ANTITRUST, TRADE REGULATION AND UNFAIR COMPETITION FINAL EXAMINATION

J une 11, 2002 PROFESSOR McCAREINS

SPRING 2002 COURSE NO. 437 LEVERORE HALL - ROOM G27 NORTHWESTERN UNIVERSITY

KELLOGG GRADUATE SCHOOL OF MANAGEMENT

INSTRUCTIONS This exam is designed to test your comprehension of various concepts discussed in class or in the course book. It is not an open book examination and no material or notes are to be used in connection with your answers to the following questions. You should use approximately 25 minutes to analyze and write a response for each question. YOU MUST ANSWER ALL SIX QUESTIONS. PLEASE WRITE LEGIBLY! Remember, while the anticipated result of each dispute should be analyzed, the reasoning leading up to the conclusion is the critical aspect of your answer. RETURN THIS EXAM WITH YOUR ANSWER BOOKS. The Honor Code, of course, strictly applies to all aspects of this test. * 1. The three major on-site rental car companies (Avis, Hertz and National)

(AHN) at the Philadelphia International Airport comprise about 70% of all rental car business at that airport. Other rental car companies who have a presence at the airport (Alamo, Budget, Dollar, etc.) have the remaining 30% of the airport business. In addition, there are a number of off-site rental car companies (Ugly Duckling, Rent a Wreck and Thrifty) that do not have

The six exam questions are hypothetical only and do not represent past or present fact patterns associated with Winston & Strawn or its clients.

a physical presence at the airport but do run shuttle buses to and from the airport. Since some of their customers are not air travelers, it is difficult to quantify the amount of airport rental business they enjoy, but it is a nontrivial amount. AHN decided that it was not cost efficient for them to build and maintain separate car washing repair and gasoline facilities, so they decided as a group to pool their resources and build one large facility for them to share with common employees. You are the general manager of the local Alamo Rental Car Company (the 4th largest on-site rental car company at the airport) and you approach AHN about joining their group and sharing in the facility (and expenses). AHN said no way. Alamo is contemplating an anti-trust action and as a graduate of this course, Alamo has asked you for advice as to the types of anti-trust claims you could make and their likelihood of success. 2. Medical residents (Residents) contend that the Matching Program,

which places about 80 percent of first-year residents each year, removes all bargaining power from the new physicians and has the effect of keeping wages lowmostly under $40,000 a yearand hours longfrequently 100 hours or more a week. The Matching Program is

administered by all major academic and teaching hospitals in the U.S. These long hours and low wages mean many first-year residents are earning less than $10 an hour. Depending on the specialty, residencies are from three to eight years. The Residents have no choice but to accept the appointment and salary, since no other employer will hire them and completing residency is required for specialty certification, a necessity in the practice of modern medicine. Employers pay Residents standardized salaries, regardless of such factors as program prestige, medical specialty, geographic location, resident merit and year of employment.

With few exceptions, employers pay salaries very close to the national average and very close to each other. The average first year resident was paid $37,383 in 2001, according to a report posted at the Association of American Medical Colleges Web site. Regionally, the average pay of a first year resident in the Northeast is $39,060; in the South, the average is $35,552; in the Midwest, $37,112; and in the West, $35,819. By contrast, post-residency physicians earn widely varying compensation based on these factors, especially geographic location and medical specialty. What is your antitrust analysis of this situation? 3. Philip Morris (PM) Retail Leaders merchandising program, which was

announced in October 1998, makes promotional payments to retailers in exchange for favorable in-store display, advertising, and promotional space. In short, PM will pay retailers more for advantageous display, advertising, and promotional space as the units sold of PM products increase. The plaintiffs (RJR, B&W and Lorillard), which are PMs major competitors, allege that PM designed and executed Retail Leaders to limit the plaintiffs abilities to promote their products. However, during the term of the Retail Leaders program, all plaintiffs have been successful in signing some retailers to merchandising contracts with favorable terms. RJRs and B&Ws sales have continued to decline at about the same level. Although Lorillard suffered an overall decline in sales following the implementation of Retail Leaders, Newport, its key premium brand, continues to gain sales following the implementation of Retail Leader. PMs sales increases have been smaller than the average rate of increase prior to the implementation of the Retail Leaders program. However, cigarette consumption is

declining. Plaintiffs have the capacity to increase production by a rate between 15 percent and 30 percent. PMs successful Marlboro brand is price sensitive, and subject to lost sales if undercut on price by competitors. RJRs revenues, profits, and cash reserves have increased since the introduction of Retail Leaders. PM owns a large share of all cigarette sales through retail outlets in the United States, with its Marlboro brand along holding about a 38 percent share and PMs overall share being 51.3 percent. Discuss the type and nature of plaintiffs antitrust claim and the likelihood of success. 4. While professional soccer is very popular in other countries, it has never

caught on in the United States. The first professional league in the United States, the North American Soccer League (NASL), was formed in 1968 but lasted until only 1985. In the NASL, each team was independently owned, as is the case with teams in most other professional sports leagues in the United States. In consideration for being awarded the right to host the 1994 World Cup tournament by the international governing body of soccer (known as football everywhere else in the world), the United States Soccer Federation (USSF) agreed to establish a Division I professional soccer league in the United States. In 1993, three organizations made proposals to develop a league and the USSF board tentatively selected Major League Soccer (MLS) as the exclusive Division I professional soccer league in the United States. The board also stated its intention to sanction only one Division I league in the United States. This position was changed

in January 1995, when the USSF announced that it would consider sanctioning additional leagues in 1998, so long as they could meet rigorous financial and operating standards. MLS, LLC was officially formed in February 1995. MLS owns all of the teams that play in the league, as well as all intellectual property rights, tickets, supplied equipment, and broadcast rights. MLS also: sets the teams schedules; negotiates all stadium leases and assumes all related liabilities; pays the salaries of referees and other league personnel; and supplies certain equipment.

MLS has the sole responsibility for negotiating and entering into agreements with players and for compensating them. Thus, MLS recruits the players, negotiates their salaries, pays them from league funds, and determines where each of them will play. In particular, MLS decides where certain marquee players will play. While the operator/investors are prohibited from bidding against MLS for players, they may trade players with other MLS teams and select players in the leagues draft, subject to strict league rules. No team may exceed the maximum player budget set by the leagues management committee. This acts as a cap on the amount a team may pay its players. Nine of the leagues twelve teams are operated by investors in the league, who are referred to as operator/investors. Each operator/investor has the exclusive right and obligation to provide Management Services for a Team within its Home Territory and is given some leeway in running its own team, such as the ability to hire the general managers and coaches of their respective teams, license local broadcast rights, sell home tickets, and conduct local marketing on behalf of MLS. In exchange for performing these services, MLS pays each of the

operator/investors a management fee based on team performance. The remaining revenues of the league are distributed equally to all investors. The league began play in 1996. In February 1997, eight players sued MLS, the USSF, and the operator/investors in a class action, alleging various antitrust law violations. Discuss their antitrust legal theories and their likelihood of success. 5. Moist snuff is a finely chopped smokeless tobacco that the user consumes

by placing a small amount between the cheek and gum. The defending manufacturer removed the competitors racks and point-of-sale (POS) advertising under the guise that retailers had given it permission to do so. Although the competitor was usually able to restore the racks, the competitor lost sales during the months before a sales representative could return to the same store to discover the problem. Because of restrictions on advertising in the tobacco industry, the POS advertising and a manufacturers ability to sell its moist snuff from its own racks were critical. The defending manufacturer also allegedly suggested that retailers carry fewer products, particularly competitors products; attempted to control the number of price value brands introduced in stores; and suggested that stores carry its slower moving products instead of better selling competitor products. Manufacturers provided information to retailers on product movement in stores to determine which items should be allocated more shelf space. The

complaining competitor alleged that this product information program was used to place the defending manufacturers racks exclusively in retail stores and hide competitor products in its racks. The number of moist snuff brands, including price-value products, increased while the manufacturer was engaging in the challenged conduct.

Discuss the nature, basis and likelihood of success of the plaintiffs antitrust claims. 6. If you walk by the office building at 100 N. LaSalle St. in Chicago, you

will see a rental car office that once served as a National car rental center. Now , the counter is jointly branded as National/Alamo. The reservations clerk behind the desk acts for both companies and you can make a car reservation for either company. Apparently, the volume does not dictate the need for two separate offices and two separate staffs for both National and Alamo, and someone had the bright idea that you could have a single counter with one employee and save money. If a potential customer does not like the rates or service, he/she can walk 50 feet to an Avis office. What antitrust issues are raised, if any, by this apparent joint affiliation between National and Alamo? Also, if you were the manager behind this move, what considerations/safeguards could you have built into the jointly staffed office concept to minimize or eliminate any antitrust risks?

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