Professor Minda

Antitrust Law Outline Fall 2004

I. Introduction and History Economic transformations that had a profound impact on antitrust law: 1) Revolution of the late 1800stransformation to a national economy through industrial revolution 2) Information/networking revolution (combined with market liberalization) of the late 1900s Railroads: first to confront problem of ruinous competition. Required high initial investment for construction of fixed assets and their maintenance. To offset high capital and operating costs, railroad companies sought large volume of business at low rates. Responding to hypercompetitive conditions, railroads formed pools and cartels. 1) Cartels: horizontal, loosely structured combinations of competitors that joined forces to create large, regionally dominant systems. 2) Pools were designed to control unstable competitive conditions within railroad industry. 3) Pools, however, were unstable themselves because members often cheated. Due to widespread cheating in pools, several prominent corporations turned to the trust. 1) Trust: tighter form of combination than pool; created when a number of corporations (previously pool members) turned their stock over to a board of trustees receiving in return trust certificates of equivalent value. 2) Each participating corporation retained its state charter, but all participants were subject to control of newly formed, unincorporated entity that held their stock. 3) Trust made central administration possible. Vertical integration permitted businesses to knock out unintegrated rivals by reducing costs and prices. 1) Vertical combinations were, by and large, more successful than purely horizontal pools in reducing costs, increasing

productivity, and eliminating competition. Trust movement ultimately grew out of problems of overcapacity caused by the industrial revolution. The first point of contention about whether and how problems caused by trusts could be solved: could the trust be regulated at all? Was it possible to control trusts? Who had authority to impose restraintsstate or federal government? Pro-trust evolutionists divided into two camps: 1) Business people believed that regulation of trusts and corporations was both impractical and improper. 2) Other evolutionists accepted existence of trust but not their imperviousness to social responsibilityembraced idea of general welfare state in opposition to laissez faire state. Most of the relevant state antitrust cases involved cartels agreements among competitors to lessen competition among them. Principal purpose of Sherman Antitrust Act was to contain the concentration of economic power. __________________________________________________________________ ____________ II. Antitrust: First Few Decades Washington Consensus: free markets are essential to ensure that democracy flourishes (philosophy subscribed to by Judge Bork and Presidents Reagan and Clinton). Historical Landscape of Antitrust Law (Pre-American Antitrust Cases) These were all English cases governed by royal regulation and privilegemonopolies reigned supreme during this era. Case of Monopolies (England 1630)naked restraint of trade Facts: Battle between Queen and Parliament. Parliament enacted law proscribing importation of playing cards. Queen

gives exclusive rights to trade in playing cards to Darcy essentially conferred patent right upon Darcy. Issue: Was the patent granted by the Queen legal? Holding: No. Court declared that the patent was invalid. Court declared that a monopoly was against the common law and pernicious to public policy: (1) prices were likely to increase, (2) product produced likely would not be of superior quality, and (3) monopoly would lead to unemployment. Rule of Law: Monopoly is an evil to be avoided. Existence of substitutes deters a firm within a competitive market from issuing supracompetitive prices. However, in a monopolized market there are no substitutes monopolies thus serve to eliminate free choice. According to Minda, the act of Parliament created a barrier to entry to the English playing cards market, hence resulting in economic protectionism (high barriers to entry often exist to protect monopoly power). King v. Norris (England 1758) English court found that salt manufacturers agreement to fix prices was illegalprice-fixing was an interference with the competitive price system that is so critical to competition. Court adopted a per se position concerning price-fixing. Rule of Law: Markets, not individuals, determine what constitutes a fair and reasonable price. Schoolmasters Case (England 1410) Facts: Attempt by private schoolmaster to legally prevent another schoolmaster from a establishing a competing private school.

Issue: Does the private schoolmaster have a legally valid claim to enjoin a potential competitor from entering the market? Holding: No. Court held that movant had no cause of action there was no legal injury. Reasoning: Competition often results in economic injury, however, this is insufficient to institute a legal action. Rule of Law: There must be a showing of antitrust injury in order to have standing to bring a cause of action.

Mitchell v. Reynolds (England 1711) *According to Minda, this is the most famous commercial case that has ever been decided. Facts: Plaintiff hired defendant as an apprentice baker. Defendant promised not to compete with plaintiff in the local parish for a period of time in return for training in the bakery business. Issue: Did the non-compete agreement constitute a naked restraint of trade? Holding: No. Court held that promise was necessary in order for the plaintiff to be motivated to hire individuals like defendant. Reasoning: Court found that although there is a restraint of trade here, the non-compete agreement constituted an ancillary/incidental restraint necessary to accomplish a larger economic/legitimate purpose. Since the underlying purpose of the agreement was to train defendant, the restraint is said to be reasonable. Rule of Law: Reasonableness is to be the test to determine the legality of a restraint of trade. Case introduced the rule of reason analysis.

Early American Antitrust Cases United States v. Trans-Missouri Freight Assn 166 U.S. 290 (1897) *This was a railroad price-fixing case in which the Supreme Court first considered the meaning of restraint of trade. Facts: Railroad companies agreed to set rates for freight traffic. Government sued to have agreement voided and the association dissolved. Issue: Does the Sherman Act proscribe only contracts in unreasonable restraint of trade? Holding: No. Court held that the plain and ordinary meaning of the statute prohibited ALL contracts in restraint of trade. Reasoning: Justice Peckham rejected proposed reasonable-price standard because it contained an inherent lack of certitude and subjected market forces to the caprices of the judiciary. Peckhams argument required dissent to specify what criteria were available for deciding how far above the competitive level a price might be raised before it becomes unreasonable. Bork: Bork lauded Peckhams opinion in this case. Bork found that Peckham chose consumer welfare as the Sherman Acts guiding policy, creating a category of agreements illegal per se, and began to work toward a formula for excepting efficiencycreating integrations from the statutes interdiction. Notes on Trans-Missouri Railroads were Americas first big businessgovernment encouraged their development. 1) There was an enormous initial fixed cost investment required to enter railroad industry (irrespective of how much such a business produced). 2) To be profitable, railroads needed a large volume of business. a) Reducing rates was a way to attract more business (to pay for the enormous fixed costs). b) Ruinous competition, according to the railroads, was the result of the high fixed costs.

3) In response to this ruinous competition, railroads created pools (no central administration). 4) Subsequent to disorganization of pools, railroads turned to trusts (tighter forms of combination). 5) Trans-Missouri dealt with a cartelan agreement among competitors to coordinate their activities. However, there are two principal problems of cartel creation: 1) Ensure that cartel members do not cheat (policing against cheaters), and 2) Basis for agreeing on a common price (if cartel members each have different marginal costs, price increase will not benefit each member the same). The aforementioned problems taken together form the freerider problem. Possible arguments proffered by the railroad in support of cartelization: 1) Rates are reasonable 2) Ruinous competition 3) Promotes public interest 4) Freedom of contractsometimes combination and restraint of trade is necessary in order to protect industry against the dangers of ruinous competition. Peckham held that the Sherman Act was NOT to be interpreted in light of the common lawevery restraint of trade meant every according to Peckham. White implored Court to employ common law rule of reason only unreasonable restraints of trade should be declared illegal. *Court softened its dictum that all restraints are illegal, stating that the formation of corporations, partnership agreements, joint sales agreements, joint sale agencies, and sales or leases with ancillary covenants not to compete, have never been regarded as contracts in restraint of trade. United States v. Addyston Pipe & Steel Co. 85 F. 271 (6th Cir. 1898), modified and affd, 175 U.S. 211 (1899) *Bork found this to be the most important case decided in antitrust history. Facts: Government sued six manufacturers of cast-iron pipe who had agreed to fix prices and divide territories.

Issue: May a reasonable-price standard be permitted to govern the legality of naked restraints of trade? Holding: No Reasoning: Judge Taft held that integration of economic activities (which is indispensable to productive efficiency) always involves implicit elimination of actual or potential competition. Court fundamentally rejected view that all agreements must be tested by standard of reasonableness. Taft thought the manifest danger in the administration of justice according to so shifting, vague, and indeterminate a standard would seem to be a strong reason against adopting it. Sea of doubt argument. Bork: Bork lauded this decision as one of the greatest in antitrust history. Bork related Tafts reasoning to modern antitrust by asserting that the integration of economic activities, which is indispensable to productive efficiency, always involves the implicit elimination of actual or potential competition. Bork holds that society should encourage these integrations because they create wealth for the community. Bork extrapolated upon Tafts argument and found that it would validate all vertical arrangements because, in a vertical case, there is always economic integration between the parties. Notes on Addyston Pipe & Steel Taft introduced the doctrine of naked vs. ancillary restraints (according to Bork). 1) Taft proposed a rule of per se illegality for what are called naked restraintsagreements in which the parties engage in no significant dealings other than the elimination of competition. 2) Taft, however, recognized that some restrictions upon rivalry are socially valuable, and to provide necessary guidelines for judging these, Taft offered the concept of the ancillary restraint. To be ancillary, and hence lawful, an agreement eliminating competition must be subordinate and collateral to a separate, legitimate transaction. Bork holds that economic efficiency serves as the principal purpose of antitrust law/enforcement. Taft implicitly repudiated Peckhams literalist interpretation of Sherman Act in Trans-Missouri.

Taft brought to life the analysis of Mitchell v. Reynolds. Most horizontal trade restraint cases were decided under a per se rule of illegality. Two dominant paradigms in antitrust law: 1) Trans-Missouri: idea of per se illegality 2) Addyston Pipe & Steel: rule of reason analysisancillary restraint doctrinenaked restraint test (employed to determine reasonableness of restraint). United States v. E.C. Knight Co. 156 U.S. 1 (1895) *First Sherman Act case to reach the Supreme Court Facts: Government challenged American Sugar Refining Co.s acquisition of four major sugar refiners, which gave American Sugar control over almost all of U.S. domestic sugar refining. Government alleged that by these acquisitions, American Sugar monopolized the manufacture and sale of refined sugar in the United States. Issue: Can a monopoly be directly suppressed under an act of Congress upon conceding the existence of a monopoly in manufacture? Holding: No. Court held that manufacturing was not commerce and thus the Sherman Act was inapplicable to this consolidation in the sugar-refinery industry. State legislatures paved the way for mergers by liberalizing the corporation laws. There was an economic advantage to states hosting huge consolidationsNJ increased its revenue in 1888 by authorizing holding companies. Holding companycompany that circumvents process of buying a company by simply acquiring enough stock in the other company to control its operations. *President Roosevelt: The line of demarcation we draw must always be on CONDUCT, not on wealth; our objection to any given corporation must be, not that it is big, but that it behaves badly. Northern Securities Co. v. United States

193 U.S. 197 (1904) *Appears to be a quasi-merger casemost known for Justice Holmess dissent. Facts: Case concerned formation of holding company (plaintiff Northern Securities) that held stock in three regionally dominant railroad companies. Government brought suit to dissolve combination on grounds that it violated Sherman Act. Issue: Did the holding companys acquisition of three regionally dominant railroad companies, thus eliminating competition between them, constitute a violation of the Sherman Act? Holding: Yes. Reasoning: Fear of monopoly. However, Justice Harlans opinion was a dogmatic analysis of the antitrust laws fraught with overly broad propositions and assertions. Harlans broad assertion regarding the illegality of every combination . . . which would extinguish competition was unsound. Under such an assertion, corporate amalgamations that could potentially produce economic efficiencies would be rendered violations of the Sherman Act. Holmess Dissent: Holmes bifurcated Sherman Act into two classes of cases: (1) contracts in restraint of trade (restricts freedom of contractor) and (2) combinations or conspiracies in restraint of tradecontrary to public policy because it restricts freedom of other competitors and the public. Holmes held that the inexorable result of Harlans opinion would be the atomization/fragmentation of American industry. Holmes ultimately rejected Harlans construction of the Sherman Act (that elimination of competition between rivals is illegal per se). Bork: Although Bork found Holmess dissent to be uneven, he found that Holmes performed valuable task of demonstrating that no rule making the elimination of competition between rivals illegal per se is practicable. Notes on Northern Securities Holmes dissent held that size alone could not be an offense; there must be evidence establishing monopolistic behavior. Holmes argued that one must look to the intent and purpose of

the trade restraint to determine illegality (employing Tafts analysis in Addyston Pipe & Steel). Court committed analytical error by reasoning that union of control over railroads achieved through holding company device was illegal because it had the same effect as a cartel agreement between railroadselimination of competition between them. 1) Notion that transactions having same effect on competition between parties to these transactions should therefore be treated by law in the same way is fundamentally unsound. President Taft outlined a functional distinction between (1) combinations established specifically to eliminate competition, and (2) those combinations that happened to restrict trade en route to efficient production. Standard Oil Co. of New Jersey v. United States 221 U.S. 1 (1911) *MOTHER OF ANTITRUST CASES Facts: Defendant achieved 90% market share of oil refining industry principally through acquisition of rivals. Defendant forced railroads to give it preferential rates and engaged in local price discrimination and business spying, all to drive local competitors from the market. Holding: Amalgamation of all associated corporations under control of Standard Oil (holding company) raised prima facie presumption of wrongful intent. Rule of Law: Sherman Act invalidates only those restraints whose character or effect are unreasonably anticompetitive. Court adopted the rule of reason in this case Chief Justice White reread Section 1 as barring only undue or unreasonable restraints of trade. Standard Oil ultimately stressed intent in determining whether defendants growth and concomitant restraint on competition constituted a violation of the Sherman Act. Minda found the remedy of this case to be ineffectual. Notes on Standard Oil

Standard Oil was controlled by rule of reason analysisCourt concluded that Standard Oil represented an unreasonable restraint of trade. Standard Oil established that Section 2 of the Sherman Act condemned the abuse of monopoly power as evidenced by trade practices which would violate Section 1 if adopted by two parties acting jointly. Courts analysis considered defendants business methods to attain power solely as an aid for discovering [their] intent and purpose. 1) Court contrasted their abusive market practices with what it termed normal methods of industrial development. 2) Difference between lawful and unlawful activity in a business with monopoly power was the presence of a positive drive to monopolizewhether this drive existed was determined by examining the intent and purpose of the defendants acts, not its market share or the markets structure. 3) Standard Oil relied on defendants growth (which occurred mainly through acquisitions of rivals, illegal railroad rebates, industrial espionage, and predatory pricing) as showing illegal intent. Supreme Court seemed to reverse trend toward a per se ban on price-fixing in Standard Oil. Court created a new rule of uncertain content which emphasized behavior and recognized that agreements between firms have many possible effects; yet it also acknowledged that some conduct may be inherently unreasonable. 1) Intent and purpose test: test advanced by Chief Justice White which held that evidence of intent and purpose must be established to determine the reasonableness of the restraint. 2) Based on this decision, proof of power (size) became circumstantial evidence of an intent and purpose to restrain trade. United States v. United Steel Corp. 251 U.S. 417 (1920) Facts: E.H. Gary, president of defendant corporation, inaugurated a system of dinners (known as the Gary dinners) which constituted congregations of producers and (according to the government) were nothing but trade meetings designed to

coordinate collective action. Issue: May the government rely solely on the size of a firm in asserting that it has violated the antitrust laws when there is no evidence that the firm has abused its power? Holding: No. Governments position rejected because size alone does not connote an antitrust violation. Rule of Law: The antitrust laws do not make mere size or the existence of unexerted power an offense. The law requires overt acts and does not compel competition nor require all that is possible. Notes on United States Steel Corp. Distinguish case from Standard Oil: 1) No secret rebates or secrecy pledges in United States Steel Corp. to serve as evidence of intent and purpose to restrain trade. 2) Gary dinnersCourt missed significance of these dinners in its decision according to Minda. Appendix A: The Framework for U.S. Antitrust Sherman Act enacted in 1890 to stem growth of combinations and monopolies that were gaining control over business in America. Sherman Act: prohibits contracts, combinations and conspiracies in restraint of trade, and monopolization and attempts and conspiracies to monopolize. Sherman Act supplemented by the Clayton Act (enacted in 1914 during Progressive Era)Clayton Act prohibits potentially anticompetitive acquisitions, exclusive dealing, tie-ins, and interlocking directorates. 1) Celler-Kefauver Amendment (passed in 1950 at peak of concentration of business power) to merger provision of Clayton Act prohibits potentially anticompetitive mergers and acquisitions. 2) Federal Trade Commission Act established Federal Trade Commission and prohibits unfair methods of competition and unfair or deceptive acts or practices. 3) Congress adopted Robinson-Patman Act in 1936 in response to price discrimination in favor of big business. a) Robinson-Patman Act (amendment to Clayton Act) prohibits

price discrimination in the sale of goods in interstate commerce when it harms competition. b) Robinson-Patman Act is INAPPLICABLE to the sale of services. c) Central prohibition of Robinson-Patman Act states that no person may sell the same goods at different prices to different customers where the effect of the discrimination may be substantially to lessen competition in any line of commerce or injure, destroy or prevent competition with one who grants or knowingly receives the benefits of the discrimination or with their customers. d) Exception is made when discriminatory low price is costjustified or necessary to meet competition. Enforcement of the Federal Antitrust Laws Two arms of the federal government have antitrust enforcement jurisdiction: 1) The Justice Department (through its Antitrust Division)sues in the federal courts. a) Enforces the Sherman Act and the Clayton Act b) Sherman Act is a criminal as well as a civil statute. c) Justice Department normally chooses to sue criminally only in event of hard core violations; principally price-fixing (which is white collar crime). I) Individuals convicted of a Sherman Act violation may go to jail for up to three years and may be fined up to $350,000, or twice the victims loss or defendants gain, whichever is larger. II) Corporations convicted may be fined up to $10 million. III) In cases it brings civilly, Justice Department may seek injunctive and other equitable relief, and it may sue for treble damages if government itself is the victim of the violation 2) The Federal Trade Commissionadministrative agency that has responsibilities for both consumer protection and antitrust. a) Within FTC is a Bureau of Competition and a Bureau of Consumer Protection b) Director of Bureau of Competition recommends antitrust cases to be broughtCommission must approve and issue complaints. c) In an FTC proceeding, staff tries case before an Administrative Law Judge. d) Decision of ALJ may be appealed to the Commissionif

respondent loses, it may appeal to a federal appellate court. e) FTC may seek preliminary relief (e.g., to enjoin a proposed merger) in federal court. f) FTC may sue to enforce the Clayton Act and the Federal Trade Commission Act (it has NO criminal jurisdiction). *Pre-merger notification filings are made to both agencies, which decide among themselves which agency will investigate the merger. Private Enforcement Clayton Act provides that a judgment for the government shall be prima facie evidence of the violation in a later private suit against the same defendants. Successful private plaintiffs are entitled to three times their losses and attorneys fees. 1) Congress adopted treble damages remedy in order to enlist efforts of private attorneys general and thus provide incentives to detect violations and to sue. 2) Treble damage remedy is codified in Section 4 of the Clayton Act. Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968): Supreme Court held that an overcharged buyer is entitled to recover the whole artificial price increase charged to it by the seller; defendant seller may not be relieved of liability or damages by proof that plaintiff passed on overcharge to downstream purchasers. Illinois Brick Company v. Illinois, 431 U.S. 720 (1977): Supreme Court held that indirect purchasers harmed by a price fix may not affirmatively assert that direct purchaser passed on overcharge to them. 1) Accordingly, treble damage suits by indirect purchasers are normally dismissed for lack of recoverable damages. 2) However, federal rule may be by-passed by state law that allows indirect purchasers in state antitrust actions to recover their damagesSupreme Court has held that state law entitling indirect purchasers to sue and recover damages does not undermine enforcement of Sherman Act and thus is not preempted by it. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. 429 U.S. 477 (1977)

Facts: Plaintiff bowling alleys sought to recover profits they lost when a big bowling company bought and revitalized a declining bowling alley that would otherwise have gone out of business. Issue: May private plaintiffs recover for injury suffered pursuant to competition unrelated to antitrust? Holding: No. Reasoning: Plaintiffs were not injured by a lessening of competition, or by anticompetitive acts en route to the lessening of competition, or by anticompetitive acts made possible by an antitrust violation. Rule of Law: Recoverable damages are limited to antitrust injury. Plaintiffs must prove antitrust injury, not merely injury causally linked to an illegal presence in the market. Policy: Brunswick holds lessons for firms injured by low-price competitioneven when maximum resale price-fixing was illegal per se, injury from low prices was held not be antitrust injury. If a dealer is required by its supplier to hold its prices down and a competitor of the dealer is squeezed from the market as a result of the illegal agreement, an antitrust action DOES NOT accrue to the competitor. Determination of StandingSupreme Court has enumerated five principal factors material to a determination of standing: 1) Harm should be direct rather than remote. 2) Harm should be of sort that antitrust laws were designed to prevent or inextricably intertwined with it. 3) Intent to harm plaintiff or those in plaintiffs class weighs in favor of standing. 4) Prospect that standing will lead to duplicative recovery or difficult questions of apportionment weighs against standing. 5) Prospect that standing will leave significant violations undetected or unremedied weighs in favor of standing. Private plaintiffs may sue for injunctive relief as well as damages. 1) Under 16 of the Clayton Act, any person is entitled to an

injunction against threatened loss or damage by a violation of the antitrust laws . . . under the same conditions and principles as injunctive relief . . . is granted by courts of equity . . . . 2) To have standing to seek injunctive relief, plaintiffs must be threatened with antitrust injury as defined in Brunswick. 3) Takeover targets form a class of merger-suit plaintiffs standing called into question by Brunswick doctrine. a) Some courts have denied target standing, apparently per se, on the theory that the target, becoming a part of the merged firm, would be party to and not victim of any anticompetitive advantage gained. b) Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d 252 (2d Cir. 1989): Second Circuit held that British target of a Luxembourg gold firm and targets partly-owned American subsidiary both had standing to seek to enjoin takeover I) U.S. firm was threatened with antitrust injury because, following monopolistic takeover, new grandparent would be likely to shut down U.S. firms gold mines while it exploited its Luxembourg gold. II) British target had standing because target would lose its ability to compete independently and because U.S. interests would be threatened with shutdown. Enforcement of Federal Law by State Attorneys General State attorneys general may also sue to enforce federal antitrust laws. As parens patriae on behalf of natural persons residing in their states, they may seek treble damages, along with costs and attorneys fees. Sections 4C to 4H of the Clayton Act (authorizing provisions) were added to the law by Hart-Scott-Rodino Antitrust Improvements Act of 1976law expressly allows use of statistical and sampling means to prove aggregate damages, and it authorizes payment of damages into one fund. States may not sue for damages for injury to their general economy, however, states MAY seek injunctive relief against violations that threaten their economy. Reach of the Federal Antitrust Laws Limits of U.S. Antitrust in International Transactions American Banana Co. v. United Fruit Co., 213 U.S. 347 (1909): Supreme Court held that Sherman Act stops at U.S.

shores (Justice Holmes). However, holding in American Banana was deeply eroded by Courts decision in United States v. Sisal Sales Corp., 274 U.S. 268 (1927): Sherman Act was applicable to conspiracies and a monopoly in Mexico, involving both private parties and foreign government officials, which threatened to have a direct competitive impact in the United States. Alcoa doctrine: if acts abroad have effects within the United States, they are caught by the Sherman Act.