© 2007 by West Legal Studies in Business / A Division of Thomson Learning CHAPTER 20 Promoting Competition

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 2 The Sherman Antitrust Act In 1890, Congress passed “An Act to Protect Trade and Commerce against Unlawful Restraints and Monopolies”— commonly known as the Sherman Act. The Sherman Act was and remains one of the government’s most powerful weapons in the struggle to maintain a competitive economy.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 3 Major Provisions of the Sherman Act Section 1 - Prohibits contracts, combinations, and conspiracies in restraint of trade. –Horizontal restraints subject to Section 1 include price-fixing agreements, group boycotts, horizontal market division, trade association agreements, and joint ventures.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 4 Major Provisions of the Sherman Act Section 1: –Vertical restraints subject to Section 1 include resale price maintenance agreements, territorial or customer restrictions, and refusals to deal. Section 2 - Prohibits monopolies and attempts to monopolize.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 5 Jurisdictional Requirements The Sherman Act applies only to activities that have a “significant” impact on interstate commerce.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 6 Section 1 of the Sherman Act The underlying assumption of Section 1 of the Sherman Act is that society’s welfare is harmed if rival firms are permitted to join in an agreement that consolidates their market power or otherwise restrains competition.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 7 Per Se Violations vs. the Rule of Reason Per se Rule: –Applied to restraints on trade that are so inherently anticompetitive that they cannot be justified and are deemed illegal as a matter of law. Rule of Reason: –Applied when an anticompetitive agreement may be justified by legitimate benefits. –Under the rule of reason, the lawfulness of a trade restraint will be determined by the purpose and effects of the restraint.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 8 Section 1 - Horizontal Restraints A horizontal restraint is any agreement that in some way restrains competition between rival firms competing in the same market. Price Fixing: any agreement among competitors to fix prices is a per se violation. –Case 20.1 In re Cardizem CD Antitrust Litigation (2003).. Group Boycotts: agreement to not deal with a vendor or third party.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 9 Section 1 - Vertical Restraints A vertical restraint of trade is one that results from an agreement between firms at different levels in the manufacturing and distribution process. Vertical relationships encompass the entire chain of production: inventory, manufacturing, distribution, retail sales. Retail Price Maintenance Agreements.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 10 Section 2 of the Sherman Act Section 2 condemns “every person who shall monopolize, or attempt to monopolize.” There are two distinct types of behavior that are subject to sanction under Section 2: Monopolization Attempts to Monopolize

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 11Monopolization The possession of market power in the relevant market and the intent to monopolize, as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. A violation of Section 2 of the Sherman Act requires that both of these elements be established.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 12 Attempts to Monopolize Definition: –Any activity by a firm to eliminate competition and gain monopoly power.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 13 The Clayton Act In 1914, Congress attempted to strengthen federal antitrust laws by enacting the Clayton Act. The Clayton Act was aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover such as: –Price Discrimination –Exclusionary Practices –Mergers –Interlocking Directorates

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 14 Section 2 – Price Discrimination As amended in 1936 by the Robinson- Patman Act, prohibits price discrimination that substantially lessens competition and prohibits a seller engaged in interstate commerce from selling goods of similar grade and quality to two or more buyers at different prices when the result is a substantial lessening of competition or the creation of a competitive injury.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 15 Section 3 – Exclusionary Practices Prohibits exclusionary practices, such as exclusive-dealing contracts and tying arrangements, when the effect may be to substantially lessen competition. Case 20.2 Illinois Tool Works, Inc. v. Independent Ink, Inc. (2006).

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 16 Section 7 - Mergers Prohibits mergers when the effect may be to substantially lessen competition or to tend to create a monopoly.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 17 Horizontal Mergers The acquisition by merger or consolidation of a competing firm engaged in the same relevant market. Will be unlawful only when a merger results in the merging firms holding a disproportionate share of the market, resulting in a substantial lessening of competition, and if the merger does not enhance consumer welfare by increasing efficiency of production or marketing.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 18 Vertical Mergers The acquisition by a seller of one of its buyers or vice versa. Will be unlawful if the merger prevents competitors of either merging firm from competing in a segment of the market that otherwise would be open to them, resulting in a substantial lessening of competition.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 19 Section 8 – Interlocking Directorates Prohibits individuals from serving as directors on the boards of two or more competing companies simultaneously.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 20 Enforcement of Antitrust Laws Antitrust laws are enforced by: –Department of Justice. –Federal Trade Commission. –Private Parties, who may be awarded treble damages and attorneys’ fees.

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 21 Exemptions from Antitrust Laws Labor unions Agricultural associations and fisheries Insurance—when state regulation exists Export trading companies Professional baseball Oil marketing

THE LEGAL ENVIRONMENT TODAY Miller Cross 5 th Ed. © 2007 by West Legal Studies in Business / A Division of Thomson Learning 22 Exemptions from Antitrust Laws Cooperative research and production Joint efforts by businesspersons to obtain legislative or executive action Other activities, including certain national defense actions, state actions, and actions of certain regulated industries