 Cartels

 United States v Trans-Missouri Freight Association: Railroad companies established TMFA to set freight schedules and
rates for members. Companies adhered to prices and schedules set by TMFA. US brought complaint alleging
association was a restraint of trade in violation of Sherman. Companies argued that rates fixed by TMFA were
reasonable and that arrangement not unlawful under Sherman because it would be lawful under common law. HELD:
Sherman prohibits all restraints of trade (whether or not reasonable). Policy: Free competition is best means to
ensure reasonable prices. ALSO, Govt not required to show that intent of TMFA was to reduce competition. Judgment
reversed and remanded.
 US v Addyston Pipe & Steel Co: Addyston made agreement with others to divide competition throughout US and fix
prices within those territories in order to exclude new competitors. US brought complaint alleging unlawful cartel.
HELD: An agreement whose main purpose is restraining trade will not be shielded from Sherman Act liability under
common law exception for ancillary trade restraints. AN AGREEMENT between parties solely aimed at restraining
competition (a naked restraint) has no valid justification and is deemed void without any consideration of the
reasonableness of the trade. The main purpose of market division was restraint of trade. Naked restraints: market
division and price fixing inherently are anticompetitive and so are per se unlawful.
 Where no per se violation: Some restraints may be beneficial to competition because the restraints are
necessary components of lawful contracts (covenant not to compete after business sold; partners agree not to
compete). IF a restraint of trade furthers a lawful contract and the extent of the restraint does not exceed the
necessity of the restraint to the contract then the restraint is not considered void under common law.
 Northern Securities Co. v United States: Northern Securities bought two railways which were huge. US brought suit,
alleging that formation of it to purchase the two companies violated s. 1. HELD: Formation of a holding company to
purchase two competing companies constitutes a combination in violation of antitrust law. S. 1 prohibits
combinations that result in unreasonable restraints of trade. Here the purchase has ended competition.
 Standard Oil Co. of New Jersey v US: SO was using large share of refining capacity to begin integrating backward (into
oil exploration and crude oil distribution) and forward (into retail distribution). SO undercut competitors by anti
competitive means, including underpricing and threats to suppliers and distributors who did business with SO’s
competitors. SO bought up virtually all of oil refining companies in US. Initially, the growth of SO was driven by
superior refining technologies and consistency in kerosene products (product standardization). The management then
reinvested profits in acquisition of most refining companies. Held: Restraint of trade had come to refer to contract
that resulted in ‘monopoly consequences’: the court identified three such consequences: higher prices, reduced
output, and reduced quality. If any of these offended then offends Sherman Act. Note: Here court acknowledged rule
of reason but said conduct of SO went beyond it and so per se unlawful.
 Naked Restraints vs Reasonable Agreements
 Board of Trade of the City of Chicago v US: Grain trading done from 9 30 to 1 15. At close, sales of grain were made at
sessions called the ‘Call’. Warehouses exploited this as in Call prices were low. Board adopted rule requiring that
purchases made after close had to be made at price established at close. DOJ sought to enjoin the Call Rule as price
fixing, illegal per se. HELD: Not shown that rule limited quantity of grain shipped, or of raising prices. Every agreement
concerning trade, every regulation, restrains. True test of legality is whether the restraint imposed is such as merely
regulated and promotes competition or whether it destroys competition. NOTE: Good intentions will not save a plan
otherwise objectionable, but knowledge of actual intent is an aid in interpretation of facts and prediction of
consequences.
 US v Trenton Potteries: 23 corp’s controlling 83% of market fixed prices of toilet bowls. D said jury should be
submitted question as to whether agreement was reasonable. Held: Price control is a per se violation. We should
refrain from whether prices reasonable because what is reasonable today may not be reasonable tomorrow.
 Appalachian Coals v US: It was depression, demand was low for coal. Producers established Appalachian Coals as
exclusive selling agent for their coal. Ownership was divided among producers. This would attempt to set highest
prices possible. Note: Coal producers represent 74% of ownership in Appalachian territory but 12% of production east
of Mississippi river. HELD: D made an honest effort to remove abuses and to make competition fairer. The industry
was distressed here, demand was declining due to other forms of energy and economy was down. Interests of
producers and consumers interlinked. Inquiry must then be whether despite this objective (removing evil) the
inherent nature of the plan was such as to create an undue restraint upon interstate commerce. Question chiefly
conerns effects on prices:
 The evidence as to conditions of productions and distribution of coal, the availability of facilities for
transportation, the extent of developed mining capacity and the vast potential undeveloped capacity, makes it
impossible to conclude that Ds will be able to fix the price. Coal will continue to have active competition.
Additional capacity exists if price of coal rises.
 US v Socony Vacumm Oil: Depression caused a crisis in oil market. Crisis was intensified by hot oil – oil produced in
violation of law and dumped on market. The price of oil fallen below cost of manufacture. Congress passed legislation
 which authorized self-help by petroleum industry working with Govt. It was proposed that major companies would
purchase gasoline from refiners that were dumping. Purchases were to be made at ‘fair going market prices’. D’s said
that scheme only allowed prices to rise to normal competitive levels and that their activities promoted competition
and thus their activities did not unduly or unreasonably restrain trade. HELD: Price fixing agreement are unlawful per
se. What is reasonable prices today may not be reasonable tomorrow. Additionally, no approval of buying programs
was obtained under the legislation which would give immunity to respondents. Though employees of govt may have
known of the programs and tacitly approved them, no immunity would have been obtained. Even if approval had
been made that approval would not have survived the expiration in June 1935 of the Act. Buying program continued
unabated after this.
 Note: Other ways competitors can directly interfere with market forces: Market division (allows monopolies in
localities); Assigning production quotas; Boycotting outsiders (When used against innovation this can be more serious
than price fixing).
 Fashion Originators Guild of America (FOGA) v FTC: FOGA to prevent pirators from copying women’s clothe designes
organized a system where retailors could not buy from or sell to any of the pirates. FOGA said there was no price rise,
output limitation or quality deterioration. If they did not comply they were boycotted. HELD: Plan is contrary to
Sherman as it narrows outlets to which manufacturers can sell and the sources from which retailors can buy. Price
fixing, limiting production or deterioration in quality are not the only types of conduct banned.
 Note Other devices: Standard setting (In Allied Tube & Conduit Corp v Indian Head D rigged the process so that a
cheaper substitute would fail to meet safety standards); Pooling Patents.
 Is this a Cartel?
 Goldfarb v Virginia State Bar: Lawyer’s price fixing resulted from bar’s promulgation of minimum fee schedules and
accompanying ‘ethics’ rules.
 National Society of Professional Engineers v US: National society members agreed to refuse to discuss question of
fees until after client selected the engineer. Govt said this was anticompetitive as there was no price competition. D
said competition amongst engineers was contrary to public interest: They said it would be cheaper and easier for an
engineer to design an inefficient method of construction. This they argued was dangerous to public safety and
welfare and so they argued that the code of ethics was not an unreasonable restraint. HELD: Two categories of
antitrust analysis: (1) Those agreements whose nature and effect are so plainly anticompetitive that no elaborate
study of industry is needed to establish their legality – they are illegal per se. (2) Agreements whose competitive
effect can only be evaluated by analyzing the facts peculiar to the business, the history of the restraint, and the
reasons why it was imposed. Price however is the CNS of the economy (Socony) and an agreement that interferes
with it is illegal per se. Here although there is no price fixing, it operates as a ban on competitive bidding. We may
assume that competition is not conducive to ethical behavior BUT that is not a reason under the Sherman Act for
doing away with competition. Rule of reason does not support a defense based on the assumption that competition
itself is unreasonable. This would create a sea of doubt.
 Note: Rule has been expanding: if lawyers could devise an argument that seemed to give arrangements some
resemblance to price fixing there was a chance that this rule would apply.
 Broadcast Music Inc. v Columbia Broadcasting System Inc: BMI and ASCAP operate through blanker licenses which
gives licensees the right to perform all compositions owned by members. Fees for licenses are a flat dollar amount or
a percentage of total revenue and do not depend on amount or type of music played. HELD: A blanket license for
entire market of goods is not per se unlawful if the license does not produce anticompetitive effects. In determining
whether per se violation we should consider the purpose and probable effects of agreement. If agreement tends to
produce procompetitive effects and increases market efficiencies without significant anticompetitive restrictions then
the agreement is not a per se violation and should be assessed under the rule of reason analysis.
 Under rule of reason: any anticompetitive effects are weighed against the pro competitive effects to determine
whether the restraint is reasonable. Here license was designed to address an issue in the market: The transaction
costs between users seeking a small number of compositions from individual copyright owners would be high
without an intermediary capable of connecting users with copyright owners. The license creates an efficient
market by providing an intermediary while relieving the owners of the need to constantly police and attempt to
sell copyrights.
 CBS argues that licenses fix prices for compositions and thus restrains competition. However, copyright owners
are free to license their individual works outside the license. CBS can also directly negotiate with individual
owners.
 Catalano v Target Sales: Wholesalers formed agreement in which they all refused to extend trade credit. Before they
used to compete with each other in extending credit. COA said agreement might enhance competition by removing a
barrier perceived by some sellers to market entry, and ‘by increased visibility of price.’ HELD: Extending interest free
credit is equivalent to giving a discount equal to the value of the use of the purchase price for that period of time.
 THUS, credit terms must be characterized as inseparable from price. Thus, this case falls within the per se illegality.
COA argument fails because any ability to increase price would encourage new entrants.
 Arizona v Maricopa Country Medical Society: Physicians had an agreement setting max fees they may claim for health
services provided to policyholders of specified insurance plan. Insured patient only guaranteed full amount payment
for his bills if he goes to a foundation member physician. If he goes to a nonmember physician he must pay excess.
HELD: D’s accept that price fixing are unlawful on their face but argue that per se rule does not apply here because
the agreements are horizontal and fix max prices and alleged to have procompetitive benefits. As for procompetitive
benefits these need not be considered where per se violation. D then relies on Broadcast Music Inc (BMI Case): Court:
That is different, each foundation here is composed of individual doctors who compete with others for patients,
foundations are not similar to partnerships where they agree not to compete.
 National Collegiate Athletic Association v University of Oklahoma: NCAA adopted a plan for televising college football
games by networks with a view to reducing adverse effects of live TV on game attendance. The plan allowed only one
game per week to be broadcast in each area and limited each member institution to two televised appearances per
season. Held: Agreement was a horizontal restraint – an agreement among competitors on the way they will
compete: It places a ceiling on number of games that may be televised. By restraining quantity of television rights
available for sale to broadcasters, the practice creates a limitation on output. Moreover, the minimum aggregate
price precludes any price negotiation. Price fixing and output limitation is per se unlawful. We do not however apply
per se rule here because it involves industry in which horizontal restraints on competition are essential if product is to
be available at all. Rule of Reason applies. Justifications:
 (1) Court rejects D’s analogy to BMI: NCAA is not an integrated joint venture, the schools are individual agents.
Nor were their procompetitive efficiencies, NCAA could be marketed just as effectively without the plan.
 (2) NCAA’s argument that plan is necessary to protect live attendance is not based on desire to maintain the
integrity of college football as a distinct and attractive product, but rather on a fear that the product will not
prove sufficiently attractive to draw live attendance when faced with competition from televised games.
 FTC v Superior Court Trial Lawyers Association: Lawyers engaged in a boytcott: agreed to not accept new cases until
their fees were raised. Held: Boycott which was also a price-fixing cartel was illegal per se. Boycott could have social
benefit but we do not consider this where illegal per se. ALSO: It does not matter whether the parties of a boycott or
a price fixing agreement had market power: A small participant may for a time being impede competition.
 California Dental Association v FTC: CDA had rules of ethics which prohibited false and misleading advertising.
Members expelled if they did not follow the rules. Held: The prohibitions may have procompetitive effect or possibly
no effect on competition. The restrictions are designed to avoid false advertising: specialized knowledge is required to
evaluate the services and the patients do not have this knowledge. THE KEY INQUIRY is whether these advertising
restrictions limit the total delivery of dental services NOT whether they restrict information or advertising. Quality
advertising may lead to higher demand for dental services. Note: There is no bright line separating a per se violation
and a violation resulting from a rule of reason analysis: must look at market conditions and other variables. Matter is
remanded to consider whether the restrictions had a net anti-competitive effect.
 Polygram Holding v FTC: P and W formed a joint venture to distribute recordings of the 1998 concert. Concerned that
the concert was not as appealing as the earlier ones, they both agreed to price discounting and advertising of the
1990 and 1994 recordings before and just after the release of the 1998 recordings. (Note: W distributed recordings of
1994 concert and P of 1990 concert previously). HELD:
 SC’s approach to evaluating a s. 1 claim has gone through a transition categorical approach (whether illegal per
se or within rule of reason) to a more nuanced and case specific inquiry.
 If it is obvious that a restraint likely impairs competition, there is a rebuttable presumption that the trade is
unlawful. D can rebut this by showing procompetitive benefits that offset anticompetitive harm. NOTE: The
initial determination of whether a restraint is likely to impair competition is known as the quick look. If the quick
look reveals that the restraint is likely to harm competition the court undertakes a more in-depth analysis under
the rule of reason.
 Agreement here would harm competition as it was an agreement to fix prices. Thus presumption that agreement
was unlawful. D’s attempt to rebut this have fallen short: They argue that it will improve profitability. A
RESTRAINT cannot be deemed lawful solely because it increases the profitability of the entity that introduced the
restraint.
 Note:
 Per se: The agreement is condemned without investigation into purpose or effect. Intention to (e.g.) fix prices is
enough.
 Rule of Reason: This includes all cases where the per se rule is inapplicable. The question is how to analyze the
problem to determine whether the agreement is anticompetitive and should be proscribed.
 Obviously Anti-Competitive: When an agreement on its face, has strong anti-competitive properties and no
obviously pro-competitive properties, as in National Society of Professional Engineers, the burden shifts to the
 defendant to demonstrate pro-competitive/efficiency aspects. Absent such a showing the agreement is
condemned. This is called a ‘quick look’ analysis.
 Not so-obviously anticompetitive: In this case a full analysis may be necessary. This usually entails: a definition of
the relevant market, calculation of market shares, assessment of market power, and attention to all
anticompetitive and procompetitive aspects. If anticompetitive aspects and procompetitive aspects are both
weighty, you will want to ask whether an obvious less restrictive alternative is available. As the SC said in
California Dental Association, what is needed ‘is an enquiry meet for the case’.
 Texaco v Dagher: Texaco and Shell collaborated in joint venture to refine and sell gas in western US under Texaco and
Shell Oil brand names. P, a class of Texaco and Shell Oil service owners, allege that Ds engaged in unlawful price fixing
when Equilon (the joint venture) set a single price for both gasolines. HELD: This is not a per se illegal agreement
because it is a joint venture. After the joint venture they became a single entity functionally. This is regardless of fact
that Equilon sold gasoline under both Texaco and Shell brands. The price-setting practice is an essential activity for a
joint venture. Agreement should have been assessed under the rule of reason and the judgement of COA is reversed.
 Is D One Person? Or Multiple Parties Who Can Conspire?
 Copperweld Corp v Independence Tube Corp: A corporation and its wholly owned subsidiary are not capable of
conspiring with one another. They are a single enterprise and their act is unilateral.
 American Needle Inc. v National Football League: 32 football teams (separately owned) formed a new entity, NFLP to
market the teams names, logos, trademarks and related intellectual property. NFLP granted non-exclusive licenses to
use the logos for items such as caps and T shirts to American Needle and others. Subsequently it withdrew the non-
exclusive licenses and gave an exclusive license to Reebok. American needle sued, alleging a conspiracy of the teams
to restrict the distribution of the teams intellectual property rights. Ds moved to dismiss on the grounds that NFLP
was a single entity and the teams could not conspire: HELD: Main inquiry is whether the agreement is created
through separate decisions makers with the result of depriving the marketplace of independent centers of decision
making.
 Often decision makers in a true single entity have a unity of interest and thus are less likely to be engaged in
concerted activity. Here the NFL teams are independently owned. The teams compete with each other not only
on the field but also to attract fans for ticket sales and contracts with coaching talent as well as sale of
trademarked merchandise.
 Consequently, a decision made by all teams to grant an exclusive license to one vendor stifles competition. The
fact that NFL created NFLP to collectively market teams merchandise does not mean that the structure escapes
s. 1 liability.
 Here the NFLP’s agreement to be the sole agent in charge of licensing the teams logos is the only thing
preventing each separate team from managing its own licensing of trademarks.
 Pleading and Proving Agreement (1) Proving a cartel:
 Two ways to prove: Direct Evidence or Circumstantial Evidence.
 Direct Evidence: When cartel members themselves come forward (usually a whistleblower employee).
 Circumstantial Evidence: This is the focus of this section.
 Interstate Circuit v United States: Manager of Interstate and Consolidated (Exhibitors) sent letter to distributors
where he asked compliance with two demands as condition for Interstate’s continued exhibition of their films: One
that distributors agree that in selling their product that this A product will never be exhibited at any theatre at a
admission price lesser than 25 AND that A pictures which are exhibited at a night admission of 40 or more – they shall
never be exhibited in conjunction with another feature picture. HELD: The letter named all addressees and so each
distributor knew that the proposals were under consideration by others. Everyone knew that there would be losses if
there was no unanimity. Compliance with the proposals involved a radical departure from previous business
practices; Court finds it hard to believe that several distributors would have taken such action unanimously without
some understanding that all were to join.
 There are also plus factors to raise a question of collusion when P is relying on conscious parallelism:
 (1) Day before they all raised their prices a secret meeting was held; (2) D’s identical bids were sealed and there
was no non-collusive way they could have known bids of others; (3) If any one competitor had pursued the
course of conduct alone, it would have been unprofitable, but if all did so together they would gain.
 CO Two Tire Equip Co v US: Question is not whether identical prices fixed. Here we have in addition to price
uniformity other plus factors: (1) A background of illegal licensing agreements containing min price maintenance
provisions; (2) An artificial standardization of product; (3) A raising of prices at a time when a surplus existed in
industry; (4) a policing of dealers to effectuate the maintenance of min price provisions.
 Theatre Enterprises v Paramount Film Distributing Corp: Here P was refused when it asked for first run films. There is
no evidence of illegal agreement between Ds. Ds said that first runs are normally granted to non-competing theatres.
Since P’s theatre is in competition with downtown theatres an arrangement would be economically unfeasible. EVEN
IF D’s wished to grant P such a license, no downtown exhibitor would waive his clearance rights and agree to a
 simultaneous showing. As a result, if P were to receive first runs the license would have to be exclusive. However an
exclusive license would be unsound because P is located in a suburban area as compared to the theatres in the urban
area. HELD: A business’s behavior may be used as circumstantial evidence to support a theory of unlawful agreement
BUT mere parallel business behavior does not prove an agreement. Also companies offered justifications for the
parallelism here.
 Matsushita Electric Industrial Co. v Zenith Radio Corp: D were Japanese firms and American firms owned by Japanese
parents. US firms (P) claimed that they engaged in a conspiracy to have high prices in Japanese market but low prices
in US market to drive them out. Held:
 P cannot recover damages based on alleged cartelization of Japanese market because American antitrust laws do
not regulate other nations economies. P also cannot recover for any conspiracy by D to charge higher prices in
American market. P cannot recover for a conspiracy to impose non-price restraints that have the effect of either
raising prices or limiting output. This is because such restrictions benefit competitors.
 Thus neither D’s alleged supracompetitive pricing in Japan, nor the five company rule that limited
distribution in this country, nor the check prices insofar as they established minimum prices in this country,
can by themselves give P a claim for damages.
 COA thus erred when it found evidence of these alleged conspiracies to be direct evidence of a conspiracy
that injured P.
 Note: Ps allegation of horizontal conspiracy to engage in predatory pricing if proved, would be a per se violation
of s. 1. BUT D’s did not appeal from that conclusion. The key issue HERE is whether P adduced sufficient evidence
in support of their theory to survive summary judgment.
 P must show that Ds did not act independently. Here it is likely that D’s acted independently because P’s theory
is weak. It would be difficult for them to price low as they would lose profits which they would have to recover
after driving away the American firms. Also there are powerful incentives for cheating among Japanese firms to
profit. It is unlikely that they will even obtain monopoly power because despite low pricing for 20 years P still has
a large market share.
 Bell Atlantic Corp v Twombly: Class of telephone users (P) brought a damage action against four carriers. ILECs were
authorized monopolists of telecommunication services in their local regional markets. Congress passed legislation to
facilitate entry into local markets by CLECs. ILECs resisted legislation’s command to share local loop without favoring
itself. ILEC refrained from entering each others territory. HELD: There was no agreement. The fact that ILEC resisted
upstarts is natural, there was no agreement. Also the fact ILECs did not impinge on others territories despite being
encouraged by legislation DOES NOT mean that there was agreement. Here previous monopolists were just sitting
tight.
 Text Messaging Antitrust Litigation: P’s filed suit alleging mobile carriers conspired to fix text messaging prices. P
showed that carriers uniformly changed pricing structures. P also showed that carriers increased their price for price
per use. There was also an email in which one T-Mobile executive said that the price increase was ‘collusive and
opportunistic’. HELD: Tacit collusion, also known as conscious parallelism, does not violate the Sherman Act. Only
express collusion by agreement would constitute a violation. Although the email from T-Mobile executive mentions
collusion, the evidence only reveals that this is only a reference to tacit collusion which is permissible.
 State Action
 State Action Doctrine: Are certain private firm agreements outside scope of Sherman because of involvement with
the state or the political nature of the conduct?
 Parker v Brown: California adopted legislation which set forth procedure for adoption of marketing program on
petition of producers if they show that the program ‘will prevent waste and conserve wealth of states.’ Raisin
producers petitioned, raising marketing program adopted. Program carried out by state officials to restrict
competition among growers and maintain prices. Under this all raisins were delivered to Committee which was made
up of producers. HELD: Sherman not intended to restrain state action. Here it is the state that has created the
machinery for establishing prorate program.
 Political Action
 D usually claim that competitors joint lobbying of legislators to gain protection from competition are protectd political
action.
 Eastern Railroad Presidents Conference v Noerr Motor Freight: Railroads conducted campaign to create distrust of
truckers. Railroads persuaded Governor to veto a bill that would have allowed truckers to carry heavy loads. HELD:
Sherman does not prevent persons from coming together to persuade legislature to take particular action that would
produce a restraint or a monopoly.
 Allied Tube & Conduit Corp v Indiana Head: Here D argues that its efforts to affect the product standard setting
process of a private association are immune from antitrust liability under the Noerr doctrine because association’s
standards are widely adopted into law by state and local governments.
  Here Ds agreed to exclude plastic conduits approval by packing the upcoming annual meeting with new
Association members whose only function was to vote against plastic conduits.
 Court: Association cannot be treated as a ‘quasi-legislative’ body simply because legislatures routinely adopted
the Code the Association publishes. The association has no authority conferred by Govt.
 KEY: Every concerted effort intended to influence government action does not have immunity. If this were the
case competitors would be free to enter price agreements as long as they wished to propose that price as an
appropriate level for governmental ratemaking or price supports.
 THE Noerr immunity depends not only on anticompetitive activity’s impact but also on its context and nature.
 State of Missouri v National Organization for Women: NOW invited convention goers to boycott states that had not
ratified the Equal Rights Amendment. NOW hoped that the resulting economic pressure on those states would
convince legislatures to ratify the ERA. Court held for now asserting that resort to ‘a boycott in a non-competitive
political arena for the purpose of influencing legislation is not proscribed by Sherman.
 NAACP v Claiborne Hardware CO: Black citizens under NAACP gave white elected officials a list of demands to achieve
racial equality. The officials gave an unsatisfactory response. Black citizens voted to boycott the white merchants in
town. Violators of boycott were punished and there was violence. Boycott caused substantial business to be diverted
to black merchants. White merchants sued NAACP. Held: SC noted that non-violent elements of D’s activities are
entitled to protection under First Amendment. Thus only those losses proximately caused by unlawful conduct
(violence) may be recovered.
 FTC v Superior Court Trial Lawyers Association: A group of lawyers in DC engaged in a boycott, they agreed not to
accept any new cases until their fees were raised. Authority to raise fees resided in DC Council. The boycott created a
crisis in DC justice system. DC council raised fees later. SC held that the boycott which was also a price fixing cartel
was illegal per se. Then turned to Noerr and free speech defenses. HELD:
 In Noerr the alleged restraint of trade (Railroads persuaded government to veto bill) was the intended
consequence of public action; in this case the boycott was the means by which D sought favorable legislation. IN
OTHER WORDS, In Noerr the desired legislation would have created the restraint on competition; HERE the
boycott was a restraint on competition.
 D then argues that even if conduct prohibited by Sherman it is nonetheless protected by First Amendment rights
recognized in NAACP. COURT: D cannot boycott until they achieve higher fee. Although in NAACP there was a
boycott there those who joined the boycott sought no special advantage for themselves.
 We held in Allied Tube that the NAACP case is not applicable to a boycott conducted by business competitors
who ‘stand to profit’ from lessening competition.
 Final argument: Per se antitrust analysis inapplicable to boycotts having an expressive component.
 Court: Rejects this: Every refusal to do business with a customer has an expressive component: After
boycott D tells target ‘we will not do business until you do what we ask.’
 ALSO Publicity may be generated by any other activity.
________________________________________________________________________________
 Monopoly
 United States v Aluminium Co. of America (Alcoa): P claimed D monopolized the US market for Aluminium AND that D
with foreign co-conspirators, operated an international cartel that restrained imports. Aluminium requires a lot of
electricity, which is cheaply obtained by water power. Alcoa secured such power from companies and told them they
cannot sell to others for manufacture of Aluminium. D also entered into four cartels with foreign manufacturers not
to export, and them not to import. Held: D has market share of 33%by including secondary Aluminium (ingot). If we
exclude this then 90%. D may control prices and so it has 90%. D said it charged a fair price. Court: This is no excuse,
could have charged even lower prices. ALSO, assuming there was no agreement with other international firms then a
higher price would attract larger imports which would reduce price.
 Defenses to Monopoly: (1) May be instances where a market is so limited that it is impossible to meet costs
except by a large enough plant to supply whole demand; (2) Also possible that a single producer is the only
survivor, merely because of virtue of superior skill.
 (2) does not exist here because it sought to strengthen its position by two unlawful practices.
 (1) This is not the case because D repeatedly increased production before others even entered the market. This
is an exclusion of others.
 ALSO: We disregard any question of ‘intent’ to fall within S. 2.
 Additional unlawful practices: (1) Price Squeeze: Alcoa consistently sold ingot at so high a price that sheet rollers
who were forced to buy from it could not pay the expenses of rolling sheet and making a profit. At the same time
it set the price of sheet low. This is not lawful. THIS COULD ONLY be done if Alcoa had power over price.
 Structure-conduct-performance paradigm: Asserts that industry structure influenced a firm’s conduct which in turn
influenced its performance AND that high concentration indicated low competition and poor performance. NOTE: The
tightness of this relationship was later thrown into doubt, nonetheless it still has importance.
 Market Definition
 United States v EI Du Pont: Du Pont produced 75% of cellophane in US and cellophane was less than 20% of all
‘flexible packaging material’ sales. Held: Where market alternatives illegal monopoly does not exist merely because
the product differs from others. What is called for is a cross-elasticity of demand in the trade. KEY: Commodities
reasonably interchangeable by consumers for the same purposes make up that ‘part of the trade or commerce’
monopolization of which may be illegal. HERE Cellophane has no qualities that are not possessed by other materials.
Element of consideration as to cross-elasticity of demand between products is the responsiveness of sales of one
product to price change of the other: If a slight decrease in price of cellophane causes a considerable number of
customers to switch to cellophane it would be an indication of high elasticity of demand. There was high elasticity
here. Thus relevant market is flexible packaging material market.
 Modern US Market Definition and Assessment of Power
 Though determining market is helpful we need to know whether D was pricing at a monopoly level: this may be
shown by higher profits, account may be taken of return on capital, may also be evidence that D’s prices rose after
competitive force was removed.
 Eastman Kodak v Image Technical Services: Kodak previously allowed ISOs to service and repair Kodak machines. It
changed this and said that it would itself provide repair services. It required all licensed manufacturers to stop
supplying parts to ISOs. Kodak’s prices were higher than ISO’s and its service was of inferior quality. ISO’s (P) said they
monopolized market. Held: Kodak said a brand is not a market: it would have to compete with competitors. P said
that customers were usually locked in once they picked a brand as it would be costly to shift. COURT: Because
services and parts of Kodak are not interchangeable with other manufacturer’s parts and services a brand can be a
monopoly. There needs to be a factual inquiry into the ‘commercial realities’ faced by consumers. Case remanded for
trial.
 US v Microsoft Corp: Federal Government (P) sued Microsoft for s. 2 and 1 by a series of exclusionary acts and threats
to preserve its monopoly in Intel-compatible personal computer operating systems. D said that market definition was
too narrow, that there were many sources of competitive pressures on D’s Windows.
 A. Market Definition: No products that computer users could substitute for without incurring substantial costs. D
says three type of products should be included: (1) Mac Os: Court: DC found that users would not switch to Mac
Os in response to a substantial price increase because of costs of acquiring new hardware needed to run Mac Os,
as well as learning how to run new system. Os also costs more and has fewer applications. (2) Operating systems
for non-PC devices: These devices cannot perform all functions of PC, as for portal websites they do not host
enough applications to induce consumers to switch. (3) Middleware: It would take several years for middleware
to evolve into a product that can constrain operating system pricing. Thus Windows accounts for 95% of Market.
 B. Market Power: D says that market share does not by itself indicate monopoly power. Here however D had
structural barriers for competitors: (1) Consumers prefer operating systems for which a large number of
applications have been written; (2) Most developers prefer to write for operating systems that already have a
substantial consumer base. D then argues that Windows gained dominance through superior quality. Court: This
case is not about D’s acquisition of monopoly but rather of its efforts to maintain its position through means
other than competitive merits.
 Direct Proof: Having concluded that D has market power we turn to D’s alternative argument that it did not
behave like a Monopolist. There is no rule that we must examine monopoly’s actual behavior.
 The Conduct Offense
 In Alcoa court suggested that s. 2 offense might be structural – presumption that maintaining a monopoly is bad
(inefficiency and exploitation), this presumption is rebuttable if firm could prove that it did not seek monopoly; that it
was an accident or fortuity.
 This perspective was challenged in that it undermined business incentive to be the best. Bad conduct however is
difficult to characterize. What is anticompetitive conduct (Bad conduct)? Following case addresses this:
 Lorain Journal Co. v US: D (Lorain Journal) attempted to establish a monopoly. It refused to accept local
advertisements in the Journal from any advertiser who advertised over WEOL (Broadcasting radio company). Court
found below that for some advertisers advertisement was essential in Journal of D to maintain sales. Held: Conduct
not only reduced customers to WEOL it sought to destroy WEOL altogether. Elimination of WEOL would allow D to be
a monopoly again. This violated S. 2. To establish s. 2. Violation it is not necessary to show that success rewarded D’s
attempt to monopolize. When intent to monopolize and the consequent dangerous probability exist it is illegal.
 Evolution of Law
 US v United Shoe Machinery Corp [1954]: USM manufactured 75% of shoe making machines. Rather than sell them it
leased them for 10 years. When lessee tried to replace machine, USM would give favorable terms if machine was
replaced with USM machine. USM repaired for free. USM took lower rate of return where competition greater. Held:
Practices are not ones which are the result of natural market forces. The arrangements further dominance of
particular firm rather than encouraging competition on pure merit. While law allows many enterprises to use such
 practices, Sherman is now construed to forbid the continuance of market control based on such practices. Court
ordered divesture, along with injunctions which required USM to sell rather than lease its machines.
 US v Grinnell Corp [1966]: Offense of monopoly under s. 2 has two elements: (1) The possession of monopoly power
in the relevant market, and (2) The wilful acquisition of that power as distinguished from growth or development as a
consequence of a superior product, business acumen, or historic accident. Note: Courts later added to (2): By acts not
on competitive merits. NOTE: Grinnell is a step away from Alcoa’s strong skepticism towards monopoly structure.
 Essential Facilities and Duties to Deal
 US v Terminal Railroad Association: Because of topography no railroad could enter City except by using terminal
facilities controlled by the Terminal Company. DOJ sued under s 1 and 2 saying the combination (organised by six
railroad companies) was illegal. Held: Others must be allowed admission to joint ownership upon a plane of equality.
Essential Facility Duties: If a single railroad controlled access it had a duty to grant reasonable access to competing
railroads.
 MCI Communications v AT&T: AT&T refused to give MCI reasonable access to local lines (AT&T only had access). Court
held that refusal was an act of monopolization.
 Otter Tail Power v US: Residents wished to buy electricity at wholesale from otter. It refused. Residents then bought
from US Bureau. Electricity needed to be wheeled over lines of Otter. Otter refused. Held: Its refusal to sell at
wholesale or to wheel were solely to prevent others from eroding its monopoly position.
 Note: The essential facilities doctrine was an exception to the rule of no duty to deal. Courts however wanted a limit
to the doctrine which was imposed in the following case.
 Official Airline Guides v FTC: Official Airline Guide was ‘bible’ of flight schedules. Donelly Corp was the publisher.
Donelly refused to list the services of commuter airlines in the main section, they were listed at the end. Donelly said
this was because they were less reliable. P said they were denied access to a scarce resource that should be made
available to all on non-discriminatory terms. Held: No monopoly. It is not acting to preserve its own monopoly unlike
in Lorain. Also note on Otter: It was not benefiting another business it owned. Thus Donelly had no motive or intent.
A monopolist as long as he has no purpose to restraint competition or to enhance his monopoly and does not act
coercively retains right of who to do business with.
 Aspen Skiing v Aspen Highlands: Owners of four major mountains began offering interchangeable ticket that could be
used at each of the four mountains. One of the company (Ski Co) purchased 3 of the mountains. Thereafter it offered
fixed percentage of revenue to Highland which was lower. After Highland rejected offer Ski Co. discontinued the
interchangeable ticket program and established new program for the 3 mountains. P sued under s. 2 claiming that D
monopolized skiing in Aspen area. Held: A business refusal to cooperate with competitors may be a s. 2 violation if
the refusal does not serve a legitimate business purpose. D argues that P offers inferior product and that its refusal to
include Highland in the all mountain pass was its attempt to disassociate from an inferior product. This was disputed
by experts. Court noted that Ski Co did not provide evidence of a legitimate business purpose for refusal to cooperate,
decision appears to be motivated by desire to harm smaller competitor and reduce competition long term.
 Olympia Equipment Leasing v Western Union Telegraph: WU created Telex service. Previously it leased Telex
terminals, on which subscribers could send and receive messages and provided the transmission service. It decided to
focus on the transmission service and to raise capital wanted to sell its supply of Terminals. It decided to make a
market for firms that would lease Telex equipment to others, these firms bought from Telex. It offered to put names
of such firms on a list that its sales force gave to new subscribers, also gave referrals to these firms. WU then changed
course as terminals were liquidating too slowly. It withdrew support for its terminal leasing competitors. Olympia
crumbled after this. Olympia sued for monopolizing the equipment leasing market by withdrawing its support. Held: It
is not possession but abuse of monopoly power that violates s. 2. Rather than abusing its power it encouraged entry
of firms then later withdrew this help. Firm has no duty to continue to help. Some cases hold that a firm which
controls a essential facility may be guilty of monopolization if it refuses to provide access.
 Present case would be an essential facility case if WU refused to supply telex service to a customer who got his
terminal equipment from Olympia OR if Olympia were a competing supplier of telex service who depended on
owner of local exchanges (WU) to complete its service. THE ESSENTIAL FEATURE – a monopoly supplier’s
discriminating against a customer because customer decided to compete with it – is missing here.
 Aspen could not acquire three more mountains in the Aspen area BUT Olympia could and did hire salesmen to
substitute WU’s sales force.
 Verizon Communications v. Law Offices of Curtis v Trinko: Legislation imposed obligations on local exchange carriers
(LECs) in the market for telephone services. Legislation aimed to help new competitors enter the highly concentrated
market. Verizon was the incumbent LEC, it allowed several competitors to use its local telephone networks. Trinko
purchased a telephone service from one of Verizon’s competitors. Trinko brought complaint against Verizon, alleging
s. 2 violation because it discriminated against competitors that were using Verizon’s network. Held: D’s refusal to
coordinate generally will not violate s. 2. In a free market allowing firms to lawfully profit from innovation and
superior quality is allowed. There must be a showing of anticompetitive conduct. Here Verizon is bound by legislation
 BUT the legislation states that the obligations imposed by it do not affect liability for antitrust purposes. Note: in
some cases (Aspen) refusal to cooperate with competitor has been found to breach Sherman Act. Here HOWEVER no
evidence that Verizon’s refusal to coordinate was fueled by anticompetitive intent.
 Strategic Low Pricing – Predatory Pricing and Price Discrimination
 S. 2 of Clayton Act was amended by Robinson Patman Act which prohibits price discrimination (unless justified by cost
savings or need to meet competition) where the effect ‘may be substantially to lessen competition or tend to create a
monopoly.’ NOTE: This does not require market power as ingredient for violation.
 Utah Pie Co. v Continental Baking Co: Utah pie had 2/3 market. Later share was reduced to 4% after entry by D which
charged lower prices. There was evidence that lower prices were unprofitable as its price was less than its direct cost
and allocation for overhead. Here D sold at higher prices elsewhere. Held: D had predatory intent to injure P. Court
found this in the management documents that stated that Utah Pie dug holes in our operation and posed a threat.
There was also evidence that suggested injury to competition: There was a drastically declining price structure which
jury could attribute to continued price discrimination.
 Brooke Group v Brown & Williamson Tobacco Corp: Two firms engaged in price war. One of them made a claim of
predatory pricing after the other reduced priced in form of volume rebates. Held: Two requirements for P to make a
predatory price claim: (1) Prices were below D’s costs; (2) D had a reasonable prospect or under s. 2 a dangerous
probability of recouping its investment in below-cost prices. That is, must show that later prices would rise, sufficient
to compensate for amounts lost in predation. (This requires analyzing market conditions and structures). Note: Where
market is highly competitive, or where new entry is easy, or D lacks excess capacity to absorb extra demand AND
cannot quickly create new capacity – summary disposition of the case is appropriate. HERE (2) was not shown.
 Predatory Buying
 Here buyer buys up inputs at a price too high, squeezing out rivals, gaining a monopsony (single buyer) over suppliers.
Having gained monopsony it is able to squeeze suppliers, who are now forced to sell at lower than competitive price.
 Weyerhaeuser Company v Ross Simmons Hardwood Lumber: W overpaid for sawlogs and bought more than it
needed, intentionally squeezing Ross-Simons which could not pay the high price, this caused foreclosure of its plant,
thus monopolizing the market. Held: Two pronged Brooke approach should apply here as well. Court noted: Firm may
wish to buy excess to keep reserve or because of a miscalculation of how much it needs; Failed predatory bidding
schemes may also benefit consumers: acquisition of more input leads to more output. Here (2) did not exist.
 Price Squeezes
 Recall in Alcoa court based its holding on violation on two offenses: (1) D achieved monopoly actively; (2) Alcoa sold
Aluminium at a price so high and sold its own fabricated product at a price so low that fabricators could not stay in
business. (1) Has been overridden by modern law that bases liability on CONDUCT not structure. (2) Was generally
accepted until Pacific Bell.
 Pacific Bell Telephone v Linkline Communications: PB charged ISPs high prices for elements of DSL service and charged
its own end users of DSL so little that ISPs could not provide DSL at a profit. Price squeeze: When vertically integrated
firm sells inputs at wholesale and also finished goods at retail. If that firm has market power in the wholesale market,
it can simultaneously rise the wholesale price of inputs and the cut the retail price of the finished goods. This will
squeeze profits of competitors. Held: Simply possessing monopoly power and charging monopoly prices does not
violate s. 2, rather the statute targets ‘wilful acquisition or maintenance of that power’. Generally businesses are free
to choose with whom they deal, the price and conditions of those deals. BUT there are two exceptions: (1) Predatory
pricing; (2) Refusal to provide essential facilities. Note: Trinko: Courts are ill suited to act as central planners,
identifying the proper price, quantity and other terms of dealing.
 Loyalty Rebates, Bundled Rebates
 May a dominant firm give customers rebates based on their loyalty? Are such rebates merely price competition or are
the exclusionary conduct foreclosing competitors from chance to compete on merits?
 Le Page’s Inc v 3M: Here loyalty rebate was held to be in violation of Sherman. NOTE: Other jurisdictions have been
more reluctant to condemn rebates on grounds that they are price competition.
 Cascade Health Solutions v Peacehealth: Peacehealth (D) offered bundled discounts (discount where firm sells
multiple goods together). Held: Although this may benefit consumers by lower price it is possible that it may be used
to exclude firms that are more efficient. We must be careful because bundled discounts lead to lower price AND as
such we hold that bundled discounts may not be considered exclusionary conduct within the meaning of s. 2 UNLESS
the test in Brooke Group (of predatory pricing) to be applied.
 Summing Up: What Standards for Exclusionary Conduct:
 Profit Sacrifice Test: One variant asks whether D has sacrificed immediate profits as part of a strategy whose
profitability depends on the recoupment of those profits through the exclusion of rivals.
 Less Efficient Competitor Test: Judge Posner proposed this: Exclusionary practice is one that is likely in the
circumstances to exclude from the defendant’s market an equally or more efficient competitor.
  Balancing Test: In Microsoft decision, DC Circuit employed this which examines both competitive effects and
efficiencies, to assess claims under S. 2.
 For this P must first prove anticompetitive effect, after this to avoid liability D must provide a procompetitive
justification for its conduct. If D makes this showing then P must either rebut this justification.
 Intellectual Property: Duty to License?
 Is there and when is there a duty to license a patent, copyright or trade secret?
 Image Technical Services v Eastman Kodak:
 Contention of Kodak to refuse to sell its parts to ISOs was based on its reluctance to sell patented or copyrighted
parts. This is a legitimate business justification. HOWEVER, the presumption of legitimacy can be rebutted by
evidence that monopolist acquired protection of IP laws in an unlawful manner OR if there is evidence of pretext.
Here there is evidence of pretext because Kodak was previously willing to provide the products, without regard
to IP.
 CSU v Xerox: Xerox encouraged ISOs to repair and service its machines. Later it embarked on policy not to sell parts to
ISOs. ISO’s sued for antitrust violations. Xerox countered for patent and copyright infringement as CSU needing the
parts for its business had cannibalized parts from used Xerox equipment and obtained them by other means. Held:
We decline to follow Eastman Kodak. If patent infringement is not objectively baseless, an antitrust defendant’s
subjective motivation is immaterial. Presumption of legitimacy can be rebutted by evidence that monopolist acquired
protection of IP laws in an unlawful manner. Presumption cannot be rebutted on grounds of pretext however.
 Complex Strategies to maintain Monopoly, including product change, exclusive dealing, tying and bundling
 US v Microsoft Corp: Microsoft bundled IE with its operating system and refused to let OEMs include Netscape’s
Navigator on the Microsoft System. DOJ brought monopolization claim. Judge denied motion to dismiss as to all
claims except one: dismissed claim challenging D’s monopoly leverage; use of leverage in the operating system
market to gain a competitive advantage in the browser market. Held: Having a monopoly alone does not violate s. 2.
Only violates when it acquires, maintains, or attempts to acquire or maintain a monopoly BY engaging in
EXCLUSIONARY conduct ‘as distinguished from growth or development as a consequence of a superior product,
business acumen, or historic accident.’ Principles: (1) To be exclusionary the act must have an anticompetitive effect.
(2) P must demonstrate that conduct harmed competition not just competitor; (3) D may then proffer a
procompetitive justification; (4) IF D’s procompetitive justification stands unrebutted, then P must demonstrate that
the anticompetitive harm of the conduct outweighs the procompetitive benefit. (5) Our focus is on effect of the
conduct, not intent.
 D engaged in a variety of exclusionary conduct: (1) M refused to let OEMs include Navigator on M’s operating
system. This is anticompetitive. Justification: M is exercising right as holder of copyright. Court: IP law does not
confer a privilege to violate antitrust laws. Justification: Netscape can still be distributed. Court: Although M did
not bar rivals from means of distribution, it did bar them from cost-efficient ones.
 (2) Integration of IE and Windows: This prevented OEM’s from pre-installing other browsers and deterred
consumers from using them. Users could not remove IE. Justification: Only provided justification for users
inability to choose default browser, technical reason. P does not rebut.
 (3) Offering IE free of charge or even at a negative price. This does not violate Sherman Act.
 (4) Agreements with IAPs: IAPs are one of two major channels by which browsers can be distributed. M has
exclusive deals with 14 of the 15 top access providers in North America. By ensuring that the majority of all IAP
subscribers are offered IE either as a default browser or as the only browser, M deals with IAPs clearly have a
significant effect in preserving its monopoly.

_____________________________________________________________________________________________

 Collaboration Among Competitors

 Two types of collaboration: (1) Lose Knit: Competitors do not integrate but have common objectives. Here they may
be sharing information, setting standards, policing fraud, or pooling patents that block one another. (2) Tight Knit:
Involves a degree of business integration to realize synergies and solve market problems. This includes joint ventures
and alliances.
 FTC v Indiana Federation of Dentists: A group of dentists formed Federation (D) and began policy of ignoring requests
from dental insurance companies for X-rays of patients. Insurers used X-rays to determine cheapest adequate
treatment for patients, Federation viewed this practice as dangerous to the doctors autonomy. FTC (P) brought
complaint against federation, alleging that the collective practice of withholding X-rays eliminated competition among
dentists regarding policies dealing with insurers. Held: Collective refusal amounts to unreasonable restraint of trade.
Question is whether restraint merely regulates and thereby promotes competition OR whether it suppresses and
destroys competition. Policy of Federation in refusing to give X rays resembles group boycotts. Although boycotts
have been stated as unlawful per se, we refuse to hold such a case to be a per se violation. Application of Rule of
 Reason: A refusal to compete with respect to package of services offered to customers impairs ability of market.
Absent some procompetitive virtue – such as creation of efficiencies – such agreement limits consumer choice.
Federation: (1) There was no market power; Court: Absence of proof of market power does not justify a naked
restriction AND even if no naked restraint there is proof that restraint led insurers unable to obtain x rays in localities
where federation had a heavy majority; (2) No finding that refusal to give X-rays led to more costly services; Court:
Refusal to provide information for choosing least cost effective option would clearly raise price; (3) X-rays alone
cannot be used to choose adequate care (concerns for quality being effected): Court: Such a justification was
provided in Society of Professional Engineers. Insurers have incentive to consider welfare of patients as well as to
minimize costs so as to maintain reputation and business.
 Note: Court assigns more deference to Tight Knit collaboration which includes integration. Following case is a
covenant not to compete (Tight Knit).
 Rothery Storage & Van Co v Atlas Van Lines: Atlas had a nationwide carrier, provides moving services to individuals
and businesses. Atlas employs independent moving companies throughout country. The deregulation of moving
industry impacted relationship between van lines (Atlas) and agents. After this agents could easily obtain interstate
transportation authority. Agents could cut prices to attract business for themselves. This posed free rider problems
for Atlas. Under new policy, agents could continue to exercise independent interstate authority only by transferring
its independent interstate authority to a separate corporation with a new name. These new entities could not use the
facilities or services of Atlas or any of its affiliates. P claimed that Atlas’ new policy amounts to boycott because (D)
refuses to deal with any carrier agent that does not comply. HELD: New policy allowed legally separate companies to
integrate activities by contract. Atlas controls 5-6% of market. It is impossible that an agreement to eliminate
competition within that size can produce any of the evils of a monopoly. Chief efficiency achieved is the elimination of
the free rider problem. An agent can attract customers because of Atlas’ national image and use Atlas equipment.
 Addyston Pipe & Steel: A naked horizontal restraint (that does not accompany a contract integration) can have
no purpose other than restricting output and thereby raising prices AND so is illegal per se; an ancillary
horizontal restraint (One that is part of an integration of economic activities of the parties AND appears capable
of enhancing the group’s efficiency), is to be judged according to its purpose and effect.
 ALSO there is no possibility that the restraints can suppress market competition and so decrease output. The
integration is the SAME as a merger. If Atlas bought the stock of all of its carrier agents, the merger would not
even be challenged under the DOJ merger guidelines because of inferences drawn from Atlas market share and
structure of the market.
 Credit Suisse Securities v Billing: Investors in IPO offerings sued underwriters for various practices, including tying and
laddering in the course of launching the IPO (buyers in IPO were required to buy more stock in successive stages).
Held: SEA preempted antitrust laws. Justice Stevens agreed that case was properly dismissed but on the ground that
the practices were not unreasonable under the rule of reason: Agreements among underwriters on how to best
market IPOs should be treated as a procompetitive joint venture.
 Loose Knit Agreements
 Two types of restraints: (1) Exploitative (Price Fixing) and (2) Exclusionary: Boycotts are exclusionary, by disabling
competition D firm might protect or increase its own power at consumer expense. This way exclusionary restraints
might lead to exploitation. NOTE: Duties not to exclude have expanded, giving rise to Northwest Wholesale.
 Northwest Wholesale Stationers v Pacific Stationary & Printing: Buying cooperative of small retailers ousted a
distributor. The distributor claimed that is exclusion was a concerted refusal to deal, illegal per se. HELD: Exclusion
was not per se illegal. When P challenges expulsion from a joint buying cooperative, some showing must be made
that cooperative possesses market power or unique access to a business element necessary for effective competition.
 United States v Visa and Mastercard: Visa and Mastercard were organized as joint ventures and owned by different
member banks. Visa and Mastercard enacted rules prohibiting their member banks from issuing cards using any
payment system other than Visa or Mastercard. No bank was willing to forfeit its membership in Visa or Mastercard
to issue Amex cards. DOJ sued, alleging violation of s. 1 of Sherman. Held: Case involves two separate markets: (1)
General Purpose card market; (2) Network Services market for general purpose cards.
 (1) DC found that other forms of payment – such as cash, checks and debit cards are not considered by most
consumers to be reasonable substitutes.
 (1) Here restraint is imposed by members on themselves so as not to compete with others. Such agreements are
anticompetitive and clearly prohibited by Sherman.
 (2) In the market for network services the exclusionary rules have prevented Amex and Discover from selling
their product at all. If there were no exclusionary rules Visa and Mastercard would have been impelled to design
and market their products more competitively.
 Procompetitive Justifications: Key benefit claimed is that rules promote ‘cohesion’ within MasterCard and Visa
networks so that the networks compete effectively. DC found that rules not necessary to accomplish that goal.
No evidence that allowing member banks to issue cards of rivals would endanger cohesion.
 Exchange of information
 American Column & Lumber Co v US: AHMA instituted a plan. This created a system for lumber producers to share
information. Plan was optional, but 365 members of AHMA joined. Participants would send detailed information
about sales, inventory, and prices to secretary who would disseminate to members. Also, they issued market-report
letters that contained statistical analyses of present and future market conditions. Participants attended regular
meetings to discuss market conditions and production levels. Shortly after plan’s adoption, the price of lumber wood
rose significantly. US (P) sued, alleging violation of s. 1. During meetings D had blatantly suggested that restricting
production and increasing prices would be profitable. Note: D produced 1/3 of total production of US. HELD: A trade
group violates Sherman by sharing detailed information among competitors if the purpose and effect of the activities
are to restrain competition. If competitors share information in a way that makes it easy to adopt a uniform strategy,
the fact that coordination occurs openly in public in the form of a trade association will not preclude liability. Minutes
from plan show that one purpose of plan was to induce members in restraining production.
 Maple Flooring Manufactures Association v US: MFMA was association of companies that made and sold wood
flooring. MFMA engaged in information sharing about their products and the market conditions of the industry.
Example: MFMA members were given average cost of different types of flooring, as well as a pamphlet featuring the
standard freight rate. Members met to discuss industry conditions and share opinions on how to address problems.
HELD: No evidence that published list of costs and freight rates have been used to fix prices. Here price was not a
proper subject of discussions in the meetings. The Govt did not charge that there was an understanding at the
meetings with respect to prices. The dissemination of information tends to stabilize trade. With knowledge
dissemination there is no overproduction which means there is no economic waste. The sharing of knowledge on
business conditions and its consequent effect in stabilizing production and price is not a restraint of commerce.
 US v Container Corporation of America: There was exchange of info but no agreement to adhere to a price schedule.
Information exchanged was in relation to specific sales to identified customers, not a statistical report on average cost
to all members without identifying parties to specific transaction as in Maple Flooring. Here D just requested for
information as to most recent price charged. Held: This concerted action is sufficient to establish a conspiracy or
combination, initial ingredient of s. 1 violation. Price info exchanged is illegal per se. Stabilizing prices as well as raising
them is within ban of s. 1.
 US v United States Gypsum Co: D shared info about sales, price and customers so as to avoid buyer liar problem in
which buyer tells manufacturer that it obtained a lower price from elsewhere. Legislation prevented discriminatorily
low price to one buyer and not to competitors. D said telephone conversations were necessary to verify whether
buyers had really been offered a lower price by a competitor and thus to establish a meeting-competition defense (to
the legislation). Held: SC did not hold D guilty and reversed on Mens Rea grounds. BUT it said that price verification to
take advantage of defense in legislation is not a controlling circumstance. The defense can usually be satisfied by
efforts short of inter-seller verification.
 Agreements of Competitors to Restrain their Own Competition
 A. Professional Restraints: Professionals put restraints on themselves to maintain high standards.
 B. Higher Education – Brown/MIT: US v Brown University: Overlap formed by MIT and 8 Ivy schools to coordinate
financial aid for students who were admitted to more than one school in the group. Members agreed to award aid
only on need basis and use standard methodology for calculating need. Additionally, members met once a year to
resolve discrepancies and to set amount of aid given to commonly admitted students. D said that on this they would
be able to select school on merits and not on price. US sued, alleging violation of s. 1, seeking injunctive relief. HELD:
Because agreement aims to restrain ‘competitive bidding’ and deprive students of ability to utilize and compare
prices in selecting schools, it is anticompetitive ‘on its face.’ Thus we agree that there has to be some ‘competitive
justification even in absence of a detailed market analysis.’
 Justifications: (1) Improved quality of educational program; (2) Increased consumer choice by making Overlap
education more accessible to greater number of students; (3) Promoted competition for students among
Overlap schools in areas other than price. DC rejected these saying they were all non-economical, social welfare
justifications.
 On appeal, MIT contends that by promoting socio-economic diversity Overlap improved quality of education. SC
has recognized improvement in quality of a product or service as one procompetitive virtue. ALSO: it claimed
that by increasing financial aid available to needy students it provided more students ability to study. Finally: MIT
argues that by eliminating price competition among schools Overlap channeled competition into areas such as
curriculum, campus activities and student-faculty interaction. Court: This is not an accepted justification.
 NOTE: Here Overlap is not an attempt to withhold service from customers as was the case in Indiana Dentists
BUT rather to extend a service to needy who otherwise could not afford education. Thus rather than suppress
competition Overlap may merely regulate competition and enhance it.
  We leave to DC to decide whether full funding of need may be continued on an individual institutional basis,
absent Overlap, whether tuition could be lowered as a way to compete for qualified ‘needy’ students, or
whether there are other alternatives to implement MIT’s professed social welfare goal.
 Another aspect of Indiana Dentists and Professional Engineers was that those agreements embodied a strong
economic self-interest of parties to them.
 Thus the nature of higher education and asserted procompetitive benefits convince us that a full rule of reason
analysis is in order here.
 Note: Once D demonstrates that conduct promotes a legitimate goal, P must then show there exists a viable less
restrictive alternative.
 Intellectual Property:
 1995 Guidelines contain a safe harbor for licensing transactions: Agencies will not challenge a restraint in a licensing
arrangement if (1) Restraint is not facially anticompetitive; (2) Licensor and Licensees collectively account for no more
than 20% of each relevant market significantly affected by the restraint.
 1995 Guidelines: Antitrust concerns arise when licensing arrangement harms competition among entities.
 Example 1: Manufacturer of jets and a firm that makes composite materials enter joint venture to produce a new
turbine. Joint venture could cross license in which parties agree to exchange rights to relevant IP to develop
turbine. NOTE: This would be unlawful if manufacturer requires supplier of composite to refrain from supplying
similar materials to competing jet manufacturers.
 Agencies approach is the application of rule of reason: S. 3.4: Whether restraint has anticompetitive effects and
if so whether the restraint is reasonably necessary to achieve procompetitive benefits that outweigh the
anticompetitive effects. NOTE: non-exclusive licenses are generally allowed. Because such a license imposes no
restrictions on party to use licensed IP and as such competition is not diminished.
 Cross Licensing
 Patent pooling was considered cartelizing in guise of eliminating blocking effect of patents. Today it is recognized
that patent pooling may be a way for inventors and producers to use common standards that serve consumers
e.g. DVD standard technology.
 Agency recognizes that patent pooling may provide procompetitive benefits such as reducing transaction costs,
integrating complementary technologies, clearing blocking positions and avoiding costly infringement litigation.
 They can however have anticompetitive effects: Collective price or output restraints in pooling arrangements
may be deemed unlawful if they do not contribute to an efficiency enhancing integration of economic activity
among participants. Note: When cross-licensing or pooling arrangements are mechanisms to accomplish naked
price fixing or market division they are subject to challenge under the per se rule.
 Pooling need not be open to all, however, exclusion from cross-licensing and pooling arrangements among
parties that collectively possess market power, may in some cases harm competition. Two factors: (1) Whether
those outside cannot compete effectively; (2) The pool participants collectively possess market power. If they
cannot compete effectively and participants possess market power then rule of reason applied.
 Standard Setting and FRAND Obligations
 Standard setting organizations sponsor development of standards. The standards they set may reflect market
power. Owners of technology necessary to practice the standard may try to capitalize on their advantage,
demanding super high royalties for its license – this is called a patent ambush.
 To avoid this problem SSOs now generally require that members disclose in advance all patents that may be
infringed by the standard and agree to license their relevant technology on reasonable and non-discriminatory
terms (RAND terms).
 One group devised FRAND: Fair, reasonable and non-discriminatory terms. Under FRAND each member agrees to
declare in advance the max royalty rates and the most restrictive other terms that it will require in licensing its
technologies to users of the standard.
 FTC v Actavis: Solvay initiated patent litigation against Actavis and Paddock. Later parties settled: Actavis agreed it
would not bring its generic to market till a later date, and agreed to promote the product of Solvay. Other
manufacturers made similar promises. Solvay in turn agreed to pay millions of dollars (large sums) for nine years to
the parties. The companies said these were compensation for other services. FTC says that these payments were
rather made for Actavis’s promise not to compete. FTC says D (Solvay, actavis, other parties) violated s. 5 of FTC Act
by unlawfully agreeing to share in Solvay’s monopoly profits, abandon their patent challenges, and refrain from
launching low cost products to compete with Solvay’s product. 11th Cir held that absent sham litigation or fraud in
obtaining the patent, a reverse payment settlement is immune from antitrust attack. HELD: Parties colluded here and
this is not allowed due to anticompetitive impact. Reason why FTC’s complaint should not have been dismissed: (1)
Agreement may have adverse effect on competition as it may promote supracompetitive pricing; (2) D may provide
justifications and there may be analysis under rule of reason; (3) Mere fact that A is able to pay B millions suggests
that it has significant market power to charge supracompetitive prices. (4) An unexplained large reverse payment
 itself suggests that patentee has serious doubts about patent’s survival. AND this suggests that payment’s objective is
to maintain supracompetitive prices that is to be shared.
 FTC urges us to hold that reverse payment settlement agreements are presumptively unlawful and that courts
reviewing such agreements should proceed via a ‘quick look’ approach, rather than applying the rule of reasons.
(Quick look analysis shifts to D the burden to show empirical evidence of procompetitive effects). We decline to
do so. We decline to do so as we noted in California Dental that abandonment of rule of reason in favor of
presumptive rules (or a quick look approach) is appropriate only where ‘an observer with even a rudimentary
understanding of economics could conclude that the arrangements in question would have an anticompetitive
effect on customers and markets. We don’t think reverse payment settlements here meet this criterion.
 Rule of Reason applies here.

________________________________________________________________________________________________________

 Mergers
 S. 7 of Clayton Act: Prohibits M&As whose ‘effect may be substantially to lessen competition or to tend to create a
monopoly in any line of commerce in any section of the country.’
 Brown Shoe Company v US: Brown was fourth largest manufacturer of shoes. Kinney was 8th leading shoe retailer.
Brown acquired Kinney. US sued under S. 7. Held: Merger illegal on grounds that it would foreclose Kinney’s
competitors from substantial outlets and it would eliminate important retailing competition where both companies
were located.
 Discussion: Market: Market determined by reasonable interchangeability of use or cross elasticity of demand
between the product itself and substitutes for it. Within this market submarkets may exist, this is determined by
public recognition of the market, the products characteristics and uses, distinct customers, production facilities
etc. Market here is for men’s, women’s and children’s shoes. Under s. 7 it is important to examine the effects of
a merger in each such submarket to determine if there is a reasonable probability that the merger will
substantially lessen competition.
 Discussion: Probable Effect of Merger: Market share of merger is key to determine effect on competition. In an
industry as fragmented as shoe retailing, control of substantial shares of trade in a city may have important
effects on competition. Strong national chains can insulate outlets from competition in particular locations.
Some benefits may be conferred on consumers by eliminating wholesalers such as lower prices. BUT we cannot
fail to recognize Congress’ desire to promote competition through protecting small businesses. Congress new
that higher costs and price may be incurred from fragmented industries, nonetheless it favored it.
 US v Philadelphia National Bank: (Philadelphia National Bank Presumption): Philadelphia Bank, second largest bank
sought to acquire Girard, third largest bank. Resulting bank would have been the largest in the county area. It would
have 36% assets and deposits in region. HELD: A merger that results in a big share is so inherently likely to lessen
competition substantially that it must be enjoined in absence of evidence clearly showing that the merger is not likely
to have anticompetitive effects. Without considering smallest market share that would pose a threat, we are clear
that 30% does pose a threat. D says that big banks will help it compete with out of state large banks for large loans.
We reject this because of the concept of ‘countervailing power: If anticompetitive effects in one market could be
justified by pro-competitive consequences in another, the logical upshot would be that every firm in an industry
could, without violating s. 7, embark on a series of merger that would make it in the end as large as industry leader. D
then argues that big bank needed to bring business to the area. Court: If a merger reduces competition it will be
proscribed regardless of other benefits. This decision was taken by Congress.
 FTC v Consolidated Foods Corp: Consolidated Foods, major food processor acquired Gentry, the third largest maker of
dehydrated onions and garlic. Consolidated had used reciprocity programs in the past (I will buy from you if you buy
from me) and could be expected to continue to do so. Held: Acquisition illegal. The reciprocity made possible by such
an acquisition is anticompetitive. Reciprocal buying may create a protected market which others cannot penetrate
despite better price, quality or service.
 FTC v Proctor & Gamble: P&G one of largest producers of soap acquired Clorox, leading manufacturer of household
bleach. Clorox had 49% of market. Clorox had a strong brand image by advertising. P&G was nation’s largest
advertiser and because of this received discounts from media. After merger, producers other than Clorox were selling
more bleach than before. HELD: Merger would affect competition as smaller firms would fear Proctor and thus would
not compete due to fear of retaliation. It is certain that P&G would become price leader. ALSO the acquisition may
raise barriers to entry: Clorox was limited by its budget to advertisement, Proctor had media discounts. Thus new
entrant would be more reluctant to face Proctor. KEY: Possible economies cannot be used as a defense to illegality.
Congress decided this. ALSO: By acquisition Proctor was eliminated as a potential competitor, evidence showed that
Proctor was most likely to enter the field.
  Citizen Publishing Co. v US: C and S entered into joint agreement providing joint sale of advertising, joint distribution
of newspapers and pooling profits. Later S was failing. C shareholders acquired stock of S to prevent it going under. D
raised defense of ‘failing company.’ Acquisition is allowed if a company is about to fail as it would not impair
competition. HOWEVER, at the time parties entered into agreement S was not about to fail. ALSO, even if it was about
to fail no effort was made to sell the company to another person. Finally, there have been many companies now that
are reorganized under the Bankruptcy Act to become viable entities. Thus the failing company’s doctrine’s importance
may be reduced or eliminated.
 Turning of Tide
 US v General Dynamics Corporation: GD acquired two coal producers, creating a post merger market share of 44.3%.
DOJ sued relying on its statistical case. SC held that statistics if reliable as a proxy for future market shares, would
have qualified for Philadelphia presumption but in this case statistics did not suffice as a proxy. The market had
changed, Coal was facing intense competition from other sources of energy.
 The courts thus began demanding harder proof from P that any given merger would probably increase market power,
raise prices, and lower output.
 Contemporary Law and Enforcement
 In 2010 federal agencies jointly issued revised guidelines covering mergers of competitors and potential competitors
(Horizontal Mergers). These are printed in Appendix C. There are no current guidelines on vertical and conglomerate
(all other) mergers. The 1984 guidelines covered non-horizontal mergers and are printed in Appendix D. In any event,
horizontal mergers are the main concern.
 Brief summary of what you will find in the Horizontal Merger Guidelines.
 There are two anticompetitive scenarios: (1) Cartel like (Coordinated effects); (2) Monopoly or single firm power
(unilateral effects)
 How do agencies reach the point at which they can predict a merger’s probable effect?
 The traditional route is to define the market, measure the market concentration and its increase as a result
of the merger and if the numbers are high enough, explore whether the market environment is conducive
to coordinated or unilateral price rising behavior.
 The Guidelines describe tools available to define the market.
 Assume a single monopolist who raises price 5% (SSNIP) and see what will happen. Will a critical mass of
buyers shift to another alternative so that our monopolist could no longer profit from the price increase? If
so, include that the next alternative in the market and proceed again with a SSNIP until the hypothetical
price increase is (hypothetically) profitable, and you have your market (product and geographic). It may not
be so simple. The Guidelines recognize that more than one set of market delineations may be equally
plausible. The agencies may work with more than one market definition or even none at all in gauging the
mergers effect, as we relate below.
 Next, list the market participants and the shares of each, and measure concentration using HHI. To do so,
multiply each share by itself and add the squared shares, both before and after the merger. The resulting
numbers are your Herfindahls (HHIs).
 Computing the HHI:
 Assume a four-firm market with firm shares of 40%, 30%, 20%, 10%. The 20% and 10% firms merge.
 A. Post-merger HHI: 40(square) + 30 (square) + 30 (square): 3400 HHI
 B. The increase in the HHI as a result of the merger (delta): Compute pre-merger HI and substract this
figure from the post-merger HHI: 3400 – 3000: 400 increase, or delta.
 Then as a rule of thumb:
 1. If the increase in HHI from before to after the merger (the delta) is less than 100 OR the post-merger
HHI is below 1500, this is so small a change in concentration or such a low level of concentration that
there is unlikely to be a problem.
 2. If the merger results in an HHI between 1500 and 2500 (a moderately concentrated market) and the
delta will increase by more than 100 points, or if the merger results in an HHI above 2500 (a highly
concentrated market) and the delta is between 100 and 200 points, the merger ‘potentially raises
significant concerns and often warrants scrutiny.
 3. ‘Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than
200 points will be presumed to be likely to enhance market power.’ This presumption may be
rebutted. The presumption in Philadelphia National Bank will probably not be used by the agency in its
administrative function of analyzing a merger. But if the agency goes to court it will probably take
advantage of the presumption.
 If the theory of harm is a unilateral effects story (Increase of single firm market power) the agencies might not
travel the above route at all.
 Assume Coke acquires Pepsi.
  In this case the agency is likely to estimate a diversion ratio. In our hypothetical case, this will be the
diversion of sales from Coke to Pepsi in the event of higher prices for Coke. One assumes that Coke raises its
price, and calculates what part of the unit sales lost by reason of the price increase would be diverted to
Pepsi. This fraction is the diversion ratio. The value of the sales diverted to Pepsi equals the number of units
diverted divided by the difference between the price and incremental cost of Pepsi.
 The value of the sales diverted to Pepsi indicates the release of pressure on Coke by Pepsi as a result of the
disappearance of Pepsi’s competition. This is called upward pricing pressure or ‘UPP’.
 Note: Agencies will also take account of incentives of the merged firm to reduce price after a unilateral
effects merger if there are expected cost savings from the merger. Efficiencies could be seen as a discount
from the UPP harm.
 The value of diverted sales to Pepsi divided by the lost revenues attributed to the increase in the price of a
bottle of Coke is called ‘Gross Upward Pricing Pressure,’ or GUPPI. GUPPI:
 Value of diverted sales to Pepsi/ Lost Revenue to Coke.
 The higher the GUPPI, the greater the freedom and incentive of Coke to raise its prices without negative
consequences (lost profits), and thus the greater the likelihood that the merger will harm consumers and is
anticompetitive.
 Whether the story is of coordinated efforts or unilateral effects conditions of entry matter. If in the event of a
price increase, entry can be expected to be timely, likely and sufficient to fully counter a price rise, the merger is
not likely to be anticompetitive.
 As for efficiencies they are part of the competitive analysis.
 The agencies will not challenge a merger if cognizable efficiencies are of a character and magnitude such
that the merger is not likely to be anticompetitive in any relevant market.’
 There is a possibility of a failing firm or even a failing division defense, but the requirements to prove the defense
are so hard to meet that this is almost never an issue.
 All these concepts are explained in the horizontal merger guidelines (App. C).
 Case Law (Market Definition)
 Although agencies have softened their reliance on market definition courts are still accustomed to defining markets
as the first step.
 FTC v Staples: to define the market the court used Brown Shoe ‘practical indicia’ of submarkets. It found low cross-
elasticity of demand between superstore and non-superstore retailers, and it found that superstores had unique
characteristics – in appearance, size, format, product variety, type of consumer, and public recognition. The court
found a submarket in consumable office supplies sold through office supply superstores.
 In this category in many local markets post-merger HHIs would be 10,000 and the average delta would be 2715.
 The court determined that the FTC had established a prima facie case of violation, that Staples then had the
burden to rebut the prima facie case and that it did not meet its burden.
 FTC v Whole Foods Market: Whole Food Markets (D), a supermarket specializing in premium natural and organiz
foods with 194 stores, decided to buy Wild Oats, another premium natural and organic supermarket (PNOS) with 110
stores. These two were the only nationwide operators of PNOSs and they were allegedly one another’s closest
competitors. FTC brought proceedings to enjoin the merger. HELD:
 FTC will usually be able to obtain a preliminary injunction blocking a merger by ‘raising questions going to the
merits so serious, substantial, difficult, and doubtful as to make them grounds for investigation. IF the FTC raises
such serious questions, the merging parties may come forward with evidence in their favor on merits.
 ON THE MERITS, the appellate court relying on Brown Shoe and Staples, held that the DC erred as a matter of
law in concluding that the relevant market must comprise all supermarkets. RATHER, the merger law should be
applied to protect the core customers of PNOSs from exploitation.
 FTC showed evidence that PNOS competition had greater effect than conventional supermarkets on PNOS prices.
The CEO of Whole Foods also considered Wild Oats as a meaningful threat.
 US v H&R Block: H&R was to acquire competitor TaxAct. Both made software for preparation of tax returns. Three
modes of tax preparation: hiring accountant, using a software; doing it yourself manually. In software market, H&R
was second with 15.6% and Tax Act was third with 12.8%. Number 1 firm had 62%. Thus after merger top two firms
would hold more than 90%. DOJ sued alleging that merger would raise price, lessen innovation, and lessen consumer
choice. Its motion for preliminary injunction was turned into a trial on the merits. HELD: P argues market is software
market. D says that no it is for all modes of filing tax.
 Hypothetical Monopoly Test: An analytical method used by courts to define market is to ask hypothetically
whether it would be profitable to have a monopoly over a given set of substitutable products. IF so then those
products may constitute a relevant market. Under this the inquiry asks whether a firm would impose a small but
significant non-transitory increase in price (SSNIP) on at least one product (usually five percent and more) and
still make a profit. In other words, would enough DDIY users switch to the assisted or pen and paper methods of
 tax preparation in response to a five-ten percent increase in DDIY prices to make such a price increase
unprofitable? Using this the software is the relevant product market in this case.
 Note: Here business documents of D revealed that they considered software tax modes firms as competition.
 Case Law (Horizontal Mergers)
 We noted how competition may be harmed by horizontal mergers: coordinated effects (cartel) and unilateral effects
(monopoly). We turn first to former.
 Hospital Corp of America v FTC: D, largest proprietary hospital chain in US wished to acquire two corporations
Hospital Affiliates Inc and Health Care Corporation. Before these acquisitions, D owned one hospital in Chattanooga,
Tennesse. Acquisitions gave it ownership of two more in area. It also had contracts to manage other hospitals in the
area. After acquisitions D owned or managed 5 out of 11 hospitals in the area. Thus its market share went from 14%
to 26%. This made it the second largest provider of hospital services in a highly concentrated market where the four
largest firms had 91% of the market. HELD: Such concentration clearly makes the case that competitors in the market
may collude by coordinating their pricing without committing detectable violations of s. 1. There are also barriers to
entry to hospital market in area (approval by state agency required). Relevant market is restricted to Chatoonga
because going out of city if there is an emergency is out of the question. Demand for hospitals is also inelastic and so
providers can profit by raising prices.
 KEY: S. 7 does not require proof that a merger caused higher prices in the market. All that is necessary is that the
merger creates an appreciable danger of such consequences in the future. Considering the concentration of the
market, the absence of competitive alternatives, the regulatory barrier to entry, the low elasticity of demand,
the exceptionally severe cost pressures under which hospitals labor today, the history of collusion in the
industry, and the sharp reduction in competitors brought about by acquisition we cannot say that the
Commission’s prediction is not supported by substantial evidence.
 Note: Not all mergers that create high concentration produce either coordinated interaction or unilateral effects. The
following cases involves a merger in an environment of robust competition.
 US v Baker Hughes: Tamrock proposed to acquire Secoma. US challenged this, charging violation of s. 7. It presented
statistics showing merger would significantly increase concentration in the already concentrated US HHUDR market.
The Govt established a prima facie case of anticompetitive effect. HELD: Court gave weight to two non-entry factors:
(1) The flawed underpinnings of govt’s prima facie case and (2) the sophistication of HHUDR customers. THESE TWO
FACTORS influenced the probability that the acquisition would have anticompetitive effects.
 The statistical case is misleading because US HHUDR market is so small a firm selling one piece could increase its
shares by 2-4%. Court found that although the market is concentrated, such concentration would not doom
competition. High concentration has long been the norm in this market.
 Because of customer’s sophistication the market was still likely to be competitive even if the market is
competitive. ALSO the court noted that the barriers to entry here were very low.
 Mergers Likely to Produce Unilateral Effects:
 There are a few decisions on this.
 Sirius-XM: Sirius proposed to buy XM. This would be merger of two only satellite radio providers in the country. DOJ
cleared merger without imposing any conditions. They said there would be no effect on competition because of
following reasons: lack of competition between parties prior to the merger; the competitive alternative services
available; technological change; efficiencies likely to flow from the transaction that would benefit customers.
 Google Admob: Google proposed to acquire AdMob, the largest mobile advertising network. Mobile advertising
facilitate transactions between advertisers and software developers on mobile devices. AdMob had a third of the
market. Google owns the world’s most popular search engine and was beta-testing an advertising network for mobile
applications. FTC cleared transaction issuing following statement: iPhone and Android compete so there is strong
incentive to compete for Google. If Google were to exercise market power on Android after acquisition, it would risk
making Android less competitive against iPhone and other platforms.
 Note on US v H&R: Court noted that both coordinated and unilateral effects were probable. The HHI was 4291 (very
high) and so made the Philadelphia National bank presumption and that D had not rebutted this. Regarding
coordinated effects court noted that firm would have no interest in providing free access or low price services. Court
noted past history of HRB and Intuit to. Lobby the IRS for limits on free offers, and TaxAct had played special role in
constraining prices. Unilateral Effects: Court observed that unilateral effect were possible even if Intuit is the closest
competitor of HRB and TaxAct. Diversion rate was 12 and 14% which was very high. (Ratio above).
 Mergers Eliminating Potential Competitors
 There are few such cases and are seldom won by P.
 US v Marine Bancorporation: NBC, a subsidiary of Bancorp was second largest bank in Washington. NBC proposed to
acquire WTB, third largest bank in Spokane. Top three banks in Spokane had 42, 32, 19 percent of deposits. NBC did
not operate in Spokane. Govt sued on potential competition theories. HELD: Two conditions must exist before is is
possible to resolve whether Govt’s theory, if proved, establishes a violation of s. 7: Must be determined that: (1) NBC
 has available feasible means for entering Spokane market other than by acquiring WTB; (2) That those means offer a
substantial likelihood of ultimately producing deconcentration of that market or other procompetitive effects. (1) is
not an issue but (2) is. Due to state law restrictions the only method of NBC for entering must be by acquisition of an
existing bank.
 Ginsburg v InBev: Anheuser-Busch – largest beer brewer in country with 50% of sales was acquired by Inbev, the
largest brewer in the world. Beer consumers challenged transaction. Court dismissed complaint on the pleadings
before discovery. P alleged that acquisition removed a potential entrant. DC found that P had not supported claim
with sufficient facts either that Inbev intended to enter US market OR that any rational market participant tempered
its pricing because it viewed InBev as a potential entrant.
 Non-Horizontal Mergers
 Vertical mergers have benefits: efficiency, saving costs, innovation, often there is no anticompetitive story to tell.
BUT: May foreclose competitors from scarce inputs or outlets, increase barriers to entry, and induce collusion.
 Ticketmaster, largest provider of ticketing to major concert venues in US and world with 80% US market, was to
merger with Live Nation, largest promoter of live concerts. LN was a major customer of Ticketmaster. It transformed
itself from major customer of Ticketmaster to its only major competitive threat. The merger was apparently a
response to the competitive threat. Companies presented efficiencies: Integration of production and sale of concerts,
reducing costs to concert venue owners AND ultimately to consumer/concert-goers. THE DOJ approved the merger
but with conditions: To cure the horizontal problem, the judgment required the merged firm, LNE to establish two
new ticketing entities. As for vertical foreclosure effects – the use of power over performances to foreclose ticketing
competitors. DOJ fashioned conduct remedies with a view to preserving competition by ‘equally efficient rivals.’
 The Enforcement of Federal Antitrust Laws
 The federal antitrust laws may be enforced by the government and by private parties. Two arms of the federal
government have antitrust enforcement jurisdiction – the Justice Department (DOJ), through its Antitrust Division and
the Federal Trade Commission.
 S. 4 of Clayton: Any person who shall be injured in his business or property by reason of anything forbidden in the
antitrust laws may sue therefor and shall recover threefold the damages by him sustained, and cost of suit, including
a reasonable attorney’s fee.
 Note: Indirect purchasers cases are normally dismissed. There are exceptions though. State law may authorize
indirect purchasers to bring suit under state antitrust laws Check book for details.
 Brunswick: One who is harmed only by competition itself may not recover.
 The SC has enumerated five principal factors material to a determination of standing: Associated General Contractors
of California v California State Council of Carpenters:
 (1) The harm should be direct rather than remote.
 (2) The harm should be of the sort that the antitrust laws were designed to prevent or inextricably intertwined
with it.
 (3) Intent to harm plaintiff or those in plaintiff’s class weighs in favor of standing.
 (4) The prospect that standing will lead to duplicative recovery or difficult questions of apportionment weighs
against standing.
 (5) The prospect that standing will leave significant violations undetected or unremedied weighs in favor of
standing.
 Recent cases have narrowed substantially the scope for private enforcement:
 (1) Bell Atlantic Corp v Twombly: Heightened the pleading standard in antitrust cases. Said that a claim must be
‘plausible’ at the pleading stage to proceed to discovery.
 Procedure: Pre-Merger Notification
 Much of antitrust merger practice is devoted to premerger filings and meetings with govt officials. The agencies
usually want to know the same facts. Yet each jurisdiction has its separate forms.
 Skeletal View of Hart Scott Rodino Antitrust Improvements Act of 1976, as amended: Merger parties must file
premerger notification, along with information, for merger above a threshold size. They must then wait (not
close transaction) for 30 days (15 days for cash tender offers). Within waiting period govt may request additional
information (significant amount). Waiting period may be extended for 30 days (10 days for cash tender offers)
from the time of compliance with the second request. If within the waiting period the government sues and
moves for preliminary relief, its motion is entitled to expedited treatment in the courts.
 In general, notification is required where (for 2012), as the result of the acquisition, the acquiring person would
hold aggregate stock or assets of the acquired person:
 (A) in excess of $272.8 million; or if less:
 (B) (i) In excess of $68.2 million and (ii)
 (I) Any voting securities or assets of a manufacturer having sales or assets of $13.6 million or more are
being acquired by a person with sales or assets of $136.4 million or more,
  (II) Any voting securities or assets of a non-manufacturer which has assets of $13.6 million or more are
being acquired by a person with sales or assets of $136.4 million or more, or
 (III) Any voting securities or assets of a person with sales or assets of $136.4 million or more are being
acquired by a person with sales or assets of $13.6 million or more.
 The figures are adjusted annually.
 Enforcement
 In US if merger passes through Hart-Scott-Rodino process without challenge, legal effect is that federal govt has
waived its right to seek preliminary injunction before the closing.
 The merger may still be challenged by the Federal Government if it is deemed anticompetitive, although subsequent
federal challenge is rare. Also the private parties and state attorney general can still sue.
 Private Standing to Sue
 S. 4 and 16 of Clayton created an enforcement role for private attorney general: S. 4: Under this a private person
injured or threatened with injury from antitrust violations are empowered to sue and get treble damages. S. 16:
Under this they can get injunctive relief.
 Brunswick v Pueblo Bowl O Mat: Operator of bowling alleys challenged D’s acquisition of failing bowling alleys, which
competed with P. P said but for acquisitions alleys would failed and so P would win extra business. Held: P must prove
an ‘antitrust injury’ under s. 4 (injury which antitrust laws forbid). Here P was not injured by restrained competition
but by competition itself.
 Most private antimerger actions have been under S. 16 to prevent merger from occurring – usually by competitors.
Before these Ps were accorded standing without challenge. Now however DOJ noted that: if a merger is so
anticompetitive that it raises price and reduces output, the rise should benefit rivals. But if merger efficiency creating
he merged firm likely to occur then will become a fierce rival.
 Cargill Inc. v Monfort of Colorado: M was fifth largest beef packer. D was second largest. After merger D would have a
share equal to the largest. P sued, claiming S. 7 violation because effect would be to substantially lessen competition
or create a monopoly. P argument (Price-cost squeeze): Acquisition will result in concentration of power which
threatens Ps supply of fed cattle and its ability to compete. D: Allegation of lose profits due to ‘price-cost squeeze’
was nothing more than an allegation of losses due to vigorous competition. COA: P’s allegation not simply ‘price cost
squeeze’, would be injured in form of ‘predatory pricing’ (By paying more to cattle suppliers and charging less for
boxed beef it sells, after driving away competition it would charge high prices) (Cost price squeeze). HELD: S. 16 and 4
have differences: 4 requires P to show actual injury. 16 requires a showing of only ‘threatened’ loss or damage. P
UNDER BOTH however must allege an injury of the type that antitrust laws were designed to prevent. Two theories of
P: (1) At or near cost pricing; (2) Below cost pricing. Court noted that (1) is allowed. This is at heart of competition as
new firm may be more efficient. (2): IT WOULD BE IMPOSSIBLE to tell in advance whether D would engage in
predatory pricing, lower court held that there was ‘substantial threat’ of injury however.
 NOTE: P did not allege injury from below cost pricing before DC and so this is rejected. NOTE: US argues of
dangers of allowing competitor to challenge acquisition on basis of speculative claims of post-acquisition
predatory pricing. US thus wants us to adopt a per se rule denying competitors standing to challenge on
predatory pricing theories. We reject this.
 COURT: P must show a threat of antitrust injury, mere showing of loss or damage due to competition not enough
 Sprint Nextel Corp v AT&T: AT&T wished to merge with T-Mobile. Merger would have combined 2nd and 4th largest US
wireless carriers to form the largest. DOJ sued to block merger under s. 7, arguing effect of merger would be to
‘substantially lessen competition or tend to create a monopoly.’ Competitor, Sprint Nextel, also filed suit under s. 16.
AT&T moved to dismiss the private action on grounds that complaint failed to allege antitrust injury and that P did not
have standing. Held:
 As for s. 4, antitrust injury is one factor to be considered when deciding whether P has standing. Other factors:
Directness of injury, whether claim for damages is ‘speculative’, the existence of more direct victims, the
potential for duplicative recovery and the complexity of apportioning damages. THIS IS NOT required for s. 16
however. Here P must only show that there is a threat of injury that is real, immediate and not speculative. We
now turn to question of whether P has standing. For purposes of this inquiry, we assume that there is an
antitrust violation.
 P alleges injuries that stems from both horizontal and vertical aspects of acquisition. Horizontal: in certain
markets carriers compete to sell outputs, and in others they compete to seek inputs. (Concerns of monopoly and
monoposony). Vertical: In other markets they carriers buy and sell services from each other so vertically linked.
 (1) Market for Wireless Services: P says that merger would lead to higher wireless rates. This is not sufficient to
allege antitrust injury. Merely claiming rise of price is not enough because P likely to benefit from rise.
 (2) Market for Wireless Devices: Carriers compete to secure most desirable devices for their own networks,
sometimes leveraging exclusivity deals with device makers. P says merger would bar them from accessing
innovative handset and raise its costs. WHERE D restricts access to necessary input by means of anticompetitive
 conduct court have found the resulting loss is injury the type of which antitrust law forbid (Kodak). WHAT
DISTINGUISHES Kodak is that there D was both P’s competitor and supplier. It would not be the alleged antitrust
violation – AT&T’s acquisition – but rather the anticompetitive acts ‘made possible by violation’ that would injure
P. Here threatened injury is of the type that antitrust laws were designed to prevent. BUT because P’s theory
depends on monoposony power and not its simply ability to refuse to sell to them, alleging a plausible threat of
loss or damage is a more complex task for P. Yet other Ps have succeeded on similar theories in past. Court must
determine sufficiency of P’s pleadings, in particular, the plausibility of their threat to injury arising from
monoposony power.
 (3) Market for Backhaul: Here P alleges that acquisition would increase P’s cost for necessary input which it
purchases from AT&T. Court: T-Mobile also purchases Backhaul from AT&T thus merger would not increase
AT&T’s power. P however argues: Acquisition will decrease number of backhaul purchasers. When merger
eliminates demand independent providers will exit market and incentives for new entry will be diminished. At
the end, market is more concentrated and Sprint will suffer harm. Court: P fails to allege facts to support its
theory that elimination of T-Mobile as a purchaser of Backhaul will increase concentration by putting
independent providers out of business. COURT: At the pleadings stage, P need not supply ‘detailed factual
allegations,’ and yet it must state facts sufficient to ‘raise a right to relief above the speculative level.’ (Twombly).

________________________________________________________________________________________________________

 Vertical Restraint
 Example: Manufacturer require retailer not to sell its item at more than 10 or a reseller may demand that
manufacturer impose a $10 floor on its dealers resale price.
 Vertical restraints anlysed under s. 1 Sherman and S. 3 Clayton, and if monopolistic then S. 2 of Sherman.
 Two categories of vertical restraints: Restraints that limit the freedom of a party to the contract; AND restraints that
also foreclose outsiders; typically, tying and exclusive dealing.
 A. Restraints in the Course of Distribution
 Basic rule for first century – Dr. Miles
 Vertical price fixing is also called RPM (Resale price maintenance). Here manufacturer dictates price at which its
buyers, who are intermediaries may resell.
 Dr. Miles: Held that resale price maintenance agreements were illegal per se. The vertical per se rules were later
overruled in Leegin Creative Leather Products wherein court noted costs and benefits of RPM.
 California Retail Liquor Dealers Ass’n v Midcal Aluminum Inc:
 Facts: California statute required all producers and wholesalers of wine sold in the state to post a resale price
schedule and it prohibited wholesalers from selling below posted prices.
 Held: Such vertical control destroys horizontal competition as effectively as if wholesalers ‘formed a combination
and endeavored to establish the same restrictions by agreement with each other. Thus we must consider
whether State’s practice is sufficient to establish immunity under Parker v Brown. There court noted that
because Sherman is directed against individual and not state action that the state regulatory programs could not
violate it. To obtain such immunity it must be shown that (1) the challenged restraint must be ‘one clearly
articulated and expressed as state policy’; (2) The policy must be ‘actively supervised’ by the state. Here (1)
satisfied as it has purpose to permit resale price maintenance. The program does not meet (2) however. The
State simply authorizes price setting and enforces the prices established by private parties. State neither
establishes prices, nor reviews the reasonableness of price schedules.
 D then argues that even if act not protected state action, the 21st amendment bars application of Sherman.
Court: Although states retain substantial discretion to establish regulations, those controls may be subject
to the federal commerce power in appropriate situations. Asserted states interests are less substantial than
national policy in favor of competition.
 Refusal to Deal and Resale Prices: When is RPM unilateral? When is it undertaken by agreement?
 S. 1 only prohibits anticompetitive contracts, combinations and conspiracies. It does not prohibit a firm’s unilateral
policy of RPM. A firm and its wholly owned subsidiaries are treated as one firm, whose parts cannot conspire or agree
to conspire (Copperweld v Independent Tube Corp).
 A supplier MAY choose to deal only with firms that adhere to its schedule of resale prices without triggering
examination under s. 1. When is there a contract, combination or conspiracy to set resale prices, sufficient to bring
the case within S. 1?
 US v Colgate: D said no sales would be made to those who did not adhere to prices. P says D unlawfully created a
combination with wholesale and retail dealers to fix prices. Held: In absence of any purpose to create a monopoly the
act does not restrict the right of a trader or manufacturer to decide who he will deal with.
  In Parke Davis, however, courts took opposite turn from Colgate. Lawyers thus advised their clients that Colgate was
dead.
 Note: Following case came at a time that whenever a manufacturer cut off a discounting distributor, the terminating
distributor would sue manufacturer, alleging that the cut off was pursuant to an RPM agreement. P could easily get a
jury and won – despite D’s insistence that P was eliminated due to sub-standard performance.
 Monsanto Co. v Spray-Rite Service Corp: Monsanto stopped selling to Spray-Rite after complaints from other
distributors about Spray-Rite’s discount pricing. P brought suit alleging D violated S. 1 of Sherman by conspiring with
distributors to fix the price of herbicide products. Held: Two distinctions that is important: (1) Distinction between
concerted and independent action. Under Colgate, a manufacturer can announce its resale price in advance and
refuse to deal with those who fail to comply. (2) Distinction between concerted action to set prices and concerted
action on non-price restrictions. The former is illegal per se. Latter is judged by rule of reason.
 On claim of concerted price fixing P must show evidence sufficient to carry its burden proving that there was
such an agreement. Permitting an agreement to be inferred merely from the existence of complaints could deter
legitimate conduct. TO bar a manufacturer from acting solely because the information upon which it acts
originated as a price complaint would create an irrational dislocation in the market. There must be evidence that
tends to exclude the possibility that the manufacturer and non-terminated distributors were acting
independently. KEY: P should present direct or circumstantial evidence that reasonably tends to prove that the
manufacturer and others had a ‘conscious commitment to a common scheme designed to achieve an unlawful
objective.
 Here there was such evidence: Monsanto approached distributors that if they did not maintain the suggested
retail price they would not receive adequate supplies. Newsletter also states that every effort will be made to
maintain a minimum market price level. Monsanto would terminate those who did not abide by price set (P).
 RPM: The New Rule of Law
 Leegin Creative Leather Products v PSKS: P operated store which sold D’s products. D made new policy of not selling
to retailers that sold below its suggested prices. D said that wanted retailors to have sufficient profit to be able to
focus on customer service and store appearance. P refused to sell at such prices and so was excluded. Held:
 Justifications for vertical price restraints: Can stimulate Interbrand competition – competition among
manufacturers – by reducing intrabrand competition – competition among retailers. This will allow retailers to
invest in services and promotional efforts. Absent vertical price restraints Interbrand competition may be
underprovided: Discounting retailers can free ride on retailers who furnish services. ALSO, vertical price
restraints can increase Interbrand competition by facilitating market entry for new firms and brands. Also it
would be difficult for a manufacturer to make and enforce a contract with retailor specifying the different
services it must perform.
 Vertical agreements however can have anticompetitive effects too: Unlawful price fixing, designed solely to
obtain monopoly profits. May facilitate a cartel as well. A horizontal cartel among competing manufacturers or
competing retailers that decreases output or reduces competition to increase price is per se unlawful. THUS to
the extent a vertical agreement setting minimum resale prices is entered upon to facilitate either type of cartel,
it, too, would need to be held unlawful under the rule of reason.
 However, cannot always be said that resale price maintenance ‘always restricts competition and decreases
output.’
 Difference between manufacturer price and retailor price is considered by manufacturer as cost of
distribution which it would likely wish to minimize so as to sell max goods.
 Also, many decisions a manufacturer makes can raise prices: Contracting with different suppliers to obtain
better inputs or it might hire an advertising agency to promote goods. Yet no one would think that these
violate the Sherman Act. The manufacturer strives to improve its product quality or promote its brand
because this conduct will lead to increased demand despite higher prices.
 If rule of reason were to apply to vertical price restraints, courts would have to be diligent in eliminating
their anticompetitive uses. Certain factors are relevant to the inquiry:
 The number of manufacturers that make use of the practice in a given industry. If few manufacturers
lacking market power adopt the practice, there is little likelihood that it will facilitate a manufacturer
cartel as it can be undercut by rivals. A retailer cartel is also unlikely when only one single
manufacturer uses resale price maintenance.
 The source of restraint may also be important. If there is evidence that retailers were the impetus for
vertical price restraint, there is greater likelihood that the restraint facilitates a retailer cartel or
supports a dominant, inefficient retailer. If, by contrast, a manufacturer adopted the policy the
restraint is less likely to promote anticompetitive conduct.
 Finally, that a manufacturer or retailer can abuse resale price maintenance may not be a serious
concern unless it has market power.
 Restraints on Distributors Other than minimum Resale Pricing – Free Traders to Free Riders

 Customer and Territorial Restraints

 Early Law:
 US v Arnolds, Schwinn: D made bicycles. D sold them to retailors and distributors. Each distributor was exclusive
wholesaler within assigned territory. Each was forbidden to sell outside territory. Held: Restraints illegal per se.
 Albrecht v Herald (overruled by State Oil v Khan): Here max prices were set. SC held agreement illegal per se.
 Turning of Tide: (i) Non-Price Restraints
 Continental TV v GTE Sylvania: Under franchise agreement, a retailor could only resell D’s products from
authorized locations. D hoped this would reduce intrabrand competition and incentivize retailors to provide
better services. P sued claiming that franchise plan violated antitrust law. Held:
 Per se rules of illegality are appropriate only when they relate to conduct that is manifestly anticompetitive.
 The market impact of vertical restrictions is complex because of their potential for reduction of intrabrand
competition and stimulation of Interbrand competition.
 Vertical restrictions promote Interbrand competition by allowing the manufacturer to achieve certain
efficiencies in the distribution of his products.
 New manufacturers and manufacturers entering new markets can use restrictions to induce
competent retailers to make the kind of investment of capital and labor that is often required in the
distribution of products.
 Because of market imperfections such as the free rider effect, these services might not be provided by
retailers in a purely competitive situation.
 Economist also argued that manufacturer have economic interest in maintaining as much intrabrand
competition as is consistent with efficient distribution of their products.
 Accordingly, the per se rule in Schwinn must be overruled. Note: Particular applications of vertical restraints
might justify per se prohibition under Northern Pacific. BUT we do make clear that departure from the rule
of reason standard must be based upon demonstrable economic effect rather than – as in Schwinn – upon
formalistic line drawing between sale and non-sale transactions.
 Business Electronics v Sharp: When vertical restraints are used a cartel is more likely if there are vertical price
restraints rather than vertical non-price restraints. Price fixing it was said might facilitate cartels. Without
agreement on price the manufacturer both retains its incentive to cheat on any manufacturer level cartel and
cannot as easily be used to organize and hold together a retailer level cartel.
 Limits of Free Rider Justification
 Eastman Kodak v Image Technical Services:
 Kodak invoked free riding as a reason to dismiss a monopoly suit against it. It claimed it cut off independent
service providers from the parts they needed to repair the Kodak equipment in order to prevent the ISOs
from exploiting the investment Kodak made in product and development.
 Court rejected this. According to Kodak they said ISOs are free riding because they failed to enter the
equipment and parts market. One of the evils proscribed by antitrust laws is the creation of entry barriers to
potential competitors by requiring them to enter two markets simultaneously.
 Toys R US (TRU) v FTC: Here court distinguished legitimate free riding argument from one that is not recognized:
 Legitimate: Where manufacturer sets min price so as to ensure that retailor provides adequate services.
Without this min price a consumer may check product from one retailors services and then buy later online
from another retailor. The retailor not providing such services is free riding.
 Illegitimate: Here manufacturers distributed to as many different outlets as would accept them.
Manufacturers did not care about services, but rather wanted to sell max amount.
 Turning of the Tide: (ii) Price Restraints; Maximum Price Fixing
 State Oil Company v Khan: Here there was imposition of max price Khan could charge. Held: Low prices benefit
consumers as long as above predatory levels. Cutting prices is essence of competition. Thus not per se illegal.
 B. Exclusionary Restraints
 Proposal of bill to declare illegal all sales of goods on condition that the buyer not use the goods of a competitor. S. 3
was at first designed to prohibit these practices outright, but as a result of legislative compromise the Act prohibits
the enumerated practices where the ‘effect may be to substantially lessen competition or tend to create a monopoly
in any line of commerce.’
 In early 70s SC applied strong rules against foreclosing restraints: Tying, in particular, was condemned on the belief
that they served little purpose beyond suppression of competition.
 Tying
 Tying entails selling (or licensing) one product on the condition that the buyer buy another.
  In early cases, the defendants often defended that they needed to police the quality and safety of the tied product.
Their justification was usually shown to be a pretext.
 Many cases brought under s. 1 Sherman, and s. 3 Clayton Act.
 Cases: The following cases suggest a fear that tying would fence out competitors from the right to compete.
 IBM v US: IBM leased its tabulating machines on condition that lessees use only IBM manufactured tabulating cards.
IBM claimed that condition was warranted to assure quality. Held: Tie illegal. No evidence that others cannot meet
the quality requirements. Note: IBM created card market. Why did IBM have a duty to share that market with
competitors? In contemporary analysis is Trinko relevant?
 International Salt Company v US: D leased machines that injected salt into canned products (Saltomat) and machines
that dissolved rock salt into brine for industrial processes (Lixator) on condition that lessees bought the salt they
would use in the leased machines from International Salt. There were exceptions though: could buy in open market if
there was reduction in salt prices and D could not meet reduction. Held: Despite exceptions SC held against D. D did
not prove necessity of a tie in to protect good will in its machines. It is unreasonable per se to foreclose competitors
from any substantial market. The tendency of the arrangement to accomplish monopoly is obvious.
 Northern Pacific Railway v US: In sale and leases of land railroad extracted preferential routing clauses, requiring the
buyer or lessee to ship all goods produced on the land on the Northern Pacific Railway provided that its rates and its
services were equal to those of competing carriers. Held: The preferential routing clauses are per se illegal under s. 1
of Sherman.
 Sherman Act rests on premise that unrestrained interaction of competitive forces will yield the best allocation of
our economic resources, the lowest prices.
 Tying agreements serve hardly any purpose beyond suppression of competition: They deny competitors free
access to the market for the tied product, not because the party imposing the tying requirements has a better
product or a lower price but because of his power or leverage in another market. AT THE SAME TIME buyers are
forced to forego their free choice between competing products.
 NOTE: Tying only works where D has power. If it does not then other competitors simply may sell the good it is
selling without tying it. THUS the very existence of tying arrangements is itself compelling evidence of the
defendant’s great power, at least where no other explanation has been offered for the existence of these
restraints.
 While buyers got land, they wanted by yielding their freedom to deal with competing carriers, D makes no claim
that it came any cheaper than if the restrictive clauses had been omitted.
 IN FACT, any such price reduction in return for rail shipments would have quite plainly constituted an unlawful
rebate to the shipper.
 Fortner Enterprises v US Steel Corp: Here there was a loan requirement that P buy only US Steel houses with the loan.
Held: Fact that US steel was able to impose the condition on so many buyers proved its sufficient economic power.
Later in Fortner (II) the tone changed. Court held that P had not proved US Steel’s economic power over credit: The
unusual credit bargain offered to P proves nothing more than a willingness to provide cheap financing in order to sell
expensive houses. THUS the so called tie was not a tie it was merely a strategy to compete in the prefabricated house
market. Fortner II THUS highlighted the seriousness with which market power had to be proved.
 Tying – Modern Analysis
 Tie-ins now viewed more favorably as thought they may have efficiency ends.
 Jefferson Parish Hospital District No. 2 v Hyde: Jefferson Hospital (D) entered into agreement with Roux that
established Roux as exclusive provider of Jefferson Hospital’s anesthesiological services. P argued tying arrangement.
 Held:
 HOWEVER not every refusal to sell two products separately can be said to restrain competition
 THE ESSENTIAL characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control
over the tying product to force the buyer into the purchase of a tied product that the buyer either did not
want at all, or might have preferred to purchase elsewhere on different terms. WHEN such ‘forcing’ is
present, competition on the merits in the market for the tied item is restrained and the Sherman Act is
violated.
 LAW draws a distinction between the exploitation of market power by merely enhancing price of the tying
product, on the one hand, AND by attempting to impose restraints on competition in the market for a tied
product, on the other.
 When seller’s power is just used to maximize its return in the tying product market, where presumably
its product enjoys some advantage, the competitive ideal of Sherman is not necessarily compromised.
 BUT IF THAT POWER is used to impair competition on the merits in another market, a potentially
inferior product may be insulated from competitive pressures.
 IF LATTER consumer freedom is impaired by his need to purchase the tying product, and perhaps by an
inability to evaluate the true cost of either product when they are available only as a package.
  HERE we must consider whether D has used market power to force their patients to accept the tying
arrangement.
 Discussion (III):
 D say that package offered does not involve a tying arrangement at all – that they are merely providing
functionally integrated package of services.
 COURT: Case law indicates that answer to the question of whether one or two products are involved
turns not on the functional relation between them, BUT rather on the character of the demand for the
two items.
 The anesthesiological component of package could be provided separately and could be selected by
either individual patient or by one of the patient’s doctors. Record supports conclusion that consumers
differentiate between anesthesiological services and other hospital services provided.
 THUS hospital’s requirement that its patients obtain necessary anesthesiological services from Roux
combined the purchase of two distinguishable services in a single transaction.
 Discussion (IV):
 Question remains whether this arrangement involves the use of market power to force patients to buy
services they would not otherwise purchase. P’s only basis for invoking per se rule against (and thereby
avoiding analysis of actual market conditions) is by relying on the preference of persons residing in Jefferson
Parish to go to East Jeffesron, the closest hospital.
 COURT: A kind of preference of this kind is not necessarily probative of significant market power. 70% of
patients residing in Jefferson Parish enter hospitals other than East Jefferson. Thus D’s dominance is far
from overwhelming.
 THE FACT THAT a substantial majority of parish’s residents elect not to enter East Jefferson means that the
geographic data do not establish the kind of dominant market position that obviates the need for further
inquiry into actual competitive conditions.
 Discussion (V):
 In order to prevail in the absence of per se liability, P has burden of proving that the Roux contract violated
Sherman Act because it unreasonably restrained competition.
 This involves an inquiry into the actual effect of the exclusive contract on competition among
anesthesiologists.
 Little evidence that Roux contract has unreasonably restrained competition.

 Eastman Kodak v Image Technical Services: Announced that it would only provide customers replacement parts to
them only if they bought repair services from Kodak or performed the repair themselves. ISOs squeezed out, sued for
monopolization and tying violations. They asserted that Kodak had market power in the Interbrand machine market.
Held: For P to succeed he must show that (1) The service and parts are two distinct products; (2) That Kodak has tied
the sale of two products.
 (A) For these to be separate, there must be sufficient consumer demand so that it is efficient for a firm to
provide service separately from parts. Here the service and parts were sold separately in the past. Even the
development of service industry is evidence of the efficiency of a separate market for service.
 (A) Kodak: Because there is no demand for parts separate from service there cannot be separate markets for
service and parts. Court: By that logic, we would be forced to conclude that there can never be separate
markets, for example, for cameras and film, computer and software. COURT: We have found arrangements
involving functionally linked products at least one of which is useless without the other to be prohibited tying
devices.
 (B) Having found sufficient evidence of a tying arrangement we NEXT consider the other necessary feature of an
illegal tying arrangement: appreciable economic power in the tying market.
 Market power is the power ‘to force a purchaser to do something that he would not do in a competitive
market.’ Defined as ‘the ability of a single seller to raise price and restrict output.’ Existence of such power
is inferred from the seller’s possession of a predominant share of the market.
 P: D has market power because parts only obtainable from D, evidence that consumers shifted to Kodak
even though quality is lower. D: Even if it has monopoly share of parts market it cannot exercise market
power for Sherman violation BECAUSE competition exists in the equipment market. D argues that it could
not have the ability to raise prices above competitive level because any increase in profits from higher price
in the aftermarkets would be offset by a corresponding loss in profits from lower equipment sales.
 Court: EVEN IF KODAK could not raise the price of service and parts one cent without losing equipment
sales, that fact would not disprove market power in the aftermarkets. EVEN a monopoly loses quantity sold
when it raises prices but that price may be more profitable. AS SUCH competition in the equipment market
can coexist with market power in the aftermarkets.
  Court: As per Kodak’s theory a rise in prices should have effected its equipment sales. Here Kodak raised
prices but sales of equipment not dropped. Kodak: This is because it charged sub-competitive prices for
equipment and supracompetitive for services. Court: This not shown here.
 Court: D’s theory ignores information costs (too much info to consider, repair, parts, warranties, quality,
need to upgrade) and switching costs which would create a less responsive connection between service and
part prices and equipment sales. Although there are sophisticated customers that may push down prices,
this may not occur if they are few.
 Court: IN SUM, there is a question of fact whether information costs and switching costs foil the simple
assumption that the equipment and service markets act as pure complements to one another.
 US v Microsoft: D bundled IE browser with Windows operating system (tying product). Lower court held per se illegal.
We hold that the rule of reason rather than per se analysis should govern the legality of tying arrangements involving
platform software products. Held:
 The consumer demand test in Jefferson Parish, is a rough proxy for whether a tying arrangement may, on
balance, be welfare-enhancing, and unsuited to per se condemnation.
 Only when efficiencies from bundling are dominated by the benefits to choice for enough consumers,
however, will we observe consumers making independent purchases.
 On the supply side, firms without market power will bundle two goods only when the cost savings from
joint sale outweigh the value consumers place on separate choice.
 IF A COURT find that there is no noticeable separate demand for the tied product, AND that the entire
‘competitive fringe’ engages in the same behavior as D, then the tying and tied products should be declared one
product and per se liability should be rejected.
 M: Jefferson Parish’s consumer demand test would ‘chill innovation to the detriment of consumers by
preventing firms from integrating into their products new functionality previously provided by standalone
products – and hence, by definition subject to separate consumer demand. Court: There is merit to this
argument.
 Here M argues that IE and Windows are an integrated physical product and that the bundling of IE API’s with
Windows makes the latter a better applications platform. There needs to be a precise inquiry into the injury here
and so per se rule not appropriate because it may stunt innovation.
 (1) Separate products test is a poor proxy for net efficiency from newly integrated products:
 Example: First firm to merge previously distinct functionalities (e.g. inclusion of starter motors in
automobiles) or to eliminate the need for a second function (the invention of the stain-resistant carpet)
risks being condemned as having tied two separate products because at the moment of integration there
will appear to be a robust ‘distinct’ market for the tied product.
 (2) Because of the pervasively innovative character of platform software markets, tying in such markets may
produce efficiencies that courts have not previously encountered and thus the SC had not factored into the per
se rule as originally conceived.
 Vacated and remanded. P must prove the relevant market and show the actual effect of the tie on competition
in the tied product market.
 In many cases the tying product is protected by a patent. Does a patent presumptively confer market power? Past
cases answered in the affirmative making it quite simple for P to prove a prima facie case in a challenge to a patent
tie-in.
 Illinois Tool Works Inc. v Independent Inc: Tying arrangements involving patented products should be evaluated
under the standards applied in cases like Jefferson Parish rather than per se rule. P wanted a rebuttable presumption
that patent grants market power. Court: Academic literature recognizes that a patent does not necessarily confer
market power. Thus we reject proposition of a presumption. THUS even in patent case must prove market power.
 Exclusive Dealing And Requirement Contracts
 First landmark case: Standard Stations: DOJ sued Standard Oil, (D), largest of the competitors in Western states,
which accounted for 23% of Western gasoline sales. Of all retail gas outlets in the Western area, 16% had exclusive
supply contracts with Standard Oil. DOJ sued SO under s. 1 and s. 1 of Sherman, relying principally on s. 3 which
declares: It shall be unlawful for any person to lease or sell goods on the condition that the leasee or purchaser
thereof shall not use or deal in the goods of a competitor where the effect may be to substantially lessen competition
or tend to create a monopoly.
 Held: Court took note of the possible efficiencies of exclusive contracts (You, the buyer, buy exclusively from me and
not from my competitors) and requirements contracts (You, the seller, promise to fulfill my requirements).
 Requirements contracts may be of economic advantage to buyer as well as seller and thus indirectly of
advantage to consumers. In case of buyer, they may assure supply, afford protection against rises in price,
enable long-term planning on the basis of known costs, and obviate the expense and risk of storage in the
quantity necessary for a commodity having a fluctuating demand.
  From seller’s point of view, requirements contracts may make possible the substantial reduction of selling
expenses, give protection against price fluctuations and offer the possibility of a predictable market.
 WE CONCLUDE therefore that qualifying clause of S. 3 (May be to substantially lessen competition) is satisfied by
proof that competition has been foreclosed in a substantial share of the line of commerce affected. (This test is
known as the ‘quantitative substantiality’.
 Note in this case court noted that evidence was not enough to conclude whether competition had been
foreclosed.
 Note: The punitive rule of Standard Stations necessarily put weight on market definition: If the share foreclosed was
significant, the exclusive contract was illegal; If not, it was probably legal.
 Tampa Electric: Tampa had contract by which Nashville agreed to supply its new plant’s coal for 20 years at a stated
price. Nashville reneged after price rise in coal and claimed that contract was illegal under Clayton and Sherman.
Nashville wanted court to find narrow market, such as peninsular Florida (where Tampa Electric operated). (Under
this Tampa’s plant would use 18% of coal in area). Thus under this significant portion of market would be foreclosed
to the competitors of Nashville. Tampa wanted large market in which its need was a drop in the bucket (less than 1%
of total coal supplied by Nashville and its Appalachian area competitors. Court agreed with Tampa.
 Note: Today Nashville would not even go to trial. We would ask two preliminary questions. The second is: What
is the story by which Nashville’s contract to supply Tampa gives Nashville market power or increases or preserves
its market power? None can be imagined.
 The first is: Why does Nashville have standing to make this claim? What is the antitrust injury that Nashville
might suffer from an anticompetitive aspect of this contract? How is it hurt by the (alleged) anticompetitive
nature of the contract?
 Modern Law and Analysis on Exclusive Dealing and Requirement Contracts
 By 1980s exclusive dealing was judged by the usual analysis: Does this contract harm competition and consumers?
Does it convey market power? Or is it merely a means to compete? S. 3 of the Clayton Act is seldom invoked, and
when it is it is generally read in conformity with Sherman Act.
 The Barry Wright case follows. It involves a huge market share and invites us to think about what we mean by
foreclosure and by anticompetitive foreclosure.
 Barry Wright Corp v ITT Grinnell Corp: G makes nuclear plant pipe line systems and buys 50% of snubbers used. G
bought from Pacific, only domestic manufacturer of snubbers. G contracted with BW to help BW develop its own
snubber and to use BW as its exclusive source when BW had sufficient production. Pacific however offered G a
discount and G continued to buy from Pacific. G agreed to buy snubbers from Pacific for next 2 years. BW sued for
violations of Sherman and Clayton Acts for exclusive dealings. Held:
 B argues that Pacific’s requirements contract with Grinnell was exclusionary, that it was more restrictive of
competition than legitimate business considerations would justify. Court disagrees.
 Every contract to buy virtually forecloses alternative sellers. Thus courts judged such contracts under the rule of
reason.
 THUS we are to take into account the extent of the foreclosure and the buyer’s and seller’s business justifications
for this arrangement.
 HERE:
 If Barry describes Grinnell as accounting for half the snubber market, this characterization suggests a three-
year foreclosure of 50% of the market. This sounds like a significant portion as per case law.
 BUT this description considerably overstates the size of the foreclosure and its likely anticompetitive effect
for several reasons:
 (1) Grinnell did not actually promise to buy all its requirements from Pacific; it entered into a contract for a fixed
dollar amount. G is free to purchase excess amount that he may want.
 (2) The Grinnell-Pacific contract was not a single three-year agreement. The scope of this agreement’s preclusive
effect extended over something less than Grinnell’s expected requirements and lasted 2 years.
 (3) Grinnell’s contract with Barry suggests that a snubber buyer typically places order for snubbers well in
advance of expected delivery. Under these circumstances, a Grinnell decision to buy a year or two’s worth of
snubbers at one shot INSTEAD of from time to time seems likely to have had limited anticompetitive effects.
 There are also legitimate business justifications for agreements:
 For buyer (Grinnell), the contracts guaranteed a stable source of supply and a favorable price.
 For seller (Pacific), they allowed use of considerable excess snubber capacity; and they allowed production
planning that was likely to lower costs.
 Finally, Grinnell is not a small firm that Pacific could likely bully into accepting a contract, that might foreclose
competition. To the contrary it was Grinnell, not Pacific that sought the extensions for 1978 and 1979.
 THUS as Pacific’s challenged conduct is not exclusionary for purpose of s. 2 Sherman, it does not violate other
provisions of law BW sights (S. 1 of Sherman).
  United States v Microsoft: M made exclusive deals with all Internet Access Providers (IAPs). M agreed to put AOL (one
of IAP’s, the biggest) icon on Windows desktop and AOL agreed to not promote any non-Microsoft browser nor
provide software using any Microsoft browser except at customer’s request and even then AOL agreed not to supply
more than 15% of its customers with a browser other than Ms. P argues this forecloses Netscape’s Navigator browser.
 Held: There must be significant foreclosure because there are economic benefits to exclusive dealing. An
exclusive deal affecting a small fraction of a market is clearly not likely to have anticompetitive effect.
 Here there is clearly harm to competition as IAPs are one of two major channels by which browsers can be
distributed. M has deals with top 14 IAPs. This ensures M’s monopoly. P having demonstrated a harm to
competition, the burden falls on M to defend its exclusive dealing contracts with IAPs by providing a
procompetitive justification for them. M says it wants developers to be focused upon its APIs. Court: This is not a
justification.
 Franchising
 Courts concerned that the advent of franchise would mean small suppliers being foreclosed from opportunities to sell
AND that franchisees were foreclosed from the right to negotiate their own deals for suppliers or business place. But
these concerns for autonomy were dropped after GTE Sylvania.
 Most antitrust franchise litigation is litigation by the franchisee suing for tying and monopolization or attempt to
monopolize the franchisor’s market.
 In the following two cases you will become well acquainted with key battlegrounds of the franchise antitrust cases:
 Was the franchisor offering one product or many products? What was the market; was there a market
comprised of the particular brand? Did the franchisor have market power?
 Principe v McDonalds Corp: P had two franchises for McDonalds. It wanted a third. McDonalds refused claiming they
lacked sufficient management depth and capabilities to open third store without impairing quality. P sued alleging
McDonalds violated antitrust laws by tying store leases and 15k security deposit notes to the franchise rights at the
stores. DC: (1) Notes represent deposits against loss AND do not constitute a product separate from the store leases
to which they pertain; (2) As for tying lease, McDonalds sells one product: The license contract and store lease are
component parts of the overall package McDonald’s offers its franchisees. Held: Affirm lower court.
 Key Question: Whether the tied in products are integral components of the business method being franchised. In
the case of McDonalds it was. McDonalds business model was providing everything a business needed to
function. CONTRAST TO Chicken Delight case where Franchisor required franchisee to purchase cookers and
fryers from them. There D licensed another party to use its trademark. In Chicken Delight there was no overall
single package offering everything a business needed.
 WHERE the challenged aggregation is an essential ingredient of the franchised system’s formula for success,
there is but a single product and no tie in exists as a matter of law.
 Applying this standard, the lease is not separate, Mc Donald’s practice is what makes McDonald’s franchise
uniquely attractive to franchisees.
 All of these factors (sit selection, ownership of restaurants by McDonald’s, the building of the stores by
McDonald’s and substantial investment by both McDonald and its franchisee contribute to the overall success of
the McDonald’s system.
 Queen Pizza v Dominos Pizza: Agreement provided that Dominos may in its sole discretion require ingredients,
supplies and materials for pizza be purchased exclusively from them or its approved suppliers. Effect of this was that
only 10% of ingredients purchased from outsiders. P contends that Dominos has a monopoly in the aftermarket for
sales of supplies to Dominos franchisees AND that it has used its monopoly power to unreasonably restrain trade,
limit competition, and extract supracompetitive profits.
 Note: Three claims of P: (1) Either D monopolized market for ingredients, supplies and distribution services
or attempted to do so in violation of s. 2; (2) D’s exclusive dealing arrangements have unreasonably
restrained trade in violation of s. 1; (3) D imposed an unlawful tying arrangement by requiring franchisees to
buy ingredients and supplies from them as a condition of obtaining fresh dough, in violation of s. 1.
 HELD: AS FOR (1), In determining market court looks at interchangeability of the product.
 Were we to adopt P’s position that contractual restraints render otherwise identical markets non-
interchangeable for purposes of relevant market definition, any exclusive dealing arrangement or franchise
tying agreement would support a claim for violation of antitrust laws.
 P contends that they face information and switching costs that lock them in, making it economically
impracticable for them to abandon Dominos. They argue that the fact that they are locked in supports their claim
that an aftermarket for Dominos approved supplies is a relevant market for antitrust purposes.
 Court: Kodak does NOT hold that the existence of information and switching costs alone such as those faced
by Dominos franchisees, renders an invalid market valid. In Kodak, the repair parts and service were unique
and there was a question of fact about cross-elasticity. Judgment as a matter of law was therefore
 inappropriate. Here it is uncontroverted that Domino’s approved supplies and ingredients are fully
interchangeable in all relevant respects with other pizza supplies outside the proposed relevant market.
 Kodak different in other respects:
 Information costs: Initially ISOs repaired. Then Kodak repaired. At the time of sale consumers did not know
the future higher price kodak would charge. HERE P knew that Dominos retained power over their ability to
purchase supplies.
 Were we to accept P’s relevant market, virtually all franchise tying agreements requiring franchisee to purchase
inputs such as ingredients and supplies from the franchisor would violate antitrust law.
 Courts long recognized that franchise tying contracts are an essential feature of franchise because they
reduce agency costs and prevent franchisees from freeriding – offering products of sub standard quality.
 P allege D imposed an unlawful tying arrangement requiring franchisees to buy ingredients and supplies from
them as a condition of obtaining Domino’s Pizza fresh dough, in violation of s. 1.
 Here P alleges D used its power in purported market for Domino’s approved dough to force P to buy
unwanted ingredients and supplies from them.
 If D had market power in the overall market for pizza dough AND forced P to purchase other unwanted
ingredients to obtain dough, P might possess a valid tying claim. BUT where D’s power to ‘force’ P to
purchase the alleged tying product stems not from the market but from Ps contractual agreement to
purchase the tying product, no claim will lie. For that reason, P’s claim was properly dismissed.
