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Contents

§ 1 Defining Monopolies.......................................................................... 4
§ 1.1 Product Market...........................................................................4
§ 1.2 Product “Submarkets”?.............................................................. 4
§ 1.3 Geographic Market.....................................................................5
§ 1.4 Proving Market Power............................................................... 5
§ 1.4.1 Direct Proof..........................................................................5
§ 1.4.2 Indirect Proof.......................................................................6
§ 1.4.3 Rebutting an Inference of Market Power..........................6
§ 2 Analyzing Violations of Sherman Act § 1........................................6
§ 2.1 Per Se Rule................................................................................. 6
§ 2.2 Rule of Reason............................................................................ 6
§ 2.3 Choosing the Rule to Apply.......................................................7
§ 3 Horizontal Restraints........................................................................ 7
§ 3.1 Hardcore Price Fixing (Per Se Prohibition)..............................7
§ 3.2 Horizontal Agreements Requiring Rule of Reason..................7
§ 3.3 “Quick Look” Analysis of Horizontal Agreements....................8
§ 3.4 Professional Self-Regulation......................................................8
§ 3.5 Allocation of Markets................................................................. 8
§ 3.5.1 Additional Considerations in Market Divisions...............9
§ 3.5.2 Permissible Market Divisions............................................ 9
§ 3.6 Refusals to Deal..........................................................................9
§ 3.6.1 Per Se Rule or Rule of Reason?.......................................... 9
§ 3.6.2 Market Power in Relation to Refusals to Deal................10
§ 3.7 Industry Regulations...............................................................10
§ 3.8 First Amendment Concerns.....................................................11
§ 3.9 Joint Ventures.......................................................................... 11
§ 3.9.1 Harm to Competition........................................................ 11
§ 3.9.2 Review Under the Clayton Act.........................................11
§ 3.10 Research and Development...................................................11
§ 3.11 Horizontal Conspiracies.........................................................12
§ 3.11.1 Conscious Parallelism.....................................................12
§ 3.11.2 Plus Factors.....................................................................12
§ 3.12 Trade Associations and Exchange of Information...............12
§ 3.12.1 Per Se Rule...................................................................... 12
§ 3.12.2 Shift Toward the Rule of Reason...................................13
§ 4 Vertical Restraints...........................................................................13
§ 4.1 Rule of Reason.......................................................................... 13
§ 4.1.1 Practical Effect of Shift.....................................................13

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§ 4.2 Policy Considerations...............................................................14
§ 4.3 Additional Considerations....................................................... 14
§ 4.4 Vertical Non-Price Restraints.................................................14
§ 4.5 Vertical Conspiracies............................................................... 14
§ 4.5.1 Requirement of Plus Factors............................................14
§ 5 Conduct by a Single Firm................................................................15
§ 5.1 Two Elements of Monopolization............................................15
§ 5.2 Analytical Framework............................................................. 15
§ 5.3 Categories of Forbidden Conduct............................................ 15
§ 5.3.1 Generally Permitted Conduct..........................................15
§ 5.3.2 Maintenance of Excess Capacity......................................16
§ 5.3.3 Refusals to Deal................................................................ 16
§ 5.3.4 Relationship to Essential Facilities................................. 16
§ 5.3.5 Bottom Line....................................................................... 16
§ 5.3.6 “Price Squeezing” Not Cognizable...................................17
§ 5.3.7 Technological Considerations ..........................................17
§ 5.4 Attempted Monopolization......................................................17
§ 5.4.1 “Dangerous Probability of Success”.................................17
§ 6 Other Limitations on Single-Firm Action...................................... 18
§ 6.1 Predatory Pricing..................................................................... 18
§ 6.1.1 Measuring Cost................................................................. 18
§ 6.1.2 Effect on Victim.................................................................18
§ 6.1.3 Harm to Competition........................................................ 18
§ 6.2 Tying..........................................................................................18
§ 6.2.1 Per Se Rule........................................................................ 19
§ 6.2.2 Rule of Reason................................................................... 19
§ 6.3 Exclusive Dealing Arrangements............................................19
§ 6.3.1 Rule of Reason................................................................... 19
§ 6.3.2 Exclusive Dealing Under the Clayton Act.......................20
§ 6.3.3 Exclusive Dealing Under the Sherman Act.................... 20
§ 6.3.4 Exclusive Dealing Under the FTC Act............................20
§ 7 Mergers.............................................................................................20
§ 7.1 Horizontal Mergers.................................................................. 21
§ 7.1.1 Efficiencies as a Defense...................................................21
§ 7.2 Analytical Framework............................................................. 21
§ 7.3 “Failing Company” Defense..................................................... 22
§ 7.4 Conglomerate Mergers.............................................................22
§ 7.4.1 Extension Mergers............................................................ 22
§ 7.4.2 Pure Conglomerate Mergers............................................22

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§ 8 Exemptions.......................................................................................23
§ 8.1 Noerr-Pennington Doctrine..................................................... 23
§ 8.1.1 Sham Exception................................................................ 23
§ 8.1.2 Providing Fraudulent Information to the Government. 23
§ 8.2 State Action Immunity.............................................................24
§ 8.2.1 Extension of Immunity to Individuals.............................24
§ 8.2.2 Unilateral Government Action.........................................24
§ 8.3 “Cleary Articulated”................................................................. 24
§ 8.4 “Actively Supervised”............................................................... 24
§ 8.5 Municipalities........................................................................... 25

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§1 Defining Monopolies
A firm is a monopoly when it has the “power to control prices or ex-
clude competition.” United States v. E.I. du Pont de Nemours & Co.
Whether such power exists depends on the definitions of (1) the
product market and (2) the geographic market in which the firm oper-
ates.

§ 1.1 Product Market


The product market is usually defined by estimating the cross-elasti-
city between a firm’s products and the products of its competitors. In
laymen’s terms, cross-elasticity measures the degree to which con-
sumers may be “held hostage” to the product of a particular firms. Al-
though some degree of cross-elasticity exists in all cases, the character-
istics of the product may be taken into account in setting the boundar-
ies of the product market. See, e.g., Int’l Boxing Club v. United States
(championship boxing matches were a distinct product from ordinary
boxing matches); Syufy Enters. v. Am. Multicinema, Inc. (“top-grossing”
first-run films occupied a distinct market from other first-run films);
United States v. Microsoft Corp. (high cost of switching between Win-
dows and Mac OS meant that Windows occupied its own product mar-
ket).

§ 1.2 Product “Submarkets”?


In some cases, it may be appropriate for a court to define a “submar-
ket,” a subset of goods within a market which are sufficiently distinct-
ive to have limited cross-elasticity with other goods within the same
market. See, e.g., Brown Shoe Co. v. United States (a submarket may
exist where products have “peculiar characteristics and uses, unique
production facilities, distinct customers, distinct prices” and so forth);
FTC v. Whole Foods Market, Inc. (“premium, natural, organic super-
market” is a cognizable subclass of supermarkets); FTC v. Staples, Inc.
(“office supply superstores” are a distinct submarket).
A submarket may consist entirely of the products of one firm. See, e.g.,
Eastman Kodak Co. v. Image Tech. Servs., Inc. (distinct submarket for
aftermarket parts and services for Kodak photocopiers). Alternatively,
a submarket may be defined by a bundle of services. See, e.g., United
States v. Philadelphia Nat’l Bank; United States v. Grinnell Corp.
(“central station” alarm services).

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§ 1.3 Geographic Market
Geographic markets generally depend on the extent to which physical
distances impose barriers to entry on would-be competitors. Trans-
portation costs are often a major factor in determining whether a dis-
tant firm is capable of meaningful competition with a local firm. See,
e.g., United States v. Aluminum Co. of Am. (cost of transporting alu-
minum from overseas meant that Alcoa had effective control of the
American market for aluminum).
Furthermore, a firm may be found to have nationwide market power
even if its products are available on a locality-by-locality basis. See,
e.g., United States v. Grinnell Corp. (Grinnell had nationwide market
power for “central station” alarm services even though each individual
service covered only local communities). Localities, in turn, may be
defined by consumers’ standards of convenience. See, e.g., Jefferson
Parish Hosp. Dist. No. 2. v. Hyde (“East Bank of Jefferson Parish” was
a cognizable geographic market because patients tended to choose hos-
pitals by proximity); United States v. Philadelphia Nat’l Bank (indi-
viduals and businesses tended to patronize local banks rather than
those located farther away).
In rare cases, a product may be so widely distributed that its geograph-
ic market is worldwide. See, e.g., United States v. Microsoft Corp.
(Microsoft products had a global market). Alternatively, a firm may
have a nationwide monopoly on one level and numerous local monopol-
ies on another. See, e.g., FTC v. Proctor & Gamble Co. (Proctor &
Gamble found to have nationwide monopoly in the manufacture of
bleach but also regional markets defined by barriers to transportation).

§ 1.4 Proving Market Power

§ 1.4.1 Direct Proof


Market power can be directly proven by showing conduct that would
immediately restrain competition. See, e.g., FTC v. Superior Ct. Trial
Lawyers Ass’n (collective refusal by trial lawyers to deal with indigent
criminal defendants caused court system to grind to a halt); FTC v.
Ind. Fed’n of Dentists (dentists’ concerted refusal to submit X-rays to
insurance companies for cost determinations had “actual, sustained ad-
verse effects on competition”).
Direct proof, however, can be hard to come by.

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§ 1.4.2 Indirect Proof
Market share can be a proxy for market power, but a defendant may
rebut the link between market share and market power.
In using indirect proof, it is important to avoid the “cellophane fallacy.”
Just because a firm cannot further raise prices without losing custom-
ers does not mean that it is not already making supracompetitive
profits on its goods or services. Relevant factors in assessing market
power include (1) entry barriers, (2) abnormal profits, (3) historical
trends, (4) fragmented competition, (5) and corporate conduct, and (6)
vulnerability of consumers to abuses of market power. Furthermore, a
finding of market power may be weakened where it can be shown that
competing firms would quickly enter the market if prices were to be
raised.

§ 1.4.3 Rebutting an Inference of Market Power


A firm may rebut an inference of market power by showing (1) that it
possesses only a temporary advantage because of technological superi-
ority or (2) that the market has low entry barriers.

§2 Analyzing Violations of Sherman Act § 1

§ 2.1 Per Se Rule


The per se rule operates against “agreement whose nature and neces-
sary effect are so plainly anticompetitive that no elaborate study of the
industry is needed to establish their illegality.” Nat’l Soc’y of Prof’l
Engineers v. United States. The main advantage of a per se rule is ease
of application and administrative convenience.

§ 2.2 Rule of Reason


The rule of reason is applied to conduct that merits a review of the un-
derlying market conditions before a court can come to a sensible con-
clusion as to any potential anticompetitive effects. See Chicago Bd. of
Trade v. United States. The rule of reason has evolved to accommodate
a “sliding scale” approach, where the depth of review of the underlying
market varies according to the obviousness of the potential anticom-
petitive effect.

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§ 2.3 Choosing the Rule to Apply
Categorize the conduct by (1) determining whether a horizontal or ver-
tical arrangement is involved, (2) assessing if there has been an agree-
ment, and (3) categorizing the particular restraint at issue.
Then, apply the appropriate rule, depending on whether the conduct
merits per se prohibition or a fuller analysis under the rule of reason.

§3 Horizontal Restraints

§ 3.1 Hardcore Price Fixing (Per Se Prohibition)


In general, hardcore price fixing (i.e., price fixing without even an at-
tempted procompetitive justification) is a violation of § 1 of the Sher-
man Act. The Court has described such price fixing as “a combination
formed for the purpos and with the effect of raising, depressing, fixing,
pegging, or stabilizing the price of a commodity in intersatte or foreign
commerce.” United States v. Socony-Vacuum Oil Co. Even without
overt action, intent alone is sufficient to establish a violation. Id.
Furthermore, setting any ingredient of price is equivalent to setting
price itself. See, e.g., Nat’l Macaroni Mfrs. Ass’n v. FTC (limiting pur-
chase of durum wheat when supplies were low was price fixing);
Catalano, Inc. v. Target Sales, Inc. (eliminating short-term credit is
price fixing); Arizona v. Maricopa Co. Med. Soc’y (setting maximum
prices, rather than a specific price, is price fixing); Virginia Excelsior
Mills, Inc. v. FTC (creating a joint sales agency for the purpose of set-
ting uniform prices is price fixing).

§ 3.2 Horizontal Agreements Requiring Rule of Reason


When a horizontal agreements appears to have some procompetitive or
efficiency-improving characteristics, courts have applied the full rule of
reason. See, e.g., Chicago Bd. of Trade v. United States (Board of
Trade could prohibit after-hours trading because it made the market
more competitive overall and had minimal effect on overall exchange of
grain); Broadcast Music, Inc. v. Columbia Broadcasting System, Inc.
(blanket license was acceptable because it provided a valuable service);
United States v. Brown Univ. (price fixing with respect to financial aid
was acceptable because universities were non-profit organizations with
social goals); Calif. Dental Ass’n v. FTC (ethical concerns proffered to

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justify restriction on advertising of discounts should be analyzed under
full rule of reason).

§ 3.3 “Quick Look” Analysis of Horizontal Agreements


The court may apply a “quick look” analysis only if “an observer with
even rudimentary understanding of economics could conclude that the
arrangement in question would have an anticompetitive effect on cus-
tomers and markets.” Calif. Dental Ass’n v. FTC. Quick look analysis,
however, assumes that there is at least some likelihood of anticompet-
itive harm. See, e.g., NCAA v. Bd. of Regents of Univ. of Okla. (partial
rule of reason was appropriate, though court ultimately found the re-
strictions on TV broadcasts unjustified); Nat’l Soc’y of Prof’l Engineers
v. United States (code of ethics analyzed under quick look but found to
do anticompetitive harm).

§ 3.4 Professional Self-Regulation


Horizontal restraints resulting from professional self-regulation have
generally received rule of reason analysis on the ground that codes of
ethics are concerned with more than just profits. See, e.g., Nat’l Soc’y
of Prof’l Engineers, supra; AMA v. FTC (ethical canons for physicians
analyzed under rule of reason, and several canons were found to be of-
fending); Vogel v. Am. Soc’y of Appraisers (rule of reason review prohib-
iting appraisers from accepting compensation consisting of a percent-
age of the appraised value); Calif. Dental Ass’n v. FTC, supra.

§ 3.5 Allocation of Markets


Markets can be divided on the basis of (1) fixed percentages of avail-
able businesses, (2) geographical regions, or (3) allotment of particular
customers. In general, market divisions result in a per se violation of §
1 of the Sherman Act. See, e.g., Timken Roller Beaing Co. v. United
States (Timken prohibited from engaging in geographic market divi-
sions); United States v. Sealy, Inc. (Sealy could not divide licenses to
use the Sealy brand among different mattress manufacturers); United
States v. Topco Assocs., Inc. (geographic market division violated § 1 of
Sherman Act even though it was arguably done for the purpose of pro-
moting competition between the Topco label and other brands); Palmer
v. BRG of Georgia, Inc. (two bar-exam-review companies committed § 1
violation by reaching agreement where one company agreed to yield
the state of Georgia to the other).

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§ 3.5.1 Additional Considerations in Market Divisions
Market divisions, however, may serve procompetitive purposes. They
may, for example, prevent companies in one area from free-riding off
the services and advertising provided by companies in another. This
was essentially the concern that motivated the market divison in
Topco. See also General Leaseways, Inc. v. Nat’l Truck Leasing Ass’n.
Because of Topco, however, it is unclear whether courts will readily ac-
cept “preventing free-riding” as a justification for market divisions.

§ 3.5.2 Permissible Market Divisions


An association of firms may designate an “area of primary responsibil-
ity” for each member firm with regard to advertisements. Firms may
also enter into “pass-over” clauses, which require firms selling in par-
ticular markets to compensate other firms within that market for lost
sales.

§ 3.6 Refusals to Deal


Horizontal boycotts were formerly prohibited under a per se rule. See,
e.g., Paramount Famous Lasky Corp. v. United States (producers and
distributors of motion pictures refused to deal with any theater which
declined to submit disputes to mandatory arbitration or to post $500
security); Fashion Originators’ Guild of Am. (FOGA violated § 1 in re-
fusing to deal with stores known to distribute Guild designs to other
designers); Klor’s, Inc. v. Broadway-Hale Stores, Inc. (causing distrib-
utors to decline to sell to a competing retailer, if proven, would be a § 1
violation); Radiant Burners, Inc. v. Peoples Gas Light & Coke. Co.
(withholding trade association’s mandatory approval to sell a new
product can amount to a § 1 violation); FTC v. Superior Ct. Trial Law-
yers Ass’n (refusing to accept indigent criminal defendants is a viola-
tion of § 1, in addition to being an attempt at price fixing, supra at §
1.4.1). Recently, courts have increasingly applied the rule of reason
where such boycotts may have procomptitive effects.

§ 3.6.1 Per Se Rule or Rule of Reason?


In general, the per se rule has been applied when the refusal to deal
features (1) joint efforts to disadvantage competitors, (2) a restriction
of access to supply, facility, or market necessary to enable the boycot-
ted firm to compete, (3) a dominant position in the relevant market,

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and (4) practices generally not justified by plausible arguments that
they were intended to enhance overall efficiency and make markets
more competitive. N.W. Wholesale Stationers, Inc. v. Pacific Stationery
& Printing Co. The bottom line is that the features of the refusal to
deal must add up to a “predominantly anticompetitive effect.” Id. Ad-
ditionally, the courts have suggested that a “core group of situations”
resembling group boycotts are worthy of per se condemnation: (1) hori-
zontal combinations at one level of distribution having the purpose of
excluding direct competitors from the market, (2) vertical combinations
designed to exclude from the market direct competitors of some mem-
bers of the combination, and (3) coercive combinations intended to in-
fluence the trade practice of boycott victims.
In Toys “R” Us, Inc. v. FTC, the court held that a boycott could be con-
demned under the per se rule if (1) the boycotting firm has cut off ac-
cess to a supply, facility, or market necessary for the boycotted firm, (2)
the boycotting firm possesses a dominant position in the market, and
(3) the boycott cannot be justified by plausible arguments that it was
designed to enhance overall efficiency. The problem, however, is that
the factors in this standard require an inquiry into market conditions
and pretty much defeats the purpose of a per se rule.

§ 3.6.2 Market Power in Relation to Refusals to Deal


From a practical standpoint, group boycotts are effective only when the
boycotting parties have market power. However, older cases did not
explicitly discuss market power. Later cases, however, have stated
that market power has a role in the analysis. See, e.g., Ind. Fed’n of
Dentists; N.W. Wholesale. According to Superior Court Trial Lawyers,
it is not necessary to actually disadvantage a competitor to be liable for
a refusal to deal. However, the rule does not apply to purely vertical
refusals to deal. NYNEX Corp. v. Discon, Inc.
N.W. Wholesale applied the full rule of reason to a refusal to deal,
where as Indiana Federation of Dentists applied a quick-look analysis.

§ 3.7 Industry Regulations


Industry regulations may promote product quality and serve other pro-
competitive ends, but they may be abused for anticompetitive ends. In
general, any industry association operating as a de facto boycott is pro-
hibited. E.g., FOGA. Regulations on quality are generally permitted,

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unles they (1) allege unreasonable standards or (2) impose an inappro-
priate standard of review. In re Rambus addresses the issue of using
industry standards to strong-arm competitors into paying royalties for
patented technologies. The Rambus court said that the FTC did not
prove that the standard-setting body would not have adopted some oth-
er standard absent Rambus’s deception.

§ 3.8 First Amendment Concerns


Courts should be aware that some boycotts have expressive content.
However, the expressive content cannot be tied to commercial gain.
See, e.g., Superior Trial Ct. Lawyers Ass’n.

§ 3.9 Joint Ventures


In general, joint ventures are reviewed under a rule of reason because
a joint venture presumably has some purpose other than to stifle com-
petition. Such “sham” ventures include situations where membership
in the venture seems to be a pretext for excluding certain firms. There
have been, however, some characterization problems. See United
States v. Topco Assocs., Inc. Furthermore, sham joint ventures will be
reviewed as ordinary horizontal agreements. Review by courts, how-
ever, does not cover arrangements wherein two firms incorporate joint
ventures as separate entity. Joint ventures, however, have been con-
demned under a per se rule when they engage in market division.

§ 3.9.1 Harm to Competition


The courts are concerned with competition, not with particular compet-
itors.

§ 3.9.2 Review Under the Clayton Act


Under § 7 of the Clayton Act, joint ventures might be analyzed as con-
glomerate mergers. See, e.g., United States v. Penn-Olin Chemical Co.
(district court needed to decide whether one of the joint venturers
would have entered the market but for the merger).

§ 3.10 Research and Development


Joint ventures can help to accelerate research and development. The
National Cooperative Research Act limits liability against research or-
ganizations.

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§ 3.11 Horizontal Conspiracies
Because colluding firms must make their intentions known in un-
der-the-table ways, courts have developed standards of proof for con-
spiracies to commit anticompetitive acts.

§ 3.11.1 Conscious Parallelism


When a firm has taken steps to communicate its intentions to all other
relevant parties, a court may infer a horizontal conspiracy. Interstate
Circuit v. United States (theater chains committed conspiracy by send-
ing letter to eight movie distributors and listed every distributo as a
recipient on each copy of the letter); cf. Theater Enters. v. Paramount
Film Distrib. Corp. (no inference of conspiracy when movie distributors
refused to sell movies to a suburban theater when there were good
business reasons to decline doing so).

§ 3.11.2 Plus Factors


Plus factors, which weigh in favor of finding a conspiracy, often entail
evidence that (1) parties acted contrary to their economic interests and
(2) were motivated to enter into a price-fixing conspiracy. In re Baby
Food Antitrust Litig. See also Toys “R” Us, Inc. v. FTC (inference of ho-
rizontal conspiracy where various toy manufacturers knew about Toys
R Us’s demands and all decided to depart from past distribution prac-
tices).
The bottom line is that plus factors are necessary if a case is to go to
trial; an absence of plus factors will result in summary judgment for
the defendant. See, e.g., Bell Atlantic Corp. v. Twombly.

§ 3.12 Trade Associations and Exchange of Information


Trade associations can exchange useful information about price, terms
of sale, output, and other statistics, but such information may also fa-
cilitate collusion. Information exchanges within trade associations are
generally reviewed under a rule of reason. There are, however, two
ways of treating information exchanges under § 1 of the Sherman Act:
(1) as evidence of a conspiracy and (2) as a violation of § 1 in itself.

§ 3.12.1 Per Se Rule


Older cases focused on the use of the exchanged information. If the in-
formation was being applied toward an anticompetitive purpose, then

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courts were likely to find a § violation. See, e.g., Am. Column & Lum-
ber Co. v. United States (exchange of information about lumber pricing
prohibited where firms apparently intended to raise prices); Cement
Mfrs. Protective Ass’n v. United States (no § 1 violation because inform-
ation was being collected to prevent customers from speculating on ce-
ment prices); Sugar Inst. v. United States (sugar sellers committed § 1
violation by forcing each other to commit to openly announced prices).

§ 3.12.2 Shift Toward the Rule of Reason


Later, courts turned toward a per se rule. See Container Corp. of Am.
(exchange of pricing information about cardboard boxes was a § 1 viol-
ation because it tended to restrict price competition). The Container
concurrence, however, suggested that a rule of reason would be appro-
priate. Subsequent cases, however, have added qualifications to the
use of the per se rule. See, e.g., Todd v. Exxon Corp. (exchange of de-
tailed salary information was anticompetitive owing to market condi-
tions). Todd suggested that five factors are important in evaluating an
exchange of information: (1) market power; (2) concentration of the
market; (3) elasticity of demand; (4) fungibility of products; and (5)
nature of the information exchanged. The bottom line is that exchange
of information regarding future prices tends to have a high risk of cre-
ating anticompetitive results whereas information regarding past
prices is less dangerous.

§4 Vertical Restraints

§ 4.1 Rule of Reason


Courts currently subject all vertical restraints to a rule of reason ana-
lysis. Leegin Creative Leather Prods., Inc. v. PSKS, Inc. Leegin over-
turned Dr. Miles Medical Co. v. John D. Park & Sons Co., in which a
vertical restraint was prohibited by a per se rule.

§ 4.1.1 Practical Effect of Shift


The practical effect of the shift is questionable. Under Colgate, firms
were already allowed to refuse unilaterally to deal with firms which
did not comply with pricing demands. On a practical level, the rule of
reason will discourage the bringing of cases since a finding of a viola-
tion is significantly less likely under the rule of reason.

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§ 4.2 Policy Considerations
The Leegin court cited several considerations which are relevant to re-
views of vertical restraints: (1) the tension between intrabrand com-
petition and interbrand competition; (2) the fact that manufacturers
are more likely than retailers to side with consumers; (3) the free-rider
problem, wherein some retailers might take advantage of advertising
and services provided by others; and (4) the possibility of coercion by
retailers, which might use price maintenance as a way to squeeze com-
peting retailers out of business.

§ 4.3 Additional Considerations


Vertical price maintenance arguably protects smaller businesses,
which might not be able to compete against larger ones in a price war.
This protection, however, comes at a cost to consumers, who end up
paying more than they would otherwise. Furthermore, price mainten-
ance may serve a business purpose for luxury goods and other products
that depend on the snob effect.

§ 4.4 Vertical Non-Price Restraints


In general, vertical non-price restraints are evaluated under the rule of
reason. Continental T.V., Inc. v. GTE Sylvania, Inc. The GTE
Sylvania court, however, left room for the possibility of per se prohibi-
tions in the future.

§ 4.5 Vertical Conspiracies

§ 4.5.1 Requirement of Plus Factors


As with horizontal conspiracies, courts have required plaintiffs to show
the presence of plus factors in order to establish the existence of vertic-
al conspiracies. See, e.g., Monsanto Co. v. Spray-Rite Serv. Corp. (ter-
mination of price-cutting distributor following complaints from other
distributors not enough to show conspiracy unless plaintiff proved that
termination was part of an attempt to fix prices). See also Garment
Dist., Inc. v. Belk Stores Servs. Inc. (termination of price-cutting retail-
er not a vertical conspiracy when manufacturer effected termination in
order to preserve the business of a more valuable customer).

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§5 Conduct by a Single Firm

§ 5.1 Two Elements of Monopolization


Section 2 of the Sherman Act states that a firm becomes liable for
monopolization through (1) the possession of monopoly power in the
relevant market and (2) the willful acquisition or maintenance of that
power as distinguished from growth or development as a consequence
of superior conduct, business acumen, or historic accident. See, e.g.,
United States v. Grinnell Corp.; United States v. Aluminum Co. of Am.
In Alcoa, the court stated that specific intent to monpolize was not ne-
cessary. As long as a firm had intent to engage in the immediate con-
duct giving rise to a monopoly. Furthermore, the court has stated that
courts with monopoly power are subjected to heightened scrutiny.
See, e.g., Eastman Kodak Co. v. Image Tech. Servs., Inc.; Aspen Skiing
Co. v. Aspen Highlands Skiing Corp.

§ 5.2 Analytical Framework


There are four steps in analyzing single-firm conduct: (1) define the
relevant market; (2) assess the market power of the alleged monopolist
constitutes “monopoly power”; (3) examine the nature of the conduct;
and (4) consider business justifications for the conduct.

§ 5.3 Categories of Forbidden Conduct

§ 5.3.1 Generally Permitted Conduct


While monopolies are restrained from abusing their dominant market
positions, they are allowed to compete like any other business.
Olympia Equip. Leasing Co. v. Western Union Telegraph. This is be-
cause “the emphasis of antitrust policy [has] shifted from the protectin
of competition as a process of rivalry to the protection of competition as
a means of promoting economic efficiency.” Id. See also Berkey Photo,
Inc. v. Eastman Kodak Co. (Kodak was not obligated to disclose in-
formation concerning its Instamatic 110 even though it had a domin-
ant market position); In re E.I. du Pont de Nemours & Co. (expansion
of production capacity for titanium dioxide pigments was permissible;
Du Pont had no duty to disclose its special process for making the pig-
ments to competitors).

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§ 5.3.2 Maintenance of Excess Capacity
In Alcoa, the court found that Alcoa had abused its dominant market
position by continuing to expand production capacity in such a way
that discouraged competitors from entering the market. It is unclear,
however, whether this ruling is still valid today.

§ 5.3.3 Refusals to Deal


A monopolist’s power to refuse to deal with competitors is not absolute.
If a court finds that the main effect of the refusal to deal is to squeeze
competitors out of a market, then the monopolist must show that the
refusal serves some valid business justification. See, e.g., Aspen Skiing
Co. v. Aspen Highlands Skiing Corp. (Aspen Skiing violated § by refus-
ing to deal with Aspen Highlands because the refusal would harm con-
sumers and had no business justification); Eastman Kodak Co. v. Im-
age Tech. Servs., Inc. (Kodak’s proffered justifications for refusing to
sell aftermarket parts to third-party service providers raised factual
questions and therefore did not warrant summary judgment); Verizon
Communications v. Law Office of Curtis V. Trinko (Verizon did not vi-
olate § 2 by refusing to let competing phone services use its network
because a regulatory agency already oversaw such matters).

§ 5.3.4 Relationship to Essential Facilities


Although refusals to allow access to an essential facility would prob-
ably be a § 2 violation, the courts have imposed fairly strict standards
on what constitutes refusal to deal in an essential facility. There are
four requirements: (1) the essential facility must be controlled by a
monopolist; (2) a competitors would not be able practically or reason-
ably to duplicate the essential facility; (3) access to the facility was
denied to a competitor; and (4) it would have been feasible to provide
the essential facility to competitors.

§ 5.3.5 Bottom Line


The bottom line is that courts have been leaning toward a rule which
says that arbitrary refusals to deal are not § 2 violations unless there
is some anticompetitive purpose. Furthermore, there is no general
duty to assist competitors. Olympia Equip. Leasing Co. v. Western
Union Telegraph Co.

16
§ 5.3.6 “Price Squeezing” Not Cognizable
In Pacific Bell Telephone v. Linkline Communications, Inc., Linkline
alleged the Pacific Bell had tried to squeeze it out of business by selling
wholesale equipment at expensive prices and retail equipment at very
low prices. The court, however, found no violation because Pacific Bell
had no duty to deal with Linkline. Unless Pacific Bell engaged in pred-
atory pricing, there was no violation of Sherman Act § 2.

§ 5.3.7 Technological Considerations


Network effects tend to create monopolies. Consider, for example, the
fact that people generally use Microsoft products to ensure interoper-
ability with other people who also use Microsoft products. Further-
more, the fast-paced development of high-tech markets means that an-
titrust suits often become irrelevant by the time a final decision is
reached because the market has simply moved on.

§ 5.4 Attempted Monopolization


Section 2 of the Sherman Act also covers attempts to create monopol-
ies, not just monopolies that have been established. There are three
elements to attempted monopolization: (1) intent; (2) the nature of the
conduct; and (3) a dangerous probability that, if the conduct that con-
stitutes the attempt is allowed to proceed unchecked, it will result in
monopoly power. See, e.g., Lorain Journal Co. v. United States (Lorain
Journal committed § 2 violation by refusing to run ads for any client
that also placed ads with an upstart radio station); A.H. Cox & Co. v.
Star Machinery Co. (no violation of § 2 when Star Machinery convinced
Cox to be its exclusive distributor and Cox subsequently went bank-
rupt); Six Twenty-Nine Productions, inc. v. Rollins Telecasting, Inc.
(section 2 violation where TV station refused to deal with an advert-
ising agency with evident intent to monopolize).

§ 5.4.1 “Dangerous Probability of Success”


Conduct amounts to an attempt to monopolize only when there is a
dangerous probability of success. Spectrum Sports, Inc. v. McQuillan.
To determine whether a dangerous probability exists, a court should
first determine the relevant market, including (1) the strenght of the
competition, (2) the probable development of the industry, (3) the bar-
riers to entry, (4) the nature of the anticompetitive conduct, and (5) the

17
elasticity of consumer demand. Int’l Distrib. Ctrs., Inc. v. Walsh
Trucking Co. The bottom line is that the courts are concerned with
competition rather than competitors. This means that elbows-out busi-
ness tactics are acceptable as long as they do not threaten to create a
monopoly.
The problem, however, is that the requirement of dangerous probabil-
ity means that § 2 does not cover thuggish behavior by smaller firms.

§6 Other Limitations on Single-Firm Action

§ 6.1 Predatory Pricing


Predatory pricing requires proof that (1) a firm has priced below cost
and (2) there is dangerous probability that the firm will recoup its
losses through future supracompetitive pricing. Brooke Group v.
Brown & Williamson Tobacco (note there has never been a successful
case under the Brooke Group standard).

§ 6.1.1 Measuring Cost


Ideally, we would use marginal cost as the lowest price at which a
product could be sold without causing the firm to lose money. Because
it is hard to separate marginal costs from other costs, however, aver-
age variable cost is an acceptable substitute.

§ 6.1.2 Effect on Victim


A predatory-pricing firm need not completely drive its competitors out
of business in order to achieve its purpose. Rather, it can simply in-
timidate other firms into raising their prices or otherwise to back off
from competing.

§ 6.1.3 Harm to Competition


The bottom line is that predatory pricing makes sense only if a firm
has a reasonable expectation of recouping the costs through future
supracompetitive pricing. The problem, however, is that there is not
much theory stating what circumstances are necessary for recoupment.

§ 6.2 Tying
Tying is prohibited under § 1 of the Sherman Act and § 3 of the
Clayton Act. Under the Sherman Act, tying of any kind of product is

18
prohibited, and tying is defined by two factors: the business engaged
in tying must have a monopolistic position in the tying product and (2)
a substantial volume of business in the tied product must be re-
strained. The Clayton Act covers only commodities, but the standard
of review is the same as that under the Sherman Act.

§ 6.2.1 Per Se Rule


Tying is condemned under a per se rule. The analysis consists of (1)
determining if there are two products involved and (2) assessing
whether the seller has sufficient market power to compel buyers to
purchase the tied product. E.g., Jefferson Parish Hosp. Dist. No. 2 (an-
esthesiology services are a distinct product from other services since
patients often request specific anesthesiologists). Tying may be imple-
mented by obscuring the true costs of a good or service. See Eastman
Kodak Co. v. Image Tech. Servs., Inc. (customers’ unfamiliarity with
total cost of ownership meant that Kodak could tie aftermarket ser-
vices to sales of photocopiers). See also Int’l Salt Co. v. United States
(manufacturer not allowed to tie salt to machines which used salt).

§ 6.2.2 Rule of Reason


Other types of tying are examined under a a rule of reason. E.g.,
United States v. Microsoft Corp. The point is that some forms of tying
may have procompetitive effects, usually by introducing efficiencies.
See also United States v. Jerrold Electronics Corp. (distributor of TV
equipment could bundle equipment together to form full sets because it
was a pioneer in a new industry).

§ 6.3 Exclusive Dealing Arrangements


The Sherman Act and the Clayton Act both prohibit exclusive dealing
arrangements that place unreasonable restraints on competition. The
Sherman Act requires proof of competitive harm whereas the Clayton
Act requires only a probability of a substantial lessening of competition.
Again, the Clayton Act is limited to commodities. Additionally, the
FTC Act’s general prohibition on “unfair methods of competition”
seems also to cover exclusive dealing arrangements (and then some).

§ 6.3.1 Rule of Reason


In general, exclusive dealing arrangements are analyzed under a rule
of reason. E.g., U.S. Healthcare, Inc. v. Healthsource, Inc.; Roland Ma-

19
chinery Co. v. Dresser Indus., Inc. There is a three step process for de-
termining whether an exclusive dealing arrangement exists: (1) look
for an agreement to deal exclusively—under § 1 of the Sherman Act
and § 3 of the Clayton Act, an agreement must be proven, but § 2 of the
Sherman Act covers unilateral conduct that is functionally equivalent
to exclusive dealing; (2) define the relevant market; and (3) apply the
rule of reason.
An exclusive dealing arrangement need not be explicit in order to viol-
ate antitrust laws. Courts have sometimes inferred a “meeting of the
minds.” E.g., United States v. Dentsply Int’l, Inc.

§ 6.3.2 Exclusive Dealing Under the Clayton Act


The Clayton Act covers any exclusive dealing arrangement that tends
to substantially lessen competition. A “substantial lessening of com-
petition” is found by examining market conditions and relative condi-
tions of competitors. Tampa Electric Co. v. Nashville Coal Co. (no viol-
ation where amount of coal market foreclosed was tiny compared with
the overall market for coal).

§ 6.3.3 Exclusive Dealing Under the Sherman Act


Under § 1 of the Sherman Act, exclusive dealing is recognizd only
when it is proven that 40–50 percent of the market will be foreclosed.
United States v. Microsoft Corp. Otherwise, the analysis is the same
as that under the Clayton Act.
Under § 2 of the Sherman Act, monopolists may become liable for
smaller amounts of market foreclosed. Microsoft. Furthermore, liabil-
ity may exist for unilateral conduct. United States v. Dentsply Int’l,
Inc.

§ 6.3.4 Exclusive Dealing Under the FTC Act


In FTC v. Brown Shoe Co., the court found that Brown Shoe’s “fran-
chise agreement” was an unfair method of competition.

§7 Mergers
Section 7 of the Clayton Act governs horizontal and vertical mergers.
It prohibits mergers which threaten to “substantially lessen competi-
tion” in “any line of commerce.” A “line of commerce” may include dis-

20
tribution of goods in any submarket. Brown Shoe Co. The Clayton Act
is intended to address threats to competition in their incipiency.

§ 7.1 Horizontal Mergers


The Department of Justice and the FTC have promulgated guidelines
for reviewing mergers. One salient point of these guidelines is that
they use the Herfindahl-Hirschman Index to calculate market concen-
trations and changes therein. The greater the increase in concentra-
tion resulting from a merger, the more suspect the merger is. Firms,
however, may rebut inferences of anticompetitiveness arising from the
HHI.

§ 7.1.1 Efficiencies as a Defense


Section 4 of the guidelines states that proffered efficiencies must be
merger-specific and verifiable in order to be cognizable as defenses. Ul-
timately, a merger does not pass muster unless the efficiencies out-
weigh the potential anticompetitive effects. Efficiencies are also accor-
ded different weight depending on their respective natures. “Hard” ef-
ficiencies, such as the merging of production facilities, are given signi-
ficant weight. “Soft” efficiencies, such as better research & develop-
ment, are accorded less weight.
In rare cases, a government may allow a merger to go forward if it
finds that the merger would allow the resulting firm to compete in lar-
ger markets. E.g., United States v. Philadelphia Nat’l Bank (merging
banks argued that the larger resulting entity would be able to compete
with larger New York banks.

§ 7.2 Analytical Framework


FTC v. H.J. Heinz Co. provides the current analytical framework for
mergers. (1) Determine the market using the standard market analys-
is. (2) Assess the concentration in the relevant market before and after
the merger. (3) If the merger would lead to a substantial increase in
concentration, then the merger is presumed to be illegal. (4) Examine
rebuttal arguments and potential defenses. (5) Consider if plaintiff
can rebut defendant’s justifications with other factors.
Generally, post-merger evidence of concentration or other effects on
market is accorded little weight since it is susceptible to manipulation
by the firms in question.

21
§ 7.3 “Failing Company” Defense
Courts have been willing to allow a merger to go forward when one
company is obviously in dire financial straits. Under the guidelines of
the DOJ and FTC, the failing firm defense is available only when (1)
the allegedly failing firm would be unable to meets its financial obliga-
tions in the near future; (2) it would not be able to reorganize success-
fully under Chapter 11 bankruptcy; (3) it has made unsuccessful good-
faith efforts to elicit reaosnable alternative offers of acquisition; and (4)
absent acquisition, the assets of the failing firm would exit the relevant
market.
See, e.g., Hosp. Corp. of Am. v. FTC (inelasticity of demand for hospital
services and tradition of collusion between hospitals in region meant
that merger should not go forward); FTC v. H.J. Heinz Co. (merger of
baby-food manufacturers failed because merging firms failed to estab-
lish an adequate procompetitive justification); FTC v. Staples (signific-
ant increases in concentration, combined with speculative efficiencies,
meant that merger should not be permitted).

§ 7.4 Conglomerate Mergers

§ 7.4.1 Extension Mergers


Extension mergers involve firms which produce similar or complement-
ary types of products or firms which produce similar items in different
geographical markets. These mergers may reduce potential competi-
tion or actual competition. See, e.g., United States v. Penn-Olin Chem.
Co. (district court should have considered whether one member of joint
venture would have entered market and the other would have stayed
out had the venture not happened); FTC v. Proctor & Gamble Co.
(P&G’s proposed acquisition of Clorox disallowed because P&G would
have been able to leverage enormous market clout to squeeze other
bleach sellers); United States v. Falstaff Brewing Corp. (Falstaff’s pro-
posed acquisition of local brewery found to be impermissible because it
was a way for Falstaff to squeeze into a market).

§ 7.4.2 Pure Conglomerate Mergers


In a conglomerate merger, firms in unrelated markets merge for the
sake of achieving efficiencies. Because there is no increase in concen-
tration in either market, the Sherman Act and the Clayton Act gener-

22
ally do not reach these firms. In general, only the FTC Act could be
used to question these mergers.

§8 Exemptions

§ 8.1 Noerr-Pennington Doctrine


In general, efforts to lobby the government for changes in policy are
immunized from antitrust liability, even if such efforts are plainly de-
signed to disadvantage a competitor. Eastern R.R. Presidents Conf. v.
Noerr Motor Freight Co. Furthermore, the Noerr exception extends to
efforts to influence judicial and administrative actions. Calif. Motor
Transport Co. v. Trucking Unlimited.

§ 8.1.1 Sham Exception


However, lobbying is anticompetitive when it is designed to abuse gov-
ernmental processes in such a way as to disadvantage a competitor.
The sham exception applies if (1) the conduct is “objectively baseless”
and (2) there is clear subjective intent to harm a competitor. Prof’l
Real Estate Investors v. Columbia Pictures.

§ 8.1.2 Providing Fraudulent Information to the Government


See, e.g., Calif. Motor Transport Co. v. Trucking Unlimited (litigation
found to be antitrust violation because it was intended to “harass” com-
petitors); Otter Tail Power Co. v. United States (court remanded case
for evaluation of lawsuit intended to make it difficult for a power com-
pany to sell bonds); Woods Exploration and Producing Co. v. ALCOA
(court declined to apply Noerr where defendant allegedly filed false
production statistics with the Texas R.R. Commission); MCI Commu-
nications Corp. v. AT&T Co. (filing of tariff proceedings against MCI
was a sham because AT&T knew that the recipients of the tariff filings
could do nothing about the filings); Clipper Express v. Rocky Mountain
Motor Tariff Bureau (blanket protest against competing firm’s lower
tariff rates was antitrust violation because there was no attention paid
to merit of complaints); Allied Tube & Conduit Corp. v. Indian Head,
Inc. (ballot-stuffing designed to prevent approval of a new type of elec-
trical conduit was violation of antitrust laws).

23
§ 8.2 State Action Immunity
A state may effect a policy that supports a monopoly as long as that
policy is “clearly articulate and affirmatively expressed” and “actively
supervised” by the state. Calif. Retail Liquor Dealers Ass’n v. Midcal
Aluminum, Inc. However, this immunity extends to states only. A mu-
nicipality cannot authorize monopolies. Town of Hallie v. City of Eau
Claire. There are four reasons for this limitation: (1) states create mu-
nicipalities; (2) municipalities do not exercise sovereign powr and can-
not because their interests are more parochial; (3) redress through
political action would not protect people living outside the municipal-
ity; (4) the sheer number of municipalities would threaten national an-
titrust enforcement.

§ 8.2.1 Extension of Immunity to Individuals


A private actor is immune from antitrust liability as long as that actor
is acting under a scheme that meets the requirements of Midcal and
Parker.

§ 8.2.2 Unilateral Government Action


Unilateral government action does not qualify as a “conspiracy” to
monopolize because there is only one actor.

§ 8.3 “Cleary Articulated”


As long as a policy is clearly articulated, it need not be mandatory to
fall within the scope of Midcal and Parker. Southern Motor Carriers
Rate Conf. v. United States.

§ 8.4 “Actively Supervised”


See, e.g., Calif. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc.
(regulation of wine prices was not actively supervised because state ex-
ercised no control over definition of “reasonable” prices); FTC v. Ticor
Title Ins. (joint price-setting by insurance companies, which filed pro-
posed rates with the state, was not actively supervised because the
state had no say in setting prices); 324 Liquor Corp. v. Duffy (no im-
munity where state merely ratifies the independent decision of a
private body); Patrick v. Burget (harassing peer reviews proceedings
against a surgeon not immune because state could not review outcome
of proceedings). In Patrick, the court declined to decide whether judi-

24
cial review of a peer-review decision itself is enough to constitute active
supervision.

§ 8.5 Municipalities
A statutory provision authorizing municipalities to engage in anticom-
petitive conduct does not need to acknowledge the potential anticom-
petitive effects. The effect must merely be a “foreseeable result.” See,
e.g., Town of Hallie v. City of Eau Claire (municipal-level monopoly
over sewage disposal was immune because the state had authorized
the monopoly and determined the area to be served); Columbia v.
Omni Outdoor Advertising, Inc. (billboard monopoly was immune be-
cause it was carried out pursuant to a state policy that granted muni-
cipalities plenary zoning power).
The rationale for this rule is that municipalities authorized to enact
policy should not have to look over their shoulders for potential anti-
trust enforcement.

25