1. CHAPTER 37 ANTITRUST LAW DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

2. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 THE BASIS OF REGULATORY REFORM Little federal or state regulation of business in early history of United States. Little federal or state regulation of business in early history of United States. Federal courts took “hands off” attitude toward business. Federal courts took “hands off” attitude toward business. Tide began to turn in late 1800s as public tired of irresponsible corporate behavior. Tide began to turn in late 1800s as public tired of irresponsible corporate behavior. Government regulation of business has become major factor in management of commercial affairs. Government regulation of business has become major factor in management of commercial affairs.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 THE SHERMAN ANTITRUST ACT Passed in 1890. Passed in 1890. Purpose is to preserve economic ideal of a pure-competition economy. Purpose is to preserve economic ideal of a pure-competition economy. Prohibits: Prohibits: – Combinations that restrain trade. – Attempts to monopolize any area of commerce. Violations can result in fines, imprisonment, injunctive relief, and civil damages. Violations can result in fines, imprisonment, injunctive relief, and civil damages.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 SECTION 1: THE SHERMAN ACT Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. – Prohibits contracts, combinations, or conspiracies which restrain interstate commerce. – Requires two or more persons acting together before a violation can be found.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 SECTION 1: THE SHERMAN ACT Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. – Rule of Reason: Method for evaluating contracts that allegedly restrain trade. Method for evaluating contracts that allegedly restrain trade. Courts examine the purpose and effect of conduct to determine whether there is unreasonable restraint of trade. Courts examine the purpose and effect of conduct to determine whether there is unreasonable restraint of trade. Not the conduct itself, but the effect in a given industry makes conduct illegal. Not the conduct itself, but the effect in a given industry makes conduct illegal.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 SECTION 1: THE SHERMAN ACT Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. – Per se Violations: Acts inherently contradictory to the economic theory of pure competition. Acts inherently contradictory to the economic theory of pure competition. Per se violations were: Per se violations were: –Horizontal price fixing. –Vertical Price fixing. –Horizontal market divisions. –Group boycotts.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 SECTION 1: THE SHERMAN ACT Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. Section 1: Contracts, Combinations, or Conspiracies in Restraint of Trade. – “Quick Look” Analysis. Allows defendant firm an opportunity to rebut presumption that certain conduct is automatically anticompetitive. Allows defendant firm an opportunity to rebut presumption that certain conduct is automatically anticompetitive. If court agrees with evidence of defendant, court removes conduct from per se category and applies a rule-of-reason analysis. If court agrees with evidence of defendant, court removes conduct from per se category and applies a rule-of-reason analysis. Gives firms opportunity to show there is business justification for their conduct, and should not be found in violation of the law. Gives firms opportunity to show there is business justification for their conduct, and should not be found in violation of the law.

8. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 SECTION 2: THE SHERMAN ACT Section 2: Monopolizing and Attempts to Monopolize. Section 2: Monopolizing and Attempts to Monopolize. – Prohibits seeking a monopoly or attempting to keep monopoly once one is attained, either act is illegal. – Can be violated by one or more persons. – If firm controls 70 percent or more of a relevant market, firm has monopoly power. – Courts examine relevant market, may include product produced by firm and substitute goods.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 SECTION 2: THE SHERMAN ACT Section 2: Monopolizing and Attempts to Monopolize. Section 2: Monopolizing and Attempts to Monopolize. – Courts then look at elasticity of demand between challenged product and substitute. – Defenses to rebut Section 2 was/is violated: Firm argues not attempting to retain power. Firm argues not attempting to retain power. Position was legally acquired. Position was legally acquired. Position was “thrust upon” it. Position was “thrust upon” it.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 THE SHERMAN ACT: REMEDIES Remedies. Remedies. – Sherman Act violation is shown, both civil and criminal remedies are available. – An individual may be fined up to $100,000. – May be sentenced up to three years in prison. – Corporation can be fined up to $1 million. – Injunction issued against prohibited conduct. – Injured parties may recover treble damages and attorneys’ fees.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 THE CLAYTON ACT Sherman Act alone not sufficient to solve major business problems of the country. Sherman Act alone not sufficient to solve major business problems of the country. Sherman Act remedial in nature. Sherman Act remedial in nature. By time remedy sought, injured party had suffered irreparable harm or had ceased to exist. By time remedy sought, injured party had suffered irreparable harm or had ceased to exist. Congress intervened and enacted the Clayton Act designed to nip problems “in their incipiency.” Congress intervened and enacted the Clayton Act designed to nip problems “in their incipiency.”

12. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 SECTION 2: THE CLAYTON ACT Section 2: Price Discrimination. Section 2: Price Discrimination. – Made it illegal for seller to discriminate in price between different purchasers unless price differences could be justified by differences in costs. – Amended by the Robinson-Patman Act. Prohibits buyers from knowingly accepting a discriminatory price. Prohibits buyers from knowingly accepting a discriminatory price. Prohibits dummy brokerage fees and promotional kickbacks. Prohibits dummy brokerage fees and promotional kickbacks. Sellers still prohibited from granting discriminatory prices. Sellers still prohibited from granting discriminatory prices.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 SECTION 2: THE CLAYTON ACT Section 2: Price Discrimination. Section 2: Price Discrimination. – Person accused of price discrimination can defend against charge by showing: Price offered meets, but does not beat, a competitor’s price. Price offered meets, but does not beat, a competitor’s price. Lower price is being charged for goods because they are obsolete, damaged, or seasonal variations. Lower price is being charged for goods because they are obsolete, damaged, or seasonal variations. Price differential based on legitimate cost savings based on quantity discounts, and such discounts are available to any customer who places sufficient size orders. Price differential based on legitimate cost savings based on quantity discounts, and such discounts are available to any customer who places sufficient size orders.

14. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 SECTION 2: THE CLAYTON ACT Section 2: Price Discrimination. Section 2: Price Discrimination. – Under Section 2, was necessary to show that general competition had been harmed. – Under Robinson-Patman Act, it is sufficient to prosecute on a showing that a competitor was injured.

15. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 SECTION 3: THE CLAYTON ACT Section 3: Exclusive Dealings and Tying Arrangements. Section 3: Exclusive Dealings and Tying Arrangements. – Bans exclusive-dealing contracts and tying arrangements when “effect may be to substantially lessen competition or tend to create a monopoly.” – Actual harm need not be shown. – In an exclusive dealing contract, one party requires the other party to deal only with them.

16. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 SECTION 3: THE CLAYTON ACT Section 3: Exclusive Dealings and Tying Arrangements. Section 3: Exclusive Dealings and Tying Arrangements. – In a tying arrangement seller refuses to sell one product unless buyer also purchases another product. – Defense to a charge : Seller attempts to show that tied product if tied for quality control. Seller attempts to show that tied product if tied for quality control. Seller must prove that no competitors produce a competing product that works with controlled product. Seller must prove that no competitors produce a competing product that works with controlled product.

17. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 SECTION 7: THE CLAYTON ACT Section 7: Anti-Merger Provisions. Section 7: Anti-Merger Provisions. – Originally written to prohibit mergers where stock of one firm acquired to substantially lessen competition or create a monopoly. – Amended by Cellar-Kefauver Act Prohibits acquisition of stock/assets of another firm that may tend to have negative effect on commerce. Prohibits acquisition of stock/assets of another firm that may tend to have negative effect on commerce. – Government must allow merger.

18. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 SECTION 7: THE CLAYTON ACT Section 7: Anti-merger Provisions. Section 7: Anti-merger Provisions. – Challenge to merger, government might argue “concentration trend” has been established. – Or one of firms was a “potential entrant” into one of the industries affected by the merger. – As defense, company might show without merger, one of the companies would have gone out of business.

19. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 SECTION 8: THE CLAYTON ACT Section 8: Interlocking Directorates. Section 8: Interlocking Directorates. – Prohibits interlocking directorates. – No one may sit on board of directors of two or more competing corporations. – If either of the firms has capital and surplus in excess of $1 million. – If merger violates antitrust law.

20. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 THE FEDERAL TRADE COMMISSION ACT FTC Act created the Federal Trade Commission (FTC) to enforce antitrust laws. FTC Act created the Federal Trade Commission (FTC) to enforce antitrust laws. Section 5 prohibits unfair methods of competition and deceptive trade practices. Section 5 prohibits unfair methods of competition and deceptive trade practices. Broad language permits FTC to regulate conduct that technically might be beyond the reach of other, antitrust statutes. Broad language permits FTC to regulate conduct that technically might be beyond the reach of other, antitrust statutes.

21. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 THE FEDERAL TRADE COMMISSION ACT Conduct need not deceive to be unfair; it need only have a “fair possibility” of deception. Conduct need not deceive to be unfair; it need only have a “fair possibility” of deception. Representation is considered deceptive if it is ambiguous. Representation is considered deceptive if it is ambiguous. If FTC opposes business practice as unfair or deceptive issues a cease-and-desist order. If FTC opposes business practice as unfair or deceptive issues a cease-and-desist order. Business must stop conduct or face fine of $5,000 per violation. Business must stop conduct or face fine of $5,000 per violation.

22. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 THE FEDERAL TRADE COMMISSION ACT FTC is concerned about bait-and-switch and deceptive advertising. FTC is concerned about bait-and-switch and deceptive advertising. Bait-and-switch involves advertising a product at an enticing price to get customer into store and then talking the customer into buying a more expensive product. Bait-and-switch involves advertising a product at an enticing price to get customer into store and then talking the customer into buying a more expensive product.

23. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 UNFAIR TRADE PRACTICES Common law unfair trade practices include: Common law unfair trade practices include: – Palming off: Advertising, designing, or selling goods so they appear to be goods made by someone else. – Trade secrets: Any special processes or formulas that are guarded by holder of trade secret. Employees who reveal trade secrets to others may be liable in tort. Employees who reveal trade secrets to others may be liable in tort.

24. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 UNFAIR TRADE PRACTICES Common law unfair trade practices include: Common law unfair trade practices include: – Trade secrets (cont’d). Person or company who receives trade secret is guilty of appropriating trade secret, use of trade secret can be stopped by an injunction. Person or company who receives trade secret is guilty of appropriating trade secret, use of trade secret can be stopped by an injunction. Recipient of information will be liable for damages suffered by the trade secret. Recipient of information will be liable for damages suffered by the trade secret.

25. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 25 UNFAIR TRADE PRACTICES Common law unfair trade practices include: Common law unfair trade practices include: – Patent. Federally created and protected monopoly power of inventors. Federally created and protected monopoly power of inventors. Grants inventor exclusive right to use, make, or sell product for 20 years. Grants inventor exclusive right to use, make, or sell product for 20 years. Holder can file an infringement suit against violators, and infringer will be enjoined from further production and will be liable for damages to holder. Holder can file an infringement suit against violators, and infringer will be enjoined from further production and will be liable for damages to holder.

26. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 26 UNFAIR TRADE PRACTICES Common law unfair trade practices include: Common law unfair trade practices include: – Copyright: Protects writers, artists, and composers. Protects writers, artists, and composers. Copyright grants creator exclusive right to profit from work for creator’s life plus 50 years. Copyright grants creator exclusive right to profit from work for creator’s life plus 50 years. Injunctive relief and damages awarded to holder for an infringement action. Injunctive relief and damages awarded to holder for an infringement action. – Trademark: Mark or symbol used to identify a brand name product. Mark or symbol used to identify a brand name product. Violator subject to an injunction and the imposition of damages. Violator subject to an injunction and the imposition of damages.

27. © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 27 EXEMPTIONSEXEMPTIONS Labor unions are exempt from the Sherman and Clayton Acts. Labor unions are exempt from the Sherman and Clayton Acts. Applies only to “labor disputes” and normal union activities. Applies only to “labor disputes” and normal union activities. Farm cooperative are exempt as long as they are engaged in sale of farm produce. Farm cooperative are exempt as long as they are engaged in sale of farm produce.