antitrust: an overview
Trusts and monopolies are concentrations of economic power in the hands of a few. Economists believe that such control injures both individuals and the public because it leads to anticompetitive practices in an effort to obtain or maintain total control. Anticompetitive practices then lead to price controls and diminished individual initiative. These results in turn cause markets to stagnate and depress economic growth.
Because of fears during the late 1800s that monopolies dominated America's free market economy, Congress passed the Sherman Antitrust Act in 1890 to combat anticompetitive practices, reduce market domination by individual corporations, and preserve unfettered competition as the rule of trade. The Sherman Antitrust Act forms the foundation and the basis for most federal antitrust litigation.
As for the states, many have adopted antitrust laws that parallel the Sherman Antitrust Act to prevent anticompetitive behavior within local intrastate commerce. Since Congressional jurisdiction does not reach purely intrastate commerce, states needed to pass their own legislation to avoid having anticompetitive behavior depress their own local economies. See, for example, the Massachusetts Antitrust Act.
The Federal Antitrust Acts
Congress derived its power to pass the Sherman Act through its constitutional authority to regulate commerce. Therefore, the Sherman Act can only be used when the conduct in question restrains or substantially affects either interstate commerce or trade within the District of Columbia. To satisfy this jurisdictional requirement, the plaintiff must show that the conduct in question occurs during the flow of interstate commerce or has an appreciable effect on some activity that occurs during interstate commerce.
The Sherman Act is divided into three sections. Section 1 delineates and prohibits specific means of anticompetitive conduct, and Section 2 deals with end results that are anticompetitive in nature. Sections 1 and 2 supplement each other in an effort to outlaw all types of anticompetitive conduct. Congress designed the supplementary relationship to prevent businesses from violating the spirit of the Act, while technically remaining within the letter of the law. Section 3 simply extends the provisions of Section 1 to U.S. territories and the District of Columbia.
Because the courts found certain activities to fall outside the scope of the Sherman Antitrust Act, Congress passed the Clayton Antitrust Act of 1914 to further widen its scope. For example, the Clayton Act added the following practices to the list of impermissible activities: price discrimination between different purchasers, if such discrimination tends to create a monopoly; exclusive dealing agreements; tying arrangements; and mergers and acquisitions that substantially reduce market competition.
The Robinson-Patman Act of 1936 amended the Clayton Act. The amendment aimed to outlaw certain practices in which manufacturers discriminated in price between equally-situated distributers to decrease competition.
The Per se Rule vs. the Rule of Reason
Violations under the Sherman Act take one of two forms - either as a per se violation or as a violation of the rule of reason. Section 1 of the Sherman Act characterizes certain business practices as a per se violation. A per se violation requires no further inquiry into the practice's actual effect on the market or the intentions of those individuals who engaged in the practice. Some business practices, however, at times constitute anticompetitive behavior and at other times encourage competition within the market. For these cases the court applies a totality of the circumstances test and asks whether the challenged practice promotes or suppresses market competition. Courts often find intent and motive relevant in predicting future consequences during a rule of reason analysis. A presumption exists in favor of the rule of reason for ambiguous cases.
Types of Prohibited Anticompetitive Schemes
Congress designed these federal antitrust laws to eradicate certain frequently used anticompetitive practices of which the following are a few.
Section 2 of the Sherman Act prohibits monopolization, attempts to monopolize, and conspiring to monopolize. Any such act constitutes a felony. A monopoly conviction requires proof of the individual having intent to monopolize with the power to monopolize, regardless of whether the individual actually exercised the power.
Price-fixing occurs when a company or companies within a given market artificially set or maintain the price of goods or services at a certain level, contrary to the workings of the free market. Section 1 provides that price-fixing is an illegal restraint on trade, regardless of whether a vertical or horizontal scheme. A vertical scheme is a scheme among parties in the same chain of distribution. A horizontal scheme occurs among competitors on the same level.
In 1911 vertical price-fixing schemes became a per se violation of Section 1 when the Supreme Court interpreted the statute in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373. However, in the landmark case of Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. __ (2007), the Supreme Court overturned the 96-year-old Dr. Miles precedent and held that courts should apply the rule of reason when analyzing vertical price-fixing schemes. The ruling renders all vertical limitation schemes subject only to the rule of reason.
Collusive bidding occurs when two or more competitors agree to change the bids they otherwise would offer absent the agreement. Under Section 1, collusive bidding is per se illegal.
A tying arrangement is an agreement by a party to sell one product only on the condition that the buyer agrees either to buy different products from the seller or not to buy those different products from another seller. Tying arrangements are subject to the rule of reason unless the arrangement shuts out a substantial quantity of commerce in which case the scheme is per se illegal.
Section 2 makes illegal a firm's refusal to deal with another firm if the refusing firm refuses for the purpose of trying to monopolize the market. Meanwhile, section 1 prohibits a group from refusing to deal with a particular firm. A group refusal to deal is known as a group boycott. Because of seemingly contradictory Supreme Court decisions over the years, the question of whether group boycotts are subject to the rule of reason or a per se rule has been left murky.
Exclusive dealing agreements require a retailer or distributor to purchase exclusively from the manufacturer. These arrangements make it difficult for new sellers to enter the market and find prospective buyers, thus depressing competition. However, because companies widely-use requirements contracts, which essentially are exclusive dealing agreements, for purposes that promote competition, exclusive dealing arrangements only face rule of reason scrutiny.
Below-cost pricing intended to eliminate specific competitors and reduce overall competition is known as predatory pricing. Section 2 disallows this conduct. In Brooke Group Ltd. v. Brown & Williamson Tobacco, 509 U.S. 209 (1993), the U.S. Supreme Court devised a two-part test to determine if predatory pricing had occurred. First, the plaintiff must establish that the defendant's production costs surpass the market price charged for the item. Second, the plaintiff must establish that a "dangerous probability" exists that the defendant will recover the investment in above-cost inputs. In Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc. (05-381) (2007), the Supreme Court said that this test also applies when determining if a predatory bidding scheme exists.
Certain practices and organizations have received exemption from the federal antitrust laws. First, patent owners received an exemption in the Sherman Act because federal policy favors incentivizing innovation. Of course, the exemption does not go beyond the granted patent monopoly.
Second, the Clayton Act exempted labor unions and agricultural organizations from the Sherman Act's reach.
Third, the Securities Exchange Act of 1934 (SEA) heavily regulates securities trading; thus, certain activities that fall within the scope of the SEA are exempt from antitrust law. The U.S. Supreme Court took up this very issue in 2007 in Credit Suisse Securities (USA) v. Billing (05-1157). The Court decided that if securities regulation and antitrust law are incompatible, then the securities regulation prevails and individuals who would otherwise violate antitrust law receive antitrust immunity. Determining incompatibility requires the presence of the following four criteria: 1) behavior squarely within securities regulation; 2) clear and adequate SEC authority to regulate; 3) active and ongoing SEC regulation; and 4) a serious conflict between regulatory and antitrust regimes.
Federal Trade Commission
The Federal Trade Commission Act of 1914 (FTCA) bolstered the Sherman Act and Clayton Act by providing that the Federal Trade Commission (FTC) could proactively and directly protect consumers rather than only offer indirect protection by protecting business competitors. Congress endowed the FTC with the power to fill gaps remaining in antitrust law or to stop new business practices not yet invented at the time of the Clayton Act's enactment but contrary to public policy. Section 5 of the FTCA gives the FTC broad powers to cope with new threats to the competitive free market.