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Regulation of Business

11. Regulation of Business. Administrative Agencies The Federal Trade Commission Act and Consumer Protection Laws Antitrust: The Sherman Act. McGraw-Hill/Irwin Business Law, 13/e. © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 11. Regulation of Business. The Clayton Act,

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Regulation of Business

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  1. 11 Regulation of Business Administrative Agencies The Federal Trade Commission Act and Consumer Protection Laws Antitrust: The Sherman Act McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

  2. 11 Regulation of Business The Clayton Act, The Robinson-Patman Act, and Antitrust Exemptions and Immunities Employment Law Environmental Regulation McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

  3. THE CLAYTON ACT, THE ROBINSON– PATMAN ACT, AND ANTITRUST EXEMPTIONS AND IMMUNITIES 50 C H E A P T R “Competition policy is intended to ensure a fair fight, not to punish winners or protect losers.” Carl Shapiro, Information Rules (cowritten with H. Varian, 1999)

  4. Learning Objectives • Clayton Act: • Section 3 • Section 7 • Section 8 • The Robinson-Patman Act • Antitrust exceptions and exemptions 50 - 5

  5. Enforcement of Clayton Act • Not illegal unless anticompetitive effect is substantial • No criminal penalties and private plaintiffs may sue for injunctive relief, treble damages • Dept. of Justice and FTC share enforcement of Clayton Act to seek injunctive relief or issue cease and desist orders 50 - 6

  6. Meaning of Not Insubstantial • Quantitative substantiality test(Standard Oil): • Courts look at the dollar amount of commerce involved • Qualitative substantiality test(Tampa Electric): • Courts examine the area of effective competition (total market for product within competitive region) and percentage of market the agreement covers 50 - 7

  7. Clayton Act Section 3 • Prohibits two potentiallyanticompetitive behaviors: • Tying agreement: restrains trade by requiring buyer to buy one product (tied product) in order to buy another product (tying product) • Exclusive dealing agreements: buyer required to handle seller’s product exclusively or purchase all buyer’s requirements for a commodity from seller 50 - 8

  8. Clayton Act Section 7 • Prohibits mergers to achieve monopoly • Applies to acquisition of stock or assets of another company in any line of commerce or any activity affecting commerce • Act prohibited if it would substantially lessen competition or tend to create a monopoly • Functional interchangeability test • Requires Pre-Merger Notification & Report Form filed with FTC and Justice Department 50 - 9

  9. Horizontal Mergers • Horizontal mergers: mergers among firms competing in same product and geographic markets • Rigorous scrutiny since result is increased concentration in relevant market • Vertical mergers: between firms that had, or could have had, a supplier–customer relationship and does not directly result in concentration 50 - 10

  10. Clayton Act Section 8 • Prohibits any person from serving as director or senior officer of two or more competitor corporations, each with capital, surplus, and undivided profits more than $10 million • Excludes banks and common carriers • Per se standard of liability • No illegality if competitive overlap between firms is an insignificant part of either firm’s total sales 50 - 11

  11. Robinson-Patman Act • Enacted to stop major chain stores from price discrimination: • Primary: lower prices in areas with competition; higher prices in areas without competition • Secondary: using power to compel lower prices from manufacturer than offered to smaller firms • Tertiary: customer who received lower pricing from supplier passes savings to its customers 50 - 12

  12. Robinson-Patman Act Details • Applies only to discriminatory acts that occur with actual sale in commerce • Narrower than affecting commerce test of the Sherman Act • Statutory defenses to Section 2(a) liability: • Cost justification • Changing conditions • Meeting competition 50 - 13

  13. Antitrust Exemptions • Labor unions: not combinations or conspiracies in restraint of trade; activities generally exempted from antitrust scrutiny • Agricultural cooperatives: exempt under Clayton Act and Capper–Volstead Act • Joint export activities of American firms are exempt under Webb–Pomerene Act as long as activities do not artificially or intentionally enhance or depress U.S. prices 50 - 14

  14. Antitrust Exemptions • Insurance business subject to state regulation exempt under McCarran–Ferguson Act • Regulated industries receive some antitrust immunity since regulatory agencies have industry oversight • State action exemption recognizes states’ rights to regulate economic activity in the interest of their citizens 50 - 15

  15. Other Antitrust Issues • Noerr-Pennington doctrine: Sherman Act does not prohibit two or more persons from joining to petition government to obtain government action even if efforts intended to eliminate competition • Patent licensing promotes innovation by granting a limited monopoly to those who invent and develop products and processes 50 - 16

  16. International Law • Foreign Sovereign Immunities Act (FSIA): governmental actions of foreign sovereigns and their agents exempt from antitrust laws • Act of state doctrine: American courts will not judge legality of a foreign sovereign’s act • Sovereign compulsion doctrine:available defense if foreign sovereign compelled private party to commit acts that would otherwise violate U.S. antitrust laws 50 - 17

  17. Test Your Knowledge • True=A, False = B • For most Clayton Act violations, only a probability of significant anticompetitive effect is required. • Clayton Act § 3 prohibits tying arrangements and price discrimination. • Mergers are illegal unless approved by FTC. • Regulated industries are always exempt from the Sherman Act and Clayton Act. 50 - 18

  18. Test Your Knowledge • True=A, False = B • Shirts, Inc. manufactures shirts in Alabama and sells to retailers in Alabama at a 15% discount due to lower delivery costs. As a result of its action, Shirts, Inc. violated the Robinson-Patman Act. • Vertical mergers are between firms that previously had, or could have had, a supplier–customer relationship. 50 - 19

  19. Test Your Knowledge • Multiple Choice • Mercedes Benz required all of its automobile dealers and service centers to exclusively use Mercedes authorized or approved products. Which of the following is true? • (a) Mercedes violated antitrust law by engaging in an exclusive dealing agreement • (b) Mercedes violated law only if the agreement may substantially lessen the competition or tend to create a monopoly 50 - 20

  20. Test Your Knowledge • Multiple Choice • To determine the anticompetitive effect of a merger, a court must identify: the relevant product market and the relevant? • (a) The relevant product market • (b) The relevant geographic market • (c) Both A & B • (d) Both A & B plus whether any officers or directors of one company are officers and directors of the other company 50 - 21

  21. Thought Questions • Do the exemptions for antitrust liability available for patents, changing conditions, meeting competition, among others, make sense if the goal of antitrust law is to promote competition? Is regulation the best method for promoting competition? 50 - 22

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