) Issue : Whether quick look sufficient to determine whether behavior anticomeptitive.

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(2) Held – Quick look appropriate in some circumstances but not here. Remanded for ROR application on whether anticompetitive. Anticompetitive effects must be comparably obvious to employ quick look rule. “Quick look analysis carries the day when great likelihood of anticompetitive effects can easily be ascertained.” Here, advertising restrictions arguably protecting patients from misleading or irrelevant advertising call for more than cursory treatment as obviously comparable to classic horizontal agreements to limit output or price competition.

(3) Quick look first came up as theory promulgated in NCAA v. Bd of Regents (held “naked restraint on price & output requires some competitive justification even in absence of detailed market analysis.”). Didn’t happen there. Calif Dental case was first Sup Ct look at quick look analysis. 5-4 decision w/ strong dissent.

(4) Breyer Dissent – Identifies “four classical, subsidiary antitrust questions: (1) What is the specific restraint at issue? (2) What are its likely anticompetitive effects? (3) Are there offsetting procompetitive justifications? (4) Do the parties have sufficient market power to make a difference? Would affirm lower courts – “I should have thought that anticompetitive tendencies of the three restrictions [at issue] were obvious. An agreement not to advertise that a fee is reasonable, that service is inexpensive, or that a customer will receive a discount makes it more difficult for a dentist to inform customers that he charges a lower price. . . And that likelihood means that dentists will prove less likely to offer lower prices.”

(5) Remanded to 9th Cir – pg 24 of supp – dismissed complaint & found FTC’s evidence too general to support claim. Did not produce evidence under ROR. “Unwarranted second bite at apple.”

(6) Not a holding that restricting advertising is per se illegal. (7) If judge adopts per se but D presents ROR, object b/c D cannot present evidence on issues not raised

by P. Never as P ignore ROR.

i. NCAA v. Bd of Regents (US, 1984) – perhaps case w/ greatest impact on consumerism for privately brought antitrust suit. Facts – OU & Georgia football programs challenged NCAA control over broadcasting games. NCAA system – colleges could not negotiate w/ networks & NCAA set price for broadcasts. NCAA’s procompetitive argument – TV threatens actual attendance at football games.(1) Rule – Ct rejected applying per se b/c it recognized that this was situation “in which horizontal

restraints on competition are essential if product is to be available at all. Instead applied ROR – procompetitive – NCAA argued its regulations enhanced competition. “Despite fact that case involves restraints on ability to compete in terms of price & output, fair evaluation of competitive character requires consideration of NCAA’s justifications for restraints.” Under ROR, hallmarks of anticompetitive behavior place upon D heavy burden of establishing aff def that competitively justifies apparent deviation from operations of free market.

(2) Held – “By curtailing output & blunting ability of Ps to respond to consumer preference, NCAA has restricted rather than enhanced place of intercollegiate athletics.” Output-restricting agreements are anticompetitive.

(3) Reasoning – No doubt that challenged practice constitutes restraint of trade in sense that limits freedom to negotiate & enter contracts. Horizontal restraints. NCAA argued did not possess market power & could not be held liable under Sherman Act but Ct found such market power. Ct also stated “As matter of law, absence of market power does not justify naked restraint on price or output.”

(4) Dissent – Justice White predicted: (a) that college football threatened by unbridled competition;

(i) effects since plan – 100s of games on TV; increased attendance & stadium expansion; cost of advertising goes down during football games, which benefits consumers; dollars per appearance on TV has increased each year

(b) that College Football Assoc would have same problems as NCAA in regulating TV(i) has not happened b/c of BMI case – nonexclusive. New plan – colleges assign right to

televise each game to CFA. CFA goes to network to determine which games to show prime time. Games not picked up by networks, assigned back to schools to negotiate to televise at times that did not conflict w/ network game broadcasts.

(ii) Another effect – realignment of football conferences. Conferences won arrangements w/ networks & CFA no longer needed. Stepped aside as to TV regulation. Conferences now negotiated directly w/ networks to market TV packages as did CFA.

(iii) Suits filed against CFA plan were not successful.

6. Sports & Antitrust Laws

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a. Checkered history of application of antitrust law in sports context. Analyze any sport – professional or amateur – in way of NCAA case. Absent statutory or ct created exception, laws apply to sports same as apply to businesses.(1) Nature of sports different than nature of other business b/c sports requires cooperation among

teams/competitors. Such cooperation not necessary in other businesses. Team owners must cooperate in order for there to be a product to sell. Players must cooperate in order to negotiate salaries. (Players assoc negotiates on basis of players) – cooperation = horizontal restraint.

b. Bargaining Employee/Employer Exception Analogous to Sports:(1) Congress enacted exemption for collective bargaining in union context – authorizes otherwise

anticompetitive conduct (employees get together & bargain for pay & benefits, etc.) of employees to be lawful. Specific exception for employees from antitrust liability.

(2) Nonstatutory, judically created exception for employers to bargain collectively w/ union on behalf of employees. Players Assoc is union in sports context. Judicial exemption allows owners to negotiate w/ Players Assoc w/o violating Sherman Act.

(3) Brown v. Pro Football – antitrust exemption under labor law. CBA b/w NFL & Players Assoc expired w/o renewal – negotiating on CBA. Owners took stand on developing taxi (development) squad – don’t make team but want to keep players around as practice dummies. CBA said limit development squad to certain number of players & set their salaries. (a) Held – CBA, although expired, still being negotiated & necessary for continued operation of

league. No violation.

(4) 1961 – Sports Broadcasting Act – granted exemption from antitrust laws for telecasting of professional sports & allowed NFL & other sports to agree among owners how to televise games, as long as football did not broadcast on Friday nights during high school football or on Saturdays during college football games.

c. Baseball Exemption – Until 1997, all sports covered under antitrust laws except baseball.(5) 1922, Sup Ct antitrust case against baseball owners. Held in order for violation, must be

K/combination in restraint of trade in interstate commerce. B/c played on field, local & not interstate.(6) 1942 – subsequent Sup Ct case – stare decisis as to 1922 decision. Baseball has absolute exemption

from antitrust laws.(7) 1972 – Flood v. Kume – Sup Ct decided yes, baseball has absolute exemption. Indeed, baseball is in

interstate commerce, but Congress has not changed previous decisions & exemption for baseball. B/c Congress not addressed issue, exemption stands.

(8) Congress passed Flood Act in 1997 – basically says major league baseball subject to antitrust laws just as any other sport but minor league baseball not covered.

d. Key info on Sports & Antitrust: Two key exemptions:(1) labor law exemption analogy – CBA w/ players associations(2) telecast exemption not to conflict w/ high school or college.(3) No longer a baseball exemption

e. Recent decisions seem to say NBA single actor – group is single actor – not each individual team as actor. No violation b/c no combination/K/conspiracy b/c all one single collective actor. Prevalent view seems to be that leagues are single actors, which exempts leagues from § 1 but not § 2 b/c § 2 does not require combination.

f. Carracing – next potential for huge antitrust suit. Two types of courses – oval or street courses. Two leagues that governed racing – CART & USAC. New league (IRL) started w/ certain requirements – (1) oval tracks only; (2) slow down; (3) change spec on car to lower cost of season. CART said – any CART driver or team that participates in new league cannot participate in CART races.(1) CART filed suit in Detroit w/ junk claims plus antitrust allegations but no clear antitrust claim & did

not seek antitrust remedy(2) IRL sued CART & Penske in Indianapolis – clear antitrust complaint plus junk claims(3) Foyt sued CART & Penske in TX for Antitrust (?) and junk(4) Fittipaldi sued IRL & George in Miami(5) B/w CART & IRL suits, antitrust claims transferred to Indianapolis & junk claims transferred to

Detroit. Ended dispute. Foyt & Fittipaldi were transferred to Indianapolis & settled.

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(6) Are IRL & CART leagues as NFL, etc? Two leagues or one league? Have interleague play w/o retribution, date conflicts, Make Indy 500 the “world cup.”

C. Proof of Agreement1. Introduction - § 1 of Sherman Act requires agreement – two or more parties engaged in restraint. How does

one prove “agreement?”a. Infer conspiracy from circumstantial evidence. Agreement requirement under § 1 does not require proof

of explicit collusion. Agreement can be tacit (silent, implied, unspoken). Evidence showing “meeting of minds,” concerted action, or mutual understanding sufficient to support inference of agreement.

2. Conscious Parallelism and the Interstate Circuit Doctrinea. Interstate Circuit v. US (US, 1939) – Letter demanding theater exhibitors to substantially increase price

for film admissions. Letter addressed to all eight exhibitors – knew competitors received same letter. Evidence that knew other competitors would engage in price increase. All agreed to increase price. No evidence of direct communication b/w each other in regard to agreement. (1) Rule – Inference of conspiracy – D presented weak evidence where strong evidence should have been

available – infers strong would have been adverse.(2) Conscious Parallelism – acting in parallel fashion w/o agreeing to do so (cars hitting brakes on

interstate). Difficult to distinguish b/w legitimate conscious parallelism & illegitimate agreement/conspiracy.

(3) Held – Acceptance by competitors, w/o previous agreement, of invitation to participate in plan, necessary consequence of which is restraint of interstate commerce, is sufficient to establish unlawful conspiracy under Sherman Act.

b. US v. Masonite Corp (US, 1942) – “Fixing of prices by one member of group pursuant to express delegation, acquiescence, or understanding is just as illegal as fixing price by direct, joint action.”

c. Proof of withdrawal from conspiracy is effective affirmative defense to § 1 claim. To w/draw effectively, must either report conspiracy to antitrust authorities or clearly communicate intent to w/draw.

d. Theatre Enterprises, Inc. v. Paramount Film Distributing Corp. (US, 1954) – Downtown theaters showed first run films. Suburban theaters could not. Crest Theater opened in suburb. Went to six distributors to ask for first run movies. All six said no. Alleged conspiracy b/c all six were acting consciously parallel by giving same answer.(1) Issue – Whether respondents’ conduct toward Crest Theater stemmed from independent decision or

from agreement, tacit or express.(2) Rule – Business behavior is admissible circumstantial evidence from which may infer agreement.(3) Held – Conscious parallelism is not by itself enough to demonstrate conspiracy.

e. “Plus Factors” – Conscious parallelism + ? = Conspiracy. Lower cts have interpreted Sup Ct’s opinions on parallelism to allow parties to meet agreement requirement if evidence of consciously parallel conduct (common plan) in addition to other so-called plus factors (conduct evidence from which inferences can be drawn demonstrating that competitors had agreed, either explicitly or implicitly, to a common design & course of action): (1) proposal for joint action; (2) identical sealed bids;(3) complex yet identical set of responses; (4) direct communication or opportunity for it or phone message notes evidencing conversation; (5) failure to deny agreement; (6) set of circumstances that made each participant aware it was in its interest to participate if all did, but

adverse to its interest to participate if others did not. Evidence that common action was contrary to Ds’ own economic self interests is critical to the inquiry.

3. Delivered Pricing & Base-Point Pricinga. “Delivered Price” is price to buyer & includes charge for delivery. Concept of base-point pricing sets

delivered price at figure which includes transportation costs from standard reference point, but not necessarily from where product is shipped. Question here – whether industry-wide delivered pricing system can give rise to inference of collusion under § 5 of FTC Act.

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b. Parallel business behavior that is not illegal under Sherman Act may still constitute an unfair method of competition under § 5 of Sherman Act, which does not require conspiracy or agreement. All Sherman § 1 violations also violate § 5 of FTC Act but not vice versa.

c. FTC v. Cement Institute (US, 1948) – FTC declared illegal use of basing point price system adopted by several cement manufacturers. Under basing point system, sellers quote only a delivered price (includes freight costs). Prices can be kept uniform by establishing one or more basing points (centers where large number of sellers or dominant firms located). Price to any buyer includes freight from nearest base point, regardless of where goods actually shipped from. Thus, buyer located close to seller is charged for “phantom” freight. Sup Ct affirmed FTC ruling, holding that basing point system was conducive to price parallelism b/c buyer is generally quoted about same price from all sellers wherever located.

4. Oligopoly Pricing & Facilitating Devicesa. DuPont v. FTC (The Ethyl case) (2nd Cir, 1984) – FTC noticed all four anti-knock ethyl gas producers

using same pricing policies & brought suit alleging conspiracy. (1) Issue – “Whether, given characteristics of industry, challenged business practices constitute ‘unfair

methods of competition’ in violation of § 5 of FTC Act simply b/c they ‘facilitate’ consciously parallel pricing at identical levels.”

(2) Rule – Mere existence of oligopolistic market structure in which small group of manufacturers engages in consciously parallel pricing of homogenous product does not violate antitrust laws. Represents condition not “method.”

(3) Held – Have not proven conspiracy based merely on evidence of conscious parallelism. In absence of proof of violation of antitrust laws or evidence of collusive, coercive, predatory, or exclusionary conduct, business practices not ‘unfair’ unless those practices have an anti-competitive purpose or cannot be supported by an independent legitimate reason.

(4) Case is “final nail in coffin” on conscious parallelism – does not get you there. Before conduct in oligopolistic industry may be labeled unfair w/in meaning of § 5, minimum standard demands, absent tacit agreement, at least some indicia of oppressiveness must exist such as (1) evidence of anticompetitive intent or purpose, or (2) absence of independent legitimate business reason for conduct.

5. Intra-Enterprise Conspiracya. General rule – generally single corp cannot conspire w/ itself under § 1. Question arises whether

concerted activity b/w corp & subsidiaries or subdivisions can give rise to § 1 liability.

b. Copperweld Corp. v. Independence Tube Corp (US, 1984) – Held – No conspiracy can exist b/w parent corp & wholly owned subsidiary b/c have same economic interest/economic unity.(1) Makes no distinction b/w unincorporated subdivisions & wholly owned subsidiary. Reasoning –

enterprise should be free to structure itself in ways that serve efficiency of control, economy of operations, & other factors dictated by business judgement w/o increasing exposure to antitrust liability. Nothing inherently anticompetitive about corp’s decision to create subsidiary.

c. Partially-owned subsidiary – although cases mixed, Meyers’ view is that where partially-owned subsidiary is majority owned, cannot conspire. Probably jury question where minority owned.(1) Can two wholly-owned subsidiaries conspire? No, have unity of interest thru common parent.

Partially owned majority subsidiaries probably cannot conspire. Partially owned minority subsidiaries probably creates jury question as to conspiracy.

d. Gap in Sherman Act Coverage Filled under Oklahoma Antitrust Act(1) As illustration (in notes Oct. 2) demonstrates, gap in Sherman Act coverage for individual action

where market share is low. Intentional gap that makes economic sense. § 1 coverage does not take into consideration market share but § 2 coverage does consider market share so that where market share is low, cannot demonstrate either monopoly or attempt to monopolize.

(2) Oklahoma Antitrust Act – [This information will appear on final exam] - § 203(A) extra word in OK act not in Sherman Act – word is “act” – every act, contract conspiracy . . . Literal effect of this word is that under OK Antitrust Act, there is no gap similar to that under Sherman Act. Individual act in restraint of trade is actionable under § 203(A).

6. Burdens of Proof & Summary Judgment Problems (on issue of conspiracy)

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a. Matsushit Electric Industrial Co. v. Zenith Radio (US, 1986) – US cos. sued Japanese cos. alleging consp so as to drive out US competition. Alleged that consp had been occurring for 20 years at time of filing suit & 30 years at time case was b/4 Sup Ct – yet had not actually driven out competition.(1) Rule – Establishing genuine issue of material fact in order to avoid Summ J involves two components:

(1) show more than conspiracy – show injury resulting from alleged illegal conduct; (2) issue of fact must be “genuine” – shown w/ specific facts. . . . Where record taken as whole could not lead rational trier of fact to find for nonmoving party, no genuine issue for trial. Follows from these settled principles that if factual context renders claim implausible – makes no economic sense – respondents must come forward w/ more persuasive evidence to support claim than would otherwise be necessary.

(2) Cites Monsanto Co. v. Spray-Rite Service Corp. – conduct as consistent w/ permissible competition as w/ illegal conspiracy does not, w/o more, support inference of conspiracy. That’s why burden shifts. Requires P under § 1 claim to present evidence “that tends to exclude possibility” that alleged conspirators acted independently.

(3) Held – If Ds had no rational economic motive to conspire, & if conduct is consistent w/ other, equally plausible explanations, conduct does not give rise to inference of conspiracy. Evidence must tend to exclude possibility that petitioners underpriced respondents to compete for business rather than to implement an economically senseless conspiracy. In absence of such evidence, no genuine issue for trial & Ds are entitled to Summ J.

(4) Dissent – criticizes Summ J standard making judge one of jurors as fact finder.

b. Experts in Antitrust – make sure comply w/ Daubert factors to assess reliability:(1) Whether offered theory or technique can be & has been tested;(2) Whether theory or technique has been subjected to peer review & publication;(3) Known or potential rate of error or existence of standards; &(4) Whether theory or technique used has been generally accepted.

c. City of Tuscaloosa v. Hacros Chemicals (11th Cir) – expert economist used methods acceptable w/in discipline so that testimony admissible. Once testimony admitted, sufficient to entitle Ps to go to trial & survive Summ J.

D. Horizontal Market Divisions – competitors agree to divide market, not agreeing to fix prices. Division of market can affect price so this is not always permissible. Apply per se if division restrains trade, competition, output.1. Example – Four plumbing contractors in Norman. Divide up town into four regions. Each won’t do work in

another’s area. Other ways to divide – one company takes gov business, one takes private business. One company agrees to sell only certain products and other company other products.

2. US v. Sealy (US, 1967) – Horizontal competitors given licenses by Sealy to manufacture mattresses, Sealy divided territory among licensees. Looks like vertical arrangement except that licensees actually owned & controlled Sealy. D was merely puppet & competitors set up territory division arrangement – Per se violation.

3. US v. Topco Associates (US, 1972) – Geographic territory allocation per se illegal. Independent grocers form co-op to better compete w/ big chains. Created generic brand & agreed to limit sales to specific territories. D argued pro-competitive b/c only way small independents could compete. Court held horizontal restraint on competition w/in geographic area firmly established as illegal per se b/c it creates monopoly in that geographic area. Illegal no matter how worthy reasons are.

4. Polk Bros v. Forest City Enterprises (7th Cir, 1985) – product allocation – ROR. Two merchants formed joint venture to share one building (strip mall). Agreed not to overlap on products sold. Primary purpose was to eliminate free riding on advertising that lured customers to stores. Ct applied ROR – restriction on competition ancillary to valid business purpose; not naked restraint of trade.

E. Boycotts & Other Concerted Refusals to Deal1. Boycott is refusal to deal w/ particular firm. Individual boycott OK, but cannot lobby others to do same.

Typically, boycotts horizontal in that conspire w/ competitors & vertical in that conspire not to deal w/ supplier or buyer. Boycotts against horizontal competitor are illegal per se.

2. Development of Per Se Analysis: Collective Agreements Aimed at Competitorsa. Eastern States Retail Lumber Dealers’ Assoc. v. US (US, 1914) – Retailers circulated list of wholesalers

who also acted as retailers. P claimed list acted as boycott b/c other retailers would not do business w/ wholesalers-retailers after circulation of lists.(1) Held – Circulated list acted as boycott.

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(2) Rule – “Act harmless when done by one may become public wrong when done by many acting in concert, for it then takes on form of conspiracy, & may be prohibited or punished, if result too hurtful to public or to individual against whom concerted action is directed.”

(3) Rationale – Ct found it of no consequence that record lacked direct evidence of actual conspiracy to use “black lists” as a boycott b/c “conspiracies are seldom capable of proof by direct testimony & may be inferred from things actually done."

(4) Is conduct actionable where three retailers conspire to boycott one other retailer? Antitrust laws protect “competition” & not competitors, so if boycott harms only one retailer as a competitor, action is not necessarily unlawful under Sherman Act.

b. Klors, Inc. v. Broadway-Hale Stores (US, 1959) – Case of two complimentary stores side-by-side w/ agreement not to sell certain items in both stores. “Evidence” at trial of other manufacturers/sellers available to public. D moved for summ j on ground that no public wrong resulted from concerted action. TC found merely private quarrel w/ no public wrong. Ct of App affirmed. Sup Ct reversed.(1) Rule – Public harm must always be shown, but if there is a per se violation, public harm will be

inferred. If violation not per se & is tested under ROR, then private P will not get benefit of presumption of public harm & must show it through evidence.

(2) Held – Per se illegal group boycott. When conduct anticompetitive on face, P need not prove injury to competition. Group boycotts clearly bad for consumers in aggregate, so per se test applies.

c. Eastern State and Klor – seem to say horizontal group boycott per se violation. Klors stands for proposition that public harm is inferred.

d. Market Definition – What are included as substitutes for particular product in question? Is cell phone a substitute for pay phones? Does not have to define market substitutes as everything that all customers of one can afford the other.

e. NYNEX Corp. v. Discon, Inc. (US, 1998) – telephone removal services case.(1) Held – Per se group boycott rule does not apply – must prove injury to market competition.

Substituting one supplier for another is not per se violation. ROR analysis. Facts seem to portray more vertical arrangement than horizontal arrangement. Where both vertical & horizontal, ct will treat as vertical if more vertical than horizontal. Under ROR, must show injury to competition – not presumed as under per se.

(2) Rationale – New entrants could not come into market if made rule that changing suppliers is per se violation.

(3) Case stands for – only use per se when boycott horizontal; where have private P & apply ROR, P must prove injury to competition, not just injury to individual P.

3. Toward Limited Balancing Approach: Collective Agreements Aimed at Customer Dealingsa. Paramount Famous Lasky v. US (US, 1930) – movie distributors enter agreement to all use standard K w/

exhibitors.(1) Ct used truncated/limited ROR analysis. Not going to arbitrarily apply per se, especially where not

traditional/classic boycott.(2) Held – When under guise of arbitration parties enter unusual arrangements that unreasonably suppress

normal competition, their action becomes illegal. Not necessary to show that challenged arrangement suppresses all competition b/w parties or that parties themselves are discontented w/ arrangement. Interest of public in preservation of competition is primary consideration.

b. Smith v. Pro Football, Inc. (D.C. Cir., 1979) – NLF draft not per se illegal group boycott b/c NFL clubs that implemented draft are not competitors w/ the players, & refusal to deal w/ players did not decrease competition for “providing football entertainment to public.” But ct found agreement (not to deal w/ players before or after draft) was unreasonable restraint of trade under ROR b/c its purpose & effect was anticompetitive.

4. Industry Self-Regulation & Disciplinary Actionsa. Silver v. NYSE (US, 1963) – NY Stock Exchange immune from antitrust liability under federal securities

laws only where conduct necessary to operation of Securities Act. Conduct here not immune but per se violation. Before self-regulation & anticompetitive collective action are approved under implied exception to antitrust, procedures must be established that satisfy fundamental fairness – notice & opportunity for hearing.

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b. Northwest Wholesale Stationers v. Pacific Stationery & Printing (US, 1985) – Pacific was member of NW purchasing cooperative, violated co-op’s bylaw, kicked out of membership. Alleged boycott by horizontal competitors.(1) Rule – Apply per se: (1) if boycotting firm has dominant market share – generally not justified by pro-

competitive conduct; (2) if boycott cuts off access to supply, facility, or market necessary to enable the boycotted firm to compete – essential facilities doctrine.

(2) Held – No per se evaluation b/c some pro-competitive efficiencies – associates may self-regulate in reasonable ways & rule at issue here was reasonable. P really objecting to being expelled from cooperative venture – not complaining of nature of venture itself. Not detrimental to exclude this one P – did not eliminate anything essential to competition for P. Must cut off competition to supply or market.

(3) Actual Holding - “P seeking application of per se rule must present threshold case that challenged activity falls into category likely to have predominantly anticompetitive effects. Mere allegation of concerted refusal to deal does not suffice b/c not all concerted refusals to deal are predominantly anticompetitive. When P challenges expulsion from joint buying cooperative, some showing must be made that cooperative possesses market power or unique access to business element necessary for effective competition.”

(4) Reasoning – Distinguishes Silver – no procedural safeguards required here – not dispositive that P was expelled from the cooperative venture w/o notice & opportunity for hearing. Silver held that procedural safeguards were necessary only b/c of nature of NYSE & the Securities Act.

c. Analysis of Boycott: (1) Is it horizontal? (2) Is boycott aimed at competitor or competition? If so, per se. (3) Does boycotting firm or firms have dominant market power?

d. FTC v. Indiana Federation of Dentists (US, 1986) – 100 dentists, concentrated in geographic area, agreed among themselves not to supply patient X-rays to insurance companies. Gov claimed per se horizontal group boycott – concerted refusal to deal.(1) Ct applied ROR - although conspiracy resembled “group boycott,” did not apply per se b/c rule

generally limited to cases in which firms w/ market power boycott suppliers or customers in order to discourage them from doing business w/ competitor – not the case here – activity aimed at non-competitor.

(2) Held – Evidence of actual adverse effects on competition in those areas where boycotting dentists predominated is legally sufficient to support finding that challenged restraint was unreasonable even in absence of elaborate market analysis.

(3) ROR Analysis – (1) Horizontal agreement among dentists. (2) Refusal to compete w/ respect to package of services offered to customers, no less than refusal to compete w/ respect to price terms of agreement, impairs ability of market to advance social welfare. (3) Not necessary to determine that boycotting group has market power where present proof of actual detrimental effects, such as reduction of output, caused by the arrangement.

(4) Ct cited Professional Engineers, noting that dentists failed ROR b/c no pro-competitive justification for their policy to w/hold info from customers.

5. Naked & Ancillary Concerted Refusals to Deala. Associated Press v. US (US, 1945) – Gov charged that AP had by concerted action set up system of By-

laws that prohibited all AP members from selling news to non-members & that granted each member power to block nonmember competitors from membership. Dist Ct found that By-laws had hindered & impeded growth of competing newspapers.(1) Rule – Individually, parties may sell to whomever they wish, but when they join together, they cannot

as an assoc refuse to deal w/ specific parties.(2) Held – per se violation of § 1 as arrangement designed to stifle competition. Naked restraint – not

ancillary. Result was to limit competition, not to provide product.(3) D sometimes has duty to competitor – facility here necessary for competitor’s survival. Essential

Facility Doctrine.

b. OK Statute – 79 OS § 203 (c), (d) – codify essential facility doctrine (c) unlawful for any person in control of an essential facility to deny access to it upon reasonable terms if the effect of such denial is to injure competition. (d) “Essential facility” means a facility:

(1) Which is controlled by an entity that possesses monopoly power;(2) That a competitor would be unable to practically or reasonably duplicate,

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(3) The use of which has been unreasonably denied to a competitor or a customer of the entity that possesses monopoly power, and

(4) That it would be feasible to allow competitor or customer to use or have access to without causing harm to or unreasonably interfering w/ the entity that possesses monopoly power.

c. SCFC ILC v. Visa USA (10th Cir, 1994) – Visa bylaws said can exclude from membership any applicant that is issuing Discover or AE cards. Sears issued Discover & alleged exclusion from Visa is violation of Sherman Act § 1. Ct held (ROR) not violation of § 1. Reason – under market power test, considering all banks that issue credit cards, Visa lacked market power & Sears failed to demonstrate harm to competition. Pro-competitive reason given was to prevent “free riding.”

6. Noncommercial Boycotts – based on commercial or political motivations? Sherman Act targeted at only commercial ventures.a. Missouri v. NOW (8th Cir, 1980) – economic boycott – NOW’s effort to influence Missouri to ratify ERA.

Held – Sherman Act not intended to regulate politically motivated boycotts – covered by 1st Amend as political speech. “Using boycott in non-competitive arena for purpose of influencing legislation is not proscribed by Sherman Act.”

7. Summary of Boycottsa. Per Se Boycott – applied where:

(1) D has market power or exclusive access to essential facility to effect competition.(2) Restraint aimed at competitor w/ no efficiencies shown – no positive benefits.(3) Naked Restraint – no market power required to be shown – so obvious

b. ROR(1) Target is customer rather than competitor(2) Economic impact not immediately obvious(3) Market definition may not be necessary if actual adverse effects to market are shown (Indiana

Federation)(4) When inquiring into market power – really looking at how restraint affects market.

c. Non-commercial activity not covered by Sherman Act.

III. Chapter 5 – Vertical RestrictionsSection 1 – Intrabrand Distributional RestaintsA. Vertical Restraints - Agreements b/w manufacturer & distributor, or b/w wholesaler & retailer, or b/w any two

sequential parties in production-distribution chain.1. Types of conduct typically vertical restraint: (1) resale price maintenance (RPM); (2) market division; (3)

exclusive dealing; & (4) typing arrangements.2. Horizontal Restraint – Interbrand restraint. In horizontal context, if competitors told cannot conspire, they

must compete or drop out of competition.3. Vertical Restraint – Intrabrand restraint. In vertical context, if tell Ford cannot impose certain restriction on

dealers, Ford can buy its dealers & sell to consumer directly – Vertical Integration.‘

A. Resale Price Maintenance (RPM) – Per se violation of § 1 for seller (manuf) contractually to set min price at which buyer (retailer) can resell product. ROR applies to setting max price.1. Setting Vertical Minimum Prices

a. Dr. Miles Medical Co. v. John D. Park & Sons Co. (US, 1911) – Dr. Miles sought to maintain min prices for all sales of its product at wholesale & retail. Thru two types of agreements: (a) consignment; (b) retail sales agency. Held – Vertical minimum price fixing or RPM per se illegal. (1) Dr. Miles’s arguments: (a) Propriety medicine manufactured under secret process – rejected b/c

product not patented. (b) Manufacturers entitled to control price of own products – rejected b/c RPM is about fixing prices for resale – conduct would not work as horizontal restraint & should not work as vertical restraint.

(2) Important in RPM to distinguish b/w max & min price maintenance. Here, dealing w/ min price maintenance.

(3) Ct found – under consignment K, no RPM b/c no sale. Under retail agency agreement, parted w/ title & setting price for resale is RPM, vertical restraint per se forbidden by Sherman Act

b. 1937, Congress passed Miller-Tydings Fair Trade Amendment – permitted states to authorize RPM agreements for branded commodities. Insulate small businesses from price & marketing practices of large businesses.

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(1) OK responded (as did 47 other states) w/ State Unfair Sales Act. Purpose of OK’s Act – prevent large chains from selling below cost in order to run out small competitors, including lost leader sales – pricing particular products below cost in order to draw customers to purchase other items at regular cost. OK’s act constitutionally upheld as valid by OK Sup Ct & US Sup Ct.

(2) Act construed narrowly. 10th Cir – strictly construed b/c Act is anti-competitive rather than pro-competitive. Illegal in OK not to sale goods at least at 6% mark-up. Conduct not actionable unless can show intent & purpose of injuring competition, etc. § 598.5(c) – evidence of less than cost is p/f evidence of intent to injure competitors & to destroy or lessen competition.

(3) Act applies only to wholesalers & retailers – not to manufacturers.(4) Clean Hands Doctrine – injunctive relief – if one seeks equity, one must come into ct w/ clean hands

- complainant cannot have sold below cost. Clean hands doctrine does not apply to actions for damages. § 598.7 – Meeting competitor’s price – good faith selling below cost in order to meet (not beat) competitor’s price. Argument as well that Act is inefficient in protecting small business. In part, b/c cannot sell below their own cost – cost to small businesses is probably higher than cost to large businesses b/c of volume of sales.

2. Consignment Contracts as Means to Control Vertical Pricea. Question left open by Dr. Mills – whether rule applied to manufacturer that transferred product thru

consignment or agency relationship rather than outright sale –addressed in US v. General Elec. (US, 1926) – no violation of antitrust law for manufacturer to dispose of his article directly to consumer & fix price by which agents transfer title from him directly to consumer.

b. Simpson v. Union Oil (US, 1964) – reevaluated General Electric. Held – If Sherman Act violation assumed for consignment agreement that achieves RPM, injury presumed – consignment agreement & lease being used to injure interstate commerce by depriving independent dealers of exercising free judgment whether to become consignees at all or remain consignees & to sell at competitive prices.(1) Held – RPM thru present, coercive type of “consignment” agreement is illegal under antitrust laws &

petitioner suffered actionable wrong or damage.(2) Distinguished GE case on grounds that: (1) risk of loss on nonsale products passed to retailers in

Simpson; (2) GE was patent case.(3) Nothing wrong w/ true consignment. “But when ‘consignment’ device used to cover vast gasoline

distribution system, fixing prices thru many retail outlets, antitrust laws prevent calling ‘consignment’ an agency, for then end result of Socony-Vacuum, would be avoided merely by clever manipulation of words, not by differences in substance.” Professor Meyers has problem w/ Ct’s use of “vast” & “clever manipulation of words.” Would there be violation if only a small distribution system of perhaps 2-3 outlets? Why discourage “clever” use of words?

(4) Case did away w/ whole scheme of gas distribution. Trying to protect dealers but impact was to put independent dealers out of business. Decision led to vertical integration of the industry – no more small independently owned service stations – all owned by Texaco, Chevron, Exxon, etc, selling direct to consumer. Case tells – better not ask for something unless you really want it – Simpson won the case but lost in the end b/c vertically integrated.

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3. Unilateral Refusal to Deal as Means to Enforce Vertical Price Maintenance: Colgate Doctrinea. General Rule – Manufacturers are free to announce “suggested retail prices,” as long as merely suggested

& action is truly unilateral. But what if seller announces it will cease dealing w/ any customer who fails to adhere to suggested retail price?(1) US v. Colgate (US, 1919) – Colgate Doctrine – 2 prongs: (a) no agreement; (b) under some

conditions manufacturers have absolute right to refuse to deal or to deal w/ whom they choose.(b) Colgate wanted products sold at “suggested retail price” – mere suggestion of price is not retail

price fixing. But had policy to refuse to continue dealing with those who did not adhere to suggested price. 2 reasons that retail price fixing not found here: (a) no agreement; (b) just unilateral announcement of terms under which manufacturer would deal.

(c) Quoted portion of Colgate Doctrine – “In absence of any purpose to create or maintain monopoly, act does not restrict long recognized right of trader or manufacturer engaged in entirely private business, freely to exercise his own independent discretion as to parties w/ whom he will deal. He may announce in advance circumstances under which he will refuse to sell.”

(d) Monopoly & market share are exception to Colgate doctrine – cannot claim Colgate under monopoly situation. Private business only – does not apply to public utilities. Manufacturer does not need to answer why they refuse to deal.

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(2) Parke Davis (US, 1960) – all you can do is not do business w/ them when dealer refuses to sell at suggested price. Cannot give second chance – that forms de facto agreement.

4. Vertical Maximum Price Fix – probably benefits customersa. Albrecht v. Herald (US, 1968) – Maximum price fixing is illegal per se.

b. State Oil v. Khan (US, 1997) – overrules Albrecht – not illegal per se to set max prices.(1) Facts – State Oil set max price that retailers could sell gas. If sold over that amount, excess was

remitted to State Oil. Kahn had no incentive to sell above or below suggested price.(2) Held – Vertical max price fixing, like majority of commercial arrangements subject to antitrust laws,

should be evaluated under ROR. ROR will effectively identify situations in which vertical max price fixing amounts to anticompeitive conduct.

(3) Stare Decisis – “General presumption that legislative changes should be left to Congress has less force w/ respect to Sherman Act in light of accepted view that Congress ‘expected cts to give shape to statute’s broad mandate by drawing on common law tradition.’”

(4) Ct notes – “primary purpose of antitrust law is to protect interbrand competition.” At issue here was intrabrand competition.

5. Dealer Termination a. Most often complained about action by dealers. Terminated dealer generally asserts termination caused by

failure to adhere to vertical restraints imposed by manuf or supplier. Comes about either as termination or failure to renew agreement. Dockets clogged w/ frivolous or meritless dealer termination cases. Assuming no br/K, is termination unlawful under antitrust laws? Typically manuf has number of dealers in competition w/ each other. Dealer 3 may be a price-cutter, not following suggested price, not promoting product, etc. so that manuf wants to terminate agreement w/ Dealer 3.

b. Under Colgate & Sylvania, together, appears terminated dealer must prove 2 things for per se:(1) a qualifying “agreement” instead of unilateral terms by distributor (otherwise legal);(2) this was “price” rather than “non-price” agreement (otherwise, apply ROR).

c. Continental TV v. GTE Sulvania (US, 1977) – Vertical non-price restrictions such as territorial & customer restraints receive ROR. GTE wanted dealers to fight other brands, not each other.(1) Interbrand competition main focus of antitrust laws.(2) Valid pro-competitive reasons: (a) eliminate intrabrand competition to promote interbrand

competition; (b) eliminate free-riding; (c) maintain quality (product image).

d. Monsanto Co. v. Spray-Rite Service Corp. (US, 1984) – standard of proof required to find vertical price-fix conspiracy in violation of §1 – mere complaints not enough – must be evidence that excludes possibility (any chance) of independent action.(1) Facts – Spray-Rite, discount operator, was terminated & alleged that Monsanto conspired w/ another

dealer to effectuate termination. 7 th Cir – proof of termination following competitor complaints is sufficient to support inference of concerted action. Sup Ct rejected this – complaints not enough to infer conspiracy. Reasoning – 7th Cir standard makes proving consp too easy, even when no consp exists. Might preclude manuf from taking complaints from dealers.

(2) Colgate – Manuf can deal & refuse to deal w/ whomever as long as do so independently. (3) Held – Correct standard is that there must be evidence that tends to exclude possibility of independent

action by manuf & distributor. Must be direct or circumstantial evidence that reasonably tends to prove that manuf & others had conscious commitment to common scheme designed to achieve unlawful objective. Something more than evidence of complaints needed.

e. Business Electronics v. Sharp Electronics (US, 1988) – Facts – Hartwells was small dealer w/ customer service - demonstrate how to use calculator. Business Electronics sold at discount w/o service. Hartwells says terminate BE or will w/draw as dealer.(1) Held – Even if price is part of complaint, apply ROR, unless shown that non-price reasons were not

even a plausible purpose of the termination. Vertical restraint per se illegal under § 1 only if express or implied agreement to set resale prices at some level.

(2) Recognized premises of GTE Sylvania & Monsanto – (1) presumption in favor of ROR; (2) departure from ROR must be justified by demonstrable economic effect, such as facilitation of cartelizing, rather than formalistic distinctions; (3) interbrand competition is primary concern of antitrust laws; (4) rules in this area should be formulated w/ view toward protecting doctrine of GTE Sylvania (interbrand competition is main focus of antitrust laws).

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f. Summary – Two parts to proving § 1 violation – (a) K, combo, combination; (b) in restraint of trade. Monsanto rule goes to (a) – cannot prove conspiracy merely w/ evidence of complaints. Business Electronics goes to (b) – apply ROR to determine whether in restraint of trade, unless shown to be vertical price restraint. To show price restraint & apply per se rule, must show no plausible purpose for which non-price reasons were used to terminate.

Section II. Interbrand Vertical ForeclosureA. Exclusive Dealing Under ROR

1. Exclusive Dealerships – contractual relationship whereby all but one dealer in same product of same company/manufacturer are eliminated. If supplier unilaterally decides only to sell to one dealer in particular area, no violation of § 1. Arrangement protects dealers in that they only can carry product in certain market.a. Valley Liquors, Inc. v. Renfiled Importers (1982) – Renfiled (supplier) terminated Valley (distributor) &

granted exclusive dealership to other distributor. Alleged that terminated unlawfully in order to set prices. Ct applied ROR & held no – P must show improper motive where there exists plausible reasons for termination. Judge Posner writes:

We reject casual of interbrand competition w/ intrabrand competition. Elimination of price cutter who is taking free ride on promotional efforts of competing distributors will tend to stimulate nonprice competition intrabrand as well as improve interbrand position . . . ROR is difficult to apply . . . courts look for shortcuts. Balance tips in favor of P if D has significant market power. . . Vertical actions of companies w/o market power are of little concern to cts b/c such companies cannot afford to intentionally disserve customers, if they mistakenly do . . . market retribution will swiftly correct the problem.

b. ROR applies – In general, manuf may lawfully pick & choose those w/ whom will deal; t/f may choose to sell to certain buyers & not to others. However, legality of such arrangement may ultimately depend upon extend of interbrand competition. If no interbrand competition (manuf has no competitors), intrabrand competition may be considered more important, thereby restricting manuf’s right to deal.

2. Interbrand Vertical Foreclosure – (Output Ks) – cannot sell to my competitors – not necessarily lawful for manuf to impose restrictions on how the buyer can resell goods. Subject to ROR. Certain nonprice vertical restrictions may foster interbrand competition & thereby have redeeming competitive virtues, even though they reduce or eliminate intrabrand competition.

3. Exclusive Dealing – (Requirement Ks) – have to buy all you need of X from me.a. Clayton Act § 3 – deals w/ exclusive dealing – “Unlawful to sell or lease goods on conditions . . . that

substantially lessen competition or tend to create monopoly.” Easier to show than injury to competition. Applies to goods & not services, not output contracts.

b. Test – Subject to ROR, D must foreclose substantial share of market. First, define market; then, apply ROR to determine extent of foreclosure. If no foreclosure, may be legal.

c. Efficiency Analysis is considered. Exclusionary effects of exclusive dealings must be weighed against economies achieved thru K’s efficiency features.

4. Tampa Elec. Co. v. Nashville Coal – TE agreed to purchase all coal requirements from NC for 20 yrs. TE wanted out – filed Clayton § 3 action since K foreclosed 18% of Florida coal market. Considering only state-wide market, TC granted Summ J for TE. NC appealed – said relevant market is aggregate of all states where NC did business – not only Florida. Based on regional market definition, no substantial foreclosure.

B. Tying Arrangements 1. Introduction: Economics of Tying

a. Leverage Theory – will sell product one on condition that seller buys product two (which is not as desirable as product one). Try to leverage selling power of product two to market power of product one. Product one is the tying product. Product two is the tied product.

b. Problem in tying, disproportionate number of sales of product two that would not otherwise get w/o tying arrangement. T/f, affecting market economy. Irrational displacement of sales in product two.

c. Certain products that so traditionally are sold together are not considered tying – shoes.d. Three statutes where tying becomes issue - §§ 1 & 2 of Sherman; § 3 of Clayton; § 5 of FTC Act. Tying

illegal under § 3 of Clayton Act – form of exclusive distribution arrangement – only as to goods & not services.

e. Three elements P must Prove for per se:(1) Two Separate Products – must be coherent basis for distinguishing second product from first

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(2) Tying Product – D possessed sufficient economic power in market of tying product (must first define product & relevant market)

(3) Tied Product – substantial amount of commerce affected in tied product.

2. Development of Unique Per Se Rule for Tying Arrangementsa. Times Picayune Publishing Co. v. US (US, 1953) – advertising in both morning & evening papers.

(1) Rule of thumb for monopoly power – 50% of market. Justice Clark states, “When seller enjoys monopolistic position in market for tying product . . . a tying arrangement violates narrower standards expressed in § 3 of Clayton Act b/c from either factor requisite potential lessening of competition is inferred.” Sup Ct later says too high a standard. Not Clayton Act case – Clayton Act deals w/ products, not services.

(2) Test from Times that continues today – If substantial volume of commerce in tied product is restrained, tying arrangement violates § 3 of Clayton Act b/c requisite potential lessening of competition inferred.

(3) Essence of illegality of tying arrangement is wielding “monopolistic” leverage; seller exploits dominant position in one market to expand empire into next.

(4) Held – no tying product (could not identify whether advertising market of morning or afternoon papers was dominant) so no tying arrangement.

b. Dunkin Donuts (not in book) – P complained that DD required franchisers to purchase paper products (bags & napkins) from D at higher price than could get on open market. Underlying problem w/ tie – charging more for Product 2. Ct held illegal tie under Clayton § 3.(1) Full Line Enforcing – must buy entire line of products we produce – not just desirable products.

Tying in context. To be illegal under § 3 of Clayton Act, must either substantially limit competition or tend to create monopoly

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c. Northern Pacific Railway v. US (US, 1958) – US had given RR 40 mill acres of land for its building rail across US. RR began selling land on condition that if buyer/lessee produced anything on land, had to ship it on RR. RR promised that its rates would be equal to those of competing carriers.(1) Land was tying product. Tied product was rail.(2) Rule – Tying arrangements traditionally subjected to per se rule when party has sufficient economic

power w/ respect to tying product to appreciably restrain free competition in market for tied product & a “not insubstantial” amount of interstate commerce is affected.

(3) Held – RR’s preferential routing clauses were unlawful restraints of trade. RR possessed substantial economic power by virtue of extensive landholdings, which it used as leverage to induce purchasers & lessees to give it shipping preference. Also, no doubt that a “not insubstantial” amount of interstate commerce was & is affected by tying arrangement.

(4) Arguments that did not work – (1) don’t really enforce agreement for requiring rail service – so what, people are following agreement whether enforced or not; (2) economic effect on consumer was same here – promised price to be same. Does shifting from whom purchase service when price is same have negative effect on consumer or competition?

(5) Meyers believes cost factor made this not unlawful tying arrangement. Northern Pacific did not say cost was defense. Further, Northern Pacific applied per se rule analysis.

d. Essence of Tying – prove (1) two products; (2) tying product has market power; (3) arrangement has not insubstantial affect on economic market.(1) Factors cts look to in finding two products: (a) physical characteristics; (b) business justification such

as cost efficiencies; (c) end-usage; (d) whether challenged aggregation is essential ingredient of product’s success; (e) industry trade practices; & (f) whether products ever sold in separately.

3. Proof of Tying Product Powera. US Steel Corp. v. Fortner Enterprises (US, 1977) – tying sell of homes to credit. Tying product –

extension of credit. Tied product – homes.(1) “Sufficient economic power” – whether seller has power, w/in market for tying product, to raise prices

or require purchasers to accept burdensome terms that could not be exacted in competitive market. Whether seller has some advantage not shared by competitors in market for tying product.

(2) Held – If evidence merely shows credit terms unique b/c seller willing to accept lesser profit – or incur greater risk – than its competitors, uniqueness will not infer economic power in credit market. W/o any evidence that US Steel had some cost advantage over its competitors – or could offer form of financing significantly differentiated from what other lenders could offer if they elected – unique character of its financing did not support conclusion that they had kind of economic power necessary.

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(3) Ct said – don’t really have two products here – just one product – a credit sale of homes. No evidence that US Steel was selling credit w/o homes. Tantamount to left shoe-right shoe.

(4) Major point – just b/c yell “unique” does not prove inference of market power.

b. Jefferson Parish Hosp v. Hyde (US, 1984) – alleged tie b/w surgery (tying product) & anesthesiology (tied product). Ct finds two products. (1) Test for 2 products – Would buy one w/o other? Found two products b/c “choice of individual

anesthesiologist separate from choice of hospital” is one that patients should enjoy & exercise.(2) Held – Tie but no sufficient market power. (Only if patents are forced to purchase anesthesiologist

services as result of hosp’s market power would arrangement have anticompetitive consequences.) Insufficient market power b/c patients have lots of choices as to other hospitals.

(3) Ct still ostensibly applying per se rule. “Far too late in our antitrust jurisprudence to question proposition that certain tying arrangements pose unacceptable risk of stifling competition & are unreasonable per se.”

(4) Not finding per se tying arrangement, ct proceeded to answer whether K violated Sherman Act b/c unreasonably restrained competition. Inquiry into actual effect on competition among anesthesiologists. Found no evidence of actual adverse effect on competition.

(5) O’Connor Concur – “Per se doctrine in tying cases requires elaborate inquiry into economic effects of tying arrangement. As result, tying doctrine incurs costs of ROR w/o achieving its benefits: doctrine calls for extensive & time-consuming economic analysis characteristic of ROR, but then may be interpreted to prohibit arrangements that economic analysis would show beneficial.” Calls for abandonment of per se approach.

c. Distinguishing tying arrangements from exclusive dealing Ks can be difficult. Two practices are governed by very different legal tests.

d. Eastman Kodak v. Image Tech Services (US, 1992) – Copiers case. No argument that Kodak had significant market power in sale of copiers. P alleged Kodak had unlawfully tied sale of service for Kodak machines to sale of parts. Kodak refused to sale parts to Independent Service Operator. ISOs sued – truncated discovery. Summ J granted in D’s favor. Ct of App reversed. (1) Issue – whether D’s lack of market power in primary market precludes, as matter of law, possibility of

market power in derivative market.(2) Kodak urged for adoption of a substantive legal rule that “equipment competition precludes any

finding of monopoly power in derivative after-markets.” If no market power in sale of copiers, how can have market power in parts & services? Must look at market power in relation to competitors – cannot have monopoly over own products. Ct disagrees that can never be monopolist over own product. “Relevant market for antitrust purposes is determined by choices available to Kodak equipment owners. B/c service & parts for Kodak equipment not interchangeable w/ other manufacturers’ service & parts, relevant market is composed of only those companies that service Kodak machines.” Kodak has market power in this market.

(3) Ct complains that “record too sparse” b/c of truncated discovery.(4) Does this case narrow Matsushita? Backing away from burden placed on P in Matsushita (to offer

theory that makes economic sense)? Majority in Kodak restrict broad interpretation of Matsushita, at least where P’s economic theory of antitrust enforcement – use of dominant market power to create tying arrangement in intrabrand market – can be shown to have anticompetitive, exclusionary effect.

(5) Cir cts reluctant to follow Kodak. Interbrand competition thriving in market. Isn’t this really just a form of vertical integration & how can cts tell firms that they must sell to ISOs rather than do work themselves?

(6) Kodak concluded that after-market power might exist even though Kodak had no power in primary market b/c poorly informed customers might purchase copier not knowing about repair costs, & be “locked-in,” since cheaper to pay monopoly price for parts than to discard copier & purchase different brand. Subsequent cases have noted obvious fact that lock-in theory applies only if time gap b/w decision to buy copier & need for parts.

e. Microsoft (2000) – Civil action brought by gov against Microsoft. Two antitrust issues discussed here: (1) Microsoft tying operating system to Browser (Explorer). (2) Exclusive Dealing.(1) Tying Arrangement – Held – Dis Ct found Microsoft guilty of tying. Found had market power to

substantially affect market. Found two products; proof that marketing Explorer by itself establishes separate product. Made no difference that did not charge for Explorer.

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(2) Exclusive Dealing – Agreements in question required other party to promote & distribute Internet Explorer to partial or complete exclusion of Navigator. Held – No exclusive dealing b/c access not denied. Netscape had access to market & could be used w/ Microsoft operating system(a) Rule – Cts condemn as exclusive dealing only those contractual arrangements that substantially

foreclose competition in relevant market by significantly reducing number of outlets available to competitor to reach prospective consumers of competitor’s market.

(b) Test – subject to ROR. Cts look at a variety of factors: (1) degree of exclusivity & relevant line of commerce implicated by agreement; (2) whether % of market foreclosed by Ks is substantial enough to import that rivals be largely excluded from competition; (3) agreements’ actual anticompetitive effect in relevant line of commerce; (4) existence of any legit, procompetitive business justifications offered by D; (5) length & irrevocability of agreement; (6) availability of any less restrictive means for achieving same benefits.

IV. Chapter 6 – Monopoly Structure, Power, & ConductA. Introduction

1. § 1 of Sherman Act has two components: (1) K, combo, consp; (2) in restraint of trade. Claims under § 1 are evaluated under either per se or ROR.

2. § 2 of Sherman Act – no per se or ROR lingo. Very diff from § 1, although same conduct can violate both sections.

3. Three Offenses: a. Monopolize (not to have monopoly) – can do by self or by consp – no requirement of consp. Generally

50% or above of market share gets to jury.b. Attempt to Monopolize – Specific Intent + Dangerous Probability of Success (b/w 30-50% of market

share)c. Conspiracy to Monopolize. No such thing as conspire to attempt to monopolize.

4. Tension of § 2 is balancing when § 2 should stop success – encourage to compete but do not compete too well as to reach monopoly position. Traditional Remedy – dissolution. § 2 Dilemma – Are there diff standards by which conduct is judged depending on how successful a business is? Yes. When competing becomes monopolizing.

5. Terms – Monopoly Power – means market power. Judges & cases use term “monopoly power.” Economists use “market power.” A firm w/ 1% of market has market power but not monopoly power. Firm w/ 70% has both market power & perhaps monopoly power.a. Monopoly Power – Sup Ct & all Cir Cts, except 10 th , has defined monopoly power as: “Power to control

price or exclude competition.” Some argue that not different b/c power to control price gives power to exclude competition & vice versa. But Cir Cts & Sup Ct say they are different. (1) 10th Cir – view power to control price & power to exclude competition as separate but requires both

types of power in order to find monopoly power.(2) In OK – Antitrust Reform Act – specifically defines monopoly power as or. OK has adopted other

cir’s views of monopoly. Different standard, then, in OK from 10th Cir. Wanted law in OK to be construed as close to generally prevailing law in country.

6. Search for Standards – on when one is violating § 2. No definitions, explanations, or standards written into text. Wanted cts to construe as it does Constitution & wants cts to develop standards. Under § 2 Monopoly Power (MP) + ? = Monopolization? Is monopoly power by itself violative? Or, is something else required? What conduct or circumstance do we put in ? to come up w/ monopolization?

B. Problem of Monopoly1. US v. Amer Can (D. Md., 1916) – various actions including purchasing competitors at high prices, non-

compete agreements extending years, etc.a. In court for “bad acts” pre-1910 or so. Ct looked at things as done presently/recently. Profits not really out

of line. Ct does not need to get into “business” of saying that monopoly power OK if not making huge profits. What they should look at is cost of monopoly on others – competitors & consumers. Could extract inflated prices from purchasers but be inefficient in business operations so that do not have or show excessive profits. Cts should not allow defense of low profits.

b. Ct discusses size of firm – Size itself is not crime but unlawful exclusion of others to increase size is violation. Illegal or unnatural growth may not be OK. Look at origin of growth – natural, legit, or illegally acquired?

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2. Natural Monopoly – local newspaper in small towns – not enough demand to support competitors.a. ALCOA (2nd Cir. (Judge Learned Hand), 1945) – Alcoa was sole producer of aluminum “ingot” in US. P

argued that this was evidence of monopoly.(1) 30/60/90 test - 90% of market share is monopoly; 64% questionable; 33% is not. (2) Important decision – force & effect of Sup Ct decision. Roadmap case for evaluating § 2 cases.

Defining market – who gets to define market sometimes determines whether ct finds monopoly. Here, ct defined market as virgin ignot & recycled ignot. “Thus, in case at bar, Alcoa always knew that future supply of ignot would be made up in part of what it produced at that time, & that consideration must have had its share in determining how much to produce.” Defining market as such, Alcoa enjoys 90% control.

(3) Ct acknowledges that although Alcoa had 90% of market & hence monopoly power, it still may not be guilty of monopolizing b/c it may have had monopoly “thrust upon” it. Origin of monopoly may be critical in determining its legality. Size does not determine guilt; must be some exclusion of competitors; growth must be something else than ‘natural’ or ‘normal;’ must be a ‘wrongful intent,’ or some other specific intent; or some ‘unduly’ coercive means used.

(4) Held – Acloa used its monopoly size for abuse. Not a passive beneficiary of monopoly. “Exclusionary acts” include those not honestly industrial, & not limited to those actuated by desire to prevent competition.

(5) Alcoa developed the modern two-stage definition of the offense of monopolization under § 2. First, ct must determine whether D has “monopoly power” – sufficient market power to “dominate” an industry. If no, D is not guilty. If yes, ct must additionally determine whether D is an “innocent” monopolist whose dominance was “thrust upon” it by its own skill or efficiency, or whether it engaged in anticompetitive or monopolistic acts.

(6) Conduct that is not competitively inevitable may be exclusionary.

3. Three Tests b/4 this case to determine Monopolization – Must have monopoly power. Assuming monopoly power, three tests:a. Classic Test – MP & have engaged in acts that are unreasonable restraints of trade (acts unlawful under §

1) (not honestly industrial)b. Most Hostile Test – MP (alone, plus nothing else). Makes big bad.c. Intermediate Test – MP plus exclusionary acts. Does not have to violate § 1. Can be acts that are

honestly industrial. Used today - Sup Ct has thrown out the most hostile & classic tests.

4. Defensesa. Natural Monopoly – “Thrust Upon” Monopoly – did not choose to monopolize – just naturally happened.

Passive.b. Superior Skill, Foresight & Industry Defense – Monopoly b/c have superior skills, superior foresight.

Did better than competitors & was more industrious. Microsoft’s defense.

5. Double standard in the law – someone w/ monopoly power may not engage in same type of conduct that someone w/o monopoly power can lawfully perform. Conduct which is held exclusionary when practiced by someone w/ monopoly power can form basis of § 2 violation but firm w/o monopoly power can engage in same conduct w/o it being held exclusionary & w/o it forming basis for § 2 violation.

C. The Modern Offense of Monopolization1. Market Power & the Relevant Market:

a. Test for illegal monopolization: (1) D must have large amount of market power; & (2) D must have engaged in certain monopolistic, or anticompetitive, acts.(1) Market power is ability to raise price by reducing output.(2) Monopoly power – power to control price or exclude competition.

(a) Prove: (1) with actual evidence of controlling price or excluding competition (such direct evidence may be sufficient); or (2) Determine whether D has power to so control prices or exclude competitors.

b. As general rule, cts begin analysis in monopolization cases by determining D’s market share. Ct must define “relevant” market – consists of two parts – product market & geographic market. P always wants to define market narrowly b/c easier to establish monopoly power. Normally, product has some sort of competition, must determine what competitors fall w/in relevant market. Then, determine market share to determine market or monopoly power.(1) In determining market share, ct generally does three things:

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(a) identifies “product” that is alleged to be monopolized; (b) determines relevant geographic market; (c) computes “market share” expressed as D’s output of relevant product in relevant market, divided

by total output of relevant product in relevant market.

(2) Market power is function of three different values: (a) D’s market share; (b) elasticity of demand in entire market; & (c) cross-elasticity of supply of competing or potentially competing firms.

(i) Elasticity of supply – presence of unused capacity in industry or existence of firms that could easily shift to production of product. Greater elasticity of supply, less control particular producer has over market price.

(3) Things to be grouped inside relevant market must, to significant degree, be substitutes for each other. That is, to conclude that a grouping of sales constitutes relevant market is to conclude both (a) that things inside grouping do not face significant competition from things outside grouping & (b) that things inside grouping do compete w/ each other.

c. US v. Du Pont (US, 1956) – US brought action against Du Pont for monopolizing cellophane.(1) Ct below found relevant product market was flexible packaging market. 75% of market for

cellophane. Cellophane just 20% of all flexible packaging market. (2) Ct says relevant market depends on availability of like products for buyers – whether cross-elasticity

of demand b/w cellophane & other wrappings. Look at product in question – are there a lot of products one could substitute for cellophane? Demand-side. What does buyer demand – what is buyer willing to accept if first product priced too high or otherwise not available?

(3) In order to define relevant product market – look at substitutability/fungibility – what products substitutable for another – ct looks to price, uses, etc.

(4) Price can be different. “In determining market, it is use or uses to which commodity is put that control. Selling price b/w commodities w/ similar uses & different characteristics may vary, so that cheaper product can drive out more expensive.” No clear lines but once determined what is & is not w/in product market, line is drawn.

d. Note on Cross-Elasticity of Demand – criticizes Du Pont for committing the “Cellophane fallacy” – concluding from observed high cross-elasticity of demand at current market prices that D lacks power, while ignoring possibility (from direct evidence) that firm is already charging monopoly price.

e. Telex v. IBM (10th Cir. 1975) – Telex alleged that IMB monopolized & attempted to monopolize plug compatible peripheral computer products. IBM alleged that all peripherals were in the market, including those not plug compatible. Argued that suppliers of noncompatible plug peripherals could shift to produce compatible plugs if reward is great enough. (1) Reasonably interchangeable – not actually interchangeable today. If incentive present to cause

manufacturer to change & not too expensive to change, define market from supply side as compatible & noncompatible suppliers. Suppliers in market today & those that could reasonable enter market in future. Price assumption – if IBM gets high enough, consumers won’t change (not reasonably interchangeable from demand side) but competitive suppliers will change.

(2) Held – Reasonable interchangeability proven here; hence, market should include all peripheral products, those compatible & those not compatible. These products, though not fungible, are fully interchangeable & may be interchanged w/ minimal financial outlay, & so cross-elasticity of supply exists.

(3) Preferred approach for defining from demand side but can do supply side analysis. In defining market, look at both demand & supply side.

D. Measuring Geographic Market1. US v. Grinnell Corp. (US, 1966) – burglary alarm case.

a. Found geographic market was nationwide b/c nationwide prices, discounts, terms, etc. Competitors operate throughout nation. Even though individual customer must interact w/ home station w/in 25-mile radius of home.

b. Reasoning – “We see no barrier to combining in a single market a number of different products or services where that combination reflects commercial realities. There is here a single basic service –protection of property through use of central service station – that must be compared w/ all other forms of property protection.”

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c. Where are competitors; where are potential competitors?

2. Relevant geographic market generally larger than existing area in which D sells. Issue is whether, w/ small increase in price, firms in surrounding areas that not actually competing in geographic area at this time, would be reasonably likely to enter market.

3. Four steps to calculate Share of Market:a. Determine product market (cellophane v. flexible wrap);b. Determine appropriate geographic market (regional v. national);c. Determine total sales in market (both product & geographic market);d. Determine D’s sales in market

E. Monopoly Conduct1. Exercise of monopoly power does not refer to monopolistic pricing, but rather to creation or preservation of

market power by means considered anticompetitive. These means are called “exclusionary practices” & are activities that, when combined w/ market power, yield the offense of monopolization.

2. Barriers to Entrya. United States v. United Shoe (D. Mass, 1953) – challenged lease agreements that United Shoe commanded

from lessees as barriers to entry. Lease terms held exclusionary.(1) Ct found conduct exclusionary, not economically avoidable, honestly industrial, but sufficiently

exclusionary to arrive at monopolization under § 2. United’s leases created barriers to entry: (1) lease deters shoe manufacturer from disposing of United machine & acquiring competitor’s machine b/c of 10-yr term of lease; (2) when replacing United machine at end of term, United gives favorable terms if replace w/ another United machine; (3) United does not charge for repairs during lease term so that there are no independent service organizations & other competitors are forced to offer same repair services. Exclusionary features of United’s leases were the 10-year term, full capacity clause, return charges, & failure to segregate service charges from machine charges.

(2) Ct finds leases constitute “Ks, arrangements, & policies which, instead of encouraging competition based on pure merit, further the dominance of a particular firm. In this sense, they are unnatural barriers; they unnecessarily exclude actual & potential competition; they restrict free market.” All the intent that is required in finding a § 2 violation is intent to engage in the practices, not intent to monopolize.

(3) Held : (1) United has, & exercises, such overwhelming strength in shoe machinery market that it controls the market; (2) strength excludes some potential, & limits some actual, competition, & (3) strength not attributable solely to D’s ability, economies of scale, research, natural advantage, & adaptation to inevitable economic laws.

(4) Ct rejected remedy of dissolution. Ct determined leases should be purged of restrictive features – terms shortened, full capacity clause eliminated, discriminatory charges removed, United Shoe required to segregate charges for machines from service charges. Ct also instructed that United is to offer for sale any machinery that it also offers for lease.

(5) Test for exclusionary conduct – “though ‘honestly industrial,’ not economically inevitable.” Creating jury instruction on this test is not easy. Must define ‘honestly industrial’ & then define ‘economically inevitable.’

(6) Three requirements for barriers of entry – (a) Initial cost - must be some relatively high cost for prospective entrant to bear; (b) Risk – must be significant risk of failure; (c) Sunk cost – significant % of these cost must be unrecoverable in event of failure.

3. Problem of Strategic Behaviora. Berkey Photo v. Eastman Kodak Co. (2nd Cir. 1979)

(1) Rule – After monopoly power found, second element of § 2 offense is “willful acquisition or maintenance of that power as distinguished from growth or development as consequence of superior product, business acumen, or historic accident.” Mere possession of monopoly power not a problem but cannot act w/ regard to competitors so as to smother them.

(2) Held – Use of monopoly power attained in one market to gain competitive advantage in another is violation of § 2, even if no attempt to monopolize second market. Use of economic power creates liability. Reasoning – Tolerate existence of monopoly power only insofar as necessary to preserve competitive incentives & to be fair to firm that has attained position innocently. No reason to allow exercise of such power, though, for detriment of competition.

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(3) Berkey argued that monopolist has duty to inform competitors of new products & advancements in order to allow competitors to compete. Ct rejected this. Might stifle innovation. Firm may normally keep innovations secret from rivals as long as wishes, forcing them to catch up on strength of own efforts after new product introduced.

(4) Does not impose on Kodak obligation to announce innovations in advance. Innovation itself is no exclusionary action. Also, no violation of § 2 for Kodak to encourage sales of its new product although it may have suffered certain deficiencies.

(5) Ct notes that Kodak proved no damage to itself from the complained-of activities.

b. Calif. Computer Products v. IBM (9th Cir., 1979) – P manufactured peripheral computer products compatible w/ IBM. Charged IBM w/ “technological manipulation” of its products so as to exclude CalComp’s products from compatibility where such manipulation did not improve performance.(1) Held – IBM, assuming it was a monopolist, had the right to redesign its products to make them more

attractive to buyers – whether by reason of lower manufacturing costs & price or improved performance. Under no duty to help CalComp or other peripheral equipment manufacturers survive or expand.

c. Drawing line b/w permissible innovation & impermissible exclusionary conduct is difficult.

d. Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (US, 1985) – 4 mountains –offered six-day All-Aspen lift ticket. Ski Co. owned three mountains; Highlands owned by another company. Ski Co discontinued four mountain pass & offered only three mountain pass for its three mountains. Highlands sued Ski Co for monopolization in violation of § 2. Jury found Ski Co. violated § 2, affirmed by 10th Cir on grounds of exclusionary conduct & duty to deal (essential facilities doctrine)(1) Sup Ct said no affirmative duty to deal w/ competitors. But here, not dealing w/ monopolist refusing

to engage in cooperation proposed by competitor. Instead, monopolist elected to make important change in pattern of distribution that had originated in competitive market & had persisted for years. Ski Co’s decision to terminate All-Aspen ticket was decision by monopolist to make important change in character of market. B/c jury found no business justification for making this change, conduct was held exclusionary.

(2) Exclusionary Conduct – comprehends behavior that not only (1) tends to impair opportunities of rivals, but also (2) either does not further competition on merits or does so in unnecessarily restrictive way. Conduct exclusionary on its fact, if justified by legit business reasons is OK. Whether exclusionary does not depend on whether conduct hurts P but whether hurts customers – whether impaired in unnecessarily restrictive means. Ct uses language “predatory” but Meyers says too strong. Predatory (§ 1 conduct) not necessary to find § 2 violation – need only exclusionary.

(3) Essential Facilities Doctrine – not necessary to examine this argument b/c found liability on ground of exclusionary conduct.

(4) Relevant Market – downhill skiing; geographic market – all ski destinations nationwide? All skiing in Colorado? Just Aspen? Ct found submarket – may be more than one relevant, appropriate market. Submarket is Aspen.

(5) Diff b/w “Attempt to Monopolize” & Monopolization – Intent relevant to both offenses. In “attempt” circumstances, necessary to prove “specific intent” to accomplish forbidden objective – intent that goes beyond mere intent to do act. In monopolization context, evidence of intent merely relevant to question whether challenged conduct is fairly characterized as “exclusionary” or “anticompetitive.” No monopolist monopolizes unconscious of what he is doing.

e. SmileCare Dental Group v. Delta Dental Plan (9th Cir. 1996) – no violation of § 2 b/c unlike Aspen Ski, Delta Dental did not discontinue marketing arrangement w/ SmileCare. Distinction b/w refusing to deal initially & terminating existing agreement in competitive market.

f. Submarket – not as large as primary market but is market in & of itself. Can’t submarket just be ruled primary market w/o confusingly distinguishing submarket from primary market? (1) Idea for submarket came from Sup Ct in Brown Shoe – factors:

(a) industry or public recognition of submarket;(b) products in submarket have peculiar characteristics;(c) unique production facilities for submarket products;(d) distinct customers;(e) distinct prices;(f) sensitivity to price changes;

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(g) specialized venders for submarket.(2) Meyers has argued submarket in situation where 6 competitors (4 coops & 2 privately owned

companies). Aruged submarket for private companies distinct from coops.

g. Essential Facilities Doctrine – if monopolist in control of essential facility, duty to deal w/ competitor. Essential facility requires three factors:(1) facilities must be essential to P’s business survival in that particular market;(2) facility cannot be practically duplicated; (3) can be used by P w/o interference w/ D’s use.

V. Oklahoma State Antitrust LawsA. OK Const requires legislature enact antitrust laws. First enacted in 1910.B. Revised in 1997

1. Four goals of revision:a. conform as closely as possible as fed antitrust laws;b. correct procedural deficiencies:

(1) old law required atty gen bring case in OK Sup Ct (no jury trial); (2) enforcement powers – AG investigatory powers

c. repeal onerous provisions – unduly harsh penaltiesd. repeal unconstitutional provisions

2. § 203A – like Sherman § 1 – except makes individual conduct able to violate Act b/c of word “act,” which does not require agreement/conspiracy/etc. Has to be that way under OK const.

3. § 203B – mirror image of Sherman § 24. § 203C – essential facilities doctrine (Meyers argued against this as unnecessary b/c of fed precedent used to

construe our act)5. § 205 – essentially same as fed except: (1) If state of OK is P (injured party) damages not trebled; but if OK

brings action on behalf of OK citizens, can treble damages; (2) Previously, AG had no power to intervene on behalf of OK citizens.

6. § 210 – Meyers argues pro-business b/c: (1) provision if think AG oversteps bounds, can shut off investigation; (2) FTC has same powers & have not used then in antibusiness ways – not many investigations lead to lawsuit. (3) If AG does not have this power, forced to file suit in order to investigate all complaints. If able to investigate, can work out w/o going to court. (4) In other contexts, OK AG has same power & has not abused it nor has it resulted in more suits. Essentially, § 210 is more likely to result in fewer lawsuits rather than more.

Worth 2pts on final: Never marry man who won’t clean up kitchen.

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