Antitrust

1. Antitrust Is Monopoly Power Necessarily Harmful to Society? Does Google have monopoly power? On what? Why? Why Not? Is that bad? Why? Can you name monopolies in other industries?

2. Should Budweiser (AB InBev) be allowed to buy Corona (Modelo)? Antitrust Invev 39% Modelo 7% MillerCoors 25% Heiniken 6% Other 22%

3. American Needle v. NFL (2010 Supreme Court Case). NFL gave Reebok exclusive right to make hats, T-shirts and other gear with team logo. American Needle says that violates antitrust law – each team should be free to negotiate on its own. Drew Brees, Saints Quarterback, says if the NFL wins it will enable owners to extract total control over a multi-billion dollar business. How can the NFL do this? Should it be able to? How are consumers hurt? Why Do We Have Antitrust Laws? Standard Oil Trust Created the 7 Sisters (Made Rockefeller even richer)

4. Aug 2010 Settlement prevents intel from using threats, bundled prices or other offers to exclude or hamper competition. 2009 EU Case: $1.45 Billion. For rebates to customers that bought less of a rival’s product allowed Intel to get 70% of EU chip market. Sherman Antitrust Act • “Unreasonable Restraints.” U.S. Supreme Court added “unreasonable” • Restraint is greater than needed to protect legitimate business interest • Restraint poses an undue hardship on the promisor or likely injury to the general public • Contracts in Restraint of Trade. Contract or combination in restraint of trade is illegal. • Monopoly or Attempt to Monopolize. Monopolies or attempts to monopolize are illegal. • Interstate Commerce. The Sherman Act applies only to activities that have a “significant” impact on interstate commerce. • Interstate Commerce (commerce clause). Section 1: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal…” 930 start here on Tues

5. Horizontal Price-Fixing, Horizontal Market Division Presentation Case: Palmer v. BRG of Georgia, Inc. (1990) , p. 137Groups 14 & 15 to present

6. V. Feb 2013 Price Fixing “international conspiracy to set prices at supra competitive levels.” “…defendants met repeatedly.” Agreed to coordinate prices “agreed at a 2004 meeting in Joinville, Brazil, to announce a global price increase of 8% to 10% with the aim of negotiating a 6% increase.”

7. Presentation Case The Rule of Reason vs. Per Se Violations Continental Airlines v. United Airlines Groups 12 & 9 to present Size checker here

8. Market Division Example. Supervalue and C&S Wholesale Groceries, Inc. “divvied up the regions so they wouldn’t have to compete against one another.” How Judged • Per Se -so blatantly anti-competitive that it is per se a violation (limited) • Rule of Reason - it is a restraint of trade, but not an unreasonable restraint (most often the correct standard) • Applied when an anticompetitive agreement may be justified by legitimate benefits. • Under the rule of reason, the lawfulness of a trade restraint will be determined by the purpose and effects of the restraint.

9. Current Antitrust Example: JACOBI INDUSTRIES PLEADS GUILTY TO BID RIGGING(July 2007) • Bid Rigging. The president and owner of Jacobi Industries Inc., a Medford, N.Y. company, pleaded guilty to conspiring to rig bids on U.S. Department of Defense (DOD) contracts for military tiedown equipment and cargo securing systems. • $20,000 Fine – 6 Months Prison. Jacobi has agreed to pay a criminal fine of $20,000, and to cooperate with the Department's ongoing investigation. Jacobi could also serve up to six months in prison. The terms of the plea agreement are subject to court approval. Maximum 10 years of prison and $1million fine (or twice the gain or twice the loss). • Conspiracy. Jacobi participated in the bid-rigging conspiracy from November 2001 to January 2005, during which time he and co-conspirators discussed and agreed among themselves not to compete by agreeing not to submit prices or bids against each other on certain contracts. • Attending meetings and engaging in discussions regarding the sale of military tiedown equipment and cargo securing systems; • Agreeing during those meetings and discussions not to compete on certain contracts with the DOD by not submitting prices or bids on those contracts; • Submitting bids in accordance with the agreements reached; • Selling military tiedown equipment and cargo securing systems to the DOD under those agreements at collusive and non-competitive prices; and

10. Hurricane Katrina Fund – Bid rigging issues • Reminders from the government to bidders • 10 years in prison - $1 million fine ($100 million for corporations) plus restitution • Per Se Violations – not rule of reason • Schemes • Bid suppression • Complementary bidding • Bid rotation • Customer or market allocation • Suspicious indicators – what the government looks for • Identical bids on line items • Bids too high (for work being done) • Winner subcontracts to a loser • Clear gap between winner and others • Same increment between bids • Qualified bidders do not bid – why? • Prices mysteriously drop when a new bidder appears • Competitors are seen meeting. • Competitors get equal business over time • Patterns of any sort • 2010 FBI Raid – Margins “Too Good” • FBI raided three US offices of Japanese auto part makers. • Profit margins appear too good and may be the product of collusion.

11. Horizontal Price fixing United States v. Maloof • Background • Sales Manager. Maloof was a sales manager for Bay Industries. • Sold Steel Buildings. Bay Industries sold steel buildings • Fiberglass Major Component. A major component of the buildings is fiberglass insulation • Insulation prices went up • Key Fact. Maloof contacted a competitor and agreed to charge the same prices to overcome the price increase of fiberglass • Other competitors joined in the practice • Finding. Sentenced to 30 months in prison

12. Section 1 of the Sherman Act Case: United States v. VISA U.S.A., Inc. (2003)End-of-Chapter Q. 4, p. 685 • Market Power. Their market exceeds 70% market share • Exclusionary Rules. A bank that chooses to issue the credit cards of American Express or Discover forfeit the right to issue MasterCard or Visa. • Questions. • Should it be against antitrust laws for MasterCard and Visa to control the industry as they do? • How would this case be judged? What’s the standard? What would the arguments on each side be? • Who do you think won? $2.25 Billion Visa $1.8 Billion MasterCard

13. Price Fixing OPEC School Milk Scam NCAA Cap of assistant coach salaries Any agreement among competitors to fix prices is a per se violation. Group Boycotts - agreement to not deal with a vendor or third party Horizontal Market Division –Trade Associations Joint Ventures – NEXT SLIDE Resale Price Maintenance Agreements (rule of reason) Territorial Restrictions Free Rider Problem Customer Restrictions Refusal to Deal Non-Price RestrictionsDefendants generally win non-price based vertical restraint actions Restraints of Trade – Overview Horizontal Vertical

14. More Recent Price-Fixing Cases Ice Industry 2008 • Ice industry price-fixing in Detroit market • Home City Ice plead guilty and faces a fine as much as $100 million • Employee, McNulty, wore a wire to get evidence at a meeting at TGI Friday’s. • Damaging quote from executive “we can’t let them play one of us off the other, all they want is to get a better price.” Toys R Us 2009 • Consumer lawsuit (not just the gov brings these suits) claiming Toys R Us conspired with 5 manufactures to fix prices on strollers, high chairs, care seats and breast pumps. Chinese Vitamins • 2009 article on case pending that Chinese makers of Vitamin C obtained a dominant market share in vitamin C and then got together to conspire to raise prices – • Evidence still confidential but one bit is a conversation about prices at a convention in Las Vegas

15. Horizontal Restraint Trade Association Example: Standard for USB for computers • Exception to Antitrust. • Generally permissible to join a trade association • i.e. GM, Ford, and Chrysler form an association to lobby congress against increases in CAFÉ standards • Price Discussions. Don’t discuss prices or anything that affects prices, such as costs, discounts, terms of sale or profit margins • Leave meetings immediately if the discussion turns to price • Don’t make announcements or statements about prices, either at formal or informal function • Don’t discuss sales or production cost statistics • Inventory or Marketing Plans. • Don’t discuss the level of existing or future inventories • Don’t discuss specific marketing plans • Don’t disclose any other competitively sensitive information Big Bear Lodging Case (SKIP) end of chapter Q 7 Association formed to jointly promote Big Bear Valley. Alleged price fixing and group boycott

16. Vertical – Retail Price Maintenance Agreement Presentation Case State Oil Co. v. Khan, 522 U.S. 3 (1977)Groups 16 & 13 • Under a contract with a gas station lessor (Khan), State Oil would set a suggested retail price and sell gas to Khan for 3.25 cents per gallon less than that price. When State Oil terminated the contract for nonpayment of rent, Khan filed a suit alleging price fixing in violation of the Sherman Act. • The court ruled in State Oil’s favor, but was reversed on appeal. State Oil appealed to the U.S. Supreme Court. • Should all “commercial arrangements subject to the antitrust laws” be evaluated under the rule of reason?

17. Price Fixing Issue: Girl Scout Cookies: $2.50 or $3.00. Horizontal Market Division ExampleIn re Cardizem CD, 332 F.3d 896 (6th Cir. 2003) • Facts • HMR makes a prescription drug called Cardizem CD. • HMR’s patent expired in Nov. 1992 • Andrx Pharmaceuticals, Inc. developed a generic version and FDA gave Andrx a 180 day period to sell drug without other new generic versions as competition. • HMR sued Andrx over the patent and the two parties agreed that HMR would pay Andrx $40 million per year until case resolved in an un-appealable manner. • Issue - Buyers of Cardizem CD filed suit in antitrust law • Questions • What is the legal action? • What are the issues? • Who should win? 930 200start here thurs

18. Vertical – Retail Price Maintenance Agreement Case Presentation: Leegin Creative Leather Products, Inc. v. PSKS, U.S. Supreme Court, p. 138Groups 18 & 19 • Leegin produced women’s fashion accessories and sold to Kay’s Kloset. • Kay’s Kloset refused to sell at price suggested. • Leegin stopped selling to Kay’s Kloset. Kay’s Kloset sued and won $33.6 million in lower court based on a per se violation of antitrust law. Leegin Wallet Belt

19. Reaction to Leegin Embraced new law - Sued for price-fixing Manufacturers are embracing price-fixing Some stores fight back – “Our suppliers can set pricing policies all they want – but it’s their loss, not ours.” - Owner of Pet Supply Store. We just steer customers away from that product. Baby-Age.com, an online retailer, says 100 of 465 suppliers now fix price. State Law Targets Minimum Pricing • 2009 • Maryland passes law that prohibits manufacturers from setting min prices • Applies to sales Maryland residents over the internet when the retailer is out-of-state.

20. Discuss Colgate Doctrine • Colgate – refusal to deal • Dr. Miles Medical • Parke, Davis, Co. – read quote • Leegin Vertical – Refusal to Deal and Group Boycott Monsanto Co. v. Spray-Rite Service Corp • Spray-Rite Sold Monsanto's herbicide • Low price distributor • Sold below other distributors • Alleged Group Boycott and Illegal Resale Price Maintenance • Monsanto terminated Spray-Rite as a distributor • Claimed failure to hire trained sales persons and failure to promote product • Spray-Rite bought herbicide from other distributors although could not get enough (group boycott?) • Standard • Direct or circumstantial evidence needed to prove defendant and others “had a conscious commitment to a common scheme designed to achieve an unlawful objective. • Enough Evidence • Monsanto would not ship adequate supplies to price cutting distributors • Monsanto complained of the price cutting • Newsletter referred to maintaining prices

21. Horizontal Price fixing In re Baby Food Antitrust Litigation, question • Three companies maintained 98% of market share • Gerber (70% market share by itself) • Heinz • Beech-Nut • Potential Price Fixing • Allegation that prices were shared in advance of actual price increase • Heinz and Beech-Nut followed Gerber’s lead so that they all benefited from price increase with relative market shares staying the same – advanced notice of price increase was necessary to accomplish this. • Conscious Parallelism • How do you know if it’s price fixing or just a reaction to a competitor’s price change? • Plus Factors – need more to prove price fixing

22. Section 2 of the Sherman Act • Section 2 condemns “every person who shall monopolize, or attempt to monopolize.” • There are two distinct types of behavior that are subject to sanction under Section 2: Section 2: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or person, to monopolize any part of trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.” Monopolization Attempts to Monopolize

23. Monopolization and Attempts to Monopolize • Monopoly Power. The possession of monopoly power in the relevant market • Willful Acquisition. And the willful acquisition or maintenance of the power, as distinguished from growth or development as a consequence of • a superior product, • business acumen, • or historic accident. • Both Elements Required. A violation of Section 2 of the Sherman Act requires that both of these elements be established. • Attempt to Monopolize • Definition: Any activity by a firm to eliminate competition and gain monopoly power.

24. Presentation Case, Christy Sports, LLC (P) v. Deer Valley Resort Co (D) (10th Cir 2006), p. 145.Groups 20 & 17

25. Sirius and XM radio merged in 2007 – subject to Justice Department approval as not anti-competitive. Mergers • Horizontal. • Relevant Market. The acquisition by merger or consolidation of a competing firm engaged in the same relevant market. • Less Competition. Will be unlawful only when a merger results in the merging firms holding a disproportionate share of the market, resulting in a substantial lessening of competition, and if the merger does not enhance consumer welfare by increasing efficiency of production or marketing. • Vertical • The acquisition by a seller of one of its buyers or vice versa. • Will be unlawful if the merger prevents competitors of either merging firm from competing in a segment of the market that otherwise would be open to them, resulting in a substantial lessening of competition. • Conglomerate • The acquisition of a noncompeting business

26. Essential Facilities Doctrine Anti-Monopoly – Essential Facilities Doctrine end of chapter Q 2 Exclusive dealing contract with Hasbro – Toys-R-Us and K-Mart Start here after break 930200

27. Nestle v. Dreyer Ice Cream: Super Premium By buying [Wild Oats] we will…avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville, and several other cities which will harm [Whole Foods'] gross margins and profitability.  By buying [Wild Oats]…we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing natural organic food chain to rival us…[Wild Oats] may not be able to defeat us but they can still hurt us….[Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space.  Eliminating them means eliminating this threat forever, or almost forever. • FTC required disposal of: • 2 Dreyer’s brands: Dreamery, Whole Fruit Sorbet • 1 Licensed brand: Godiva Whole Foods and Wild Oats Summer 2007 • Should U.S. sue to stop this? • What is the relevant market? • How damaging is Whole Foods CEO John Mackey? • “eliminate a competitor” and • “avoid nasty price wars.” • "Rahodeb“ his blog name on Yahoo • "The end game is now underway for OATS.... Whole Foods is systematically destroying their viability as a business--market by market, city by city."

28. The Clayton Act • In 1914, Congress attempted to strengthen federal antitrust laws by enacting the Clayton Act. • Fill in Gaps from Sherman Act. The Clayton Act was aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover such as: • Price Discrimination • Exclusionary Practices • Mergers • Interlocking Directorates • Tying • More Preventative. The Clayton act is more preventative than the Sherman Act. • Private Party Action – TREBLE DAMAGES.

29. TyingIBM Case

30. Tying Case: Illinois Tool Works, Inc. v. Independent Inc., U.S. Supreme Court 2006, 656

31. Robinson-Patman Act – Price Discrimination(amendment to Clayton Act) Section 2(a) Price Discrimination. [I]t shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where such commodities are sold for use, consumption, or resale, within the Untied States.. And where he effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them… Requirements: • Engaged in Commerce • Two/more Sales • Two/more Purchasers • About the Same Time • Different Prices • Commodities • Like Grade and Quality • Injuries Competition Defenses • Cost Justification • Market Conditions • Meeting Competition Volvo Truck Case, p. 665

32. Hypotheticals • Restricted Showroom Hours. At the Detroit auto dealer’s trade association meeting, it was proposed that auto dealers restrict their showroom hours, including closing on Saturdays. You are a mid-size Detroit car dealer. Do you go along with the proposal? • Retail Price Maintenance. Shopping for a stereo loudspeaker made by Sound Corporation, I couldn’t find a dealer who would sell it for less than the manufacturer’s suggested retail price. Isn’t that price-fixing? • Price Discrimination. I operate two stores that sell recorded music. My business is being ruined by giant discount store chains that sell their products for less than my wholesale cost. I thought there were laws against price discrimination. • Refusal to Sell. I own a retail clothing store and the brand Company refuses to sell me any of its line of clothes. These clothes are very popular in my area, so this policy is hurting my business. Isn’t it illegal for Brand to refuse to sell to me? • Price-Fixing. The gasoline stations in my area have increased their prices the same amount and at the same time. Is that price-fixing?

33. March 2011 Antitrust Case • Fuel and cargo surcharges • “agreed to make a uniform policy regarding fuel surcharges” • Warren Gerig of United walked out of the meeting (SMART MOVE WARREN!) • 21 airlines agree to pay $1.7 billion in fines • Criminal charges • 4 executives sent to prison (2 for six months and 2 for 8 months) • 15 more are currently fugitives • Discovered because Lufthansa notified the Justice Department under an amnesty program (disclose problem in exchange for criminal amnesty).

34. Section 8 – Interlocking Directorates Prohibits individuals from serving as directors on the boards of two or more competing companies simultaneously. Can you serve on both Apple and Google Boards?

35. Enforcement of Antitrust Laws • Antitrust laws are enforced by: • Department of Justice • Federal Trade Commission • Private Parties, who may be awarded treble damages and attorneys’ fees • Advisory Opinions. The DOJ and FTC have a process to seek an advisory opinion. • Compliance Program (benefits) • Circumstantial Evidence • Signaling behavior (wire spectrum case)

36. Professional Baseball Primarily allows MLB to stop teams from moving Raiders sued NFL based on antitrust laws to move to Los Angles from Oakland Last major league baseball move was in 1971 since then there have been 7 NFL moves, 7 NBA and 9 NHL moves. Labor (unions) Agricultural and Fisheries Insurance (Congress threatened to take this away) Foreign Trade Joint Efforts by Businesspersons to obtain legislation Cooperative Research and Development by small firms All National Football League teams agree that a player will not be hired until three full football seasons after the player’s graduation from high school. Is this a violation of antitrust laws? Clarett was a star for OSU and won the national championship for OSU. Clarett v. NFL (2004) Exemptions from Antitrust Laws

37. International Issues Antitrust Treaties with Other Countries http://www.usdoj.gov/atr/public/international/int_arrangements.htm Reach of U.S. Antitrust Laws • The DOJ or the FTC and private parties may bring an action against a foreign party that has violated Section 1 of the Sherman Act. • The FTC act may also be applied to foreign trade, and foreign mergers may also be brought within the jurisdiction of U.S. courts. • Do antitrust laws place too great a burden on commerce in the global marketplace? INTEL CASE. EU accused Intel of offering rebates designed to harm rival Advanced Micro Devices. That’s an “abuse of a dominant position” and could lead to fine. The rebates offered by Intel were of such a quantity, of such an amount, that an efficient competitor would be forced to price below cost and we think that would be bad for consumers who would be buying computers. “ WSJ 7-31-07

38. Extra Slides

39. Proctor & GambleAntitrust Policy and Compliance Guidance Antitrust laws are designed to prohibit agreements among companies that fix prices, divide markets, limit production or otherwise impede or destroy market forces. P & G’s policy is that all employees strictly comply with antitrust laws and the competition and anti-monopoly laws of all countries, states and localities in which they conduct P & G business. • Supervisors and managers are responsible for ensuring that employees under their responsibility are aware of and comply with this policy. • It is very important for employees to understand and follow this policy so that P & G avoids even the appearance of an antitrust violation. • That is why the Company’s general rule is: “NO CONTACT WITH COMPETITORS” • Membership in trade associations is permissible only if approved in advance by P & G legal counsel.

40. P & G: Fair Competition (I added the headers below – rest from P&G) • Compete Fairly. We believe in competing fairly because we all benefit from fair, free and open markets. We compete strictly on the merits of our products and services and make no attempt to restrain or limit trade • Do Not Discuss Price. We never discuss such matters as prices, pricing strategies, product or marketing plans or terms of sale with competitors. Should a prohibited subject come up during the course of a trade association or other meeting, we must leave the meeting and inform our leadership or legal counsel. • Do Not Agree with Competitors. We do not enter into agreements with our competitors concerning prices, production volumes, customers or sales territories. • Do Not Link Products. We do not link purchase of one product to another or compel suppliers to buy from us to retain their P & G business • Do Not Disparage Competitors. We do not disparage the products or services of a competitor • Do Not Collect Information Wrongfully. We collect competitive information through proper public and other lawful channels but do not use information that was obtained illegally or improperly by others, including through misrepresentation, invasion of property or privacy, or coercion.

41. Williamson Oil Co. v. Philip Morris Discount Brands Premium Brands Cigarette Manufacturers Lorillard RJ Reynolds Philip Morris Brown & Williamson

42. International Issues “Slim makes his billions the old-fashioned way: monopolies.” “It’s like the U.S. and the robber barons in the 1890s. Only Slim is Rockefeller, Carnegie, and J.P. Morgan all rolled up into one person” David Martinez, Mexican Investor Source: WSJ 8/4/07

43. EXTRA SLIDES _ DO NOT COVER

44. Warning Signs - You're On Thin Ethical Ice When You Hear... • "Well, maybe just this once...“ • "No one will ever know...“ • "It doesn't matter how it gets done as long as it gets done.” • "It sounds too good to be true.“ • “Everyone does it.” • "Shred that document." • "We can hide it." • "No one will get hurt." • "What's in it for me?" • "This will destroy the competition." • "We didn't have this conversation."

45. International Issues Discuss General Electric and Honeywell (MN Company) case Europe’s Case Against Microsoft • Abused Monopoly Power. Abused it’s near-monopoly position by bundling a media player with its Windows operations system. • $1 billion fine – largest ever • Split Product. Must split media player out of bundle • Microsoft offered a version w/o media player but few purchased it because it was the same price as the version with media player. • Disclose Protocols. Force disclosure of “protocols” Microsoft says it will sell licenses, EU says should be free. • U.S. case settled in 2001 (after an administration change)

46. Federal Trade Commission Act • Consumer Protection Act Section 5(a)(1): Unfair methods of competition in or affecting competition and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.

47. Should Yahoo be allowed to display ads sold by Google • Brainstorm the arguments – the article walks through them. • Relevant market? • Anti-competitive?Pro-competitive? • Settlement