Introduction: Naked v. Ancillary Restraint

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Antitrust Outline – Fox Spring 2012 (received an A)

  1. Cartels and Closely Related Agreements: Section 1 Violations

    1. Introduction: Naked v. Ancillary Restraint

    2. Rehabilitating Trans-Missouri: Naked Restraints vs. Reasonable Agreements: Board of Trade of the City of Chicago, Appalachian Coals, Socony (no FX requirement), FOGA (naked boycott illegal),

    3. Characterization Cases (Is this a cartel?): Goldfarb, Nat’l Society of Professional Engineers, BMI (ancillary restraint), Catalano, Maricopa, NCAA (market creation exception), Superior Court Trial Lawyers, Cal Dental, Polygram Holdings (framework), Texaco v. Dagher

    4. Can the Parties Conspire? American Needle

    5. Pleading and Proving a Cartel

      1. Proving a Cartel (summary judgment): Interstate Circuit (hub and spoke), Theatre Enterprises, Matsushita, JCT Petroleum (cat’s paw)

      2. Pleading Facts Sufficient for Plausible Inference of Agreement: Twombly, Text Messaging

    6. State Action, Political Action

      1. The State Action Doctrine: Parker v. Brown, Contours

      2. Political Action: Noerr, Pennington (exec), Cal Transport Co., Professional Real Estate, Allied Tube & Conduit, Fraud/bribery, NAACP, Role of Noerr doctrine in SCTL.

    7. The International Dimension

      1. Extraterritorial Reach and Enforcement: Alcoa (effects principle), FTAIA, Empangran

  2. Monopoly and Dominance: Section 2 Violations

    1. Introduction

    2. The ALCOA Case: ALCOA (structural offense and “thrust-upon” exception)

    3. Market Definition and Monopoly Power

      1. The Dupont Cellophane Case: Cellophane Fallacy

      2. Modern U.S. Market Definition and Assessment of Power: Kodak, Microsoft, Presumption of M Power if 70% share + barriers

    4. The Conduct Offense

      1. The Paradigm: Grinnel Rule, Lorain Journal

      2. Essential Facilities and Duty to Deal: MCI elements, Terminal Railroad Assoc., Official Airline Guides (no vert ess fac), Aspen Skiing, Olympia (flush turkies), Trinko

      3. Strategic Low Pricing – Predatory Pricing and Price Discrimination: Utah Pie, Barry Wright standard (for “below-cost” pricing), Brooke Group (only below-cost pricing predatory)

      4. Predatory Buying: Weyerhaeuser

      5. Price Squeezes: Linkline

      6. Loyalty Rebates, Bundled Rebates: Le Page v. 3M, PeaceHealth (equally efficient competitor), Loyalty Rebates, ICN Litigation

      7. Intellectual Property: Duty to License: Kodak (9th Cir.), CSU/XEROX (Fed. Cir.), Rambus

      8. Complex Strategies to Maintain Monopoly, including product change, exclusive dealing, tying and bundling, especially in high tech markets: Integration standard, Microsoft I, Microsoft II

  3. Mergers

    1. Historical Perspective

      1. Introduction: Clayton Act (“reasonable probability” merger “substantially lessen” competition), Standing in private merger suit

      2. Evolution of the Law: Brown Shoe (practical indicia), Philadelphia National Bank, Proctor & Gamble (germ of potential competition theory), Citizens Publication (failing firm defense)

    2. Contemporary Law and Enforcement

      1. Intro/overview: unilateral v. coordinated effects, GUPPI

      2. The Guidelines: Market definition (necessity, SSNIP), Market Concentration (HHI)

      3. The Case Law

        1. Market Definition: Staples, Whole Foods (core consumers), H&R Block

        2. Horizontal Mergers

          1. Mergers Likely to Produce Coordinated Effects: Hospital Corp. of America, Baker Hughes (drilling rigs), Heinz (Beechnut)

          2. Mergers Likely to Product Unilateral Effects: Monopoly and Dominance: Sirius-XM, Google/AdMob, Boeing

          3. Mergers Likely to Produce Unilateral Effects in Oligopolistic Markets: Oracle, H&R Block

          4. Mergers Eliminating Important Potential Competitors: Marine Bancorporation

        3. Non-Horizontal Mergers:

          1. Vertical Mergers: Avant!, Ticketmaster/LiveNation

          2. Conglomerate Mergers: GE/Honeywell

  4. Collaborations Between Competitors Other Than Cartels

    1. Introduction

    2. Contemporary Cases, Touchstones for Analysis: Indiana Federation of Dentists, Cal Dental, Rothery (free rider), BMI, Credit Suisse, Google/AdMob,

    3. Loose Knit Agreements

      1. Concerted Refusal to Deal with Outsiders: FOGA (per se), Northwest Wholesale Stationers, Visa/Mastercard

      2. Competitors’ Exchanges of Information: Rules of thumb, American Column and Lumber, Maple Flooring, Container (expected reciprocity) Gypsum (controlling circumstance exception)

      3. Agreements of Competitors to Restrain their own Competition

        1. Professional Restraints & By-Laws (just background here)

        2. Brown/MIT

        3. Real Estate Brokers’ multi-list services and restrictions on web discount listings: Real Comp.

        4. Intellectual Property:

          1. Intro

          2. Licensing and Cross-Licensing of Intellectual property; Pooling of Patents: Grant-back provisions, pooling/cross-licensing

          3. Standard-Setting and FRAND Obligations; Avoiding Patent Ambush: standard-setting, FRAND (Rambus), Hatch-Waxman reverse payment settlements (Cipro)

    4. More Integration: Joint Buying, Selling, Marketing, and Researching - Sharing Risks and Savings Costs, or Getting Market Power?

      1. Intro

      2. Healthcare – Agency Guidance: Med South, ACO Guidelines

    5. Tighter Alliances and Tight Joint Ventures

      1. Texaco/Shell Oil

      2. Microsoft Corporation and Yahoo – DOJ Closing Statement

      3. Boeing/Lockheed Martin – United Launch Alliance

  5. Vertical Restraints:

    1. Restraints in the Course of Distribution

      1. Formative Law: Resale Price Maintenance

        1. The Basic Rule for the First Century: Dr. Miles

        2. The Legislative Response: Fair Trade; The limits of state action protection: Midcal

        3. Refusal to Deal and Resale Prices: When is RPM unilateral? When is it undertaken by agreement? Outer bounds of RPM prohibition: Colgate (no K), Park Davis (yes K), Monsanto (“something more”), Leegin (rules of thumb for rule of reason)

      2. Restraints on distributors other than minimal resale pricing – Free Traders to free riders

        1. Non-Price Restraints: Schwinn, Sylvania (territorial division)

        2. Price Restraints: Maximum Price-Fixing: Albrecht/Khan (not per se illegal), Nynex (fraud)

    2. Exclusionary Restraints: Clayton Act Section 3

      1. Intro: Section 3 “effect may be to substantially lessen competition or tend to create a monopoly in any line of commerce,” steps of analysis

      2. Tying – historical: explanations, IBM, International Salt, Northern Pacific Railway (per se), Loew’s (since-overruled IP presumption of mrkt power), Fortner Enterprises (no mrkt power)

      3. Tying – Modern Analysis: Qualified per se rule, Jefferson Parish (separable products test), Kodak, Microsoft (carve-out for platform software), Illinois Tool (overrules Loews presumption of IP mrkt power)

      4. Exclusive Dealing and Requirements Contracts: Analysis, Barry Wright (ROR analysis), Microsoft (“significant foreclosure”), Dentsply, Jefferson Parish reconsidered.

  6. Standing

Cartels and Closely Related Agreements---------------------------------------

  1. Introduction-----------------------------------------------------------------------------

Necessary elements of a cartel:

    • Includes all significant producers (or buyers) so cartel price is not undercut.

    • Barriers to entry/expansion so insurgents don’t increase output and undercut.

    • Effective means of administration:

      • Ability to determine and disseminate the profit-maximizing price: often accomplished via information-sharing, which may itself attract attn. of authorities.

      • Ability to detect “cheating” via unauthorized price cuts.

      • Ability to punish cheaters: such as “squeeze-out” in which remaining members of cartel temporarily decrease prices beneath those at which the cheater can afford to stay in business.

    • Fewer market actors greatly facilitates cartelization by easing administration of coordination.

    • Interchangeability of products facilitates cartelization in that the profit-maximizing price is easier to determine.

    • These conditions arise prominently in the merger context in that the government will take preemptive action to prevent the creation of conditions conducive to the development of cartels, even without evidence of actual agreement (“shadow cartel”).

Forms of Cartels: “any combination which directly interferes with the free play of market forces.” (Socony)

    • Price-fixing: agree on single price

    • Market division: especially popular in the EU after trade barriers fell, divide up the market geographically and agree not to enter territory of co-conspirators.

    • Quota allocation: co-conspirators agree to limit output.

    • Customer allocation: divvy up monopoly over specific groups of customers.

    • Boycott: entrenched powers organize a boycott of newcomers, having potentially more harmful effects than price-fixing in that it completely excludes potential innovators, rather than merely raising prices (Foga).

    • Standard-setting: trade organization sets a standard of practice in a way designed to exclude a newcomer. Courts have to determine whether there is legitimate basis for standard, or whether it’s intended to serve anticompetitive ends (Allied Tube).

    • Patent pools: competitors grant one another exclusive licenses to their patents in order to exclude market entrants.

Ruinous Competition is no defense: as we saw in Trans-Missouri and Addyston Pipe.
Naked vs. Ancillary Restraints:

    • if the objective is to restrain trade and there are no procompetitive benefits, then the restraint is naked and per se illegal (even if justified on public interest grounds).

    • If the restraint is merely ancillary to, a byproduct of, a legitimate business relationship, then you get to rule of reason analysis.

  1. Rehabilitating Trans-Missouri: Naked Restraints vs. Reasonable Agreements

Board of Trade of the City of Chicago v. U.S. (1918):

    • Dealers were exploiting farmers by purchasing grain to arrive after the close of Chicago’s famous grain trade for the day, drastically decreasing the price.

    • Call Rule: to remedy, Board of Trade created requirement that all grain traded after-hours be priced as if it had arrived at closing.

    • Per se illegality:

      • District court did not allow evidence of purpose or effect of trade restraint.

      • Court holds that restraint of trade, absent evidence of intent, effect…, is insufficient, since all agreements concerning trade ultimately restrain it in some way (think non-compete agreements)

        • Mere regulation” of trade, potentially having procompetitive effect, not sufficient.

        • True test:” Restraints are violative if they “suppress or destroy competition.”

    • Restraint was “reasonable regulation of business.”

Appalachian Coals v. US (1933): Case is worthless.

    • Facts: Coal market in Appalachia was hamstrung by disorganized speculation on coal prices, other problems. The producers in the area agree to go through a single sales agent, stream-lining the process and stabilizing prices.

      • Note: They submit this plan to the government before acting on it, and this is the hearing on its legality, so government involvement/approval does not immunize an otherwise anticompetitive act.

    • Court finds that agreement is not illegal per se.

    • Rule of reason analysis:

      • Defense argues that it’s an efficient joint venture which actually facilitates fair competition by removing abuses. Though at the end of the day, they are still attempting to fix prices by removing distressed coal.

      • Court notes that ruinous competition is not a defense, but appears to allow it to inform their view of the reasonableness of the plan.

      • Court says there is sufficient ambiguity to the effect of the plan that they need to see it in action before they can decide whether or not it is anticompetitive.

    • This appears to embrace an effects requirement, which was explicitly rejected in subsequently in Socony, so this case stands on its own, never having been explicitly overturned, but without much lasting influence.

Socony-Vacuum (1940): No FX requirement for per se illegality of naked restraints

    • Great depression slows oil demand and smaller oil produces do not have the infrastructure to store it excess supply, so they flood the market with “distress oil,” lowering prices to unsustainable levels for all producers.

    • This apparent industry crisis led industry leaders, in conjunction with the government, to develop a system by which larger oil companies would store “distress oil” for smaller companies in order to avoid supply flood by purchasing it at market price and holding on to it until demand increased.

    • Rule: Per se illegality: cartel agreements that affect the market through naked restraints such as price-fixing are per se illegal, ie “any agreement with the purpose [or effect] of raising, depressing, fixing, pegging, or stabilizing price is illegal per se.” – don’t have to define the market, do power analysis, etc.

        • rejects “reasonableness” as an inquiry in application of per se rule. govt doesn’t have to prove market power, effect, or that the conspiracy was carried out – per se rule is a clear one in order to boost its deterrent effect

        • FN 59: effect not necessary to prove violation as long as there was intent to fix prices (not intended anticompetitive harm, which is definitely not necessary); the agreement itself is the illegal conduct.

        • and once you have an agreement among competitors to fix prices, that’s all you need – no Δ justifications will be heard or have to be rebutted

        • Beginning in the 70s, characterization case law began to limit the broad strokes of Socony.

    • Intent:

      • D argues that they did not intend to fix prices because they organized purchase at spot market price.

      • Court rejects because fixing a price floor still constitutes fixing a price, and they clearly intended a price floor.

    • Crisis defense/Ruinous competition

      • Court rejects crisis defense because defendants will always argue ruinous competition.

      • Policy: to the extent there are industry crises, the industry should not be left to its own devices to react to this (but in this case, the government did intervene to determine appropriate response to crisis).

    • Government involvement: is no defense even if it might inform rule of reason analysis, because the intention was still to fix prices and the government officials had no authority to confer immunity (in fact, there was a route to immunity at the time, but they failed to pursue it for unknown reasons).

Fashion Originators’ Guild of America (1941):

    • To address “style pirates,” who would make cheap copies of high fashion, members of FOGA at every part of the chain of design agreed not to deal with any style pirates.

    • Naked boycott is violative: Although the FTC had made no showing of price increase, output limitation or deteriorating quality, the Court held this was a “naked boycott” which violated the “policy of the Sherman act” in that its “necessary tendency and its purpose and effect to directly suppress competition,” expanding the reach of the Sherman act beyond the traditional harms of price increase, output limitation and deteriorating quality.

    • Extra-governmental agency: the Court also found that the organization “trenches upon the power of the national legislature and violates the statute,” in that it provides rules for the regulation and restraint of interstate commerce, and enforces them at its discretion.

  1. Characterization Cases (Is this a Cartel?)-------------------------------------------

  • Characterization cases blur the line between per se illegality and rule of reason: if qualify for the latter, you enter “continuum of reasonableness” by which cases are adjudged according to their similarity to per se cartels plus their countervailing procompetitive consideration. Here, we’re litigating whether or not we even get to that question by characterizing the facts to suggest cartelization (which is per se illegal) vel non.


    • atty negotiated purchase of his own home and drafted documents, but couldn’t get any outside atty to agree to finish the closing beneath a percentage of the price of the house specified by the bar association’s ethics rules.

    • Court determined this was, in fact, price fixing and a Sherman act violation.

    • However, they left FN stating that the professions may present fact patterns that would justify certain anticompetitive acts.

Nat’l Society of Professional Engineers (US 1978) – quick look to get to per se rule

      • NSPE has bylaws, all members have to agree to the bylaws – so no question about existence of agreement; question of characterization of agreement

        1. bylaws set rules for fees schedules – ethics rules prohibiting competitive bidding by members (prohibited price competition among members)

        2. Clearly prevents prices from decreasing to a competitive level because direct price competition for projects was outright banned.

      • Quick look to get to per se violation: this isn’t price-fixing on its face (how?) – ct gives a quick look at Δ’s justifications to determine what rule to apply

        1. ct will apply quick look analysis in cases where per se condemnation is inappropriate (e.g., not clearly price-fixing), but where no elaborate industry analysis is required to demonstrate the anticompetitive character of an inherently suspect restraint

      • D’s Characterization: incentive to prevent poor quality work

        1. safety and ethics problems – if engineers have to compete against each other on price, would cut corners in order to meet the costs

        2. D doesn’t attempt to characterize the agreement as “not anticompetitive” – but that anticompetitive nature is necessary and reasonable.

      • No public interest defense: can’t make arg under Rule of Reason that competition itself is unreasonable – so even under Rule of Reason analysis, this would be illegal

        1. only possible Δ justifications for anticompetitive behavior are pro-competitive ones – here, possible increase in public good doesn’t enhance competition

        2. Policy: there is no public interest defense because this is so vulnerable to abuse and Congress made the cost/benefit analysis and determined that competition is so often in the public interest that they didn’t even allow exemption for the extenuating circumstances when this might not be the case.

      • Quick look yields per se violation: absent articulated pro-competitive benefits, there is no justification for restraint of trade.

      • Rule: if there is hard core price fixing, then that is the end of the case; if not, you may get to a quick look.

BMI (1979):

  • Facts:

    • Copyright pools (ASCAP and BMI) license compositions to television studios for background music and monitors TV to ensure there’s no infringing use.

    • CBS didn’t want to purchase license for access to entire libraries because price was calculated as percentage of revenue and they had more revenue than other studios.

  • Per se violation?

    • CBS argued that composers should be competing against one another to lower prices and this coordination of prices should be a per se violation of the Sherman act as a form of price fixing.

    • Court rejected this argument, finding that the infringement monitoring needs and centralization of sales was reasonably necessary as coordinated enterprise.

    • The Court admits that literally speaking, this is price fixing, but so are the practices of joint ventures and (effectively) mergers between competitors, yet none are per se violations because they are not accurately characterized as “plainly anticompetitive” and “without redeeming virtue.”

    • Test: Instead, the court looks to whether the “purpose” and “effect” (though as we know, effect is not required) of the conduct is to threaten the proper operation of a free-market economy, whether it “facially appears to be one that would always or almost always tend to restrict competition and decrease output,” rather than tend toward procompetitive merits.

    • Here, because of the transaction costs associated with separately negotiating every license with each composer, and of each composer to monitor for infringement, would drastically increase the costs of doing business, and perhaps eliminate the market entirely. “The whole [of the copyright pool] is truly greater than the sum of its parts” in that it makes possible the functioning of the industry, offering a product quite separate from the licenses in their own right (meaning ASCAP and BMI provide a service in the facilitation of licensing above and beyond merely the licensing itself).

      • The restraint of trade is merely ancillary to otherwise legitimate and procompetitive business arrangement, which is to say the procompetitive benefits outweigh the anticompetitive restraints.

      • In Fox’s words, the Ds “create the market” according them some special consideration, which we see further developed in NCAA. But how is this different from a ruinous competition argument?

  • Court denies per se violation and remands for rule of reason analysis.

  • Distinguishing factors? Although the holding is of general applicability, other facts that informed the Court’s decision here, however, include

    • The copyright legislation, passed after the Sherman act, implies that copyright holders should be able to make market arrangements “reasonably necessary” to effectuate the rights granted.” And

    • A few years prior, ASCAP and BMI, in their former manifestations, were determined to violate the Sherman act and were reorganized by consent decree to provide licensees a “genuine economic choice” of how to license compositions by, inter ali, prohibiting exclusive licensing to the agencies.

Catalano (1980): quick look to get to per se violation

  • Beer distributors agree to end practice of extending interest free credit to retailers for purchase of beer.

  • Price fixing?

    • Court determined that the extent to which buyers may capture the time value of money on interest-free credit lines is an effective component of price, so distributors had colluded to eliminate a discount on the price, affixing a higher price in effect.

    • D argued that the entire price of beer is not set, so if they had eliminated a discount then in theory, the price of the beer itself should adjust to account for this effective increase. And decreased credit will ease entry for competing distributors who don’t have the overhead to delay payment.

    • But the reverse is true for the buyers (less credit requires more overhead), and moreover, anytime you increase price you ease entry for competitors, so if that were an allowable justification, then all horizontal agreements would be valid.

  • Rule: fixing a component of price constitutes price fixing and a per se violation.

Maricopa (1982):

  • Non-profit association to which 70% of doctors in market belong, determines maximum prices that member doctors will charge for certain services under certain insurance plans.

    • Remember from Socony that maximum price fixing is per se illegal as well as minimum price fixing, since a nominally maximum price functions as both the ceiling and the floor in that it signals the cartel price to the competitors.

  • Notice: patients can go to 30% of non-member doctors and even member doctors can charge more for patients off the specified insurance plans, both facts undermining market power, but market power is simply not relevant to per se violations.

  • Today:

    • The dissent points out that the reasoning for illegalizing maximum prices per se from Socony does not apply with equal force in this context because the insurance industry negotiates with the organization on these prices, so they can determine what premiums to pass on to consumers, who can easily compare premium prices to those of competing HMOs. In turn, the upward pressure on the price would be the need of the organization to attract sufficient doctors to join up. But viewed this way, these look like legitimate market forces, and this case may turn out differently today.

    • But as the court notes, letting the competitors get together and set the fee, which is inherently suspect, was simply not necessary to establishing a maximum price, even if that is a socially desirable outcome, since the insurer could simply do the same on its own. And procompetitive benefits only justify anticompetitive acts to the extent they cannot be achieved through alternative, less anticompetitive means.

    • And in any event, even if this is one of those rare cases in which bald price fixing is ultimately pro-competitive or otherwise beneficial to consumers, the Sherman act compels a bright line prohibition on these types of schemes.

NCAA (1984):
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