... University of Deusto School of Law

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1 UNIVERSIDAD DE DEUSTO ANTITRUST PROGRAM OUTLINE Professor Jesse W. Markham, Jr. Marshall P. Madison Professor of Law University of San Francisco January 18, 19 and 20 and 22, 2011 SESSION I 1. Introduction: the History and Development of U.S. Antitrust Law a. Common Law Precedents b. Historic Context 1 i. The trusts and the robber barons that created them ii. Populism and the Sherman Act of Policy Framework a. Early populism and the broad ambitions of antitrust policy b. Modern Economic Policy Underpinnings i. The Chicago School ii. Narrowing of the focus of antitrust: consumer welfare iii. Basic economics of antitrust 3. Statutory Framework i. The Sherman Act 1

2 1. Section 1 Conspiracy Prohibition 2. Section 2 Monopolization and Attempt Prohibition ii. Federal Trade Commission Act 1. Unfair methods of competition 2. Consumer fraud and deceptive advertising iii. The Clayton Act 1. Section 7 Mergers and Acquisitions 2. Section 7A (Hart-Scott-Rodino) Premerger Reporting 3. Section 2 Price Discrimination 4. Section 3 Tying and Exclusive Dealing 5. Section 4 Private Treble Damages 6. Section 4C Actions by State Attorneys General iv. State Antitrust Laws (Examples) 2 1. California Cartwright Act 2. Massachusetts Antitrust Act 4. Enforcement Framework a. Federal Government Agency Enforcement i. United States Department of Justice Antitrust Division 1. Criminal cartels 2. Civil non-merger authority 3. Civil merger authority ii. Federal Trade Commission 1. Civil non-merger authority 2

3 2. Civil merger authority 3. Consumer Protection iii. Specialized Agencies (Examples) b. State Enforcement 1. Securities Exchange Commission 2. Bank Regulators i. State Attorneys General ii. Local District Attorneys c. Coordination among jurisdictions i. Federal-State ii. Multistate iii. International 1. Example: U.S. EU Cooperation Agreement (1991) 3 d. Private enforcement i. Business-vs-business ii. Class actions e. Sanctions i. Civil 1. Damages 2. Attorneys fees 3. Injunctive relief ii. Criminal 5. Extraterritorial Reach and Enforcement of U.S. Antitrust Law 3

4 a. The effects test for jurisdiction under international law principles b. Globalization and the expansion of anti-cartel criminal enforcement 4 4

5 UNIVERSIDAD DE DEUSTO ANTITRUST PROGRAM OUTLINE Professor Jesse W. Markham, Jr. Marshall P. Madison Professor of Law University of San Francisco January 18, 19 and 20 and 22, 2011 SESSION II 1. Conspiracies, Collaboration and Coordination a. Applicable Statutes i. Section 1 Sherman Act 5 ii. FTC Act Section 5 iii. State laws b. Coverage and vocabulary: i. Only applies to agreements which are defined as a conscious commitment to a common scheme ii. Hard core cartels 1. Indefensible by balancing some sort of benefits 2. Per se iii. Horizontal agreements that may have legitimate and anticompetitive effects that need to be balanced 1. Rule of reason 5

6 a. History and purpose of the restraint b. Availability of less restrictive alternatives to achieve legitimate objectives i. Example: Two competing supermarket chains seek to improve information about consumer preferences by pooling their SKU data from the checkout stands of both. Jointly their data is more statistically interesting. This could be done by submitting each party s data to an independent third party to analyze, or they could just swap it. Since swapping gives each more than the necessary information about each other s prices, it is less restrictive to pool it through an independent analyst. c. Balancing of procompetitive benefits against anticompetitive effects i. Example: Sale of a business under a noncompetition clause iv. Vertical agreements, which now always require application of balancing test 6 c. Economics Issues 1. Examples include exclusive territories, resale price agreements i. Conditions favoring cartels 1. Relatively few market participants 2. High entry barriers 3. Homogenous products 4. Visible pricing 5. Similarity of participants (e.g., none has committed to unusual expansion plans) Cartel examples: vitamins, 6

7 textiles, construction, food and feed additives, food preservatives, chemicals, graphite electrodes, fine arts auctions, ocean tanker shipping, marine construction, marine transportation services, rubber chemicals, synthetic rubber and dynamic random access memory ii. Oligopoly markets and consciously parallel conduct 1. Requirement of an agreement 2. Example: two gas stations at a remote cross roads iii. Legitimate collaborations 1. Joint ventures a. Joint research to develop more efficient batteries for automobiles 2. Standard setting a. Interoperability standards for cell phones d. Analytical framework for conspiracy claims 7 i. Agreement 1. Inferences and direct proof 2. Parallel conduct with plus factors ii. Restraint of trade (competition) 1. Per se mode of analysis a. Price fixing i. Any agreement to tamper with the marketplace price function b. Market allocations i. Territory ii. Product 7

8 2. Section 1 in Specialized Contexts a. Intellectual Property iii. Customers c. Group boycotts i. Concerted refusal to deal at all or other than on specified terms ii. May be a price fixing conspiracy 2. Rule of Reason mode of analysis a. General applications b. Application to vertical restraints 3. Intermediary modes of analysis i. Federal agency guidelines for licensing intellectual property b. Joint Ventures i. Federal agency guidelines for competitor collaboration 8 c. Trade Associations and Standard Setting Bodies 3. Price Discrimination and the Robinson-Patman Act a. History and policy of U.S. price discrimination law i. Protecting small business ii. Large businesses obtained a price advantage from suppliers; threatened smaller ones iii. Consumers were not harmed in the sense that the supermarkets were actually charging less b. State counterpart statutes 8

9 c. Primary line and secondary line discrimination d. Elements of the offense and defenses: i. Price discrimination just means a difference in price in two sales to two different purchasers ii. Limited to commodities iii. Must be sold for use or resale within the United States, so exports are not covered. iv. Indirect discrimination is also prohibited, such as preferential credit terms, delivery, stocking, storage, etc. v. Reasonably contemporaneous vi. Products of like grade and quality vii. Buyers are liable for knowingly receiving a discriminatory price viii. Affirmative defenses include among others: 1. Meeting competition in good faith 2. Cost justification due allowance for differnces in the cost of manufacture, sale or delivery 9 e. Main Point: i. EU competition law seeks a different set of policy objective concerning the creation and maintenance of a common market 1. Price discrimination rules in the EU are therefore concerned with the problem of partitioning or compartmentalizing Europe with different prices in different countries rather than maintaining a single marketplace. ii. US statute is, alone among antitrust laws, concerned with maintaining the viability of smaller businesses against the chain stores 9

10 1. Prohibition against price discrimination is not regarded as necessarily promoting economic efficiency 10 10

11 UNIVERSIDAD DE DEUSTO ANTITRUST PROGRAM OUTLINE Professor Jesse W. Markham, Jr. Marshall P. Madison Professor of Law University of San Francisco January 18, 19 and 20 and 22, 2011 SESSION III 1. Monopolization and Attempted Monopolization a. Monopoly power and illegal monopolization i. The monopoly power element of the offense 1. Defining the relevant product market a. Cross-elasticity of demand; substitutability 11 b. Examples: i. Beer and soft drinks ii. Intel-compatible PC operating systems and Apple compatible operating system etc. 2. Defining the relevant geographic market a. Where can the consumer turn for supplies? 3. Market power and market shares a. Market shares are historic b. Market power is forward-looking c. Thus market shares are a surrogate for market power 11

12 i. Direct proof of power over price is also possible d. Recently courts have also focused on the problem of supply side substitution as a constraint on the exercise of market power. ii. The element of exclusionary or predatory conduct 1. Tying and exclusive dealing a. Two distinct or separate products b. Some market power over the tying product market c. Tying conduct, or bundling d. Use of tying product market power to coerce sales of the tied product e. Effect is presumed to be foreclosure of competition in the tied product market 2. Price squeeze and vertical foreclosure 12 a. Vertically integrated company 3. Unilateral refusal to deal and the essential facility doctrine a. Very rarely an offense in U.S.; far more easily rises to level of a violation in Europe 4. Predatory pricing and the recoupment standard 5. Raising rivals costs 6. Abuse of intellectual property a. Walker Process and fraudulently obtained patent rights b. Handgards and the enforcement of invalid patents 12

13 b. Attempted monopolization c. Professional Real Estate and limitations on antitrust remedies for assertions of intellectual property rights d. Refusals to license have never been established as a violation i. Dangerous probability of success standard ii. Relationship between dangerous probability and market power c. Conspiracies to monopolize 2. Mergers and Acquisitions a. Federal agency guidelines for horizontal mergers i. Unifying theme: mergers should not be permitted to create or enhance market power or to facilitate its exercise ii. So there are two concerns: 1. Mergers that create dominance Mergers that aggravate oligopoly conditions so as to facilitate coordinated conduct iii. The concern can also be vertical 1. Vertical foreclosure occurs when a manufacturer acquires either a critical supplier or critical customer iv. Note that under the U.S. approach, bigness alone is not the concern. This differs from the EU approach 1. Example: GE-Honeywell a. Conglomerate merger. Honeywell makes small aircraft engines and avionics component parts, as well as non-avionics components such as wheels and environmental controls; GE makes, sells and services large aircraft engines 13

14 b. U.S. approved the merger because there was neither any competitive overlap, nor any vertical foreclosure c. EU blocked the merger on the basis of so-called portfolio effects meaning that the merged company would be able to offer to the market packages of products and services that had never been available from a single source, thus displacing rivals in their respective markets who could not do so. i. This would be something like a merger between, say, Starbucks and McDonalds. The two neither compete directly, nor have any vertical relationship, but their combination might be regarded as permitting the two to offer a new bundle of products and services. ii. The U.S. approach would not find this offensive, but rather efficient. Producing something that consumers want is not regarded as anticompetitive. The EU, in effect, was concerned about the combined GE/Honeywell being too efficient for rivals to be able to compete with it. 14 b. Analytical framework for the evaluation of mergers under U.S. antitrust law i. Define the relevant market or markets ii. Compare concentration before and after and ask two questions: 1. Will it be unduly concentrated? 2. How much of that problem stems from the transaction? 3. Concentration is currently tested under a particular measure called the Herfindahl Hirschman Index, or HHI, but there is growing concern about the results 14

15 4. Concentrations standards articulated in Guidelines are not enforced way too low to reflect real problems c. Pre-merger reporting under the Hart-Scott-Rodino Act 3. Exemptions and Immunities a. Baseball (yes, baseball) and other industry exemptions i. Insurance ii. Agricultural cooperatives iii. Labor iv. Export trade v. Research and Development b. Noerr-Pennington immunity for petitioning the government c. Implied repeal and regulatory exemptions d. State action 15 15