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Antitrust Outline 2009

Antitrust Outline 2009

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Antitrust OutlineProfessor Hay
 
Fall 2006
 I.
INTRODUCTION AND BACKGROUND
 1.Internationalization : started in U.S. in 1890s; has become a big issue in other 1.countries not too2.Goals of antitrust: preserve competition so consumers benefit through lower prices, higher quality products, etc. Flip side: antitrust exists to eliminate anticompetitive monopolies3.Three types of anticompetitive behavior: buy them up (mergers covered by § 7 Clayton Act, blow them up (i.e. Sherman Act § 2 monopolization), let’s make a deal (i.e. illegal cartelscovered by Sherman Act § 1)4.Players: DOJ Antitrust Division, FTC, States, Private enforcement (90% of cases are privateenforcement actions, especially given provision for treble damages5.States and foreign countries cannot be sued under the antitrust laws6.D has to pay Ps legal fees if P wins the suit7.Expediting Act: From 1904 to 1974 appeals by government on civil cases went directly fromDistrict Courts to SCOTUS because Congress though Antitrust cases were very important8.Antitrust Standing: In antitrust you must be principal victim of cartel (injury not enough);Hypo: Suppose cartel among airlines to fix price of commercial carriers; Suppose as a result of higher prices and lower demand, many pilots and flight attendants laid off: Pilots andattendants would NOT have standing (too remote); here people who paid higher prices =victims (for more, see below)9.SC writes antitrust opinions with the fact that a lay jury and general purpose district judge will be implementing its rules in mind
lots of mechanisms to dismiss things as a matter of “law”even they appear somewhat factual10.Federal Trade Commission : Technically enforces § 5 of the FTC Act: prohibits “unfaimethods of competition”; anything which violates § 1 or §2 of Sherman Act also violates § 5of FTC Act: FTC Act is complete equivalent of Sherman Act. FTC has a staff that reports tothe Commission (5 commissioners appointed by President; no more than 3 can be member of any one political party). President cannot fire commissioner. Staff investigates andrecommends Commission file a complaint; they vote; 3 of 5
complaint; If complaint is filedit goes before an administrative law judge who in theory hears only antitrust cases (appointedfor life). ALJ writes initial opinion; loser whether it is the staff of FTC or D can appeal back tothe Commission; Commission is initially prosecutor deciding whether to issue a complaint;then FTC becomes kind of an appellate court and they write a final opinion. Then, if FTCfinds for D, no more case; then, if FTC votes in favor of the staff (most cases)
FederalCourt of Appeals
SCOTUS. Merger cases are slightly different; they go directly to FederalDistrict Court because commission is asking for preliminary injunction to block the merger. Asgeneral matter, FTC enforces same statutes as DOJ but FTC cannot bring case as criminalmatter (so cannot seek fines or jail)II.
HORIZONTAL RESTRAINTS
 1.
PRICE FIXING AND RELATED CONDUCT
1.Covered by
§ 1 of the Sherman Act
: “every contract, combination, or conspiracy inrestraint of trade is unlawful” = “every agreement in restraint of trade is unlawful”2.However, not ALL agreements in restraint of trade are unlawful only NAKEDagreements in restraint of trade (common law held this, Sherman Act was not writtenon a clean slate but with common law in mind)3.COMMON LAW BACKGROUND, FIRST CARTEL CASES & PER SE RULE1
 
1.
 Mitchell v. Reynolds
(KB 1711)i.English case: King’s Bench 1711: involved sale of a business with anagreement not to compete after sale. The court upheld the contract asvalid (if agreement was in “restraint of trade” K would be void) becausethe agreement in restraint was ANCILLARY to contract for sale (i.e. itwas incidental and there was consideration given for it). This case isseen as the origin of the naked v. ancillary test for unlawful agreementsii.Hypo based on case: Renee’s in Ithaca (French Restaurant closes),Claude comes along and wants to buy restaurant but only agrees to do soif Renee will not open a French restaurant in Ithaca for the next fiveyears. A couple of years later Renee changes her mind and opens bistro.Claude sues under K. Renee defends and says that the K is notenforceable because it violates common law restraint of trade. Lawshould allow Claude to enforce his K. Allowing such provisions areimportant to allow sales of good will, etc.1.These covenants are OK so long as they are limited in time, place, and scope2.Usually one can show that the ancillary agreement will havesome beneficial effect on public / consumersiii.New hypo: Dominos and Pizza Hut enter into an agreement. Dominossays we will not deliver to Ithaca College, Pizza Hut says we won’tdeliver Pizza to Cornell. One year. Limited in time, place, and scope(only applies to pizza, only Ithaca, only one year). This is ILLEGAL. Itis a NAKED restraint on trade. Other than agreeing not to compete thereis no other beneficial agreement thereiv.Similar Hypo: Lawyers in Ithaca form a partnership (one says I’ll won’tdo family law and you agree not to do criminal law). This is ancillary tothe partnership (will be reasonable); if all lawyers got together and didthis that raises problems because of scope and might be unreasonableeven if this is ancillary2.
United States v. Trans-Missouri Freight Association
(1897)i.Very early Sherman Act case: Railroad cartel: railroads are fixing /agreeing on rates; Railroads set rates jointly, meet and discuss the rates,and agree not to deviate under certain circumstancesii.Quick note on economics of the cartel: had unenforceable provisionsrequiring members to give notice before raising prices as mechanism to prevent cheatingiii.Railroad tries to advance a reasonableness defense: this restraint wouldhave been valid at common law because it is only a reasonable restraintof trade (i.e. the rates weren’t that high)iv.SC per Peckam rejects this saying that reasonableness is not a defense because ALL restraints of trade are illegal by the literal language of theSherman Act (this view of the statute did not survive, see below). Thiswould have overridden restraints that were legal at common law such asthe one at issue in
Mitchell v. Reynolds
(the decision is overinclusivefrom a policy perspective in this regard)1.Peckam retreats from his literal interpretation a few years later in
U.S. v. Joint Traffic Association
by recognizing that somerestraints might be OK 3.Also shows historical concern for cartels on small businesses4.
United States v. Addyston Pipe & Steel 
(1898)2
 
i.Opinion of Taft, J. Sixth Circuit affirmed by SCOTUS: Garden variety price fixing cartel with fairly complicated background facts; agreementto fix the price of steel pipeii.Mechanics of cartel: Cannot simultaneously jack up price abovecompetitive levels and let people sell as much as they want. Any carteltherefore needs to find a way to restrict the overall output; the AddystonD had clever way of restricting this: auction off the right to be thewinning bidder would be on each project (person with lowest cost willsubmit the highest bid) and then they distribute the winning bid toeveryone else to stop infightingiii.Again, D argues for a reasonableness defense: first argues that it doesnot have
market power 
to have big impact because only have 30% of market, that its
 purpose
was reasonable (prevent cutthroat competition),and that the
effect 
of its agreement (prices) were reasonableiv.Taft has a choice: adopt DOJ/
Trans-Missouri
strict approach that throwsout all restraints on trade, even legitimate ones OR adopt D’s approach,get his hands dirty and evaluate whether restraint was reasonablev.Taft REJECTS all of these arguments and takes the middle ground. Goes back to
Mitchell v. Reynolds
and Naked v. Ancillary distinction. Nakedrestrains on trade are
 per se
unlawful, don’t need to “set sail on a sea of doubt” / get your hands dirty with Rule of Reason analysis. There is noreasonableness defense. This case is the origin of the
 per se
 
rule
. PriceFixing is a naked restraint on trade and is
 per se
unlawful5.
 Standard Oil 
(1911)i.Primarily a § 2 case: White, C.J. officially rejects the strict interpretationof 
Trans-Missouri
that every restraint is unlawful more fully than JusticeTaft: he says that the basic rule is the “Rule of Reason” and then he saysthat there are some agreements (e.g. price fixing) which are “inherentlyunreasonable” (will be unreasonably as a matter of law)ii.This lays out much of the law as we know it: Naked agreements such as price fixing are inherently unreasonable; however, other nakedagreements might not be unreasonable
 per se
, might be evaluated under the Rule of Reason (distinct from Taft here); All ancillary agreementsevaluated under Rule of Reasoniii.Hypo: Suppose the supermarkets in Ithaca, Wegman’s and Tops, say thatwe’ve been competing in overtime and hours of operation; lets agreethat we’ll close at the same time – 10 PM on Sundays. This is an nakedagreement in restraint of trade (Taft) and is therefore unlawful. ButWhite would say that it’s not price-fixing, and therefore may not beunlawful.6.
Chicago Board of Trade v. United States
(1918)i.Goes to SCOTUS via Expediting Act. The Chicago Board of Trade set price of grain sales as the price when the trading floor closed. Higher  bids could not be considered from closing until the next day. Ruleallowed trading after 3pm but locked price ceiling at the 3pm price toregulate trading hours. Case goes to court on evidentiary ruling. D wantsto be able to amend their answer about the purpose of their agreement.Judge wouldn’t let them because thought agreement was a nakedrestraint of trade that was
 per se
unlawful, so purpose was irrelevant.DOJ convinced judge it was price fixing.ii.Despite the DOJ’s pigeon hole: Price is not like
Trans-Missouri
 price3

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