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Antitrust Outline 2009

Antitrust Outline 2009

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Antitrust Outline Professor 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 too 2. Goals of antitrust: preserve competition so consumers benefit through lower prices, higher quality products, etc. Flip side: antitrust exists to eliminate anticompetitive monopolies 3. 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 cartels covered by Sherman Act § 1) 4. Players: DOJ Antitrust Division, FTC, States, Private enforcement (90% of cases are private enforcement actions, especially given provision for treble damages 5. States and foreign countries cannot be sued under the antitrust laws 6. D has to pay P’s legal fees if P wins the suit 7. Expediting Act: From 1904 to 1974 appeals by government on civil cases went directly from District Courts to SCOTUS because Congress though Antitrust cases were very important 8. 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 and attendants 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 factual 10. Federal Trade Commission: Technically enforces § 5 of the FTC Act: prohibits “unfair methods of competition”; anything which violates § 1 or §2 of Sherman Act also violates § 5 of FTC Act: FTC Act is complete equivalent of Sherman Act. FTC has a staff that reports to the Commission (5 commissioners appointed by President; no more than 3 can be member of any one political party). President cannot fire commissioner. Staff investigates and recommends Commission file a complaint; they vote; 3 of 5  complaint; If complaint is filed it goes before an administrative law judge who in theory hears only antitrust cases (appointed for life). ALJ writes initial opinion; loser whether it is the staff of FTC or D can appeal back to the 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 FTC finds for D, no more case; then, if FTC votes in favor of the staff (most cases)  Federal Court of Appeals  SCOTUS. Merger cases are slightly different; they go directly to Federal District Court because commission is asking for preliminary injunction to block the merger. As general matter, FTC enforces same statutes as DOJ but FTC cannot bring case as criminal matter (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 in restraint of trade is unlawful” = “every agreement in restraint of trade is unlawful” 2. However, not ALL agreements in restraint of trade are unlawful only NAKED agreements in restraint of trade (common law held this, Sherman Act was not written on a clean slate but with common law in mind) 3. COMMON LAW BACKGROUND, FIRST CARTEL CASES & PER SE RULE 1

1. Mitchell v. Reynolds (KB 1711) i. English case: King’s Bench 1711: involved sale of a business with an agreement not to compete after sale. The court upheld the contract as valid (if agreement was in “restraint of trade” K would be void) because the agreement in restraint was ANCILLARY to contract for sale (i.e. it was incidental and there was consideration given for it). This case is seen as the origin of the naked v. ancillary test for unlawful agreements ii. Hypo based on case: Renee’s in Ithaca (French Restaurant closes), Claude comes along and wants to buy restaurant but only agrees to do so if Renee will not open a French restaurant in Ithaca for the next five years. A couple of years later Renee changes her mind and opens bistro. Claude sues under K. Renee defends and says that the K is not enforceable because it violates common law restraint of trade. Law should allow Claude to enforce his K. Allowing such provisions are important to allow sales of good will, etc. 1. These covenants are OK so long as they are limited in time, place, and scope 2. Usually one can show that the ancillary agreement will have some beneficial effect on public / consumers iii. New hypo: Dominos and Pizza Hut enter into an agreement. Dominos says we will not deliver to Ithaca College, Pizza Hut says we won’t deliver Pizza to Cornell. One year. Limited in time, place, and scope (only applies to pizza, only Ithaca, only one year). This is ILLEGAL. It is a NAKED restraint on trade. Other than agreeing not to compete there is no other beneficial agreement there iv. Similar Hypo: Lawyers in Ithaca form a partnership (one says I’ll won’t do family law and you agree not to do criminal law). This is ancillary to the partnership (will be reasonable); if all lawyers got together and did this that raises problems because of scope and might be unreasonable even if this is ancillary 2. 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 circumstances ii. Quick note on economics of the cartel: had unenforceable provisions requiring members to give notice before raising prices as mechanism to prevent cheating iii. Railroad tries to advance a reasonableness defense: this restraint would have been valid at common law because it is only a reasonable restraint of 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 the Sherman Act (this view of the statute did not survive, see below). This would have overridden restraints that were legal at common law such as the one at issue in Mitchell v. Reynolds (the decision is overinclusive from 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 some restraints might be OK 3. Also shows historical concern for cartels on small businesses 4. 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; agreement to fix the price of steel pipe ii. Mechanics of cartel: Cannot simultaneously jack up price above competitive levels and let people sell as much as they want. Any cartel therefore needs to find a way to restrict the overall output; the Addyston D had clever way of restricting this: auction off the right to be the winning bidder would be on each project (person with lowest cost will submit the highest bid) and then they distribute the winning bid to everyone else to stop infighting iii. Again, D argues for a reasonableness defense: first argues that it does not 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 reasonable iv. Taft has a choice: adopt DOJ/Trans-Missouri strict approach that throws out all restraints on trade, even legitimate ones OR adopt D’s approach, get his hands dirty and evaluate whether restraint was reasonable v. Taft REJECTS all of these arguments and takes the middle ground. Goes back to Mitchell v. Reynolds and Naked v. Ancillary distinction. Naked restrains 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 no reasonableness defense. This case is the origin of the per se rule. Price Fixing is a naked restraint on trade and is per se unlawful 5. Standard Oil (1911) i. Primarily a § 2 case: White, C.J. officially rejects the strict interpretation of Trans-Missouri that every restraint is unlawful more fully than Justice Taft: he says that the basic rule is the “Rule of Reason” and then he says that there are some agreements (e.g. price fixing) which are “inherently unreasonable” (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 naked agreements might not be unreasonable per se, might be evaluated under the Rule of Reason (distinct from Taft here); All ancillary agreements evaluated under Rule of Reason iii. Hypo: Suppose the supermarkets in Ithaca, Wegman’s and Tops, say that we’ve been competing in overtime and hours of operation; lets agree that we’ll close at the same time – 10 PM on Sundays. This is an naked agreement in restraint of trade (Taft) and is therefore unlawful. But White would say that it’s not price-fixing, and therefore may not be unlawful. 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. Rule allowed trading after 3pm but locked price ceiling at the 3pm price to regulate trading hours. Case goes to court on evidentiary ruling. D wants to be able to amend their answer about the purpose of their agreement. Judge wouldn’t let them because thought agreement was a naked restraint 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 price 3

fixing: still set by the market (not made up); will be variable day to day depending on where the market closes at 3 pm (will be the result of competitive forces) iii. SC per Brandeis, overrules the District Judge: “Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” Even though it was a naked restraint of trade, it is allowed iv. Arguably, another way this defense could be packaged is to call this an “ancillary” restraint: this is part of / in assistance of creation of commodities exchange (this is a big joint venture), not how case went off though 7. Appalachian Coals v. United States (1933) i. Seen as a big defeat for DOJ: Depression-era case allows a full scale reasonableness defense for a garden variety cartel (i.e. purpose and effect of cartel was to raise prices by eliminating competition) ii. Rejects Taft: “general standard should be one of reasonableness” iii. Case was in large part due to Depression-era hostility to competition: some people thought competition was actually to blame for the bad economy. This case is probably an oddity of that time period 8. United States v. Soconoy Vacuum (1940) i. This is not a hotel room cartel: Oil companies agree to buy up the excess oil to reduce supply and drive prices up. Most gas sold by long term K but price set by excess oil in the spot market. Buying oil and raising price there would raises prices overall including for long-term K. SC per Douglas, J. decides that this is price fixing. ii. District Court charged the jury that it was “immaterial how reasonable or unreasonable prices were, whether they were effected by the combination.” Court of Appeals called this reversible error because it was based on an illegal per se theory and Sherman Act only barred unreasonable restraints of trade iii. Case resolves the tension between Appalachian Coals and Addyston/Standard Oil: states the modern per se rule iv. Statement of modern per se rule: Under the Sherman Act, a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se. v. No reasonableness defense is allowed in a price fixing case: “elimination of so-called competitive evils is no legal justification . . . ” (PURPOSE defense won’t fly because general purpose District Court judge cannot evaluate it); Reasonableness of price cannot be a defense (“has no constancy”): administrative problem: price could be reasonable at time of trial and constantly changed (EFFECT defense thrown out); (No POWER defense: “even though in no position to control the market . . . ” to the extent that they raise prices, guilty) vi. Price fixing is illegal: no exceptions vii. AGREEMENTS to fix prices are illegal even if they do not result in a successful scheme; statute makes the agreement unlawful (Fn 11) 4

viii. Policy behind per se rule: institutional competence: would rather be overinclusive than underinclusive and we don’t trust juries to get it right: don’t want to “set sail on a sea of doubt” ix. View that competition = bad has faded by the time Socony is decided 4. THE PER SE RULE: EXTENSIONS, APPLICATIONS, EXCEPTIONS 1. Goldfarb v. Virginia State Bar (The Profession Exception?) i. Class action headed by former FTC lawyer. VA state law requires title exam; writes letters to 37 different firms asking how much would charge for search (1% price of house); All attorneys agree because of VA bar’s “fee schedule.” P argues that this is price fixing and therefore per se unlawful ii. Lawyer’s best defense: “We’re a profession.” -“The fact that a restraint operates on a profession is relevant” (this seems to pick up the idea from Chicago Board of Trade); ethical norms and self-regulation might actually promote competition (Court picks this up in FN 17) but rejects it. Even lawyers can be found guilty of price fixing. There is no blanket exception to per se rule for professionals engaged in price fixing. iii. Lawyer’s next defense: fee schedule was just advisory and non-binding: court dismisses this because failing to comply could lead to discipline / disbarment 1. Related hypo: Three grocery chains in upstate NY (Top’s, Wegman’s, PNC): Suppose that managers in each store have pricing discretion (not set on chain-wide basis). Suppose Presidents of the stores meet and agree on suggested prices for principal items sold in stores (i.e. gallon of milk for $3). We will distribute these to store managers and these are merely advisory but we agree to distribute the uniform fee schedule. This doesn’t matter. The statute can reach it because it is an agreement intended to stabilize prices iv. Lawyers’ final defense: State action required this: problem is that statute authorized enforcement of ethics rules, it did not mandate a fee schedule. The state action did not compel the lawyers to pass the fee schedule v. Side issue: does “interstate commerce” qualification in the Sherman Act carry any weight (e.g. what if the whole episode takes place in one state?). Answer: no, its just a de minimus requirement 2. United States v. Professional Engineers (The Profession Exception Redux) i. Engineers had an agreement that if someone bids on new building they would not discuss pricing until after selection of the engineer. Engineers did not meet in hotel rooms to agree on prices (contra. Goldfarb). ii. DOJ claimed that this had the same consequence of price fixing: it will be expensive for customer to go from one firm to another and will have no idea how much they’ll pay (economically this has same consequence as price fixing because firm has free reign on what to charge) iii. Engineers argue that this is not garden variety price fixing so this should be evaluated under the rule of reason. They try to invoke FN 17 of Goldfarb: We’re a profession trying to self-regulate and promote competition iv. Engineers make their fatal mistake explaining why their conduct is reasonable under the Rule of Reason: they say that allowing discussions of price will lead to competition that will produce bad results; 5

competition on price will produce shoddy work, flouting of safety hazards, etc. Core of defense: in this context, competition is not in public interest. PROBLEM: The whole idea behind antitrust policy and the rule of reason are designed to determine whether restraints promote or retard competition. They do not have different ends. If you admit that this retards competition, you lose automatically! v. Case shows that Rule of Reason and Per se rule have the same goal: separate practices which are anticompetitive from those that are procompetitive. When the Engineers admit their anti-competitiveness, they lose. There is no “public interest” exception unlike EU or Australia 3. Profession Exception: Putting Goldfarb and Professional Engineers Together: D can argue: 1) This activity is not price fixing, 2) we’re a profession and this activity is designed to self-regulate and thereby promote competition (this approach should  Rule of Reason analysis of the case) 4. Broadcast Music Incorp. v. CBS (“Quick Look” Doctrine triggered by new product) i. BMI and ASCAP are groups of musicians / recording artists that sell blanket licenses to establishments that want to use music. The license eliminates the transaction costs of having to negotiate with each individual artist every time you want to play a song. This way “Rick’s Bar” in IL doesn’t have to call up Bono every time a U2 song gets played: instead he pays a single annual for a license from BMI and they distribute profits to the artists in exchange for right to play music covered by license any time he wants. License cost varies depending on size / needs of purchaser (i.e. a big TV network like CBS pays a lot more than Rick). CBS pays a ridiculous amount to BMI (probably biggest part of budget); it filed the suit as a negotiating tool ii. Because BMI’s justification is compelling, CBS is trying to get this treated under the per se rule: says that BMI is price fixing. CBS succeeds in the Court of Appeals which says this is per se illegal price fixing because BMI and ASCAP set one price for each license iii. SC upholds the blanket license: In order to decide whether this is the kind of price fixing that ought to be held illegal per se it is required court must take a quick look at the arrangement. This opinion made plaintiff’s lawyers very unhappy. Looks like it blows apart the per se ban on price fixing by allowing for a “quick look.” “Easy labels don’t often provide ready solutions” (Case is a defendant’s dream) iv. Alternate Rationale (not what the court did): SCOTUS could have upheld the blanket license in a much more straightforward fashion: it is ANCILLARY to a legitimate joint venture to create a new product: the artists are coming together to market a new product, the blanket license. They need the power to price that product if the joint venture is to succeed. This would lead to Rule of Reason analysis v. Related Hypo: Suppose 4 Ithaca lawyers: Tax, Divorce, Personal Injury, Criminal Law. Why don’t we get together and offer pre-paid legal services for $100 / month and in return they are guaranteed legal work free if it falls into any category. This is essentially a blanket license. Obviously they have to agree on what price will be. They are in a joint venture. Providing this package only for those that want this. This is exactly what is happening in BMI. 5. Arizona v. Maricopa County Med. Soc. (Slight retreat from BMI) 6

i. Physicians set maximum prices that they will charge for services from HMOs. Basically the doctors are meeting in hotel room before AETNA comes into town and forces each to bid on becoming part of the plan and play one off another. Doctors are agreeing in advance what their maximum bid will be and presenting a united front. So court is right in saying that AETNA should agree with each doctor, not each doctor in advance agreeing ii. Try to invoke BMI “quick look” language to get around per se ban on price fixing. SC fires warning shot saying not to read BMI too broadly. Cannot meet to agree on price  per se unlawful under § 1 iii. Hay thinks this case just means: don’t read BMI beyond its facts 6. NCAA v. Board of Regents (The League Exception triggering Quick Look) i. NCAA rule stated only that one network could carry college football games. After selected as network, TV has right to pick which game it wants with some limits (no team could be on more than 4 times; some weeks network had to show regional games); BUT NCAA dictated a flat fee. TV networks could not negotiate. NCAA fee ($600,000) was an artificially high price it could charge because it limited the number of games. Individual schools could not negotiate their own prices or contracts (e.g. no Notre Dame on NBC). Oklahoma and Georgia file suit to enjoin NCAA rule. ii. Court characterizes this arrangement as price fixing but does NOT apply per se rule. Because the NCAA is a league the court applies the Quick Look Rule of Reason: League is essentially a joint venture of members that need to agree on certain things in order to exist (i.e. amateur league, # of teams, size of field, rules for play, rules for recruiting, etc.). This is what causes SC to take position it does: “this is a league and fundamental characteristic of a league is that it has to agree on certain things to exist.” So we don’t want to automatically apply the per se rule. iii. Only question the court asks: IS PRICE FIXING NECESSARY FOR LEAGUE TO EXIST? Court says it is NOT iv. NCAA argues it wanted to preserve live audiences, this is bullshit 7. Putting BMI, Maricopa, and NCAA together, the court may apply a quick look if D can point to something special (i.e. a new product, league, etc.) that needs to establish special arrangements. Quick look question: does that entity need to fix prices to exist 8. FTC v. Indiana Federation of Dentists (More quick look) i. Dentists got together and agreed not to submit x-rays to insurance companies. (not typical price fixing). This is more like a boycott. We agree to not send you information. ii. Doctors try to get around the per se rule by saying that they are a profession and that this is not price fixing. Court analogizes this to price fixing because boycott is aimed at competitors you cannot get HMO coverage without x-rays iii. Case technically brought by the FTC under § 5 of the FTC Act: prohibits “unfair methods of competition” (see above) iv. Case is kind of a quick look case because FTC only has to prove attempt to boycott (Agreement is the illegality) to win and trigger per se treatment. Case does not say that doctors have to provide the requested information, it just means that they cannot agree to withhold it v. Hypo: Usual boycott: doctors at Tompkins County Hospital say they 7

won’t work there anymore unless hospital does not hire Dr. Butterfingers. New phenomenon: “doctor specialty hospitals” which take high paying clients and leave other clients with rest. So nonspecialty hospital says to AETNA: we will not be part of system if you deal with the new hospital. Indirect way to get out competitor. Use collective leverage through a third party to eliminate competition. Lots of cases suggest these cases are per se unlawful 9. FTC v. Superior Court Trial Lawyers (Importance of Classification) i. Boycott case: trial lawyers refuse to work unless pay goes up. In this case it also seems like price fixing but couldn’t have been a hotel room cartel because salary was set by statute: boycott for higher fees ii. If lawyers try to use the profession defense to say that higher fees promote quality of representation they will run into the Professional Engineers problem: the justification of their boycott (quality of lawyers) does not promote competition. Cannot say anti-competitive action is better than competition 1. Hypo: What if instead of higher fees the lawyers strike instead until jail conditions improve? There lawyers had cited a “noneconomic” reason that gave no commercial advantage to the lawyers that directly serves a social end. Court might be sensitive to this (Cf. Clairborne Hardware: boycott of hardware stores that discriminate vs. minorities but consumers aren’t really economic competitors as the lawyers are); on the other hand, lawyers are using their combined market power, by acting jointly and agreeing in restraint of trade, court might still think this is illegal under the Sherman Act iii. Lawyers also make a First Amendment defense: we are boycotting to call attention to a social problem via our right to free expression. Court says that this doesn’t fly because lawyers can do this in other ways that do not violate the Sherman Act (i.e. might be different if they engaged in a limited, symbolic 24 hour strike) iv. Court of Appeals had said that we don’t want to apply per se rule because lawyers are nice and no harm in Rule of Reason analysis. SC reverses this point as well. Per se rule is designed for efficiency of lower courts (saves courts from reviewing actions that have been barred) but this does not make it discretionary. Court is bound to apply the per se rule; cannot fail to in interests of “justice” 10. United States v. Brown University (“Non-profit” Exception?: Third Cir.) i. Third Circuit case: Ivy league schools had regular meetings to propose and discuss financial aid packages for admitted students. By time case got to court other schools had pled out and only MIT left ii. MIT tries to argue that it is not engaged in commercial activity but merely giving charity to students and setting parameters of that. Court quickly rejects this: schools really agreeing on discounts of price that will be paid to school. This is price fixing. Agreement is to schools’ advantage. District Court applied “quick look” approach. Third Circuit opinion here reverses and remands for full Rule of Reason analysis iii. MIT’s argument to get case under Rule of Reason: 1) we are a nonprofit, 2) we are not engaged in an activity to maximize profits. This is not necessarily anti-competitive so we need a full Rule of Reason 8

inquiry. MIT then argues that the policy is 1) pro-competitive, and 2) benefits social welfare 1. MIT says pro-competitive because refusing to provide merit scholarships allows MIT to spread limited financial aid more broadly  more diverse student body  this is a better school (Cf. BMI: creating a better product). This argument is insufficient though because it justifies MIT’s policy but not its AGREEMENT with other schools. MIT takes the next step and argues that agreement is necessary for it to be rational for them to do this or else Harvard and Yale will take all the smart kids. Third Circuit thinks given this that competition might indeed be promoted 2. MIT’s second argument about social benefits not as good: we’ve seen this before and it gets rejected iv. Schools first tried to establish blanket immunity for non-profit organizations but court pretty quickly rejects this 11. Quick Look synthesized: Quick look is somewhere between per se and Rule of Reason. Restraint which on its face looks like what the court has found per se unlawful. It’s facially anti-competitive. But it occurs in a context which suggests a possibility that it might turn out to promote competition. Once quick look is adopted the burden lies on the defendant to rebut a presumption of unlawfulness. So what we’re going to do is let the defendant tell a story. The NCAA then has to persuade the court that the measure is actually procompetitive. This differs from a full-scale Rule of Reason, because on its face, it’s not clear that the restraint would be anticompetitive. In a quick look case, the defendant has to rebut the presumption that the restraint is anti-competitive. In a rule of reason case, the defendant does not have this burden. 12. California Dental v. FTC i. California Dental Association passes rules prohibiting false or misleading advertising. Problem is that rule was interpreted in a way that prevented dentists from advertising price discounts ii. Court of Appeals applied “quick look” to rule and found it anticompetitive: SC remands for full rule of reason analysis. Cannot apply “quick look” unless the agreement is anticompetitive on its face. The rule prohibiting advertising is not facially anticompetitive, it was merely interpreted that way iii. Case illustrates the black letter difference between R of R and Quick Look: Rule of Reason: until the plaintiff proves that the restraint is anticompetitive, the defendant prevails. Quick Look: the burden falls to the defendant to demonstrate that, in fact, the alleged restraint is procompetitive. 13. NFL v. Maurice Clarett (Lower court: quick look) i. Example of lower court applying quick look: age discrimination is per se unlawful but since NFL is a league, could offer pro-competitive justification. District judge rejected that justification ii. District opinion rendered moot by C of A which held that deal was immune from antitrust laws because of collective bargaining agreement 14. Polygram Holdings (Lower court: quick look) i. Another Court of Appeals opinion: “Three Tenors” case: Two recording studios (one with rights to 1990 concert and one with rights to 1994 concert); studios get together for 1998 album; legitimate joint venture: 9

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agree not to market (advertise / discount) 1990 and 1994 albums before 1998 concert ii. Another quick look case: They’re in a joint venture to produce the 1998 album. It’s not 100% certain that these types of agreements aren’t legitimate. There are special circumstances here. So we do a quick look here and put the burden on the defendants to prove that restricting 1990 and 1994 can actually improve competition. iii. Court held that agreement was a naked restraint of trade (it was not necessary to the JV of producing / marketing the new album) United States v. Topco i. Supermarkets agree to designate which store can sell Topco products in given geographic locations (not limit on whether store could be there but on what they could sell)(e.g. Wegmans sells Topco in Ithaca and P&C sells Topco in Rochester). Government sues and loses in District Court  SCOTUS via Expediting Act ii. Trial Court held that no violation of § 1 under Rule of Reason because restraint is pro-competitive: although it restricts competition with respect to private-label product it allows small chains to market a product it wouldn’t be able to otherwise and thereby compete more effectively against the large chains, from the perspective of consumers, this is a good thing. It corrects a “free rider” problem that would occur if all supermarket chains could sell Topco: no one would market it well iii. SC reverses: “whether or not we would decide the case the same way under the rule of reason is irrelevant to the issue before us.” This shows the enormous power of the per se rule: even if the argument is correct, D still loses. Court per Marshall, J. sees the geographic limitation as unnecessary to the joint venture, trial court thought it was ancillary to creating a new product, the “TopCo” brand iv. Holding of TopCo establishes that even ancillary agreements must be necessary to the joint venture: there is a substantive requirement for ancillarity General Leaseways v. National Truck Leasing Association (7th Cir.) i. Posner applies Topco to similar facts: agreement to allocate territory is not necessary to the joint venture, even though ancillary (it is not “genuinely ancillary”) Rothery Storage v. Atlas (DC Cir.) i. Bork opinion: case has similar facts to Topco and General Leaseways ii. Court holds that D does not have large enough market share to restrain trade unlawfully (only 5%). Bork’s core position: first question is not about genuine ancillarity but if it is facially ancillary, whether or not the market share is large enough to have an effect (this seems to be Rule of Reason analysis) iii. Shows circuit split Copperweld v. Independence Tube i. Major Holding: § 1 does not apply to two wholly-owned subsidiary corporations of a single parent (or two divisions of those subsidiaries) ii. Underlying rationale was based upon fact that application of § 1 turned on mere structure (calling subs divisions meant § 1 does not apply but calling them corporations meant it did); rationale: do not want to distort a parent company’s otherwise efficient choices, choice of corporate form is at stake 10

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iii. Economically this makes sense because subsidiaries have no incentive to compete for profits, they just want to maximize overall profits iv. Copperweld applies so long as parent owns at least 90% of subsidiary, courts are split if they own less (i.e. 60% is control, 49% is effective so fewer courts draw the line there) v. Hypo: Can Copperweld be applied to leagues? No since teams are individually owned, but in the case of Major League Soccer the league owns teams, Copperweld may apply there vi. There has been litigation about timing of pre-merger planning decisions: what if competitors agree to “restrain trade” before a merger? Litigation currently about this. FTC wants hard line rule. Dagher v. Saudi Refining i. Case involved multiple joint ventures. Texaco and Shell merge downstream operations (refining and marketing of crude oil); each will own 50% of Equilon and share profits equally; will not market gas as Equilon but under Texaco and Shell brands. Alleged unlawful agreement obscured by opinion is that at the time JV was created, Texaco and Shell agreed that in charter of JV the price of Texaco and Shell would always be the same; Agreement between parents that took place at the time the JV was created ii. P was attempting to sue JV to get rich quick with treble damages (class action): case file claimed that it was a per se violation or if not, should be decided under quick look rule of reason; interrogatory says that if court decides case should be tried under full scale rule of reason, we concede in advance iii. D move to dismiss on idea that this is definitely not per se unlawful: in effect D is saying that JV including the agreement was approved by the FTC; this doesn’t mean that private parties cannot challenge JV or agreement, but the agreement is ancillary to JV and must be evaluated under Rule of Reason iv. This is where Copperweld comes in: Justice Thomas says that assuming that JV is lawful agreement means nothing because it is conceded that under JV Equilon will control pricing of gasoline to maximize overall pricing of JV; Equilon will not conduct price war between Shell and Texaco (Cf. Tops and Wegmans hypo. from above) v. Court holds that § 1 does not apply here because takes P’s pleading seriously Hatch Waxmann Act cases i. E.g. - Bayer has patent on Cipro (drug that carries many billion $$$ of profits); to get U.S. patent isn’t that hard. Hatch-Waxman Act sets up process to challenge patents. Barr makes generics after patents expires. Barr tells Bayer that patent is invalid and wants to market generic now and tells them to file patent infringement suit. This is not a zero-sum game because if Bayer wins, $4 billion is protected; if Barr wins, no one gets patent and $4 billion of profits disappear because everyone makes generics. Not surprisingly Bayer tries to settle: if you agree to admit that you are infringing our patent, we will pay you $400 million; Barr agrees: FTC claims that this agreement had effect that we will not know whether the patent is invalid or not and so agreement is in restraint of trade and unlawful (issue: when can Bayer settle patent disputes?) ii. Issue with these cases: can a settlement agreement be “in restraint of 11

trade” 5. STANDING AND JURISDICTIONAL ISSUES 1. Standing i. Rule in America: “direct purchaser” rule. Ex: Cartel jacks up price of milk. Cost of milk in supermarket goes up. You and I buy milk from supermarket. Because cost to supermarket goes up, they will pass it on to the consumer; real victims of the cartel are consumers. Originally case would be brought by supermarkets who complain about higher prices for milk. SC said to D, you cannot defend vs. price fixing by saying that supermarkets passing cost on to the consumer . Consumers sue: SC says that supermarket could sue for full amount of overcharge, if we allow consumers to sue then cartel is being forced to pay twice. So SC says no to consumers, only ones allowed to sue are the “direct purchasers” ii. This is very unfair. Each state has their own antitrust laws and many states have passed overrides to this federal law (about ½ states have done this). As a result, direct purchasers file in federal court and indirect file in state court (leads to lots of double dipping) (See, e.g., Microsoft cases) iii. Overseas standing is based on international law “comity” 1. Hypo: fax paper cartel of foreign corporations in Japan. Marketed to United States. U.S. consumers are only victims. Clear that antitrust law should apply because effects U.S. consumers and no Japanese incentive to prosecute. Harder if Japan markets all over the world and there are victims everywhere. Closer call because other authorities would have interest in prosecuting the cartel. But cartel was intended to and did have effect on customers in U.S. so U.S. customers can sue in United States. 2. U.S. Customers can clearly sue foreign companies in U.S. courts 3. Empagram S.A. v. F. Hoffman-LaRoche 1. Sherman Act does not apply to conduct involving trade or commerce with foreign nations unless it falls within “domestic injury” exception: needs to have substantial, reasonably foreseeable, direct effete on domestic commerce and this effect gives rise to Sherman Act claim (actual and proximate causation). Case involved vitamin sellers cartel leading to higher prices in U.S. and around the world. The FTAIA allows court to reach the action 2. Lysine Cartel Video i. What’s going on in the video is two different things: (1) they’ve carved up the world and assigned quotas in the different parts of world. (2) Behind the scenes, these guys are cheating like crazy on one another. They don’t trust each other—they’re trying to come up with various schemes. ii. This shows what happens when push the price above the competitive level. Unless you can find some way to limit what the Cartel will sell, the Cartel is going to collapse. 2. INFORMATION EXCHANGE AND RELATED OLIGOPOLISTIC CONDUCT 1. INFERRING AGREEMENT 1. Hypo #1: Construction project to renovate Hughes Hall. 5 identical bids come 12

2.

3.

4. 5.

6.

in. Here there is too much of a coincidence, would be unusual for all bids to be the same; can subpoena travel schedule and phone logs to try to find more circumstantial evidence Hypo #2: within a week of Hurricane Katrina, gas prices go up 25 cents a gallon. Katrina wiped out 20% of gas refining capacity. P claims conspiracy. While it is possible that gas stations conspired it’s unlikely, don’t need that hypothesis to explain the result; -this one won’t get to jury Hypo #3: Delta announces it will eliminate travel agent commissions. Travel agents are furious and announce will steer clients from Delta. Other airlines see what Delta did and follows eliminating commission. Delta’s behavior is hardest to explain because if you do this they would fear travel agents steering business to other airlines From these hypos can see two strands of relevant circumstantial evidence: coincidence (#1) and risk (#3) Interstate Circuit v. United States i. Government case  SC via Expediting Act. Movie industry released movies into first-run theaters, they later went into second-run theaters. The conspiracy involved agreements among appellants to fix admission prices above a certain level, to prohibit double features of certain movies, and to impose other restrictions on subsequent-run exhibitors. Distributor theaters send letters to exhibitor theaters asking them to fix prices at first and second run theatres and not to show double features. Key issue: did the eight movie exhibitors actually agree among each other to have this policy? Jury finds for P. ii. Circumstantial evidence: Nature of the proposals: involve a radical change / departure from prior business practice (Coincidence: could not have happened by coincidence and Risk: no one company would have done this by itself: if MGM did this without agreeing, other companies would lower their rates and get all the business) iii. Case becomes complicated by letter from one of the theaters to directors of the other theaters. This letter shows that no hotel room agreement was reached and may show that 7 theaters were coerced by the unilateral action of one. But all directors were cced on the letters so they knew about this. Court sees this as showing that an agreement may have existed iv. Another theory DOJ uses: “hub and spoke” conspiracy theory: “acceptance by competitors, without previous agreement, of an invitation to participate in a plan, the necessary consequence of which, if carried out, is restraint of interstate commerce, is sufficient to establish an unlawful conspiracy under the Sherman Act.” Interstate is the hub & each of the eight circuits are the spokes. For Sherman act purposes, this counts as a horizontal agreement. Theater Enterprises v. Paramount i. Similar facts to Interstate Theater: Subruban Baltimore theater asked distributors for first run movies, each distributor tells them no and gives movies only to downtown theaters. Court holds that “parallel business behavior” itself is not sufficient circumstantial evidence to prove a conspiracy. Need to prove more than “conscious parallelism” because behavior may be individually rational for each theater (i.e. must prove something like the “hub and spoke” conspiracy in Interstate Theatre). D can defend by showing that the action is rational independent of what 13

other competitors do. However, trial judge should not have kicked the case out on Summary Judgment. 7. Toys ‘R’ Us v. FTC (7th Cir.) i. Similar to Interstate Circuit. Toys R US allegedly enters into many agreements with club sellers to undercut warehouse clubs (i.e. Costco) including price fixing, tying, etc. FTC attacks the suppliers saying that this is a horizontal agreement between the producers of toys forced by Toys R Us. “Hub and Spoke.” It would not make any sense for any seller to do it independently. An agreement can be inferred here because this is the sort of thing that they wouldn’t do unless they had no choice (TOO RISKY). The manufacturers had to know in advance that the others were going to go ahead with this. Court affirms FTC’s decision. 8. Twombly v. Bell Atlantic (How all of this plays out procedurally) 9. Case is similar to Theater Enterprises. Allegation is that D-telecommunications providers conspired not to compete against each other in geographic markets for local phone and high-speed Internet services. D defends by saying that their decisions were independently rational. D’s language: “[actions are] independently justifiable, rational and economically efficient.” i. District Court dismissed complaint on 12(b)(6) because concluded that allegations of “conscious parallelism” are not enough to prove conspiracy. Need to point to certain “plus factors” as well to survive a 12(b)(6) ii. Second Circuit reverses: point of Civil Procedure notice pleading is that should be able to obtain more information in discovery. P’s complaint should be enough to get by a 12(b)(6) even though it might not survive on summary judgment. No heightened pleading is required in antitrust cases. This case was argued before SCOTUS two weeks ago 10. Putting Together the Rules on Inferring Agreement: i. P wants to say it is a conspiracy and prove it with circumstantial evidence referring to “plus factors” ii. D has two different strategies: 1. Parallel, but independently rational (no harm no foul) (Like Theatre Enterprises) 2. Parallel, but interdependent (oligopoly) 1. Ex: USAir & Delta run shuttles between NY & Washington. Assume it costs $100 one-way. USAir and Delta are both doing badly financially. Suppose the president of USAir says, I need to make more off these flights. So he goes USAir’s chief economist and says, can the shuttle service be more profitable? Economist says, “I’ve done an elasticity calculus and people would still fly even if the shuttle price were $150. But the bad news is that it’ll only be more profitable if both airlines charged $150.” American’s president cannot call Delta and we’ll set this up. He can’t do this, but economist says “I’m 99% certain that if you raise your price to $150 Delta will follow.” If they’d met in a hotel room, that’s the monopoly price that they would have reached. Here we are observing, in contrast to Theatre Enterprises, that this is monopoly conduct, independently undertaken, which hurts consumers. Instead of being independently rational, 14

this qualifies as interdependently rational. Moral: if you use market forces to communicate pricing decisions, § 1 cannot reach you. 2. Result of oligopolistic interdependence (like USAir and Delta Ex.). Most likely to occur in highly concentrated industry; with homogeneous / fungible products; pricing is transparent; and transactions not lumpy 3. “Conscious Parallelism is overbroad in a sense because it allows oligopolies to engage in monopoly pricing without reaching agreement in concentrated markets. This is the rule because courts don’t want to determine antitrust liability based on whether pricing decisions are cost justified or not. 4. May be able to get at this second action a little through the facilitation theory (next section) 2. TACIT AGREEMENT AND FACILITATING PRACTICES 1. Theory responds to oligopolistic interdependence: Firms have engaged in certain actions to facilitate the interdependence. 2. Facilitation theory is based on the “invitation and acceptance” theory of Interstate Circuit: facilitating action is the “invitation” and compliance is the “acceptance” i. Ex: Suppose prices are normally not public and eventually rivals learn about Firm A’s conduct (contemplating initiating a price increase; this usually takes some time before the other firms learn of increase). Suppose A instead publicly announces price increase (this cuts down the window of rivals finding out about increase); other firms may follow suit and announce price increases as well. There has been no agreement between the firms, B just followed A’s lead but action of announcing prices, making public is a “facilitating practice” 1. Even here, A will have a little exposure and lose business: suppose instead A announces a price increase, effective in two weeks (unilateral increase but assumes the competitors will follow). Two weeks gives time for cartel-like activity of price matching / stabilization 3. Blomkest Fertilizer v. Potash (8th Cir.) i. Potash (type of fertilizer) sellers engaged in oligopoly pricing. Charge is that producers colluded to raise price of potash. Court looks at “plus factors” to determine whether the parallel action was a conspiracy. P has burden of proving one or more plus factors. Court holds not enough were present. Most important “plus factor”: an action taken contrary to economic self-interest ii. Held: Reasonable juror conclude more likely than not that there was a conspiracy. Plaintiff’s evidence must tend to exlclude possibility of independent action or oligopolistic action. iii. Plus factors: 1. P really believes these guys met in a hotel room (opportunity to collude) 2. Designed to fight the we’re bad defense 1. Not homogenous 2. Prices not transparent 3. Lumpy (not smooth) 15

1. GE/Westinghouse i. 1950s: GE was engaged in big hotel room conspiracy concerning heavy electrical equipment with Westinghouse and A-C. Billions of dollars in treble damages were awarded. Conspiracy was pretty unsuccessful because there were a few firms but the product was not homogeneous; the price was not transparent; and sales were lumpy: firms cheated. A few years after the suit all price discounting was eliminated. GE & Honeywell began matching prices. DOJ thought they must be meeting again but it was clear there was no meeting. This was very successful in eliminating price competition without being the perfect oligopoly. Pricing was suspicious because each machine was tailor-made (not homogeneous products), prices were no transparent, and sales were very lumpy (machines bought in waves) ii. GE began issuing a price book setting out list prices for any model of its equipment. Also, in order to insure that they wouldn’t cheat on prices, GE introduces price protection: “if anyone buys generator at list price and finds I have given discount to anyone else, we’ll retroactively give it to you”: this basically signals to Westinghouse that GE is not going to start a price war: ties hands from giving discounts. Seems as if GE does something unilaterally to facilitate oligopoly pricing. DOJ is waiving a wand and saying this pattern of practices counts as an unlawful agreement under § 1 of the Sherman Act iii. Case settles and consent decree is entered into: standard for judge to enter consent decree = judge needs to find it in the public interest 2. Ethyl v. FTC i. FTC legal theory: whatever court would have done with GE under § 1, we think this is illegal under § 5 of FRC Act. Test case: lead was being phased out so result didn’t matter and FTC deliberately left the word “agreement” out of the case. ii. Things to note: product is homogenous (no complexity there); but here is complexity: stuff is heavy and 4 manufacturers with customers (refineries) all over the country. If everyone is charging the same price f.o.b. (free on board / from the plant door) the competition would not work out either because shipping costs a lot so close producers will get more business. Instead they charge a delivery price so there would be competition across the board. The problem is this means that only need to agree on one number to achieve consensus in pricing. Each firm adopts policy of quoting on a uniform delivered price basis; makes pricing problem simpler (they would also announce price increases in advance) iii. 2d Cir. decides against. FTC though lots of people think this case is wrong. iv. Ethyl shows possible defenses to facilitating conduct theory: 1. This did not eliminate all competition: still some small firms that got discounted BUT even cartel does not eliminate all competition, that would be too much to prove 2. We’re bad: even without agreement there would be no price competition; you cannot prove that the facilitating practices made a difference 3. *Business Justification: we announced price increases because our customers like to know when prices are going up; they like 16

price protection, etc. 2. INFORMATION EXCHANGE 1. This theory is not based on an agreement on prices or practices to facilitate oligopoly pricing but based on an agreement to exchange information about prices 2. P’s options where it has evidence of information exchange: i. Infer an agreement on price (if we prove this agreement on price via circumstantial evidence, this will be considered per se unlawful; hard part here is proving the agreement by inference); here, the exchange of information may be used as a “plus factor” ii. Parallel exchange of information is a facilitating practice; don’t know whether this will constitute an unlawful agreement iii. Press claim that agreement to exchange information is in and of itself is unlawful: this agreement is going to be easy to prove (see below) 3. American Column & Lumber Co. v. United States (1921) i. Manufacturers of hardwood form “American Hardwood Manufacturer’s Assocation” and designate an “Open Competition Plan” with optional participation. Plan called for disseminating information about production and market conditions, including: daily report of all sales made, daily shipping report, monthly production report, monthly stock report, price lists, and inspection reports. Plan also called for sending questionnaires about production. ii. SCOTUS held that this plan was a “definite agreement” on production and prices. Part of a kind of Gentleman’s agreement. This was an illegal agreement in restraint of trade. However, the Court never says that this is per se illegal. Still, it seems like information exchange itself might support a cause of action 4. Maple Flooring v. United States (1924) i. Maple Flooring Association computed and distributed average cost of all grades, compiled book on shipping rates, gathered information on prices, stock, etc. In this case D wins. SC says “such information may be basis of an agreement of concerted action, but in absence of proof of such an agreement or concerted action having been actually reached, we can find no basis in gathering and disseminating information . . . ” This seems to support view that information is a “plus factor” but cannot give rise to an independent claim ii. Strong D language in the case: “an agreement to exchange information does not become illegal merely because it has the effect of stabilizing prices and limiting production”: court wants to see an actual agreement to stabilize prices and limit production iii. Some contend that Maple Flooring is an anomaly of its time and was overruled by Socony. Hay is not so sure: some of court’s sensitivity may come from the fact that pricing information is a prerequisite to perfect competition as well as oligopoly pricing 5. United States v. Container (1969) i. Case involving an exchange of price information but no agreement to adhere to a price schedule. Whenever D would call another manufacturer and ask for quote of most recent charge, D would be told the price ii. SC: “the limitation or reduction of price competition brings the case within the ban, for as we held in United States v. Soconoy, interference 17

with the setting of price by free market forces is unlawful per se.” iii. HOWEVER, even Container does not say that the per se rule applies because Fortas’s concurrence says that it is not a per se violation but can be under Rule of Reason iv. There is a circuit split on how to read the case: 1. In Container, the product is homogeneous (easier to agree on price), and industry is highly concentrated, so we have to worry about this industry achieving oligopoly result (exchange of information will allow for the last needed step: transparency): this makes the exchange alone sufficient to trigger illegality because it is an important piece of the oligopoly puzzle. This is the Pro-P interpretation of Douglas’s use of per se language in container: when industry is structurally conducive to oligopoly (highly concentrated, inelastic, etc.) then price exchange will be conducive to price fixing abuse / coordination and this will be per se unlawful (P must not prove anything further) 2. Pro-D interpretation: P must still prove that prices are supercompetitive: that is that exchange of information had the effect of leading to high prices 6. United States v. U.S. Gypsum (1978) i. Brief snippet just reiterates that exchange of price information alone is not a per se violation. Structure of the industry matters too (cites Container for this) 7. Todd v. Exxon (2d Cir. 2001) i. Discusses the cases above if want more information: exchange of information is not illegal per se but given the market conditions the court held that P’s claim could survive a 12(b)(6) motion to dismiss 2. GROUP BOYCOTTS AND RELATED CONDUCT 1. CLASSIC BOYCOTTS (make up reading if time) 1. These cases are treated as per se cases (that is undisputed): agreement to boycott a competitor is per se illegal 2. Fashion Originators’ Guild v. FTC i. The Fashion Originators’ Guild of America (FOGA) create designs for clothing. They are trying to keep out competitors who are copying their designs. So the target of FOGA is the bad manufacturers. They created an association among themselves with the aim of keeping the copiers out of certain retail stores. They refuse to deal with retailers who sell the knock-off goods. ii. Court rejects reasonableness, effect, and market power defenses asserted by FOGA: this is per se illegal under § 1 iii. Hypo based on case: Suppose we have Ralph Lauren as a manufacturerdefendant and Bloomingdales is one of the retailers. P would have to show that absent an agreement, RL would deal with the retailer. If you’re the defendant, you say that it is my individual interest to act as I am acting. Rule only prohibits agreement not the refusal to deal 3. Klor’s v. Broadway Hale i. Complaint alleges a “hub and spoke” conspiracy. Appellate court assumes for purposes of appeal that manufacturer agreed among themselves and with Broadway Hale to exclude Klor’s. This is another per se case because it is a horizontal agreement to exclude. If P filed the case as a vertical agreement case between BH and manufacturers, P 18

would have to show that the vertical agreements are anti-competitive— that consumers are worse off because these deals are anti-competitive. This shows why the plaintiff brought the case the way he did. The advantage of the per se rule is that the plaintiff does not need to show an adverse effect. We simply assume it. 4. NYNEX v. Discon i. Agreement by AT&T and NYNEX not to deal with other companies. Case categorizes FOGA and Klor’s as per se cases. Held that the boycott rule does not apply because there is no ganging up, no horizontal agreement here. 2. JOINT VENTURE BOYCOTTS 1. As general rule, joint ventures should be free to refuse to deal (i.e. they should be treated differently than agreements between competitors). The impetus behind the per se rule is bar against unlawful agreement; here JVs cannot be required to make up their own minds because it is a single entity like a league; decisions on participation have to be made jointly or it is not a JV. JV needs ability to make collective decisions to exist. JV also needs the ability to only allow some people to participate: if cannot exclude than it becomes an “industry-wide” JV 2. United States v. Terminal R.R. (1912) i. 24 Railroads converge at E and W bank of Mississippi near St. Louis. Association formed only allowing members to use terminals. ii. Court picks up this default rule: “in ordinary circumstances the parties may lawfully combine . . . ” iii. However, court distinguishes the case because the railroad is an “essential facility” / natural monopoly: participation is essential for effective competition here  special rules. Railroad must let anyone in if willing to comply with the same rules as everyone else, you have to be admitted. Basically a JV that makes it impossible for others to compete is unlawful if don’t allow others in on non-discriminatory terms iv. Terminal Railroad only applies: 1. If there is an essential facility / natural monopoly 2. Does not say everyone must be admitted, but everyone must be permitted to get in based on reasonable non-discriminatory terms v. Potential problem: what if companies risk and invest to form the essential facility? Does or should the case apply? 1. Ex: USAir and NWA sense Ithaca will become Silicon Valley of East so invest $150 million each to build modern international airport. They are right and Delta wants to come in citing Terminal RR argument (“you must admit me on nondiscriminatory terms”). I will pay you $100 million so we all have equal payment. Not really fair to USAir and NWA because they gambled / took a risk and won, if it had failed they couldn’t have sued Delta. No obligation to let the free rider in 3. United States v. Associated Press (1945) i. Publishers of more than 1200 newspapers are members of the Associated Press. AP members join JV and get AP news stories to run in their papers. In exchange, members give stories about their region to the AP. AP bylaws allow member to block the membership of nonmembers. ii. Court applies this essential facility doctrine to the AP. The rule that allows members to veto entry by non-members is no good. 19

iii. Hypo: if Cornell Daily Sun wants AP news does it say they must be admitted on non-discriminatory terms? Does it say the CLS Tower should be? No, rule is that AP wouldn’t allow people in because members had veto power, this is problematic, but everyone does NOT have to be admitted but cannot be denied access because competitors veto / say no. 4. Overview of the law so far: i. If not JV, boycott is per se unlawful ii. If JV, generally laissez faire iii. If JV and essential facility then must be admitted on non-discriminatory terms 5. Northwest Wholesale v. Pacific Stationary (1985) i. Very bad opinion: JV expels a member without procedural process. Holding: P seeking application of per se rule needs to make threshold determination of “market power.” Basically he is saying that P must show whether this thing is actually an essential facility: this statement is weird because market power, purpose, and effect are irrelevant in per se cases ii. What does Brennan mean by market power? 1. This does not apply to other cases we have studied, only to legitimate JV 2. In cases where P wants per se rule, must find market power, if P doesn’t then Rule of Reason will apply to activities of this legitimate JV (P can still win if she establishes harm to competition under R of R). If P does prove market power, however, will not have to prove any anti-competitive effect iii. Case does not go further than Terminal Railroad, it just means that ifcan only kick someone out if they have valid reasons (i.e. if they don’t pay dues they can be kicked out) 6. SCFC v. Visa (Third Circuit) i. VISA and Sears /Discover case. In the first case, Sears which had a Discover card wanted to issue VISA cards (theory was that using network of Sears stores, they could cover the country with VISA cards). Government wants to apply per se rule. VISA says that thousands of banks issue cards, what possible difference could adding one more bank make for competition? Sears thought they would make a big difference via achieving economies of scale. Court said no, there are thousands of competitors, losing one will not matter. Second case, one DOJ won and AMEX is bringing (both Discover and AMEX wanted some of the big banks in the VISA system to issue AMEX cards). Up until now, AMEX issued their own cards. Court said this is basically a boycott: rule that VISA banks cannot deal with AMEX is essential a JV boycott with market power ii. SCFC claims that bylaw 2.06 represents a concerted refusal to deal in restrain of trade. The bylaw says that visa shall not accept for membership any applicant bank which issues Discover, Amex, or other competitor cards. Sears owns a bank which issues a Sears cards. They want to issue a Visa card. Visa says no. iii. Rule of Reason says that only arrangements with anticompetitive consequences exceeding their legitimate business interests are forbidden. 20

3. EFFORTS TO INFLUENCE GOVERNMENT ACTION 1. Eastern R.R. v. Noerr (1961) i. Railroads trying to get the government to ban extra-long trailers because the trucks pose competition to railroad. P cannot sue states which have immunity, so P-truckers have to find some private actor to sue. Back up one step. How did this legislation get passed. Sue the railroads for seeking this legislation that resulted in the ban (here we have private action that  action by the state. ii. Basic problem with suing the railroad for agreeing to lobby = not an agreement in restraint of trade; this is not the kind of agreement that the Sherman Act was designed to prevent (statutory construction). An agreement to lobby is simply not the kind of agreement Sherman was enacted to prohibit. It should not matter, therefore, that lobbying was malicious; motives are irrelevant because this kind of act is not covered by the Sherman Act iii. Court draws distinction between legitimate PR campaign and sham campaign to produce this negative effect (i.e. as long as effects are incidental to genuine effort to achieve government action, they are also protected) 2. California Motor Transport (1972) i. Noerr rule applies to attempts to lobby administrative agencies as well: mere attempt to lobby is protected but here court said that actions not protected when meant to harass. This was a “sham” so illegal. ii. Derives from Noerr (417) may be situations in which publicity campaign is a mere sham directed to hamper business of competitor (i.e. company lobbies for lower rate but doesn’t care about it, wants to obtain process / delay and harm competitor through process). California Motor Transport talks about repetitive baseless claims 3. Allied Tube v. Conduit (1988) i. Makers of steel tubing lobby the National Fire Protection Association (a private, voluntary organization) to not include PVC piping / wiring in the National Electrical Code. PVC is the largest competitor of steel tubing. P is arguing agreement to lobby is unlawful agreement in restraint of trade. D argues that this is the form of lobbying protected by Noerr. P claims intent to be anti-competitive, fraudulent and deceitful conduct, attempt to influence legislature; D says Noerr covers all of these. ii. P wins even though this looks like Noerr should apply because action here seems to be more commercial than political. D are trying to lobby to enact a code that they hope the legislature will adopt; this seems to be look more like a COMMERCIAL BOYCOTT. The Association is not officially the government and may have some commercial / economic interest involved here too. 4. Massachusetts School of Law at Andover v. ABA (3d Cir. 1997) i. Modern application of Noerr: ABA is active in persuading states to accept accreditation requirements to decide who sits for the bar. Mass School of Law gets fewer application because not accredited. Can they sue? NO because harm they are seeking to remedy is harm that is direct result of state action ii. Harm of stigma (i.e. they can take the bar but no one will hire graduates)? This is a completely incidental effect to the state action 21

5. Professional Real Estate v. Columbia Pictures (The Modern Sham Exception) i. This addresses two questions: 1) Can the filing of a single law suit constitute a sham? Yes, this can be inferred from the fact that Justice Thomas never mentions this. 2) What constitutes a sham? What is our definition? 1. Hypo of executive going to patent lawyer to file the infringement case and lawyer says, I don’t think you have a good case, probably won’t win and executive doesn’t care. What happens? Subjective intent is second prong. This is not enough to be a sham. Concept of sham suggests it should be based upon subjective intent, but Thomas says this is not the only requirement 2. First prong of test = objective: litigation must be objectively baseless (this hot document will not be enough) 1. Flew in the face of a lot of lower court opinions (i.e. Posner who applied a cost-benefit test to whether P would sue otherwise): Could mean merely that P is unsuccessful (clearly that cannot be enough), could mean that P loses on motion for summary judgment, could mean that P loses on motion to dismiss. Thomas: means lawyers have probable cause or reason to believe that there was a chance the case would win (no reasonable litigant could possibly expect success on the merits); in effect, would the lawyer who filed the case be open to sanctions under Rule 11 for filing a frivolous law suit (sounds like a D friendly test a la Rule 11) 3. Thomas has in mind a two-part test: objective reasonableness is only the first prong; Prong 2: suit must ALSO be subjectively baseless (need the hot document as well) 6. Columbia v. Omni Advertising (Limitation on the Fraud Exception) i. P tries to advance a “conspiracy exception” (i.e. didn’t lie, they conspired with the government). Scalia says no, there is no conspiracy exception. Scalia’s reasoning in part is one of causation: legislature goes into session and out comes legislation (how do you really know what caused that outcome? Would they have passed the same law even if they weren’t bribed?) ii. Question left unresolved: does the no conspiracy exception apply broadly or just to the legislature? What if you bribe a judge or an agency? iii. Unlike sham exception, in fraud exception, parties genuinely want the government to act. But to get the government to act, they need to use fraud and deceit in lobbying the legislature iv. Noerr said that fraud and deception in persuading Congress to act, did not change the outcome (logic, Sherman Act not there to regulate Capitol Hill) II. VERTICAL RESTRAINTS 1. Vertical agreements generally: manufacturer / dealer, etc. 2. INTRABRAND RESTRAINTS 1. RESALE PRICE MAINTENANCE 1. Most scrutinized form of vertical agreement (involves price) (i.e. SONY says to 22

Best Buy, if you want to sell my TV, cannot sell it for less than $400 = maximum RPM) 2. Economics of RPM i. Economics dictates that Per se rules should not be applied to vertical agreements on price: manufacturers and dealers have legitimate business reasons to agree; also there is no aggregation of market power with a vertical restraint. ii. Unfortunately the court does not follow this approach. This is because of history. When you get to end of these cases will see that no P will ever succeed on vertical price fixing claim. But this is not because they undid the per se rule but because of evidentiary reasons iii. Second general observation: in the absence of any legal prohibition, we would expect many horizontal agreements on price (competitors do better in cartels) but not vertical ones: no economic incentive to engage in RPM 1. Illustration: General Mills makes Rice Krispies and wholesale price is $2 per box. Retail market is reasonably competitive. This means that retail - $3 box. Suppose dealers come to you and say you give us an RPM for $4 so we can make more money. General Mills would not agree because this might reduce demand compared to other cereals (more charge, less people buy), this won’t increase # sales and might reduce it; nothing in it for manufacturer 2. Only way GM agrees to this is if they think that happy dealers  more sales: economist goes to buy bed at store but goes to catalog and orders it from there this might be an argument for RPM: reward the store that engages in activities that  demand for product but for this to work: boost to sales has to be so large that it overcomes higher retail margin iv. How RPM can hurt consumers 1. Scenario #1: Dealers gang up on manufacturers and each refuse to deal / try to coerce manufacturer to impose RPM to fix prices; this is anticompetitive but shouldn’t need a separate policing rule because threatened boycott would be itself unlawful under § 1 2. Scenario #2: Suppose Sony and Samsung decide to form a cartel. They meet in a hotel and decide to fix price at $300 and this will result usually in retail price of $400. But Sony and Samsung both worry about cheating and undercutting cartel. To ensure against cheating, Sony and Samsung also agree to impose RPM on dealers so that they cannot charge less than $400 on retail. This prevents cartel members because they have no incentive to secretly cut prices since retailer cannot pass on cost to consumers so won’t be sales boost 3. Dr. Miles v. John Park i. Tortious interference with K action brought by Miles vs. Park for going to legitimate wholesalers and buying Miles’ products and then selling them to discount retailers who sell at lower price. Miles is pissed because he had K with wholesalers saying that if you sell my products you cannot sell them to discount retailers. Park’s defends saying that Miles’s K are invalid because it violates § 1 of antitrust laws. ii. Main holding: Court talks about a couple basic principles but the words 23

per se do not appear in the opinion; however, it has all the hallmarks of a per se case (no discussion of market power, Miles’s reasons for setting price, etc.) iii. Big rationale: ancient doctrine of restraint on alienation (i.e. once pass title, cannot impose conditions on resale / alienation of new owner; even under common law, these were invalid) iv. Rationale #2: This is just like a dealer’s cartel. No question that when dealers engage in cartel to fix retail price, conduct is per se illegal. Court is saying: we are getting the same result we would get in hotel room, since economic effects are the same, the law ought to be the same as well (should be per se illegal for manufacturer to dictate from above). But this is just wrong economically 4. United States v. Colgate i. Colgate has mandatory retail price: will not sell to dealers who charge < $2 tube. Evidence is that most or all dealers felt they didn’t have any choice so they followed this policy ii. If Colgate had announced a policy and others follow the $2 price is probably a contract but lawyer did not allege an agreement in the complaint: court says that there is no agreement so it cannot be under § 1, D wins. Some people interpret Colgate as being a technicality iii. But there seems to be a substantive issue lurking as well: “The Act does not restrict the long-recognized right of trader or manufacturer engaged in an entirely private business, freely to extend his own independent discretion as to parties with whom he will deal; and, of course, he may announce in advance the circumstances under which he will refuse to sell” iv. Result exhibits a tension between K approach and long-standing right of manufacturer v. Think about the difficulty of reading Dr. Miles counseling in light of Colgate: there is a per se rule against RPM but Colgate seems to say that you can refuse to deal with discount drug stores and announce it: Rule seems to be: can have a policy, can announce it, if you terminate the one or two dealers that don’t comply, that is OK but problems start creeping up (most likely P in RPM case will be a terminated dealer who sues for treble damages when they may have been terminated for other reasons) vi. Say do my tour of duty and observe a dealer charging $1.95 which is under the $2 policy. Don’t really want to terminate dealer. Go and explain to dealer what policy is and make sure they understand it. What is your worst fear? Eckerd says we “Agree”; there is a practical consideration, this agreement may take you out of Colgate and into Dr. Miles (longstanding right now becomes a felony) vii. Another oddity in light of Colgate: starting in 1937 Congress takes action and passes a bizarre law which says that RPM is still per se unlawful under federal antitrust law, but if an individual state wants to allow RPM in its state, it can pass “Fair Trade” legislation; and if a state authorizes RPM in its state, this preempts federal antitrust law. Most states sign on: so from 1937-1974, there was a lot of RPM. In 1974, Congress repeals enabling acts and now RPM is now unlawful; repealed because of inflation 5. Albrecht v. Herald i. Case involved maximum RPM instead of minimum RPM. Narrow 24

interpretation of Colgate: court finds agreement. Newspaper told independent distributors, each with an exclusive territory, that they would be terminated if their delivered prices for the paper exceeded a suggested maximum. When the maximum was exceeded, the newspaper informed subscribers that it would provide the paper directly itself for less. ii. Hypo based on Albrecht: NY Times comes to Ithaca and appoints Newspaper Delivery Service the only distributor in Ithaca. If NYT does this, it has to worry about NDS jacking up the price because they have a monopoly. One way to handle this is give them exclusive distributorship but capping retail price. This could not possibly be bad for consumers (fixing maximum to hold down) iii. The court has per se on its brain and so court in Albrecht says that maximum RPM like minimum is restraint on alienation and is also per se unlawful (court has changed its stance on this. 2. NONPRICE VERTICAL RESTRAINTS 1. Most common non-price vertical restraints = exclusive territories. These make sense for some products like cars (only need one dealer) but won’t for other things (i.e. toothpaste) Reason: no intrabrand competition 2. *Like RPM: exclusive territories = designed to eliminate intrabrand competition. Purpose is trying to avoid free rider problem: product will be better-promoted if one dealer knows he’ll get all the benefits of promotion 3. Early cases: i. White Motor (1963): Government brings case seeking a per se rule: SC says no, we don’t know enough about these restraints to say that they are always anti-competitive; Justice Douglas talked about potential of the free rider problem as a justification. Justice Clark dissented and said that doctrine of restraint on alienation should govern here, so per se rule should apply ii. Schwinn (1967): (1) Consignment is OK; (2) Sale is per se unlawful; Posner argued this in SC for DOJ and case comes up with a bizarre analysis and conclusion. Some bicycles were sold on consignment and some were sold to the dealers. Bizarrely the court talks about good economic reasons for not wanting a per se rule, but to allow freedom where manufacturer has parted title, would violate ancient rule against restraints on alienation (result: no intrabrand competition) 1. Case  Bizarre rule: if bicycles sold on consignment, restraints are OK; if title parted, than these are unlawful (we would like to be flexible but we are bound by this ancient doctrine not to be) 4. Continental v. GTE Sylvania (reversal of swin) i. Sylvania does not involve exclusive territories but a location clause: “We will give you license to sell our product in this one store. There could be other dealers in the same location, but we’re giving you license to sell TVs in this one store.” This is more innocuous economically, but it is still a restraint on alienation and the doctrine of Schwinn would apply ii. D game plan: mount a defense saying that exclusive territories unlawful when no consignment, but these vertical restraints don’t involve exclusive territories: these are different and should get rule of reason treatment iii. Strange things happen: go into courtroom to see who is going to be trial 25

judge and former justice Tom Clark (Mr. restraint on alienation himself). Unsurprisingly he says that these things are per se unlawful iv. En Banc court of appeals reverses picking up the theme of the defense that these are more innocuous v. SC gets case and takes an interesting approach: Court says not persuaded that location clauses and exclusive territories are economically different (that is just wrong). Court says this case is no different if restraint of alienation governs vi. Court ultimatey says that we have to get rid of the consignment / resale distinction: either we will say that these should always be per se unlawful, or allow them to analyze them under the rule of reason (goes through some of economices of chicargo school) vii. On remand under rule of reason the court said that because D had < 5% of market there is no way this could have an anti-competitive effect (Cf. Bork in Rothery) Even if it is anticompetitive, if the market share is too small, it cant hurt consumers. On the other hand, it solves the free-rider-problem. (chicargo-school) (that means: restrictions make the market more competative, because the dealers do a better job and consumers have advantages) But: Where is the limit of a “low market share”? Less than 20% or less than 5%? viii. NOTE: this case does not effect RPM and Dr. Miles: vertical price restraints are per se unlawful even if non-vertical restraints are not despite economics Post 1977 RPM
Per se unlawful (but turned over in 2001)

Non-Price Vertical restraints
Per se legal

3. MODERN CASES 1. Monsanto v. Spray-Rite i. Case brought by terminated dealer under § 1. Alleged illegal agreement is between Monsanto and other distributors to set resale prices. “If you sell at price X, you can be ad dealer, if not you’re terminated.” P alleges price agreement to get per se treatment. Case comes to SC on D’s motion for directed verdict: bizarre thing that is that P wins the case but every time it is cited in the future, it will be by D ii. Problem: Was there a RPM agreement? Case is about evidence necessary to support agreement. P argues that evidence of 1) complaints about low prices and 2) proof of termination following competitor complaints should be sufficient to support an inference of concerted action. But court does not adopt this it proves Monsanto’s conduct but this does NOT prove that other dealers agreed with Monsanto to prices and under Colgate a unilateral policy alone is legal. The court says that it would expect good dealers to complain about price cutters, it would expect Monsanto to terminate them: this could be Monsanto carrying out its own stated policy (elevates Colgate to new heights). iii. Court holds that agreement means showing that distributor communicated its acquiescence and that this was sought by the manufacturer. 26

iv. Defense lawyer likes Monsanto: can set policy, can get complaints from other dealers and act on them you just cannot get verbal agreement; not that hard to do: this is why P doesn’t win in RPM cases any more after Monsanto 2. Business Electronics v. Sharp i. Sharp takes Monsanto one step further: there is clear evidence of agreement to terminate from manufacturer. But this doesn’t work because still doesn’t show that good dealers agreed to be good dealers: they might have done it for fear of termination. Scalia holds that P must show direct effect of the agreement on specific prices to win 3. State Oil v. Khan i. Involves maximum RPM (already read Albrecht which said that max RPM is per se unlawful under restraint on alienation theory) ii. Court reverses Albrecht in Khan: economics tells us this cannot be bad for consumers; especially not per se bad for consumers (i.e. not always or nearly always bad for consumers) iii. Maximum RPM will be pretty rare; especially because manufacturer will usually not have enough outlets to overcharge consumers iv. Technically court only says maximum RPM is subject to Rule of Reason not that it is per se unlawful 3. INTERBRAND RESTRAINTS 1. EXCLUSIVE DEALING ARRANGEMENTS 1. Different from intrabrand restraints i. Intrabrand restraints (i.e. Sylvania telling its dealers where it can distribute its televisions) effect directly only the dealers of a particular brand. This restricts intrabrand competition but purpose of manufacturer is promote interbrand competition (i.e. make Sylvania better in consumers’ minds relative to other TVs) ii. Exclusive dealing similarly imposes restrictions on dealers (or purchasers) (i.e. we will sell you planes but you will not buy or carry the products of any competitors). iii. Economics: Exclusive dealing eliminates freedom of dealers. This may affect competition because consumers will not have the full panoply of options, especially if suppliers make deals with other stores in the area. This is why interbrand competition is hampered iv. Whether this is harmful depends on market share and “the degree of foreclosure,” to what extent are other dealers locked up. P also wants to define smaller markets: in certain cities all dealers are locked up 2. Standard Fashion v. Magrane Hudson i. Standard Fashion is locking up a lot of the dealers: this will make it very difficult for competing manufacturers to have outlets for their goods. This case technically is brought under § 3 of Clayton Act; for most cases, § 3 of Clayton Act is coextensive with § 1 of Sherman Act and claim can be brought under either provision ii. Court suggests that 40% of dealerships in country are locked up. This might be a sufficient “degree of foreclosure” iii. Hypo: Hay is a competing manufacturer of patterns. Suppose that in a given area all of the dealers have exclusive dealing arrangements. Nationwide 90% have exclusive dealing arrangements. Need to explain that vertical integration is impractical: expensive to open up own store; stores also carry retail goods. Also could justify activity based on 27

competition for the contracts iv. In short Standard Fashions opinion are reference to a lot of business options that need to be addressed before mounting this sort of claim 3. Tampa Electric v. Nashville Coal i. Exclusive purchasing agreement as opposed to exclusive dealership because TE is going to use coal not sell it ii. Court does not and never has adopted per se rule here because not a restraint on alienation iii. How should court figure out whether these arrangements are anticompetitive or not? Court wants to know something about the percentage of market foreclosed. Suppose TE is the dominant power company in Florida. TE accounts for 100% of all coal that will be consumed in FL. This is not enough for market definition because suppliers sell to customers in other areas (alleged victim of this arrangement is the supplier) iv. P is TE suing to enforce K. D-Nashville Coal wants to get out of it because it is a bad deal (long-term sale K and price has gone up) and is using antitrust to try to weasel out v. Principle victims would be other suppliers to coal: this is analogous to Standard Fashion (denies other coal manufacturers an outlet for their coal) 4. FTC v. Brown Shoe i. Brown Shoe (D) bought Kinney Shoe. D’s retail locations are “franchises” not owned by D. Both were manufacturers and retailers of shoes. D was the fourth largest manufacturer (4%) Kinnery was twelfth largest (.5%). D was the third largest retailer (6%); Kinney was eighth (2%). The government (P) sought to enjoin the acquisition. District Court finds trends towards mergers in the industry – fewer and fewer manufacturers. District Court finds that the merger violates section 7 of the Clayton Act. ii. Issues: Do men’s, women’s, and children’s shoes constitute relevant product markets? YES iii. Did this acquisition tend to substantially lessen competition in the retail product markets because of the supply relationship between the parties? Yes. iv. Case is more relevant to merger context below v. Small point: § 5 of FTC goes beyond §§ 1-2 of Sherman Act (may not have to show adverse effect on competition under § 5 where you would have to under Sherman); Relevance is limited: no private right of action under FTC Act (only matters if FTC is P) 5. U.S. Healthcare v. Healthsource (1st Cir.) i. HMOs signed doctors (Primary care Physicians): PCPs recommend specialists (PCPs = very important players in system). HMO signed doctors to K where gave them higher payment per month for exclusive dealing (more money if you do not sign with other HMOs). ii. Court holds that exclusive dealing K not per se unlawful, have to take shortcuts to decide whether unreasonable. Court goes with percentages. Court says that 25% of PCPs foreclosed and this leaves 75% of physicians available to rest of HMOs. You probably cannot look at the number in isolation. Requires a little more analysis than the significance. iii. Court also emphasizes competition for the contract. Court says: even if 28

it is 75%, they are all terminable on short notice. Why can’t P come into NH, go to physicians under K and say “I’m new guy, I see you have K but it is terminable on 30 days notice, so give notice now that you want to go non-exclusive” iv. Case illustrates chicken and egg problem: until newcomer has a lot of subscribers, trying to compete for K will be very difficult (don’t have much to offer); exclusive dealing K sort of reinforces the incumbent’s market power 6. Paddock Publications v. Chicago Tribune (7th Cir.) i. Easterbrook: newspapers need syndication in order to compete. Small newspaper is claiming disadvantage because it does not get to carry certain comics, columns, etc. which go to larger paper. Easterbrook reasoning: these are short-term K, why not compete for K? This doesn’t seem like a viable option for the smaller paper (circulation smaller, etc.) and only way to compete effectively is to share ii. But now you can sort of see why no per se ban on exclusive distributor contracts, more competition if compete over K, etc. iii. There are many reasons why we don’t want per se rule against exclusive dealing. There may be pro-competitive justifications. This puts courts in awkward position of trying to figure out how to separate reasonable restraints from unreasonable ones. 7. Hay’s attempt to clean up exclusive dealing law: Ask first, can other parties really compete for the K? If not, then how “essential” is the distributed product 2. TYING ARRANGEMENTS 1. Definition: Have 2 products X and Y: X is tying product and Y is tied product. Idea: If you want to buy my X, you must also buy Y from me i. In US words FROM ME are important: only tying if require buying the product from the same entity; no tie if K directs to buy the product from another source 1. Ex: if want to take out ad in morning paper, must also take out ad in evening paper, must get gravestone with plot, can get condo but must sign maintenance agreement with me, ’ll license Windows but must take IE as well, NFL season tickets and preseason games as well, etc. ii. In principle these are all agreements so § 1 of Sherman Act and § 3 Clayton Act cover; also often covered by § 2 (Microsoft case); No legitimate purpose 2. Economic theory of tying (important) i. Hypo: Apartments in Collegetown. Assume that apartments are essentially fungible and assume that this is a highly competitive market. Suppose that going market price is $1000 / 1br apartment. One of owners (Jason Fane). Fane is not only landlord but has relative in apartment cleaning business. He says, my apartment is as good as anyone else’s but if you want to rent you must subscribe to my brother’s cleaning service for $200 / month. Competitive price is $100 / month. If buy apartment from Fane, then pay an extra $100 for cleaning service. Court says that consumers wind up overpaying because tie-in is being used to extract a monopoly profit. But this won’t work. People won’t rent from Fane because now you pay $1200 for package when you could get the same value for $1100 elsewhere. Jason Fane says, OK I understand this but I really want to keep my brother employed. Can 29

make this work by dropping rent to $900. ii. Moral of the story: if you do not have market power in the tying product (i.e. if the tying product is competitive than a tie-in cannot be used to extract monopoly profits in tied product). So consumers cannot be victims if no market power. Victims are only a small part of cleaning service that is locked out iii. New hypo: now Fane is a monopolist. Only landlord in Ithaca. He charges a monopoly price $1500 (profit-maximizing monopoly price for 1 bedroom profit in Ithaca). Assume cleaning business is still competitive. Even if he charges $200 for cleaning service he cannot earn monopoly profits on both. A consumer is now paying $1700 for package. Without tie-in would pay $1600. Enough people will obtain substitute goods that this will not be a profitable strategy 1. Important proposition: even when you have a monopoly, the tiein cannot be used to earn additional monopoly profits 2. So the real victims of ties are other competitors 3. International Salt v. United States i. International salt says: if you want to use / rent my salt machinery, you must buy your sale from me. IS has patents on many salt machines and also produces salt. ii. There is no danger that IS can use monopoly on machines to achieve a monopoly in salt so tie-ins won’t be tried under § 2, usually will be § 1 cases iii. Court deals with the tying arrangement as PRICE FIXING and grants SJ for the government: “No genuine issue. Price fixing is unreasonable per se and unreasonable to foreclose competitors from any substantial market” (per se language used by the court) iv. Court is saying that competitors did not have fair shot at $500k of salt that International Salt sold. They were foreclosed from competing here. v. Three criteria for unlawful tie-ins: 1) Market power in tying product, 2) Two separate products, 3) Substantial dollar foreclosure in tied market 1. If these criteria are met, most courts say that tie-ins are per se unlawful. 2. Rationale: Patent gives license to earn monopoly profits on not only machine but tied product. Can charge whatever you want to charge for tied product but charging more for tying product gets undeserved monopoly prices (this theory is economically suspect, see above) vi. Per se rule applied despite fact that IS might have legitimate business reason: People were leasing their machines. Crappy rock salt could screw up the machines 1. Similar Hypo: Mercedes Benz says if you put in any spark plugs, must use factory authorized spark plugs. MB might do this if it’s their car because under warranty or because it has reputation for quality to maintain (people will blame Mercedes for break down) but these business justifications don’t fly once we saying tying is per se illegal vii. Market power is a condition but P does not have to prove an anticompetitive effect 4. Requirements for a tie: i. Two separate(!) products (ex: a pair of shoes) 30

ii. Market power in tying product 1. May be established by a patent (International Salt) 2. May be established by Fact of Time iii. Not insubstantial dollar volume foreclosed in commerce in tied product market (This last requirement is trivial: once some volume foreclosed = substantial) → These requirements are changing during some cases: 5. Jefferson Parish Hospital v. Hyde i. Hospital is selling surgical services and basically saying: if you want to have surgery here, need to buy anesthesia from my anesthesia department. P convinces court that this is a tie ii. Court cares about how the monopoly product is exploited: “Thus law draws distinction between exploiting monopoly power on tying product and restraining competition on the tied product” iii. First reaction might be: why are there two products? Everyone who has surgery has anesthesia, isn’t this one product? One product or two? Court says two because consumers may have option of picking own anesthesiologist. This is the test: flows from concern about foreclosing competitors. It is two products if in the absence of the tie-in a substantial number of people would want to buy the anesthesia from someone else iv. Prong #2: Market Power 1. Hypo: Tompkins County Hospital is the only hospital in Tompkins County. Assume that 90% of patients in Tompkins County hospital reside in Tompkins County. This does not show monopoly, just that just shows their clientele is primarily from Tompkins (Little in from Outside) (LIFO). Need LOFI: Little Out from Inside to show market power (do people who live in Tompkins County all go to Tompkins County hospital?). This is the situation in Jefferson Parish: Court holds that if Jefferson Parish has < or = to 30% of clientele, they do not have market power; the 30% number will be used a lot v. Since the criteria are satisfied the tie is per se unlawful vi. Facially this is really an exclusive purchasing contract: hospital agrees with Roux and we will have you be our only anesthesiologist but P labels this as a tying arrangement to get per se treatment vii. Could make out exclusive dealing argument: Victims = competing anesthesiologists. Market would be defined by medical school graduates with anesthesiology specialty, they can go anywhere. Here they are only being kept out of one hospital. This case is a loser 6. Illinois Tool Works i. Case went up to SC on very limited proposition that a patent creates a presumption of market power. Course says this is not so. ii. Test for market power: as a result of this patent am I in a position to charge substantially higher prices; Court says no presumption: P must prove that patent confers significant market power 7. Microsoft (DC Cir.) (The Tying Issue) i. Case brought under § 1 and § 2 (= (1) Is there a monopoly position; (2) monopolized) but involved same basic conduct: Microsoft trying to kill off Netscape. At one time Netscape had 90% of usage of browsers. Microsoft tried to suppress Netscape because Netscape was threat to its dominance in Operating System 31

ii. District Judge, Judge Jackson issues an opinion almost entirely favorable to government including tying issue (Microsoft tied Internet Explorer to Windows) iii. DC Circuit hears the case en banc instead of 3 judge panel. iv. Tie: Tying of Windows OS to Internet Explorer: if you want to use my operating system, must take IE. Not a traditional tying arrangement. Some Ks with OEMs (i.e. Dell) to install the program and leave it in, Microsoft also was engaged in a technological tie. OS is integrated into a single package and if you try to take IE out, the system will crash. System works better with IE vs. Netscape. Also, most computer manufacturers will not support two browsers (i.e. Dell’s help desk will not give assistance if the new browser doesn’t work) v. As a result, Netscape’s market share drops from 90% to almost nothing vi. DC Circuit: a company can defend based on efficiencies of a tie under Jefferson Parish test under the two-products prong of the test: the efficiencies are so great that no rational consumer will want to buy the products separately vii. Court also proposes using the Rule of Reason because efficiencies are not allowed under per se rule and test is backward looking, should instead ask about what will happen in the future. Per se rule is inappropriate in software cases viii. Case also shows that antitrust may not work in high tech industry because remedy may be dead by time case is decided IV.MONOPOLY 1. § 2: “it is illegal to monopolize and to attempt to monopolize” 2. MARKET DEFINITION AND THE CONCEPT OF MONOPOLOZING CONDUCT – Restraints of market through transaction cost (tarifs; transportation cost etc.) → In reality international competitors are only of marginal importance (regional restraints of markets) → local markets are very important – that leads to the determination of a market share on this market: Is 90% sufficient? The other competitors of 10% can only with high efforts raise their output (other realistic restraints are although relevant); so the relative market share can be very important; This effect is stronger for high market shares. Its unlikly to do so much harm (ex: not given for market shares of 40%) 1. United States v. Alcoa 1. This is by the Second Circuit Court of Appeals and yet it is treated like a Supreme Court case because 4 of 9 SCOTUS justices recuse themselves and 6 ordinarily required for a quorum, Congress sent to 2d Cir. Opinion written by Learned Hand: “litigant’s wishing well” into which anyone can peer and find propositions they like 2. Two issues: 1) Does Alcoa have monopoly power? 2) Has Alcoa illegally monopolized? i. Part of this opinion wants to hold these out as two separate questions: market structure component and a conduct component, but other parts of the opinion seem to collapse these into one and make it a status thing (monopoly power = illegal) 3. Monopoly Power: literally a “single seller”; means power to sell at any price you want to. To do this must define the market. Means asking 1) Are there other 32

sellers of the identical or nearly identical products? Alcoa is the only producer of virgin aluminum. 2) Are there other alternatives for the consumer which are close substitutes? Candidates in Alcoa: secondary / recycled aluminum, importers of virgin aluminum. i. Hypo: Suppose West is only publisher of textbooks. In a given year 50% of students buy secondhand textbooks instead of from West. Should this be considered in determining whether West has monopoly power if only sell 50% of books in a given year (monopoly power usually defined around 70% or 80%). This is not a trivial question but you can imagine these will usually be excluded because monopolist can still manipulate this market ii. The issue of the foreign aluminum: Foreign aluminum inherently will have importing / transportation costs (i.e. cement), characteristics (could be different in kind), and could be more expensive because of trade barriers and tariffs / quotas BUT we don’t need to ask these questions because we DO COMPETE with foreign stuff (whatever these barriers or costs are we know that producers overcome them because 10% of aluminum is imported). This is especially true in Alcoa where aluminum is homogeneous. The foreign producer will have more capacity despite the fact that it is only selling a small market share to U.S., it has potential to produce more and grow; German guy is probably already making more than 10% of U.S. market share and is just selling it elsewhere. He can shift this to U.S. almost overnight if he wants to (Hand recognizes this). This case may be the exception to the rule: this may be where Alcoa has 90% of market they will be “drowned in a sea” of foreign aluminum iii. How much power is monopoly power: Alcoa’s share is 90%; P wants to say that this is close enough; almost as good as having it all. Intuition is this is good enough but where should line be drawn? Normal case: Alcoa has 90% and other domestic manufacturers have 10% of market. 90% is enough because monopoly power is power to impose unreasonably high prices. iv. We know whether they have that power by asking counterfactual: can Alcoa profitably raise prices given its market share. All underlying this monopoly thing is the idea that if my competitors are pretty small today, they’re not going to get huge tomorrow v. Ability to raise prices above current levels cannot be only inquiry because what if current levels are substantially above competitive levels: they already have taken advantage of monopoly power? So court must also look at Alcoa’s profits and see if they are getting monopoly profits now. Alcoa is getting 10% return on equity: that is nothing vi. So Alcoa cannot raise prices any further or would be drowned in a sea of imports but current pricing does not reflect huge profits. This tells us that Alcoa does NOT have monopoly power. Hand should have found this but drops the ball on the final economic step and says they have monopoly power. 4. Has Alcoa illegally monopolized? i. To economist the evil of monopoly is that charge a monopoly premium and harm the consumer. History suggests other concerns behind Sherman Act as well (E.g.: Standard Oil: using great strength to crush smaller competitors: antitrust laws motivated by big companies crushing 33

smaller competitors). 1930s/40s new concern: role of big industrial corporations in Germany / Japan (might threaten democracy)/ If concerns about monopoly are sociopolitical as well as concerns about consumers, maybe monopoly should be a status offense: “bigness is bad.” Hand is in the middle of this cycle of competing thoughts about what our country should look like. 1. This is why Hand says things like non-abuse of monopoly power is not a defense to having monopoly power and “Congress did not condone good and bad trust; not economic motives alone but also because of its indirect social or moral effect” ii. Contemplated defenses: D “May not have achieved monopoly, Defenses: monopoly may have been thrust upon it” iii. May have achieved monopoly by “Superior Skill, foresight, and industry”: Bill Gates defense: my product is so good everyone wants to buy from me iv. Alcoa’s real sin: anticipate demand and made sure they met capacity of supply and demand (this is sensible). If you wade through all this bullshit, that is what Alcoa did. Alcoa seems to quaify for superior skill, foresight, and industry. This is nuts. The social-political philosopher in Hand is clearly winning out here v. The crime of alcoa is to build capacity. Hand wants smaller producers.... 2. United States v. E.I. Du Pont (definition of market is very important) 1. Same monopoly power issue as in Alcoa. SC now gets it wrong for same reason. Court concludes that Du Pont does not have monopoly power when probably do 2. If Court defines relevant market as cellophane, Du Pont has 100%, if wrapping materials, Du Pont has 100%. DOJ argument: we shouldn’t use the broader market because the products are not fungible (i.e. they have different characteristics and different prices) 3. D puts on an economist. Economists have developed a way to address this question: cross-elasticity of demand = % change in quantity of other materials sold / % change in price of cellophane. If ratio is a positive number then it tells us that they are pretty good substitutes. Economist comes in and says I’ve calculated cross-elasticity and it is very high. If Du Pont raises prices of cellophane above current prices, the sales of other wrapping materials would skyrocket. Therefore they do not have monopoly power. (weakness of the concept: at a given price of any product there is a substitution; that could suggest, that there is no monopoly, although there is one = Cellophene trap) 4. Problem here is that this is only half of the formula. Same inquiry as in Alcoa: are current prices already monopoly prices with the other stuff already factored in? How much are they making now? Du Pont is making 35% profit! This is way above the average (Du Pont has a monopoly). 3. The Monopoly Power inquiry synthesized: 1. Can monopolist raise prices above current levels? (define relevant market, answer is likely no) 2. Is current price at a monopoly level? (look at D’s profits) 32% is usually monopoly: average of all industries in DuPont was about 15% 34

4. Eastman Kodak v. Image Technical Services 1. Kodak refuses to sell spare parts to ISO (independent service organizations). Instead, those who buy their copier have to get service from Kodak or licensed service to get parts. 2. P chooses to frame this as a tying case to obtain the advantages of the per se rule (this is kind of a de facto tie, not a literal tie; see to tying above): no K, but if want the parts from me, have to take service from me because won’t sell it to ISOs 3. Framing it as a tying case, issues = 1) Are copy machine parts and service two products? Test: In absence of tie is there significant consumer demand to buy these things separately (YES here); 2) Has a substantial $ volume been foreclosed? YES; 3) Does Kodak have sufficient market power in tying product to use the tie *this is the crucial inquiry 4. P’s argument: Kodak has market power because if you have a broken Kodak copier, there are no substitutes for the Kodak parts (Parts = relevant market). Kodak’s market share is 100% and there is no possibility of new entry because of IP protection 5. Kodak wins on SJ in District Court because court holds that monopoly power = ability to profitably increase prices above the competitive level. Kodak does not have this power because if it raises service costs then people won’t buy the Kodak copier / equipment in the first place since copier costs more over time 6. SC REVERSES this for two reasons: i. This doesn’t mean current price is not unfair. ii. Information costs: Kodak’s argument depends on assumption that consumers do lifestyle pricing and think about cost of parts when buying the equipment (Court says that it is not prepared to assume that this is necessarily the case, this is a jury issue so no SJ) This is no case only as a matter of law. A jury has to find the evidence reasonable... 7. Important: Court did not say Kodak’s argument is wrong, just wrong as a matter of law so this argument is available and can make this lifecycle pricing argument in court 8. Where does this argument work? If mc donalds says, if you wanna do franchising, you have to buy the hamburgers from me. (lock in-effect) The franchisee does think about the additional cost (life cycle cost), so the argument is applicable. 2. PREDATORY PRICING AND OTHER MONOPOLIZING CONDUCT 1. This builds off of Hand’s second inquiry in Alcoa: has the firm taken advantage of its monopoly power. 2. PREDATORY PRICING (“Price war”) ← Very important for exam i. Economics of Predatory Pricing 1. Hypo: Suppose AA charges charging $1000 / ticket & route. Low cost carrier charges $400. Dominant firm undercuts to $200. Other firm leaves and price goes back up to $1000 and stays there for a long time. 2. There is no question that while the $200 price benefited consumers for a brief time, on balance it is bad for consumers because it destroyed the competition that had initially existed. 3. This works because of AA’s reputation for being a predator: if AA succeeds in predatory pricing in one market, then airlines will stay away from AA in other markets and not try to compete ii. What should be rule for PP case? 35

1. Option #1: a price cut is unlawful when it is temporary, has consequence of eliminating competition, and allows dominant firm to restore the monopoly price (Result-based test) 1. Problem is this is a play in 3 or 4 acts: low prices, entrant disappears, prices restored; practical problem with the test: though this is a play in three acts, courts have to decide the case after Act 1 (ex ante) (P is going to bring the case after low prices implemented): only evidence will be the low price 2. Another practical problem: Potential D-Airline needs some guidance as to what they can do: can they drop prices to meet competition? How far can they drop them? D will be discouraged from ever lowering prices 2. Option #2: Use “hot documents” that evince an attempt to PP. Easterbrook talks about these documents in AA Poultry: selectivity problem, P will find 5 or 6 out of 100,000 + pages that might say something else) 3. Option #3: Is D’s price below its cost or not? (Cost-based test) 1. Merit of this as a test: if D is pricing below cost, D is losing money ($100) on every ticket sold this cannot possibly be rational behavior unless this is a scheme to get rid of competitor and recoup costs in long-run 2. This test is a relatively conservative test in the sense that it is underinclusive. Suppose that cost to D is really only $150 so D is not going below its own cost, but at $200 my competitor can’t survive. I could make more profit, but I am foregoing it to get my competitor out. So even a price above cost might be irrational and not profitmaximizing, but this test won’t catch it 3. Big issue here: what constitutes “cost” for purpose of this test? 1. Hypo: Cars: Two kinds of costs: variable costs: labor, raw materials, energy (suppose this is $10k per car). Also are fixed costs: taxes, Rational Yes administration, depreciation (these do not vary 30.000 directly with the number of cars produced) Predatory Yes (suppose fixed costs averaged $10k per car). So Average total cost is $20k per car: $10k variable, $10k fixed Rational No 2. Suppose accountant comes in and says market is 10.000 dried up. We are in a recession. At $20k, won’t Predatory Yes sell any more cars. Economist says, “good news” if we sell $12k per car we can use our full (example based on variable cost of 20.000 and fixe cost capacity. If choice is $20k or $12k. The lawyer of 20.000; Its rational to set price to 30.000 in order to reduce the loss to 10.000) might object: if price below cost and you are a dominant firm, you are violating antitrust laws, but Business person would say that is the furthest thing from my mind. At $12k I sell more cars. Let’s say total overhead costs are $1 million. If charge $20k though save variable costs, still have to pay $1 million in fixed costs. If instead charge 36

$12k, not only cover variable costs but have $2k leftover to contribute to fixed costs. The loss will be a lot lower selling at $12k and producing a lot of cars than suing at $20k and selling no cars. If the rule is that you cannot price below cost, half companies in country would be violating the law. If you lose money, you have to price below cost. 3. Suppose instead price is $9k. Now the red light goes off. Now the economist ought to say, you shouldn’t be doing that because at $9k per car you aren’t even covering variable cost. Losing more money with each cost you sell. You will be better off shutting the doors  Areeda/Turner 4. Areeda / Turner Rule: Predatory pricing is pricing below average variable costs (AVC). This gave courts a way to get rid of a lot of cases on pleadings or on SJ if P doesn’t allege prices below AVC (predatory prices are only condamned if we are sure that its not rational → court has to be convinced its intent is to get a monopoly (but its a very conservative test)) 4. Option #4: No regulation needed 1. Economists say that even if we had no antitrust law dealing with predatory pricing, pricing below cost to eliminate competition won’t happen very much because it won’t be an effective strategy because 1) You need really deep pockets: you are bleeding lots of money on every sale (more than victim is); 2) if you drive victim out of market and raise prices again, nothing prevents victim from coming back. Predatory pricing won’t be very workable because in order for it to be effective there must be a period of payback and this won’t happen very often 2. SC picked this up in Matshushita case: claim that Japanese producers dumped TVs in the U.S. market to gain larger market share in the U.S. Court did a little math and said that flooding for twenty years to get market then would be irrational once discounted to present value 2. United States v. AMR American Airlines (not mentioned in class) i. Allegation: American Airlines is dominant in hub and starts out with high prices. A new low-cost carrier enters. AA responds by cutting prices dramatically and increasing capacity. This blows the business model for new enterer who goes bankrupt or pulls out. Then dominant firm jacks up prices again. If this theory is right, this shows that low prices have not benefited consumers over the long run. P alleges pricing below AVC. ii. Issue: How do you measure “average variable cost” for an airline to apply Areeda/Turner test? iii. How can you possibly measure this? 300 seats already on airline, what are variable cost of one more passenger? Peanuts? 1/20 of flight attendant? Plane by plane? iv. Who is going to deal with this complex question: general purpose 37

District Court judge and a jury of idiots, even dumber than us. Hay goes crazy and draws curves. Courts now trying to get out of this test. 3. A.A. Poultry v. Roseacre Farms (7th Cir.) (not mentioned in class) i. P alleges predation because D sells older eggs below cost. ii. This case is very stupid: of course eggs sold below cost because they were old. Now have to sell at a loss for whatever you can get. D has trivial market share; there is no way D will get an egg monopoly. Case is popular because of Easterbrook’s analysis which is ahead of its time iii. Points Easterbrook makes: 1. Low prices are very good for consumers as a general matter and should not be discouraged 2. Shouldn’t look at intent doctrines (chicken farmers’ hot documents) 3. Shouldn’t start with Areeda / Turner test (price < average variable cost); test isn’t bad but this should not be the first step. First step should be recoupment: only if P passes this test do we look at AVC test. Recoupment test: What is likelihood that D will eventually be able to recoup its first term losses? If it is unlikely, P loses as a matter of law. Recoupment matters because antitrust requires injury to consumers matters under antitrust laws. If no recoupment then no injury to consumers because pay low price in short run and never pay higher prices 4. Likelihood of recoupment can be shown by 1) Big Market Share, 2) Most / All Competitors Eliminated by the scheme; 3) Barriers to Entry 4. Brooke Group v. Brown & Williamson i. Case brought under Robinson-Patman Act as a price discrimination claim. Theory: Brown & Williamson is charging low price for cigarettes to some wholesalers and high price to others. (protect profits of branded cigarrets by trying to raise prices of generical cigarrets by this action) This is unlawful so long as this substantially lessens competition and creates a monopoly. Since entire focus is on low prices and not difference, as a practical matter this is a Sherman Act § 2 predatory pricing case ii. Case goes to jury. Jury comes back with big verdict for P and then trial judge throws it out on JNOV after verdict (judge throws it out because no rational jury could find recoupment) iii. Case is an affirmation of Areeda – Turner rule: court says for prices to be predatory they must be below some measure of cost (price-cost test is one of the appropriate tests) iv. Court holds that in predatory pricing case must show a serious likelihood of recoupment. v. Brown & Williamson not in a monopoly position even though this is a monopolization case (has only 12% of the market). Brown & Williamson has no hope at getting these big players out of the market, they are just trying to bully Ligett into raising its own prices of generic cigarettes; this is not like a big firm trying to squash competition to charge monopoly prices vi. This is stupid application of § 2, but court does it and adopts recoupment test: Have to show that scheme will be successful in allowing D to recoup in long-run what it loses in short-run 38

vii. On these facts, even if B & W scares off Ligett, a price war has broken out with all players involve and everyone lowers prices. This scheme also requires others cooperating in future by not pricing generics aggressively and if pricing structure for branded cigarettes remains in effect; no evidence of conspiracy here, this looks like perfect oligopoly but judge says that I think this will continue. Price war will go on and keep prices lower 5. Confederated Tribes v. Weyerhauser (9th Cir.) i. Oral argument before SC two weeks ago ii. Case involves predatory buying instead of predatory seller. Claim: D is a buyer of lumber. D is buying more lumber than really makes sense and paying more for it so that other buyers drop out. Then when Weyerhaeuser is the only buyer in town, we’ll pay less for the lumber when we are a monopsony iii. Certiorari issue: Should the Court have applied the Brooke recoupment test: does Brooke apply to cases of predatory buying? Hay thinks court will reverse Seller view: a group of sellers iv. Economics of PB: Weyerhauser is not paying more than they need to. have market power too, as well as They are saying that if I limit myself to acquiring 60% of the lumber, I buyers. would only pay $100 / ton. If I really want to buy all the logs so that they have no input, I have to pay $500 / ton. Then I can outbid my Method: Buying a lot for a short while → Price goes up, competitors. So Weyerhauser is buying more than they can justify competitors drops out of market; recouping from sale of the lumber once they are gone, the v. Critical mistakes made by the Court of Appeals in Weyerhauser (Hay): monopsonists sell less for cheap 1. D says that right now, I am offering $500 for timber, the sellers price of timber are happy because they are getting a benefit, more Its no legitimation to say, that the money. C of A says, who cares about sellers of timber, why do group of sellers has only formed we care if they get a good deal? They should care a little, the fact for resisting power on the demand that they benefit in the short-run is a good thing side. 2. Court also said that when they overpay for timber, there is no benefit to consumers (unlike predatory pricing where there is a short-run benefit to consumers). Court gets it wrong here. If Weyerhauser is buying a lot of logs, it will be selling a lot of lumber. This will benefit consumers because W will not be able to sell timber at covering price. Will sell at a loss and consumers will get a benefit. Supply will go up at same time as you’re trying to soak it up. More trees will be cut down should to supply more logs 3. EXCLUSIVE DEALING AND PURCHASING ARRANGEMENTS 1. Cf. How courts deal with this conduct under § 1 above (Tampa Electric, Standard Fashion) 2. § 2 law on exclusive dealing is similar to § 1 law though not identical 3. Ticketmaster v. Tickets.Com (District Court Opinion)(not mentioned in lecture) i. Customers = arenas who buy the services of Ticketmaster and agents. Claim is that Ticketmaster monopolized the contract by signing the dealers to long-term, exclusive dealing contracts. Claim is that longterm K allow Ticketmaster to monopolize the market and prevents competition from smaller firms like P and also others ii. There is something fundamentally wrong with this picture. Madison Square Garden (MSG) signs a long-term exclusive K because it is 39

cheaper than others. So the claim has to be kind of analogous to a predatory pricing claim. MSG is doing this because it is a good deal for them, but once TicketMaster has all clients signed up on long-term deals, then others go out of business and TM becomes the only game in town. Pay-off doesn’t come now but later. iii. But Court says there will be competition for the K because there are no barriers. The next time someone offers K, they will come back. 4. United States v. Dentsply (not mentioned in lecture) i. One of relatively few monopolization cases brought by government during the Bush Administration ii. D starts off with 80% of market in false teeth. Now D says to its distributors: if you want to deal with me, you have to do it on an exclusive basis. There is no active competition: Dentsply starts off with 80% of market, distributor needs Dentsply, so they are coerced into accepting the exclusivity iii. Dentsply’s market power also shows how Dentsply is leveraging that position to get whatever market power they don’t already have iv. Fight was about: there may not be other ways to get to distributor, but there are other ways for false teeth to get to the dentist (i.e. deal directly with the dentist) and this is what the other competitors do. As long as there are other ways of getting to market, Dentsply cannot really use its exclusive dealing to get a monopoly. Mistake: Trial Court admitted that these other ways were far less efficient and more costly than using the distributor but still held for D. 5. LePage’s v. 3M (Third Circuit & Bundled Discounts) (2008) i. Seen as a terrible opinion ii. Procedurally P succeeds at trial, reversed by original Court of Appeals panel (Justice Alito was on that panel). Jury verdict reinstated by Court of Appeals sitting en banc iii. Issue: was there evidence in the record to support the jury’s verdict? iv. Some market definition issues: market = transparent tape / Scotch tape. D has 90% of market for transparent tape. But overall market is more complex: Branded tape: D has 100% and private label tape, P has 80% of that segment (very small part of overall market). D sees sales of private label tape as eating into branded tape so it offers bundled discounts v. Hypo: You are 3M and you want to expand your sales of private label tape. What are ways you could do this? 1. Lower price of private label tape (this could lead to predatory pricing claim) 2. If you want to buy my scotch tape, must also by my private label tape (This could be possibly an unlawful Tying arrangement) 3. If you want to buy supplies from me, you must buy from me exclusively (this could be an exclusive dealing arrangement) vi. P wants tying case; D wants either predatory pricing or if not, exclusive dealing vii. Hypo: suppose ten products and that each customer needs only 1 unit of each product. For 9 of 10 products, 3M has a monopoly, but on the 10th, private label tape, can buy from 3M or someone else. Suppose we know that typical customer might prefer to buy the tenth product from LePages. D says, “If you buy 9 of 10 from me you pay $1 each = 40

$9. If you buy the tenth product from LePages who charges $1, total bill will be $10. If you buy all ten from me, I’ll give you a 5 cent discount on each product $0.95 each. Now your total bill is $9.50. This arrangement forces LePage’s to lower its tape prices to $0.50 or lower to compete. On the one hand, this looks like a tie-in: calling it a tie-in makes it per se unlawful but there is no actual tie or condition. You don’t have to buy all its just a discount if you do viii. Could think of it as an exclusive dealing arrangement, but this is not quite as good from P’s perspective because the per se rule does not apply there. Also no requirement of exclusive dealing ix. Could be PP case (not as good for P): What they are really doing / the effective price after buying the first 9 items is $9 so the effective price of the tape is really only 50 cents and that might be below AVC. x. P in LePage’s argues to the court that this is a new form of § 2 violation. Bundled discounts are unlawful if they have this anti-competitive effect. This case might be overbroad though and it makes commentators nervous. Bundled discounts are common. Are they all unlawful? This leaves things very open-ended xi. Court also clearly erroneously says that Brooke price-cost test applies only when D has a smaller market share but this is not true at all 4. United States v. Microsoft (DC Circuit: same case as above) 1. Microsoft has monopoly in OS for Intel-based computers. Court says that Microsoft monopoly is being kept alive by Application Software (the chickenegg problem: software writers won’t write software for OS with small market share and OS marketers won’t sell unless there is software). One possible threat to Microsoft dominance = NetScape (could be application software that plugs into browser that then plugs into Windows or Linux instead of directly into OS). P alleges that Microsoft tried to kill Netscape via technical tying, Ks with OEM, etc. 2. Trial was phenomenally fast-tracked: six years from complaint to appellate decision is too long for high-tech industry; There is now a commission: Antitrust Modernization Commission: deciding whether § 2 needs to be changed to adapt to the high-tech industry 3. Court endorses idea that market share is a good proxy for market power 4. Exclusionary conduct has to hurt consumers: if it only hurts competitors that is not good enough for it to be unlawful (economics oriented) 5. Useful script for § 2 case: P introduces anticompetitive effect then D must point to pro-competitive justification 6. Design change as way to disadvantage competitors: court says should be skeptical about § 2 claims based only on technological design changes 1. D appeals vs. Jackson’s remedy (break Microsoft up) based on bias and fact that he didn’t hold a remedial hearing: C of A sides with Microsoft on both of these 2. REFUSAL TO DEAL 1. I.e. Decisions by a single firm not to deal with another. Recall Colgate: as general matter a firm has complete discretion to choose the parties as to with which they’ll deal EXCEPT where purpose is to create or maintain a monopoly. 2. Are there circumstances in which a monopolist has a duty to deal? What are the terms of this duty if it exists? 1. Hypo: Suppose Alcoa has monopoly on aluminum ingot and sheet and sells it to fabricators and auto companies. Suppose Alcoa decides it doesn’t want to sell to 41

automobile companies. Interpreting Colgate literally, this does not violate § 2: they have a monopoly on aluminum but this does not help them create or maintain their monopoly (they’re no in downsteam market) 2. Suppose there are 2 auto companies: GM and Ford and Alcoa is only manufacturer of aluminum. What if Alcoa says, I only want to sell to Ford. If Alcoa does this, Ford will wind up with monopoly. Alcoa has not violated § 2 because it is doing nothing to create or maintain a monopoly. Create or maintain a monopoly means “for yourself” 3. Only applies to monopoly who is monopolist in upstream market and is trying to create a monopoly in some downstream market 3. Otter Tail v. United States 1. Otter Tail has monopoly of generation and transfer of power in Midwest (this is happening again in California right now). Otter Tail was also retailer of power as well. Wisconsin wanted to take over retailing. Wanted to condemn Otter Tail at next election and take over facilities and then retail using OT wires and poles. OT basically says, we cannot stop this condemnation process, but we won’t sell them retail power. Government sues and says that you are using monopoly power on wholesale power to maintain monopoly in retail power. Because state wants to run plants, this case is really just competition for who gets the monopoly 2. Otter Tail cannot do this. Monopolist cannot leverage their monopoly power in an upstream market to obtain a monopoly in a downstream market. Otter Tail must sell power to those in downstream market. 3. Problem for later courts is that Otter Tail and later cases came in interesting circumstances. What price should power be sold at? Doesn’t matter here because Federal Power Commission regulates rates of wholesale power. But what happens when a case like this comes up outside the regulatory context? How does D who has to deal choose the price? D will want to charge a crapload 4. Hypo: So let’s change the facts. Suppose Alcoa has monopoly in ingot and there is downstream fabrication. Alcoa won’t sell ingot to anyone but itself so it will achieve a monopoly in fabrication. SC gets wind of this and tells Alcoa it has a duty to deal. Is this going to solve the problem? Suppose cost of producing upstream product / ingot is $10 / ton. Barriers to entry are high so monopoly is permanent. Suppose cost of fabrication (aluminum sheet) is $5 per unit plus cost of ingot. For Alcoa, cost will be $15 because ingot costs $10 to them plus the $5. Suppose that Alcoa has monopoly in downstream market and their monopoly price is $25. So their monopoly profits would be $10 per unit. Now SC comes along and breaks up this scheme, requiring sale of ingot at wholesale to anyone who wants to participate. At what price does Alcoa have to sell ingot to comply with SC rule? Suppose Alcoa says let’s charge $100? No one can buy at this price and compete vs. Alcoa successfully. So judge might call this a “constructive refusal to deal” that violates terms of order. But what if Alcoa charges $20 for ingot? Competition of downstream market is feasible because competitors will enter the downstream market to turn a small profit at $25 which is the market price. So judge here will be happy because he will observe competitors entering downstream market. But Alcoa is also happy because still get their monopoly price and make a profit of $10 / ton. They are making exactly the profit margin they made before. Doesn’t matter what their market share is, they’re still making $10 on every ton sold i. This illustrates an important theorem in antitrust: If monopolist has monopoly at any one point in a vertical chain, monopolist can suck all 42

monopoly profits out of the system ii. Curious result: if this is how we interpret SC order in Otter Tail then consumer gets no benefit 5. Some might say this interpretation is too narrow. Maybe SC meant sell at a reasonable price, not at any price. But this could make us nervous too because say Alcoa sells ingot at cost for $10. All aluminum is $15. This would be great for consumers. The problem is that this requires a federal district judge to decide what a “reasonable price” for ingot should be. Another problem: the one thing a monopolist with a lawful monopoly is allowed to do is set monopoly prices (so this would produce an inconsistency with black letter law dealing with monopoly) 4. United States v. AT&T 1. Through the 1980s, AT&T controlled all of the telephone industry in the United States. Controlled all local service by regulatory fiat (regulated monopoly by the FCC). Also had monopoly on long distance until mid-1960s (also by regulatory fiat). Also had monopoly on telephone equipment 2. In 1960s, FCC authorized other firms to get into the long distance market on an experimental basis. First company in = MCI (Microwave Communications). Wanted to build microwave towers across the country. Problem MCI had, once got to each city (LA, NYC), had to plug their wires / cables into the AT&T local network AT&T found ways to refuse to cooperate even though FCC had authorized competition. This is in the Otter Tail mold: AT&T has unquestioned monopoly in local lines and was using it to prevent competition in long distance market which was authorized 3. DOJ investigated and said that the only way to solve this problem was to threaten divestiture from either long distance or local business. Practically, DOJ says can keep local monopoly and give up long distance or visa versa. 4. AT&T had assumed they were immune from antitrust because they were a regulated entity. When government goes after hot documents in discovery and to trial, AT&T realizes it will lose and settled. We will keep long distance but spin-off our local operating companies. This worked because when MCI went to plug in to local companies they got a cut and allowed it 5. Skiing v. Aspen Highlands 1. Up until Aspen, refusal to deal cases have involved monopoly in upstream market leveraging power to get a monopoly in downstream market. Unusual relationship with monopolist and victim: victim is customer of monopolist but also is competitor in downstream market. This is duty to deal with competitor in the same market: downhill skiing in Aspen. Claim: D is refusing to cooperate with P to get / restore monopoly in that market 2. Court says product market is downhill skiing at destination ski resorts and geographic market is Aspen: D is close to having a market in skiing in Aspen. Court probably got the market definition wrong: labeled it “destination skiing.” Talking about people who come from other places. So lots of other “destinations” probably compete with Aspen. D accepted the market definition question for purposes of this appeal but the market definition issue seems important for D 3. Hypo: Suppose four mountains in Salt Lake City. You own three. The fourth mountain Snow Bird comes to you and says that in many parts of country, ski companies cooperate and have All-Mountain passes where people can fly in and go for all four. If they propose this to you, do you have to work with them? Company can refuse to cooperate IF there is a legitimate business reason for the 43

refusal. BUT what counts as a legitimate business reason? Aspen leaves this unresolved: conduct was so over the top that they had no legitimate business reason 4. Spectrum of business reasons: i. Extreme #1: after discovery, document is found that says, “in short-run dealing with Snow Bird will increase our revenues. But, if we refuse, Snow Bird will go bankrupt and our revenues will go up 35% due to monopoly.” P wins it is clear that this wouldn’t make any sense accept for fact that it will allow you to acquire a monopoly and raise prices (this is NOT a legitimate business reason) ii. Extreme #2: Snow Bird wants 75% of revenues from All Mountain pass for having 1 of 4 mountains. This seems like a legitimate business reason to refuse: asking price is too high iii. Hard case: Research says that four mountain pass will be popular and more people will ski here. But I’ve done the math, we get 100% of revenues from three mountain pass. If we cooperate we only get 75% from all four. The 100% is bigger number then just the 3 mountain pass. This has nothing to do with higher prices or them going bankrupt. Question court doesn’t answer: does this count as a legitimate business reason. Can you simply say that cooperating is NOT AS PROFITABLE for the business? Unclear 5. Though the Court probably did not get it wrong on Aspen facts, because behavior was egregious 6. A few courts have urged a narrow reading of Aspen Skiing: some have said that it is significant that D in Aspen withdrew from prior scheme of operation: these cases suggest it might be different situation if P says no the first time. Others including Posner say that this is an awkward standard because will discourage cooperation in the first instance 6. More notes on Refusal to Deal 1. Refusal to deal is only unlawful when victim is competitor of monopolist 2. Not enough that monopolist uses monopoly upstream to gain an advantage downstream: there at least needs to be a serious risk that monopoly will be gained downstream as well i. Characterization of conduct is important: difference between tie-in and refusal to deal: refusal to deal, only violate § 2 if will get a monopoly in that market, tie-in violates § 1 if uses monopoly up top to buy service below. Tie-in leads to much more P-friendly standard 3. “Essential facilities” doctrine : idea: if I control some “essential facility,” I have some obligation to deal with others in that facility. Hay doesn’t think this exists as a free-standing doctrine. i. Hypo: Suppose Hay owns the only suitable football stadium in D.C. Barriers to entry are high and no one can build a new one. Stadium is an essential facility to run a football team. Stadium is leased to Redskins. Along comes another potential team that wants to lease the stadium on the alternate Sundays when ‘Skins don’t use it. Stadium owner says, “No! I refuse to deal with you.” Is antitrust liability triggered by fact that stadium is an essential facility. Does owner have right to refuse or does he need to defend decision with legitimate business reason. Does it matter that owner has piece of Redskins? If antitrust liability is only triggered by owner owning the team as well, then nothing is new here and this is Otter Tail (use of monopoly upstream to preserve monopoly 44

downstream). If owning the team doesn’t matter and owner still has an obligation to deal reasonably, then this would be new and essential facilities doctrine would matter. But most cases say that it is triggered only when owner controls upstream, but this is just Otter Tail. SC has never endorsed essential facilities doctrine but has never gotten rid of it either. Some think court was going to say this in Otter Tail but the facts were bad. 7. Image Technical Services v. Eastman Kodak (9th Cir.) 1. Back again on remand. This time in the Ninth Circuit as a § 2 case. We saw this case in the SC before. In its earlier life, this case was a § 1 tying case. Tying parts to service. When it goes back to trial court P drops the tying claim and turns it into a § 2 monopolization claim. Crime is not tie-in but is § 2 refusal to deal. Jury finds for P and then gets appealed to the Ninth Circuit. 2. Does not violate § 2 to using monopoly upstream to gain an advantage downstream “monopoly leveraging” theory. Only violate by using monopoly to gain a new monopoly 3. Key issue: Does Kodak which has a monopoly in parts have a duty to deal? Kodak’s conduct may not be actionable if supported by a legitimate business justification (nothing new this comes from Aspen); even monopolist does not have blanket duty to deal. Kodak’s defense: protection of our patented and copyrighted parts = legitimate business justification. What the hell does this mean? How is Kodak protecting its patented and copyrighted parts? ISOs will not break the parts 4. Court compounds the confusion by adopting a modified version of rebuttable presumption: while in theory Kodak does not get blanket immunity due to its intellectual property / patent, we give them a rebuttable presumption of a legitimate business reason. So this is different from Aspen: a monopolist’s desire to exclude other from patented product is a legitimate business justification but this is tautological: not selling it to others clearly evinces an intent to exclude others 5. It says Kodak’s reason is pretext so justification doesn’t fly and Kodak loses 6. Hypo: Suppose there are no ISOs to this point. Cost to Kodak of part is $10 and labor is $5. Charges monopoly price of $25. Profit is $10. Suppose ISO comes along and asks Kodak to sell parts. Kodak could say no or Kodak could say yes, I’ll sell for $20. Kodak can still extract monopoly profits inherent in parts monopoly by setting a high price for parts. If this is defensible, then what is left of the so-called duty? This seems to be what the court means: Kodak has legitimate monopoly in parts. If this is true, then they could exploit it by taking monopoly profits out in price of parts. 7. Kodak: are you trying to extract legitimate monopoly profits in parts or are you engaged in some vicious scheme to monopolize service? (this is distinction though it may not have any meaning) 8. In Re Independent Service v. Xerox (Federal Circuit) 1. Absolute identical case to this. Difference: Xerox case goes to Federal Circuit because it is a patent case. Federal Circuit approach is dramatically different from Ninth Circuits. 2. Approach: Right to exclude is not without limits but exceptions are largely cases where there is no legitimate patent or engaging in tying We are not even going to inquire into D’s motive. As long as D has legitimate monopoly in parts, if D says, “I refuse to sell those parts” then D has a legitimate business justification. Complete immunity for refusal to deal if patent is valid and not 45

engaged in a tie-in. 9. Verizon Wireless v. Trinko Problems of the case: a) Standing (not every competitor that suffers injury is protected under antitrust law) b) Jurisdiction (FCC is primary regulatory party) Core Case: 1. Verizon, has a local monopoly in New York. It is the incumbent LEC. AT&T, which under the decree become a long distance company only, they are now knocking at the door and they want to provide local telephone service. AT&T wants to compete against Verizon. So what we want to do is build a piece of the network and maybe rent access to a lot of verizon’s network. AT&T is aided by the Telecommunications Act of 1996. The Act says that we do want to create competition in local exchange service. And the Act requires Verizon to give AT&T access to their local network. And the FCC is supposed to monitor everything to make sure that everyone is holding up their end of the bargain. (primary regulatory party; whats with the courts? Should there be a second regulatory party?) 2. Claim is that, even though Verizon is reeled in by the statute, they are doing everything in their power not to deal with AT&T. So just like the AT&T case, you’re not doing what the statute and the antitrust laws tell you to do. 3. The one thing that a monopolist is allowed to do is charge monopolist prices. A monopolist in the US, assuming he got the monopoly lawfully, can charge whatever the hell he wants. (= important incentive to earn future monopoly prices) In antitrust law, its not sufficient to have a monopoly-position, the monopolist needs to monopolize, too. 4. Scalia misquotes Colgate: Of course you have an absolute right to refuse to deal, except where you are trying to create or maintain a monopoly (Scalia leaves this language out – error in use of law); (2) his comments about Aspen skiing, that it is on the outer-bounds of antitrust law. (dissing Aspen) 5. The key to Aspen was that they pulled out of a relationship that they were already in. Is Scaling suggesting a black-letter law that if you don’t cooperate in the first place you are worry free? It would seem so. 6. Trinko kind of guts the refusal to deal cases 7. Scalia would like to send it to the FCC, but the statute, nothing in this act is intended to suspend antitrust laws. 8. Essential facilities doctrine: Court has never endorsed the essential facilities doctrine. Is the refusal of the deal aimed to gain a monopoly? Trinko has completely undermined the monopolization claim. No courts have ever decided, whats a profit maximizing monopoly price. Its impossible to prove, if a monopolist is violating Section 2 antitrust laws. 10. AT&T 1. Seems to be a completely rejection of Trinko; 2. Does AT&T in the moment, the competitor buys the essential facilities, has any monopoly power? If not, section 2 of sherman act istn't applicable anymore. (argument: price is too high) 3. Bus assuming they do: Mention predatory prices; The retail price is too low. But we have to prove that the price is too low. (argument: price is too low) 4. Next step: price sqeeze claim: mixture between the 2 and 3: Even if the competitor is good in his business, he cant compete, because the price is too 46

low. Its no predatory price, but its ok for AT&T 11. Sprectrum Sprot case: 1. Section 2 is supposed to protect against anticompetitive conduct. Its not allowed to monopolize or attemt to monopolize.. 2. Pepsi has only 25% market share and tries to squeeze out 7up, that has only 10% market share. No monopolization is given, buts its clearly anti competitive.... 3. No violation of sectio 2; Plaintiff fails to prove the claim of section 2. 3. ATTEMPT TO MONOPOLIZE 1. To succeed on an attempted monopolization claim must show: “a dangerous probability of success.” Most courts will throw case out if market share is not > 40%. Microsoft has good discussion of this. 2. Lorain Journal v. United States 1. Lorain Journal has a newspaper monopoly in a town of 50,000. 99% of the population subscribe to the paper. A radio station sets up shop eight miles away. D refuses to allow advertising in its paper by companies that advertise on the radio. D monitors radio programs to enforce its policy. This qualifies as Attempted Monopolization. (essential facilities doctrine?) 3. Spectrum Sport v. McQuillan (Ninth Circuit) 1. P is the exclusive dealer of a patented product. D selected P as a regional distributor of the product. Later, D insists that P cease distributing the patented product as a condition for retaining the right to distribute other items. 2. Mere proof of unfair or predatory conduct alone does not make out an offense of attempted monopolization. You have to show dangerous probability of doing so. V. MERGERS 1. BACKGROUND AND THE BASIC PARADIGM § 7 of Clayton Act = intents to prevent mergers that may underminde competition; The idea is to stop a trend to lower competition before it gets a real problem. anti-merger statuteprohibits mergers that may substantially lessen competition or create a monopoly (This is an incipiency statute designed to nip the problem in the bud; could make the market more oligopolistic; That is negative, because its easier to esteblish a collusion; reventing mergers are an efficient tool to prevent oligopoly) 1. Mergers can be categorized into three categories: 1. Horizontal mergers (competitor firms in a market) 2. Vertical merger (firms with buyer-seller relationship: Bridgestone tires and GM) 3. Conglomerate mergers (anything else: Pepsi and GM; completely different sectors) 2. Clear from congressional history that Congress intended antitrust laws to deal with conglomerate mergers, but as antitrust law is written, it does not right now (not a big problem for economists) 3. Economics of Horizontal Mergers: aggregating market share tends toward monopoly power and monopoly prices; getting large enough allows a firm to charge monopoly prices without worrying about cooperation from other competitors. The More highly concentrated the market is, the easier it is for firms to collude (i.e. both § 1 violations and oligopoly pricing) 4. History 1. Original statute Covered only acquisitions of stock and not acquisitions of assets. In 1950, Congress gets around to fixing this problem and the Celler 47

Amendment to the Clayton Act begins the modern law of mergers: fixes the technical loophole and allows acquisition assets as well as stock and says it applies to vertical mergers and conglomerate mergers 2. FTC v. Brown Shoe i. Court lists the many concerns that prompted the amendment, among them: loss of local control, protection of small business (getting back to Jeffersonian principles here), Congress intended act to apply to vertical and horizontal mergers, wanted threat to be addressed at incipiency ii. Hypo: Suppose 4 firms with 20% of market and 2 firms with 10 each and latter two plan to merge  5 firms each with 20%. Scenario two: 20 firms of 5% each and two plan to merge  18 firms with 5% and 1 with 10% 1. Economists would be clearly be more concerned with scenario #1 because this is an oligopoly 2. Court seems to suggest that former situation is more permissible and Court is worried about latter situation: first “allows the merged firm to compete more competitively with its larger competitors.” Latter bad because gives bigger market share even though not close to monopoly power iii. “Antitrust law is concerned with competition, not competitors” but every aspect of Brown Shoe seems to address protecting smaller competitors 3. From Brown Shoe up until 1976, there was no pre-merger notification i. Prior to 1976: DOJ would read about mergers in WSJ and would have to go in and unscramble the merger after the fact: consummate the deal before DOJ finds out (ex post control) ii. Only way to undo merger = file a law suit  lots of suits, lots of litigation and kitchen sink opinions (one Justice said that in this period 1960-1980 only commonality in these cases is that government always won) 1. Pabst (merger led to 4.49% of beer market) 2. Von’s: Supermarkets crop up and take business from small grocers. This merger = 4.7% share + 4.2% share. Court says this merger is bad because economies of scale will threaten mom and pop; There was no consistency in all cases; “The only consistency is, that the government always wins.”; Bu Mergers were and are very expensive processes: There is a need to know, if the merger is lawful or not. So there is a need to define better standards. 5. United State v. Philadelphia National Bank (Important case) 1. Steps to a more applicable rule: a) defining a market b) define concentration of the market c) dominent share of the market (would the merger result in a firm, that is on top of the market?) => that creates a prima facie case Important: If there is proved, that in the defined market the competition will be reduced, there is no opportunity to defend by referring on the improvement in any market (ex: bad for NY market, but good for the market all over the US = difference to other jurisdictions)

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1. 2.

1. 2. 3. 4. 5. 6.

2. Court defines the relevant market / banking market: “Commercial banks”  larger banks. Court defines geographic area as Greater Philadelphia 3. To set out prima facie case: government must define market and define concentration (what are market shares of top 4 firms  published by Census bureau). After merger, top four would have 78% of market. Leading firm would have 36% of market. This is an oligopolistic situation. So government puts forward statistical case and gets presumption. D must rebut this by saying that these statistics do not tell the whole story 4. Why change merger law from in-depth look at every industry worried about small firms to this statistical story? Bok article: unless businessmen can assess legal consequences, sound business planning is retarded 5. PNB defenses: i. PNB says that assume we have diminished competition in Philadelphia, we can compete in NYC market. Court doesn’t let them play that game: cannot balance loss of competition in one market with increased competition in another i. Philadelphia needs larger bank to stimulate economic development Court says this isn’t allowed: shouldn’t be surprising this is similar to Professional Engineers: cannot justify anti-competitive conduct with economic benefits (different in other countries); in US if merger is anti-competitive the game is over 1. Not much merger litigation after PNB: i. Almost no private litigation over mergers (due to standing requirements) ii. First set of guidelines put out by DOJ to explain to business community the criteria that DOJ will use to challenge merger These original guidelines looked at Concentration ratio of market: if ratio of top 4 firms < 75% or > 75% (they follow PNB) DOJ said that if concentration is <75% then won’t challenge if share of both firms > 5% If concentration was > 75% lower standard This is background, don’t worry about these old guidelines These guidelines were more generous than the case law Explains why there is little litigation: if you follow guidelines we won’t sue, if you don’t we will sue and we’ll probably win i. 1976: procedural issue: pre-merger notification required by Hart-ScottRudino Act 1. Details of pre-merger notification could be a course in and of itself. Basic doctrine says: as long as merger is above a certain dollar threshold in terms of assets of the two companies, DOJ has to be notified. Threshold is quite small. Called the “first request.” Form requires you to identify all lines of business merging parties are engaged in as well as total size of business. DOJ matches up volume of business in each sector and evaluates for problems. DOJ or FTC usually gets 30 days to process papers during which merger cannot be consummated. Eve of 30th day usually leads to second request. If nothing happens after thirtieth day, can consummate the merger but nothing prevents government from challenging it later. Second Request: send us tons of documents. You can take as long as you want to fulfill the request, but cannot consummate until 30 days after the paperwork comes in. The notification system leads to little litigation because either DOJ says go ahead and we won’t sue you, or they say we will sue you and parties cave 49

2. HCA v. FTC (7th Cir. 1986) (important case) 1. Posner says that FTC wrote an 110 page opinion they didn’t need to because (1016) PNB says that nothing has changed since early 1960s. Opinion basically says that merger law has not changed despite changes in economic thinking 2. Two important points: a) prima facie assumption is sufficient b) Government guidelines are ore generous than court rules: The supreme court has never overturned the rules. There are no cases, just governmental decisions. 3. If there is a cartel with more than 4 participants and with every member more its getting harder to control the cartel. The cartel needs more market share. So they decide to merge with a firm outside of the cartel. (merger increases the market share of the cartel. In effect, the risk is reduced, that the cartel is undermined by competitors, because the non-members of the cartel have less capacity to operate with. 4. If Barriers to new Entery in the market are low, its in tendency better for the competition. (low market frictions promote competition in markets and make markets more efficient.) 5. If the products offered on a market are very heterogenious, its more unlikely that the competitors practice collusion, because they have to make more communication to synchronize their interests. 6. Non profit firms wouldn't behave like profit earning firms. (ex. Some kinds of hospitals) 2. A MORE REALISTIC APPROACH 1. General Dynamics (most important merger case) 1. Major defeat for DOJ: DOJ takes it to SC under expediting act because of market definition issue (relevant market) but they make a mistake by taking it to SC. District Judge defined market as “all energy” but if that were true then no merger of energy companies would violate antitrust laws. 2. So government does what it is supposed to and follows Philadelphia National Bank template: General Dynamics has 12.9% of market based on 1967 revenues, United Electric had 8.9% revenues of the market, Top 4 firms have 75%. Government said this squarely fits within PNB and even more clearly within other cases. 3. Government loses because Market shares examine “revenues”: money that flow into company in 1967. Revenues v. sales: have 9% of revenue coming in, but much of that is because of sales made many years earlier (long-term 20 year K), so lots of coal that was shipped last year was competed over 20 years ago; also there is a lot of coal in the ground, but they cannot sell it because it was already sold; For market definition reasons its not sufficient: If a company already sold all coal, the future maret share is 0, because they havn't any coal to sell in the future. => The point: unlike the rest of antitrust, merger law is about the future, here there is no guarantee that UE or GD will have substantial market shares in the future. (if they don't find new coal) → this is the exception of the prima facie statement. 4. Market shares are used as a proxy. This merger might be anticompetitive because one more company with decent market share makes collusion harder 5. Question to ask: if this merger does not take place and the big guys in the coal business decide to collude, how much do they have to worry about UE as a competitive force in the future? Zero because all coal they own has already been sold, so the merger is irrelevant 50

6. General Dynamics is a great case for lawyers: says that PNB assumes that revenues are a good proxy for market share and future conduct, but it may not represent the company’s competitive strength in the future. This case allows for an argument that last year’s market share does not represent the competitive strength of the acquired company 7. Hypo: Suppose Pfizer had 20% sales of beta-blockers last year. If most of sales of Pfizer’s drugs are based on patents that are about to expire and if they don’t have any new drugs in their pipeline, then this General Dynamics argument might work to get the merger through. 2. Syufy Enterprises v. United States (9th Cir. – Movie Title Case) 1. This case is an example to some extent of General Dynamics. 2. Facts: two movie chains want to merge: between them they will have 100% of market. Court says that this 100% is not representative of their ability to control the market in the future because there are no barriers to new entry 3. Purported victims were not consumers but movie companies: wouldn’t pay them very high royalties to show the movies 3. Standing in Merger Cases 1. States often bring cases for treble damages, in a merger case there is no money available because no one is damaged yet; not high publicity either 2. Consumers are potential victims so they have standing but there are no damages, only injunctions, so there is no incentive to bring the suit (free-rider problem) 3. Consumers could sue later after they are paying higher prices but would have Causation problem: hard to prove new prices come from merger and not other factors 4. Competitors they have the best incentive to sue but the problem here is standing i. Hypo: Coors and Anheuser Busch propose a merger. AB has 50% and C has 10%. Miller wants to block the merger. Miller’s theory is that as a result of merger the industry will be a tighter oligopoly and prices will go up. Judge will reject this because that will benefit Miller. ii. New Hypo: What if Miller says that prices will go down because of economies of scale. Judge will say under modern standing law, I see why you don’t like this merger, but that is not antitrust injury. Injury you complain of: producing lower prices for consumers is not antitrust injury and you don’t have standing. So either story leaves competitors without standing 1. One exception: if you can make persuasive case that firm will engage in predatory pricing after merger, that will qualify as antitrust injury, but these cases are hard to make out 2. Target of merger rarely has standing either 4. DOJ/FTC Merger Guidelines 1. Guidelines introduced in 1982: Between 1968 and 1982, big change in economic thinking about mergers. A lot more thought given to possible benefit of mergers and also rethinking about possible cost of mergers. Other concerns: antitrust courts sloppy in market definition (no real standards), General Dynamics problem, etc. Conclusion among many: merger law was in need of reform. But since merger cases not being litigated, courts could not shape law as they did in § 1 and § 2 context 2. Broad purposes of guidelines: i. Make clear what the relevant goals of merger law are 1. Brown Shoe: protect competitors OR protect consumers; 51

guidelines say only consumers matter ii. Relaxation of standards iii. Clean up: put principles behind defining market share, market definition, etc. add analytical tightness 3. General goal of merger policy / law is to protect consumers against higher prices. All of mechanical aspects (how to define markets, shares, new entry, etc.) all organized around the risk that the merger will lead to higher prices 4. BIG CHANGES OF GUIDELINES i. Merger guidelines pervaded by the “what if” question: what would happen if merger leads firms to try to increase prices. Future-looking ii. Prior to guidelines, courts had used the four-firm concentration ratio to measure market concentration. Decide to switch over to the Hirschmann-Herfindahl formula. (Hay thinks this was the head of the antitrust division showing off). HHI = sum of square of market shares 1. Complication: technically to apply the formula you need the market share of every firm in the industry, not just top 4 2. However, this doesn’t matter mathematically because won’t add much to the HHI. Once firms with below 5% of market or so, doesn’t really matter iii. Market Definition: this was the most significant change and this is now the way it is done all around the world. The “hypothetical monopolist” test 1. Illustrated If we are worried about widget merger raising prices, what might foil this plan: Competition from within the widget industry, substitute goods 2. Hypothetical monopolist test puts aside the intra-widget competition. Take a worst-case analysis. Assume that the widget producers cannot effectively protect consumer. If they tried to raise prices, what would happen? If they would be successful than widgets are a relevant market (cannot rely on competition from outside, consumers need competition from within the market). Then we look at market shares of that market. If they could not raise prices than widgets are NOT a relevant market. Need to add in the substitute goods (i.e. gadgets) and see if widgets + gadgets is the relevant market 3. This method is nice because it separates the market shares from the market definition question. It also focuses on the future “what if” question and ignores past and present behavior 4. Hypo: Assume a hypothetical monopolist. Assume monopolist tries to raise prices by 10%. Two embedded questions here: 1) percentage of existing customers that would switch to other products, 2) how many consumers would have to switch to make a price increase unprofitable 1. Suppose we know that 15% of customers will switch, then figure out profit margin. Assume price = $10, variable cost = $5. Gross profits = $5 widget. 100 sold / week so gross profits = $500 per week. If price is raised to $11, profits = $6 per widget. Need to sell 83 widgets to make price increase profitable. So here critical number is 17%. If you lose less than 17% of clientele, you’ll make money on the price increase. 52

2. So need existing prices, markup over cost and some benchmark quantity to do this test 3. Shortcut on part 2: if we know that hypothetical monopolist raises prices 10% and loses 10% of customers, its total revenues are unchanged by definition but costs will go down because producing less so it is profitable. So shortcut, if price increase is > or = to number of customers lost, then profitable iv. Measuring Market Shares 1. Suppose Pepsi only makes soft drinks and not beer. Suppose that if price went up, Pepsi could use their factory to make beer. Under historical measure, Pepsi doesn’t show up in beer market. But if price went up 10% it can be shown that Pepsi would make a lot of beer, they need to be included in the market. “Supply substitution” 2. Inverse of this = United Electric and General Dynamics defense. Will not have market share in future so doesn’t go in. 3. Market shares are measured prospectively / forward looking. Historical market share may not be a relevant indicator of market share in the future; this leaves a lot of room for creative lawyering 4. The big elephant in the room: foreign forms. This is where the Alcoa case was very forward looking. They need to be included in the market shares as well based on what if? What if price went up 10%. What would foreign firms do then. This will really drive market shares down v. Guidelines and New Entry 1. Earlier versions of guidelines admitted that entry can be a complete defense to a merger. In theory, if barriers to entry are low, a merger cannot hurt competition. A few cases like Syufy have been won or lost based on barriers to entry 2. The “Paradox” of New Entry 1. Entry becomes important when the HHI is high (market is highly concentrated), if it isn’t then won’t even get merger litigation. This also means that there has not previously been much entry 2. D’s argument is: we haven’t seen much new entry in the past but merger cases are forward looking. If prices get pushed up, there would be new entry 3. Paradox of D’s argument: entry will drive prices back down to nonprofitable prices making the entry unprofitable 3. Answer to this paradox: two kinds of entries: 1. Committed entrance: entrant that has to invest a substantial amount of money that cannot recoup if prices go back down (entrant is probably not going anywhere that fast): DOJ position is that new entrant will not “commit” capital to enter without more. So D needs to show evidence of entry in the past to win. 2. Uncommitted entrance: ex: an airline and a new route. If they already have the capital and don’t need to invest 53

more, entry is easy. Can come and go with ease and not lose anything doing it. “Hit and Run” Entry 4. Under Guidelines, if D cannot show prior entry, needs to show that entry is of kind #2. Entry is still a potential trump card if argued properly vi. Guidelines and Efficiencies 1. D must also argue that efficiencies will get passed on to consumers for this to work 2. Efficiencies more like to benefit consumers if they result in lower variable costs (this is because fixed costs do not generally get passed on in the form of lower prices) 3. Should efficiencies achieved by lowering fixed costs count in evaluating whether the merger should be allowed? 1. Consumers will get no benefit (pay only a trivial amount more) but shareholders will get enormous benefits by having the fixed costs lowered 2. This is a debate: should anti-merger law be based on consumer welfare or on total welfare (political lines are pretty clearly drawn here) vii. Guidelines and Presumptions 1. Follows Philadelphia National Bank: if government can show a prima facie case of concentration, then the merger is presumed anti-competitive unless D can come up with justification 1. This comes from the theory that oligopolies will lead to higher prices; over time people have become somewhat skeptical of oligopoly pricing theory (prices not always transparent, products not always fungible, etc.) 2. However, DOJ in guidelines has disarmed itself. It says that it will no longer assume it has set out a prima facie case from the market structure alone. DOJ also will examine other conditions of the market and satisfy itself that other conditions of the market are conducive to oligopoly pricing 3. PNB is still good law, but government is saying that for its own decision making it will look at oligopolistic coordination and collusion as well 5. Ansell v. Schmid 3. SOME RECENT CASES 1. FTC v. Staples 1. FTC’s proposed market is “Office Superstores.” This could be the right market even though every item Staples sells can be purchased somewhere else: Superstore has the appeal of being a “one stop shopping” place for consumers. Principle could be: because consumers prefer one stop shopping, they will buy at Office Superstores even if prices are cheaper somewhere else. Hypo monopolist could raise prices above current levels because while it will lose some customers, the consumers will be willing to pay more for the convenience of one-stop shopping 2. Another theory: Superstores buy in bulk, they get volume discounts and their prices are cheaper than other stores 3. Two Theories = opposite ends of spectrum: might be willing to pay premium or prices might be lower 4. If theory is that superstores are cheaper, consumers might still be hurt because 54

superstores will be selling cheaper than non-superstores, but will not sell as cheaply as if they were met by competition: other stores put a cap on what they can charge, they have lower costs so they can charge less but if no competition from other stores than they can sell at higher price and not pass on savings from buying in bulk 5. Empirical test that won the case for the commission: economic testimony that said that in cities with all three superstores the prices were lower than when two were present and an eve greater difference in cities with one superstore 2. In re AOL 1. Horizontal issue is internet access. Time Warner had RoadRunner, dominant provider of broadband internet access. AOL had largest share of internet access market with dial-up connections. Court figured out that RoadRunner was going to be future. Competitive problem was AOL investing in DSL (telephone connection more like a broadband connection) 2. This case illustrates the “fix it first” policy. Because we have pre-merger notification, DOJ will alert parties to proposed merger of problem that they will seek to block. Companies than make deal with FTC so that they can get the merger through subject to certain understandings. Deal goes through so long as AOL continues to invest in DSL and Time Warner gives some service to EarthLink 3. FTC v. H.J. Heinz 1. It is remarkable that this court got to the Court of Appeals at all. Trial judge was unbelievably stupid. Every supermarket has Gerber and Heinz or Beech Nut but not both. The judge concludes that therefore they don’t compete. This is very dumb for two reasons: one, they compete to get into the store and they compete for consumers for which store they go to 2. C of A reaffirms Philadelphia National Bank and prima facie case presumption model; recall government doesn’t do this in its own practice, but courts still do this 3. Useful discussion of efficiencies: although SC has not sanctioned the use of efficiencies as a defense, the trend among lower courts is to allow it 4. Court of Appeals rejects this defense on the merits for two reasons: 1) efficiencies are purely speculative (leads to new important job for antitrust lawyer: work with merging parties to prove that the efficiencies are real, 2) Efficiencies are not merger-specific (court is basically saying merger is a last resort. Could get license, contract, etc. . . . other feasible ways to achieve efficiencies) 4. United States v. Vail Resorts 1. Illustrates Guidelines portion about Lessening of competition through “Unilateral effects.” This is what the government did in the Vail case. Government even calculated the price increase with precision 2. This review doctrine exists because of some of the scandalous settlements of Nixon era. Government and Vail worked out a settlement / consent decree. The decree has to be filed with federal court and in federal register and allow noticeand-comment; called a “competitive impact statement” 3. Economics of Oligopoly and Nonfungible Products i. Background: if you think of mergers for fungible products (i.e. oil, coal, steel, etc.) the prices in the market place will be identical. That is what fungible products are. Market will force prices to be equivalent. Prices can be identical at a supercompetitive level or at a competitive level. The only way that a merger can effect price is if it facilitates 55

oligopolistic coordination. There is no way that a single company can effect higher prices on its own. ii. However, by definition market forces will not drive all market prices to be identical for nonfungible products iii. If industry colludes to fix prices it won’t work because beer is not interchangeable so some will do better. You will need hundreds of different prices. This is really hard for a cartel. Almost impossible to do this unless they met in a hotel room. Oligopoly coordination will almost certainly not work for heterogeneous products iv. So one would not expect merger cases here because no oligopoly. So DOJ guidelines basically say that oligopoly problem goes away, but a different problem arises (Hay thinks this is ingenious) where nonfungible products are at stake 4. Problem of “Unilateral Effects” i. Suppose market where AB has 50% of Market, Miller has 25% and Coors has 10%; Demand curve has some slope (at lower price will sell more and at higher price less). Job is to figure out the optimal, profitmaximizing price on the demand curve. Suppose economist works it out and says $2.50. Say that raising price to $2.60 would cause customers to switch. Now assume Miller buys Coors. If customers switch to Coors then Millers doesn’t lose any profits because recaptures some customers. This has to mean that profit maximizing price is higher, mathematically ii. This is the unilateral effects theory: without any oligopolistic effects of coordination from competitors, the merger will be anti-competitive by allowing Miller to charge a higher profit-maximizing price through recapturing customers with the company that has just been overtaken iii. This works with price discrimination, too: self-selection mechanism because one group of customers show specific behavior (ex. book their flights in a trip with hotel and so on) If there's a very high HHI, people will switch to the competitor very lightly. Exactly that competitor will be overtaken now. So, even if people switch, they are still at the same effective owner. Then the effective owner can raise prices. (example mentioned: +4%) 5. United States v. Oracle 1. Bitter loss for the DOJ. They thought that the judge was very biased against them. 2. DOJ defined the market in a narrow way: human resources software for really big corporations. In effect this is only 3 firms. DOJ tries to support this market definition with customer testimony 3. Authors discuss role of competitor testimony: modern courts are skeptical of this because their incentives to block merger might contradict testimony 4. Judge agrees that there is no reason to think that customer testimony will be biased, but he says that it is all backward looking, “In the past we have only looked at these two companies.” Judge says this is the wrong question to ask. Merger law asks the what if question. What would they do in face of 10% price increase? Judge says that customers were never asked that question 5. Reinforces concept that modern merger law is about the what if question 4. CONGLOMERATE AND VERTICAL MERGERS 1. Economics of vertical mergers: 1. Hypo: Before merger have 4 manufacturers, A-D who are selling to some combination of retailers (say 4). After merger, two hook up and have exclusive 56

arrangement. Concern is that a manufacturer who prior to merger might have sold shoes to a distributor is foreclosed from that distributor, but this shouldn’t be a problem because by same token other distributors need shoes. There is really no net foreclosure / availability of shoes, just switching dancing partners. On balance there is no net dimunition: no one is short shoes or supply 2. The only problem might arise if at one or both levels there is a high concentration of market power 2. Case in book: Kinney’s retailer, Brown Shoe = manufacturer 1. When case was brought, there were two concerns about vertical aspects of merger: 1) Merger would produce efficiencies by eliminating the middle man (no one cares about this anymore), 2) Foreclosure problem: Kinney will now buy all its shoes from Brown and that will foreclose other manufacturers from buying from Kinneys and visa versa 2. Foreclosure problem mostly moot 3. Du Pont 1. Most notorious example of vertical merger in this category: DuPont / GM merger 2. DuPont was biggest manufacturer of automotive paint. Concern was that GM which was the biggest auto manufacturer would buy all its paint from DuPont and foreclose everyone else. This would seem to be a problem 3. Merger was in 1917, case filed in 1949, SC ordered divestiture which took place in 1958 4. Does anything change when there is market power? Poster-child = Time Warner-Turner merger. Time Warner was dominant in cable. Was and still is the single largest provider of cable services. Turner has substantial market power in cable programming (competes vs. ABC, FOX, etc.). Concerns raised by merger: if Time Warner is dominant it can show only Turner because merger will benefit at expense of ESPN and others. Economists have raised concern that this is not profitable strategy because Turner cannot really deny its consumers programming that they want. Concern is goes the other way too: DirectTV wants Turner programming but if Turner denies programming than Time Warner benefits. Same question: why would they do this? DirectTV is offering them money. They would forego hard cash. So even in cases where there is market power at one or both levels, it is not obvious that this vertical merger causes a problem

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