Antitrust 101

1. Antitrust 101 Presentation to WMACCA

2. Wendell Taylor Doug Garrou

3. Don’t Get Caught on the Wrong Side of Antitrust! “I’m on to your little game, Harrison!”

4. Overview: Purpose of the Antitrust Laws • U.S. antitrust laws focus largely on protecting consumers, and in general they accomplish that goal by protecting competition. • The idea: in the absence of competition, consumers pay higher prices for inferior goods and services.

5. Antitrust (Competition) Law Basics:The Most Important Statutes • “Section One” of the Sherman Act • 15 U.S.C. § 1 • Prohibits “contracts…combinations….or conspiracies…in restraint of trade” – commonly referred to as “concerted activity” • Some activity is “per se” illegal; other restraints are analyzed under the “rule of reason” • “Section Two” of the Sherman Act • 15 U.S.C. § 2 • In relevant part, prohibits unilateral “monopolization” and “attempt[ed] monopolization” • The Robinson-Patman Act • 15 U.S.C. § § 13-13b, 21a • Broadly speaking, prohibits “price discrimination” with respect to sales of “tangible products” • Various State Antitrust Laws

6. Antitrust (Competition) Law Basics:Who is Enforcing these Laws? • The Federal Government • DOJ • FTC • State Governments • Private Lawsuits • Europe: government regulatory approach is changing

7. Antitrust (Competition) Law Basics:What are the Penalties? • For criminal violations, as of June 22, 2004: • Fines up to $100,000,000, or “twice the gain or loss” (even larger fines), for corporations • $1,000,000 for individuals • Prison terms up to 10 years • Plus litigation costs, which can be large • Civil litigation by allegedly damaged private parties is also common. • The law usually allows treble damages • “Full consideration damages” in some states • Attorneys fees and expenses can be substantial

8. Antitrust (Competition) Law Basics:Four Common Trouble Spots • Price Fixing and Other “Per Se” Illegal Agreements • Criminal penalties in US; growing severity elsewhere • Vertical Restraints • These are usually cases about product distribution • Important recent developments • Monopolization • Price Discrimination • Not a focus of the government • Still an important source of civil litigation

9. Price Fixing and Per Se Violations:Sherman Act § 1 Basics • U.S. law since 1890 • Prohibits “Every contract, combination . . . or conspiracy in restraint of trade . . . • Key Elements: Agreement or understanding between two or more persons or entities that unreasonably restrains competition

10. “Per Se” Concept • All agreements or contracts restrain trade to some extent • But some types of agreements are deemed perse illegal, without regard to: • Reasons for the agreement; or • Actual market effects of the agreement • Per se agreements are so “plainly” or “manifestly” anticompetitive that courts don’t care about the actual effects. Business Elecs. Corp. v. Sharp Elecs. Corp., 458 U.S. 717 (1988) • For example, if an agreement is considered price fixing, then it does not matter that: • Prices are decreased rather than increased • Prices are only stabilized • Prices are reasonable • No exact price is fixed

11. Types of “Per Se” Offenses – People Can Go to Jail for These! • Price agreements with competitors • Bid rigging • Allocation of territories or contracts among competitors • Allocation of customers among competitors • Some group boycotts (horizontal, among direct competitors)

12. Price Fixing and Other Per Se Illegal Agreements:Critical Concepts • Agreement (Any form of agreement or understanding): • Can be express or tacit, and can be inferred from circumstantial evidence • Court will look for evidence that “tends to exclude the possibility of independent action by the parties.” Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984). • Doesn’t have to be an agreement to violate the law • Agreements with an anticompetitive effect may be sufficient • Examination of unilateral best interests will be critical • Special problems presented by trade associations and standard setting organizations • There’s a fine line between competition and conviction!

13. Antitrust and the Roberts Court: 2006 Term Bell Atlantic Corp. v. Twombly (8-1) • Question: What does it take to plead a conspiracy in a Section 1 case? • Answer: • There must be enough facts to make a conspiracy not just “conceivable” but “plausible” • Pleading conscious parallelism and adding a naked assertion of conspiracy is not enough • The Conley v. Gibson “no set of facts” standard is overruled • Questions and Comments: • Will Twombly thwart the deluge of private antitrust litigation? • Will Twombly work a broader change in pleading under Rule 8?

14. Vertical Restraints:“Rule of Reason” Concept • Some restraints are not necessarily bad, and so they are not per se illegal. • An evaluation of relevant markets and all the facts and circumstances is required. • Key issue: does the restraint promote competition, or does it “violate the rule of reason” and suppress competition? • Defenses based on considerations other than competition not allowed.

15. Vertical Restraints:“Rule of Reason” Concept • Geographic territories or other vertical non-price restraints • Inter vs. intra brand competition • Information sharing • Standards setting • Exclusive dealing • Ancillary restraints • Tying arrangements

16. Antitrust and the Roberts Court: 2006 Term Leegin Creative Leather Products v. PSKS, Inc. (5-4) • Question: Is resale price maintenance (RPM) per se illegal? • Answer: • RPM should be judged under the rule of reason; Dr. Miles is overruled • Factors in analysis: (1) number of manufacturers imposing restraint; (2) source of restraint, and (3) market power (manufacturers and retailers) • Questions and Comments: • Do manufacturers want this (pressure from retailers)? • State laws: Current state prohibitions and “Leegin repealers”; analogy to Illinois Brick and ARC America

17. Monopolization:Sherman Act § 2 “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce of the United States shall be deemed guilty of a felony” 15 U.S.C. § 2.

18. Sherman Act § 2 • Prohibits: • Monopolization • Attempted Monopolization • Conspiracies to Monopolize (rarely used) • Applies to single entities – no “smoky room” agreements with competitors are needed to run afoul of this statute

19. Monopolies Are Not Necessarily Illegal!Verizon v. Trinko “The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices--at least for a short period--is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.” --- U.S. ---, 124 S.Ct. 872, 897 (2004)

20. Offense Elements • Monopolization • (1) Monopoly power, and (2) willful acquisition or maintenance of monopoly power • Attempted Monopolization • (1) Predatory or anticompetitive conduct, (2) specific intent to monopolize, and (3) dangerous probability of success

21. Monopolization • Possession of market power in a relevant market • Willful acquisition or maintenance of that market power through anticompetitive conduct • Anticompetitive conduct • Predatory • Exclusionary

22. What is Monopoly Power? • “Power to control prices or exclude competition” • “Power to raise prices above a competitive level for a significant period of time”

23. Monopoly Power • Defining the Relevant Market (product and geographic) • Interchangeability / Cross-elasticity of demand • Customer views • Battle of experts • Market Shares • 70% and above • 50% to 70% • Below 50% • Intellectual Property (Independent Ink)

24. Exclusionary Conduct • “the willful acquisition or maintenance of monopoly power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident” Grinnell (1966) • “anticompetitive conduct can come in too many different forms, and is too dependent on context, for any court or commentator to have enumerated all the varieties” Carribbean Broadcasting (DC Cir. 1998)

25. Exclusionary Conduct • Conduct that harms rivals? • Conduct that doesn’t make sense apart from harm to competition? Sacrifice? • Conduct that does not enhance efficiency? • Conduct that on “balance” does more harm than good? • Conduct that is more restrictive than “necessary”? • Lack of business justification? • Violation of independent legal obligation? • Special obligation on high share companies?

26. The Robinson-Patman Act • Purpose is to bar a seller from engaging in price discrimination that has an adverse impact on competition. • The Act’s principal provision is Section 2(a) which prohibits direct or indirect discrimination in price when certain competitive injury may result. • Government regulators don’t enforce this law, but private litigants use it as the basis for lawsuits.

27. Supreme Court: Recent Cases Volvo Trucks v. Reeder-Simco (2006) • At Issue: Whether offering dealers different prices with respect to separate sales violates Robinson-Patman Act (R-P). • Holding: This “mix-and-match” comparison cannot support R-P price-discrimination claim; R-P is transaction-specific.

28. Staying Out of Trouble:Practical Questions to Ask Every Time • Is this conversation one I would be uncomfortable for others to know about? • Is anyone acting as though this meeting is surreptitious or legally questionable? • How would this email look on the front page of the business section? • Is there a customer or competitor likely to be angry and claim “unfair competition”? • Does this plan meet our goal to be a tough competitor, but comply strictly with the law? • Is this activity in my company’s unilateral best interest -- or does it only make sense if my competitors agree to join in?