Outline Antitrust Kovacic

I. Policy & Goals of Antitrust 1. OPEN TEXT OF STATUTES • Consciously Evolutionary Scheme: required b/c goals of anti‐competition law changes over time

§ No definitions for "restraint of trade" or monopolize" ○ Must understand economic, historical, and political trends ○ Leaves to judges to make decisions like the Constitution, to interpret in context ○ Same as Constitution, how are judges being guided ‐> look at goals of the acts, text

• Historical Backdrop of Sherman Antitrust Act: telephone, telegraph, railroads ‐> these were the things changing America and the way companies do business

○ Firms back then served regional markets and a large firm was maybe 100 people ○ Larger business to drive down the scale of economies, and means little refineries are going to be

blown away by large companies like Standard Oil (and other key areas of manufacturing) ○ Faced with possibility that local (no domestic) firms are being crushed so that politicians are trying

to preserve small industries, small companies, preserve local control over enterprises, maintain political independence

○ But have to balance efficient markets with saying goodbye to small local firms ○ In 1890 Congress would have said that companies cannot stay efficient by becoming bigger, versus

theory today ‐> scale economies are really thought to operate better § I.e., AT&T + T‐Mobile ("let us merge and you can have service anywhere in the world") § But back then Congress / SCOTUS said "we are stopping mergers even at the sacrifice of

efficiency/lower prices for consumers" • Evolution to New Economics & Legal Theory:

○ So in 1975 SCOTUS changes its position based on Japan's industrial growth, very similar to China today, knockoffs changed to high end electronics, cars (Ford ‐> Toyota)

○ All that IBM, Xerox, etc had to do was to argue "look outside judge, the same Axis powers that lost in WWII have rebounded to make all those VWs and Toyotas parked outside"

○ So courts are told that we (America) had to win the race, and if the Big 3 had only innovated like IBM, we would all be driving cars that get 1000 mpg

○ So the wonderful era of US economic dominance was over and innovation, efficiency, new product development were more important now ‐ "we don't care what is fair for the small guy, because the U.S. was losing"

• International Trends ○ Used to be US, today US, EU, China, India have a lot of power to set standards, mostly in the area

of merger control ‐> thus firms must accommodate themselves to the strongest standards in order to operate in that economy

2. ANALYTICAL TENSIONS AS ANTITRUST LAWS EVOLVE • Bright Line Rules v. Reasonableness Tests

○ i.e. bright line rule: Andreas § Defense argued NO HARM ‐> that even though Ds talked a lot about setting prices, they

never did, and even when they did, they cheated on the agreement § No need to prove actual harm, the only issue was if there was an agreement between you

and your rivals to set prices and production levels • Changing Interpretations When Dealing With Dynamism

○ I.e. Google, Facebook are making different technologies, question is how to define new markets (K: "how do people buy books, what is the market, wtf is a 'Amazon'")

○ Change in social preferences are going to change the way firms behave now and in near future, difficult to predict ‐> everyone thought that IBM was on its way to complete market dominance with respect to computers

○ Very difficult for system to judge market power, who's important now, who's going to be important

• "Equilibrating Tendencies" (Continuing Adjustments by Courts) ○ From categories to concepts ○ With treble damages, etc ‐ courts, including SCOTUS, changes its perception based on current

social norms ‐> their discretion to change liability standards, remedies, procedure In twombly SC raised what is needed for for dismissal of motion to dismiss

○ I.e. what is the distinction between Andreas and a typical law firm partnership (same type of price setting between all the firm partners as how much they charge clients)?

3 WHAT CONDUCT [THAT IMPAIRS COMPETITIVE MARKETS] DOES ANTITRUST LAW PROTECT AGAINST • Competition Is Based On:

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§ Price § Quality § Innovation

○ K: competition creates tremendous consumer benefits but also upheaval § Competition is a powerfully destructive force § Innovation is good but also kills companies, i.e. the entertainment industry, paper books

○ Case: Brunswick Corp. v. Pueblo Bowl ‐ O ‐ Mat ‐1977> powerful case where SCOTUS makes a major change in policy, to focus on larger economic effects of competition law

§ K: most important phrase philosophically laid out by SCOTUS (almost a cliché now) ‐> "antitrust laws are meant to protect competition, not competitors"

□ Businesses get rubbed out everyday ‐> competition is good for society, not bad □ Antitrust suits successful only when a business can prove that they were damaged by

anticompetitive behavior, NOT just normal competitive behavior § Facts: Pueblo sues Brunswick when Brunswick comes and buys one of Pueblo's competitors

who was about to go bankrupt § P's Claim: "but for the merger, I [Pueblo] would have been the only provider of bowling

alley, thus Brunswick owes me 3 times the profit I would have made" § SCOTUS: Pueblo is an idiot for trying to claim damages due to a competitor's behavior that

increased competition • Anticompetitive Conduct:

○ 2 ways to get market power (collusion and exclusion), they are based on the nature of the effects they can cause: § [1] collusive effects (on own output): directly impair market due to coordinated action

(price‐setting or output‐restricting) between competitors o Reduce your own output to increase price (cartels) (JTC)□ See Andreas (good conditions for collusion led to price‐setting agreement between

direct competitors to fix lysine prices); see also U.S. v. Brown University § [2] exclusionary effects (on others' output): if you don't join us, we will destroy you by

forcing you to produce less output o This could also happen in vertical mergers where you buy the supplier who is the only source and

then don't sell to your competitor (you do this to raise the rivals cost of getting the product□ See JTC Petroleum 1999(exclusionary agreement between cartel and its suppliers to

exclude cartel's competitor from a vital input); ○ Case: Andreas ‐> cartel drove price up using a collusive agreement to restrict price + output by

cartel collectively decided each firm's production (output) share and selling price § Good conditions for collusion?

□ Lysine is "fungible" product ‐> commodity where quality, how it's made etc, is indistinguishable

□ Inelastic demand ‐> changes in price were not going to drive away agricultural customers, i.e. Tyson's Chicken, who needed the product

□ Cartel had control of market ○ Case: U.S. v. Brown University (SCOTUS) ‐> NOT technically a price‐setting agreement per se, but

agreement as to how much they would pay for an input that was essential to the universities ‐> can't justify price‐setting agreement was needed due to dangers of competition b/c quality gets better with increased competition

§ Facts: each school agreed to give every commonly admitted student the same $ package so that tuition would be less of an influence in the student's decision where to attend

§ 's Justification: by fixing price, the students can choose on real quality and focus financial aid more on students who need it; just like industries setting prices for public safety:

□ Society of Civil Engineers ‐> rules preventing bidding on construction contracts for public safety

□ Doctors ‐> ethics code did not allow x‐rays to be given to insurance companies b/c allowing insurance adjusters to set rates would drive doctors to cut corners

§ Holding: SCOTUS replies "GTFO, you can't argue that competition is dangerous b/c the reverse is actually true ‐> quality gets better with increased competition"

○ Case: JTC Petroleum Co. v. Piasa Motor Fuels 1999‐> SJ reversed by 7th Cir. (J. Posner) b/c even though producers were not directly part of the cartel, "agreement" is defined broadly, thus covers this type of exclusionary arrangement [where cartel gets suppliers to exclude a competitor/maverick]

§ Facts: JTC is a "maverick" asphalt applicator that does not join cartel, sues other applicators and asphalt producers (allegedly in cahoots w/cartel of other applicators)

□ Cartel gets with producers and incentivizes them not to sell to JTC in exchange for paying the producers a little more for their raw product

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□ Good conditions for collusion? ® Product is fungible product so only way to increase volume is to cut prices, but

there is inelastic demand for this product so the effect of price competition lowers profits

® Market is very small, everyone knows each others bids § Holding: denying JTC an essential input into its business is exclusionary tactic, not

necessarily to cut them off completely, but to drive up your competitors costs ‐> thus qualified as an agreement

□ I.e., Microsoft made it harder to download and install Netscape □ Basically "if you won't join us, we will make life really hard for you"

• "Cartel Problems" [That Anticompetitive Conduct is Often Meant to Solve]: ○ Competitive Products ‐> substitute + complimentary products

§ Substitutes directly threaten your cartel § Sometimes complimentary products do too

□ I.e. Microsoft saw other web browsers (Chrome) as threats to Windows (not direct substitute) b/c through the browser the customers could get access to other applications making Microsoft applications obsolete

○ Potential Entrants □ Especially for commodity products ‐> big concern from overseas □ Especially in North America, you are worried that other entrants will drop your prices □ Protected by lobbying ("buy American"), anti‐dumping suits

§ Suppliers ‐> who might enter your market to steal your business □ i.e. can make competing products or simply buy one of the smaller members of your

cartel and break the cartel price‐fixing agreement § Customers ‐> need to be tightly controlled

□ i.e. customers / internal sales people who might not know you are trying to run a price‐setting cartel and leak out info

○ Case: Andreas ‐> cartel drove price up using a collusive agreement to restrict price + output by cartel collectively deciding each firm's production (output) share and selling price

§ Cartel Problems? □ No competitors ‐> no other [big] producers of lysine or other alternative products that

the customers could switch to □ Suppliers could have demanded cartel pay higher prices if they see market going up □ New entry by your suppliers/customers □ Cheating by firms lowering their price ‐> solved by keeping close accounting +

agreeing that if any firm does not get the slice they expected, the cartel would buy back lysine to make up for the slice

4. MODERN ANTITRUST GOALS ‐ > CONSIDERING ECONOMICS, INNOVATION, & PUBLIC WELFARE • Efficiency definitions and graph ‐> Figure 1‐8, Williamson Diagram (pg. 73)

• [Dynamic] Efficiencies ‐> How do we maximize production efficiency gain > allocative efficiency loss + wealth transfer?

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○ Productive Efficiency: § The firm's productivity gains associated with lower marginal costs § Argument is that this will benefit total welfare (see below)

○ Allocative Efficiency: § Benefits to society that are lost when demand is not met § I.e. "that sandwich was so good I would have paid $6 instead of the $4 that I was charged"

○ Wealth Transfer: § The extra $ society must pay more for same product b/c cost shifted from sellers to buyers § Largest allocative efficiency loss in monopolies b/c company not meeting demand but able

to charge more solely due to monopoly ‐> increase in $ is just transfer from buyer to sellers • Wealth Distribution ‐>

How should we distribute consumer surplus/who gets benefit [of the rectangle on the diagram]? ○ Consumer Surplus: when firms offer prices at less than what each individual buyer would pay

Monopoly take Consumer surplus Away§ I.e., business travelers on airlines are inelastic customers vs. travelers who are elastic § This is price discrimination, adjusting the price with respect to the demographics of the

consumer ("figure out how much each individual customer will pay for the trip") § All firms would like to engage in one form of price discrimination or another ‐> the surplus

rectangle shifts to either consumer or the firm ○ Consumer Welfare:

§ Should to go to consumers, not firms o Consumers should be the beneficiaries (they should get the consumer surpluso (anti trust laws are not passed just For efficiency, its for the broader social and political benefits

§ See, e.g., Brunswick 1977 (competition, not competitors) § Most agencies will say they are focused on this (sounds better to help consumers, right?)

○ Total Welfare: § Should go to firms b/c cost reduction and productivity improvements lead to gradual

improvements into the larger economy (i.e. increased employment) o Canada have this rationale, most jurisdictions don't use this

• Market Access ‐> How do we increase innovation but minimize disruptions on the market?

○ K: the "innovation gene" is distributed equally in the world, but problem is that public/private restraints and artificial obstacles prevent people from releasing innovation

§ Steve Jobs successful b/c didn't have a lot of barriers that said "you can or cannot do this" § And problem is competition laws that add obstacles tend to stifle competition

○ Point: thus competition laws should allow people to try any ideas that come into the market, even ones that are not popular and not from people you expect

§ The breakthrough ideas might come from the least expected, so a successful economy is based on allowing good ideas to flourish, no matter who came up with the idea

§ I.e. starting a business in VA takes a couple hours by filling out proper form; whereas in Vietnam you have your application reviewed and if it competes with a state‐owned enterprise, you're shit out of luck

§ Imagine Bill Gates in the Vietnam trying to convince government to approve of Microsoft ○ Counter‐Point: stability vs. instability

○ Spurring innovation is great for public but tremendous disruption on market ○ I.e. the downfall of Borders and the rise of Amazon.com

• Political Impacts ‐> ○ Wartime mobilization ○ Political decentralization

○ Protecting small and medium enterprises can prevent political and economic powers from joining up and dominating

○ Much less of a goal now ‐> mostly focused on economics ○ Recent economic collapse ‐> not enough regulation? ○ Capitalism fail? Clayton Act amended in 1950: congress was concern that the productive sphere would coalesce and create

political issue. When you combine political power with money, you get totalitarian (hitler) So we sacrifice efficiency for egalitarian policy (looking to benefit the small guys

o This ended over time because the US now had other nations as competition (1975). Now there is more a focus on promoting efficiency, growth and innovation .

o The rules have not changed, they just calling the game differently Chicago school: Competition law should be aimed narrowly only to cartels and large mergers

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that create monopoly 2 things support this

o 1) Knowledge: the courts don't know all the facts so they will make mistakeso 2) Incentives: what motivates public officials: will they do stuff for short term,

and then leave when things goes wrong. Public officials are for them selves, the incentive for them is short term. They don't think long term for social good. (they are motivated to bring cases to look good

Harvard school: Close attention to institutions 1) jurors are random, so you need to be careful how you draw the rules, and be able to tell

business people what the rules are. 2) Jurors dont know the technical details

Post Chicago: Focuses on intervention 1) push in the direction of more anti trust policy

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II. Horizontal Agreements Among Competitors [Sherman Act § 1]

1. "UNREASONABLE" RESTRAINT UNDER SHERMAN ACT § 1 • Sherman Act § 1: prohibits [1] concerted action ("every contract, combination, or conspiracy") in [2]

[unreasonable]* restraint of trade § "Concerted action" in § 1 requires agreement b/w 2 actors (vs. §2's unilateral action) ‐> [SEE

NEXT SECTION ON EVIDENCE OF CONCERTED ACTION] ○ First interpretation ‐> plain and ordinary meaning of 'every contract'" shows Congress was

absolute in its prohibition, see Trans ‐ Missouri Freight (1897) (early cases ‐> no effort to hide the agreement "sure we have an agreement")

○ But every contract is by definition some sort of restraint (the point of any K is to make sure parties do some action); thus *unreasonable restraint of trade standard is adopted, see Standard Oil (1911) (new standard ‐> "every unreasonable contract that restrains trade"); Chicago Board of Trade (1918)

SUMMARY OF HISTORIC SHERMAN ACT RULES (1890 ‐ 1927): FIGURE 2 ‐ 1 (PG 93) • 2 approaches to per se condemnation

○ Trans ‐ Missouri Freight (1897): Literal Per Se Rule § "every" restraint of trade unlawful [no longer relevant]

○ Addyston Pipe (1899): Judge Taft's Per Se Rule § No purpose/effect other than restraint § Not related to any legitimate purpose

• 2 approaches to the rule of reason ○ Standard Oil (1911) & Board of Trade of Chicago (1918): Unstructured Rule of Reason

§ Look at purpose nature, and effect of restraint ○ Addyston Pipe (1899): Judge Taft's Limited Rule of Reason

§ Only ancillary restraints can be justified as reasonable

2. PER SE BAN ON OUTRIGHT PRICE ‐ FIXING BY COMPETITORS? • Per se ban started with price fixing agreements by competitors, then extended to agreements to restrict

output, divide markets, and collusive group boycotts • A price‐fixing / output‐restricting agreement by competitors: is per se violation b/c it creates a

irrebuttable presumption of unreasonableness and anticompetitive effect, Socony Vacuum Oil (doesn't matter whether agreement was to fix price or output)

o Price fixing is usually bad, leads to increase prices Any combination which tampers with price structures is engaged in an unlawful activity: dont have to show effect. Moment of illegality is at the time of the agreement.

○ [1] evidence of reasonableness of the agreement/prices agreed upon are irrelevant § Some types of restraints are simply unreasonable on their face, see Trenton Potteries

(1927) ‐ "agreements which create such potential power may well be held to be in themselves unreasonable or unlawful restraints"

§ K: Policy behind per se bright line rule is that it is easy and clear, like traffic laws ‐ there are no rough judgments as far as "doesn't matter dude was driving at 2 am when no other traffic was on road, still broke speed limit"

○ [2] proof of market power NOT required when there is evidence of actual anticompetitive effects, Socony Vacuum Oil (purpose was to set price [by fixing output] so per se violation and NOT necessary to show adverse affects ‐ just the agreement, see fn. 59); accord NCAA ("when there is an agreement not to compete in terms of price or output, no elaborate industry analysis is required to demonstrate anticompetitive character of such an agreement"), see also IFD

(clarifying ‐> detrimental effect is what needs to be proved and market power can show that, but market power is irrelevant when there is evidence of actual detrimental effects)

§ Case: Socony Vacuum Oil (1940) ‐> once found in violation [per se], the Court will not look at

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the reasonableness of prices ‐ what is reasonable today may not be tomorrow, \not legal justification

□ Even if there are hundreds of other competitors and there was no way that your price fixing agreement could have affected the market price, you are still in violation

• Conduct that Qualifies as "Price‐Fixing": two partners setting the price of their goods may be literally "price fixing" but they are NOT in per se violation of the Sherman Act unless their conduct falls into the category labeled as "per se price fixing", see BMI (the "joint selling agreement" OK b/c it made a "new product by reaping otherwise unattainable efficiencies")

○ In‐Class Hypo: law firm partnership business model accepted within antitrust law for same reason as BMI ‐> the law firm is offering a different type of service (big general practice provides a supermarket of legal services that individual lawyers could not offer)

○ Case: BMI (1979) ‐> BMI and ASCAP set their price in literal sense but not per se price fixing b/c they are not offering the same product [to do exam start with BMI, ask what is the reason for the act]

§ ASCAP and BMI are taking raw material (individual licenses) and making a bigger (but different) product that has extra added value

§ Policy argument also is that there are huge transaction costs for both the authors and end‐ users to negotiate each license individually

§ In this case the restriction was necessary to have the product at all, without it, society wouldn't have this beneficial product at all "increased economic efficiency and render markets more, rather than less, competitive"

§ K: basically this case falls into a justification SCOTUS will listen to, vs. other arguments that SCOTUS will NOT listen to:

□ Competition is bad, Standard Oil □ Prices are reasonable, Trenton Potteries □ Small market share so doesn't affect actual market, Socony Vacuum Oil

§ The Court's framework is to first characterize the conduct as "per se" or something more elaborate, and in this case this was not per se restraint so remand to D. Ct. for further proceedings under rule of reason

§ K: this is the Court's first invitation allowing arguments to characterize conduct, suggesting there is something in the middle between per se and full blown ‐ as eventually fully established by NCAA

3. PER SE BAN ON MARKET DIVISION BY COMPETITORS? • Market division [1] by true competitors, compare Topco 1972 (members in co‐op), with BRG (direct

competitors for bar review courses (agreeing to compete in the relevant market is per se illegal b/c it effectively restrains any competition if both agree not to compete with each other -BRG sells only in Georgia and Palmer (HBJ) can sell everywhere else), and [2] without any competitive benefit, see BMI (BMI and ASCAP can make "joint selling agreements" for a new product with extra added value), is in effect agreeing to create monopolies for each other by insulating themselves from competition though collusion, thus a per se violation

§ Division can be: [i] geographic, [ii] not to compete for certain customers, [iii] product lines ○ Case: Topco (1972) ‐ "agreements between competitors at the same level of the market structure

to allocate territories in order to minimize competition . . . are naked restraints of trade with no purpose except stifling of competition . . . and per se violations of the Sherman Act"; \restraint was a horizontal restraint thus per se violation of Sherman Act

§ K: would NOT be decided same today b/c: □ Topco members were not true competitors, as noted by Justice Burger's dissent

Dissent: said this was competitive under Rule of Reason b/c it enabled the small grocery stores to compete with the big boys, there was no primary purpose or effect to restrain trade

□ Under BMI, the Topco private labeled items were completely different product that no individual member could have otherwise created and offered for sale ‐> restrictions only for expanding market output of this new unique product

4. PER SE BAN ON CONCERTED REFUSALS TO DEAL? • Concerted Refusals to Deal ‐> are similar to "group boycotts" that result in collusive effects (effects that

directly restrict output or raise price), thus a species of price‐fixing that is subject to per se treatment, see SCTLA (superior court trial lawyers ass’n) (1990) ‐> SCTLA agreement to boycott trial appointments unless they got paid more violated FTC Act b/c the lawyers were direct competitors who entered into a horizontal arrangement, which was unquestionably a "naked restraint on price and output"

○ Distinguished from boycotters in NAACP v. Claiborne Hardware, who sought no personal gain, only equal rights; versus SCTLA boycott which was "conducted by business competitors who stand to profit financially from a lessening of competition in the boycotted market"

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• Exclusionary Group Boycotts ‐> evaluated under the per se approach only when: § [1] firms join efforts to disadvantage competitors by cutting off access to supply, facility,

market necessary to enable the boycotted firm to compete (exclusionary conduct) § [2] boycotting firms have dominant position in relevant market (market power) OR

exclusive access to an element essential to effective competition § [3] and no plausible arguments that the boycott enhanced overall efficiency (no

procompetitive justification) o Northwest whole sale: Here there was a cooperative. They removed one member, and that member

sued. P claims that the D (NWH) wanted to exclude them. They said the harm was that they would not be able to take advantage of co op deals. P says this is per se illegal because its a group boycott. Supreme court says the 3 conditions were not met (listed above). If 3 conditions not met use Visa test rule of reason.

o [4] the "structured rule of reason" (visa test)o 1) market powero 2) anti competitive effect. if 1 and 2 are met, burden shifts to defendants to showo 3) justification

visa justification did not work, restriction didn not exist in Europe and this did not undermine the market in Europe.

SUMMARY OF TRADITIONAL HORIZONTAL PER SE RULES: FIGURE 2 ‐ 5 (PG 153) Price Fixing Division of Markets Concerted Refusals to Deal Foundation Cases: Foundation Cases: Foundation Cases: • Trenton Potteries (1927) • Timken (1951) • Eastern States (1914) • Socony ‐ Vacuum Oil (1940) • Sealy (1967) • FOGA (1941)

• Topco (1972) • Klor's (1959) this was per se illegal boycott. Wholesale stationers changed this

Current Status: Current Status: Current Status: Operative under Maricopa Operative under BRG Collusive ‐> operative under SCTLA (1990) (1982), but with BMI (1979), (1990), but Topco eroded by Exclusionary ‐> operative as qualified by NCAA (1984), and Dagher BMI (1979), Sylvania (1977), Northwest Wholesale Stationers (1985) (2006) qualifications and other decisions

5. COLLUSIVE EFFECTS UNDER THE RULE OF REASON • Judge Taft's Limited Rule of Reason: a restraint can be justified as reasonable only if: [1] pro‐

competitive main purpose; [2] restraint is "ancillary" to main purpose but necessary; and [3] the restraint is no greater than necessary to facilitate the pro‐competitive main purpose, Addyston Pipe

○ Distinguished "naked restraints" (per se unreasonable) from ancillary restraints • "Full Blown" Rule of Reason: "true test of legality is whether the restraint imposed merely regulates

(thereby promoting competition), OR whether it may suppress or even destroy competition" § Compare Chicago Board of Trade (1918) (Figure 2‐6, PG 157) ‐> every trade org. imposes

some restraint on its members conducting business, but this restraint (relating to hours in which business may be done) merely regulates\ doesn't hurt competition

§ With Nat'l Society of Prof. Engineers (1978) ‐ while not price fixing per se, the engineering society's ban on discussing price until after an engineer has been selected effectively removes all competitive bidding, and \ they cannot meet the Rule of Reason by arguing competition itself is harmful to public o They were saying that people would hire the less expensive engineer and you would get bad service

if there is competition. (this is not a good argument).○ Considerations w/r/t the restriction: [1] nature; [2] scope; and [3] effect of restriction +

○ [4] evaluate these relevant factors: § Facts peculiar to business

□ Conditions of business before and after restraint was imposed § Nature of restraint

□ Its effect, actual or probable § History and purpose of restraint

□ Evil believed to exist □ Reason for adopting particular remedy □ Purpose or end sought to be obtained

o To avoid per se rule and from more analysis, They need a story about efficiency, and pro Competitive (BMI)

• "Quick Look" or "Truncated" Rule of Reason [NCAA]: a court will shift the burden of production to the s to justify their conduct without undertaking a full blown rule of reason analysis

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§ [1] when shows a plausible efficiency claim of the restraint, per se treatment is unwarranted, BMI

‐ AND ‐ § [2] there is "intuitively obvious " evidence of actual anticompetitive effects, CDA

○ Case: NCAA 1984‐> even though NCAA agreement was a horizontal restraint on price and output, the per se rule is not applied b/c this case involves an industry where horizontal restraints are essential if the product is to be available at all, i.e. BMI ‐> so apply "quick look" rule of reason, but NCAA agreement still doesn't pass muster b/c [2] unable to rebut presumption of unreasonableness due to strong evidence of actual harm to competition

§ [1] protecting live college games is not a justification ‐> basically saying "we need to restrict competition so we can still get top $ for live games" is inapposite to policy of Sherman Act

a. NCAA say they Have no market power Because they are in the Entertainment business.They say that they give a high qualtity product by controlling it. because if it is over expose people wont watch

□ Distinguished BMI b/c the blanket license was necessary to "market the product at all", but NCAA members could sell rights individually no problem

□ BMI also did not restrain individual member's right to sell it on its own, like the NCAA agreement

§ [2] NCAA tries to characterize agreement as necessary to compete with all of TV/entertainment market ‐ argues for really broad market where NCAA has no market power (\no adverse effects)

□ But Court limits to smaller market characterization, where NCAA restriction does in fact have actual adverse effects (b/c without it there would be 100x more college games on TV) ‐> thus market power is not required

□ K: how is it pro‐competition to limit the number of games that are televised? b. What are the relevant Markets? at what point will People find substitute. Specialist: are fanatics

who wont change. Substitute is dependent on how large specialist are and how good are people in the market are at getting to them.

○ Case: California Dental Association (CDA) v. FTC (1999) ‐> the disputed anti‐competitive effects were not "intuitively obvious", thus courts were required to do more than the abbreviated rule‐ of‐reason analysis

Court says that the FTC should not have used the per se rule, they need to take A closer look. DId the FTC do enough to prove their point, it is the defense burden to show that the FTC was incorrect and they were not allowed that opportunity. You have a level of analysis based on the circumstances, except where you find other cases that that shows that this is anti competitive. To get to quick look you need to persuade the court that the act was inherently suspect. Can be shown by pass decisions shows the act is dangerous,2) show economic evidence from studies that show bad impact on society from this act.

§ So cannot use "quick look" when there is: □ [1] the presence of plausible efficiency claims by the

‐ AND ‐ □ [2] the absence of evidence of actual anticompetitive effects (i.e. actual

anticompetitive effects were present in NCAA and IFD so quick look was OK in those cases)

§ California Dental Association 1999: argued that professional dental code required to regulate misleading dental ads In most industries, regulating "bad" advertising is normal and almost necessary conduct, i.e.

early professional cases where laws prohibiting doctors from false advertising § But in this case the ads weren't just regulating the bad shit, but also effectively eliminates

truthful advertising completely (FTC says sure code is not categorical prohibition, but as applied it operates as a complete ban)

§ There is also an information gap between dentists and patients ‐> patients only rely on the provider telling them what dentist is good, what services are required, etc

§ K: like eyewear prescriptions ‐> before the doctors wouldn't give you the prescription, but an empirical study found that the states that allowed the doctors to give prescriptions freely not only allowed customers to get 20‐30% cheaper glasses, but also increased quality

□ This has brought down price of standard eyewear down over time □ Also driving up innovation ("the glasses I wear used to have to made in a laboratory

that made telescope lens") ○ Case: Polygram Holding v. FTC (DC Cir. 2004) ‐> 3 CDs, first 2 good but 3rd was shit so recording

companies agree not to promote the first 2 CDs during the release of the 3rd shit CD § [1] "Oh come on, it's just a little restriction" that's necessary like BMI (reasonably related to

new product 3rd CD), but Court says no ‐ this is more like NCAA (can't justify the restrictions) □ Argument ‐> "we need to restrict sales of 1 and 2 b/c we have a shitty 3rd product"

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□ Court ‐> your argument sucks ("if 3rd product really that awesome, why do you need to restrict sales of the first 2?")

Polygram quick look analysis1) inherently suspect?use caselaw, and studies2) D's justificationsa)cognizable: courts say they will listen to these in the pass b)plausible: must be plausible in this specific case3) fuller anaylisisTurn to the plaintiff and ask if there are additional evidence for harm a) market power?b) other adverse competitive effect.

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III. Evidence of Concerted Action [Sherman Act § 1]

1. "CONCERTED ACTION" PER SHERMAN ACT § 1 • Sherman Act § 1: prohibits [1] concerted action ("contract, combination, or conspiracy") in [2]

[unreasonable] restraint of trade ○ Concerted action in § 1 requires an agreement between two actors (§ 2 is about unilateral action),

see Copperweld (parent and wholly‐owned subsidiary cannot provide the plurality of actors necessary to meet the "concerted action" requirement of § 1)

○ Company can curb its own output to raise prices as much as it wants, but only illegal if working in concert (regardless if prices actually raised)

2. DIRECT EVIDENCE OF CONCERTED ACTION? • Direct Evidence: is often hard to find b/c cartels try very hard to keep shit secret (K: example of

clerkship LoR open to the public, or emails, etc), but SJ not appropriate if coherent theory of agreement, see In Re Brand Name Prescription Drugs Antitrust Litigation (7th Cir. 1997) ‐ Posner* opinion there was sufficient evidence [of a coherent theory as to agreement between firms] for the case to proceed to trial (\SJ for s inappropriate)

○ In‐Class Hypo: gas station owners on the same block observing one another changing prices and following suit, without ANY communication on price

○ *Posner's response to hypo: if Gas Station A raised its prices, it was like an "offer" in a K, and Gas Station B raising its prices to match was an "acceptance"

○ Criticism ‐> you can't use ambiguous shit like this to send people to jail or to impose treble millions of dollars in damages

○ K: even though Posner has never gone back to his first academic paper ‐> he has always had a broad interpretation on what can count as evidence of "concerted action"

3. CIRCUMSTANTIAL EVIDENCE TO INFER CONSPIRACY? ○ Sometimes only circumstantial evidence is available to infer concerted action because: (i) secret illegal

agreements, (ii) agreements only adopting "facilitating practices", (iii) engaging only in "conscious parallelism"

○ Especially evidence that is consistent with shit firms need to do in order to start and maintain a cartel (i.e., reaching consensus, deterring cheating, punishing members, and preventing new competition)

○ 3 "Cartel Problems": ○ Reaching consensus: OPEC members agreed to cut production but wanted other members to do it ○ Deterring cheating by cartel members: prisoner's dilemma in game theory ‐ if everyone

cooperates, everyone wins; but if 1 cheats, everybody else loses, so everyone cheats ○ Preventing new competition, see ADM ("come and look at our facilities, if you don't give us more

market share, we'll flood the world market with our super capacity" ‐ note this is only strong hand in ONE member's hands, but excess capacity in everyone's hands nullifies this threat)

§ New external threats: □ Customers ‐> in Vitamins, producers noticed that the re‐mixers (who put vitamins into

their products for animals, etc) where engaging in arbitrage and thus bought them □ Suppliers ‐> often makers of complimentary products that learn a ton of info that is

necessary to supply the cartel firm ® Arbitrage ‐> taking advantage of price difference between 2 markets, simply

put ‐ making profit at zero cost and risk □ Entrants ‐> can see this concern in "Buy America" policy, anti‐dumping lawsuits, etc

(K: "nothing better than stifling competition than by getting the government to do it for you")

□ Hold‐outs ‐> see, e.g., JTC Petroleum 1999

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§ Different/changing product ‐> same product makes it easy to see if something is needed (could anyone predict demand of iPhone?)

• Circumstantial Evidence of Concerted Action: can be used to infer concerted action when: ○ [1] there is evidence of coordination accomplished by non‐direct exchange of assurances, see

Interstate ("hub and spoke" conspiracy where each distributor knew the concerted action was contemplated and invited, then gave adherence by participating in the plan); see Toys R Us (circumstantial evidence of horizontal agreement between toy suppliers was that each agreed to join the boycott "on the condition that their competitors [other toy suppliers] would do the same")

○ [2] there is evidence of "conscious parallelism" (when s MERELY recognized interdependence and mimicked competitor's conduct), BUT "plus factors" are required, see American Tobacco (evidence of "plus factors" required to prove conspiracy when only evidence was s "conscious parallelism"), accord Matsushita ("[conduct] consistent with permissible activity [OR] illegal conspiracy does not, standing alone, support an inference of antitrust conspiracy")

○ * Plus Factors (see chart below and *): □ Toys R Us

® Abrupt stop was big change from past ® Suspicious for toy supplier to deprive itself of a good profit source

□ American Tobacco ® Abrupt identical increase in price by all competitors on same day ® Suspicious b/c no economic justification

i. Where firms to similar activies in response to each other you can inferthat there was an express agreement. a meeting of the minds

c. Theater enterprise: say parallel action does not mean that there is a conspiracy, this change the law from what was said in tobacco. They say you actually need proof of the agreement. Turner agrees with theater enterprise. Posner: disagrees, he says you can infer, he says if there are changes, the defendants has to explain why they changed and show no anti trust violation

□ Matsushita ® Motive super important in this case b/c: if [i] s had no rational economic

motive to conspire and [ii] their conduct is consistent with other equally plausible explanations ‐> the conduct cannot give rise to an inference of conspiracy

○ [3] to survive summary judgment, the s parallel actions must be more likely than not the result of joint decision, see Monsanto (but in order to survive SJ, 's must present evidence that "tends

to exclude the possibility of independent action by the s") this is the monsanto test that is used today. That is, there must be direct or cirumstantial evidence that

reasonably tends to prove that the parties had a conscious commitment to a common scheme designed to achieve an unlawful objective. The reason is to have the manufacturers talk to the retailers about if something is liked by payers dont want to inhibit free flow of info..

§ See also Bell Atlantic v. Twombly (2007) ‐> SCOTUS extended Matsushita to the pleading stage (motion to dismiss) by finding that "bare assertion of conspiracy not enough" not enough allegations of plus factors to permit inference of an agreement (K hates this)

§ Compare Blomkest Fertilizer v. Potash Corp. (8th Cir. 2000) (SJ for s was OK b/c s did not prove enough plus factors: few inter‐firm communications, does not exclude possibility of independent action, no actions against self‐interest b/c had independent business justifications)

§ With Brand Name Prescription Drugs Antitrust Litigation (7th Cir. 1997) (SJ for s not OK b/c Posner: "absurd . . . to require s to exclude ALL possibility that s conduct was unilateral rather than collusive") and High Fructose Corn Antitrust Litigation (7th Cir. 2002) (SJ for s not OK b/c "the evidence is no conclusive by any means . . . there are alternative interpretations of every little bit ‐ but it is still highly suggestive of [an secret agreement]"

• [1] Case: Interstate Circuit (1939) ‐> no direct evidence that the exhibitors agreed with each other to impose the restrictions which fucked over other exhibitors, but OK to infer horizontal agreements between distributors in a "hub and spoke" conspiracy using only circumstantial evidence that each distributor knew the concerted action was contemplated and invited, then gave adherence by participating in the plan

Here there was no express agreement, so the court look to the method of dealing, the prices, and the fact is that all these things changed So the court can infer that something happened. Increase the price by 60% in a depression

○ Court reasons "the framework gives us the inference is that what you've done is a result of collective action, but here's your chance to tell us why this is not anticompetitive behavior"

○ Could have responded "we all independently decided to leave the theater 10 min into the film b/c

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there was a fucking fire" ○ But instead every single member declines to testify ‐> which leads the Court to say "your refusal

to testify just reinforces the inference that there was an agreement" ○ K: this is what the Court found most suspicious ‐> they gave chance for each to explain away the

inference and they ALL actively chose not too When you can see a common interest between the wheel and the spokes its easier to find an agreement

• [1] Case: Toys R Us (7th Cir. 2000) ‐ Toys R Us used a series of vertical agreements with its top 10 suppliers to orchestrate a horizontal agreement between the suppliers to boycott other discounting toy retailers ‐> circumstantial evidence of horizontal agreement between toy suppliers was that each agreed to join the boycott "on the condition that their competitors [other toy suppliers] would do the same"

○ Toys R Us tells supplies "we won't carry your shit if you sell to other toy stores" and "give us assurances you won't sell, we'll be the hub and make sure your competitors all agree too"

○ Modern day adoption of Interstate where each toy supplier was afraid to boycott by itself b/c other suppliers could cheat and get all the profits from the discount toy retailers

• [2 & 3] Case: Matsushita Electric (1986) ‐> in showing the existence of a horizontal agreement, there must be evidence that tends to exclude the possibility of independent action in order to survive SJ

○ Motive super important in this case b/c: if [1] s had no rational economic motive to conspire and [2] their conduct is consistent with other equally plausible explanations ‐> then the conduct cannot give rise to an inference of conspiracy

○ This was a 2‐stage conspiracy ‐> a high cost price‐raising conspiracy in Japan to fund the price‐ cutting conspiracy in the U.S.

§ Alleged predatory pricing by a single firm (market power =< cost in order to knock out competitors from the market)

§ K: when people are charging less its harder to prove anticompetitive effects § But Court says this is not an economically plausible predatory pricing scheme ("who would

spend 20 fruitless years subsidizing prices in America just to try to drive out Zenith") ‐> no recoupment, see Predatory Pricing Section (practically impossible to overcome "cartel problems" due to massive collective effort required)

○ K: little did they know historically this was Japan's plan supported by government and Korean and Chinese manufacturers used this same tactic to defeat Japanese companies in recent years

○ "Mistaken inferences like this are especially costly, because they chill the very conduct that antitrust laws are designed to protect" pg. 275

§ Reflects Harvard school of thought that policy should be "take the lower price today, don't care about possibility of higher price tomorrow"

○ Error Costs Analysis ○ "False positives" ○ "False negatives" ○ The Masushita Court was afraid the message they were sending out was to charge higher

prices § The was a false positive, and in Court's opinion, the more damaging result § Thus Court chooses a rule where there could be false negatives, but the general signal

we want to send is [K:] lower prices, OK • [3] Case: Bell Atlantic v. Twombly (2007) ‐ antitrust complaint dismissed b/c it only alleged conscious

parallelism but not allegations of sufficient plus factors to permit inference of an agreement ‐> SCOTUS extended Matsushita to the pleading stage by finding that "bare assertion of conspiracy not enough"

○ Poller for motion for SJ ○ Twombly takes heightened pleading standards even further to motion to dismiss stage

○ 's Claim in Pleading: there is an agreement between Bell South and North not to compete § SCOTUS: your theory of liability have to be economically plausible § 's Defense: there are all kinds of reasons why we haven't migrated into different areas and

the has not ruled out EVERY one of those ○ K: SCOTUS basically makes a decision to lower error costs, since civil litigation is out of control, but

ignores the fact district judges have all the power to control shit and not certify large class actions § K: SCOTUS cites 2 sources for the proposition that civil antitrust litigation shit is out of

control ‐> an Easterbrook article that cites no one except himself, and a student law review note that cites Easterbrook ‐> no fucking empirical evidence at all

§ Sucks b/c makes this type of case really difficult especially for private Ps (unlike DOJ, no pre‐ litigation discovery, investigators, etc)

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• * these "background" plus factors serve as the foundation of circumstantial evidence but does NOT "tend to exclude the possibility of independent action" \ necessary but not sufficient, Blomkest Fertilizer v. Potash Corp. (8th Cir. 2000) (dissenting opinion)

○ Compare Blomkest Fertilizer v. Potash Corp. (8th Cir. 2000) (SJ for s was OK b/c s did not prove enough plus factors: inter‐firm communication few and does not exclude possibility of independent action, no actions against self‐interest b/c had independent business justifications)

○ With Brand Name Prescription Drugs Antitrust Litigation (7th Cir. 1997) (SJ for s not OK b/c Posner: "absurd . . . to require s to exclude ALL possibility that s conduct was unilateral rather than collusive") and High Fructose Corn Antitrust Litigation (7th Cir. 2002) (SJ for s not OK b/c "the evidence is no conclusive by any means . . . there are alternative interpretations of every little bit ‐ but it is still highly suggestive of [an secret agreement]"

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IV. Monopolies [Sherman Act § 2]

1. MONOPOLIZATION • Sherman Act § 2: violated by "every person who shall monopolize, or attempt to monopolize, or

combine or conspire with any other person or persons, to monopolize any part of the trade or commerce . . ."

○ Monopolization (not monopoly, but abuse of dominant position) = power + conduct, Grinnell § [1] substantial market power ‐> what constitutes monopoly power in relevant market?

+§ [2] improper conduct ‐> what behavior is sufficiently exclusionary that it qualifies as "willful

acquisition or maintenance of monopoly power (as distinguished from growth due to superior product, business acumen, or accident)"?

○ [Bad] Case: Alcoa (2d. Cir. 1945) ‐> instead of 's abusive practices, focused more on 's market power

§ K: almost a "no fault" monopolization offense b/c price‐setting by a monopolist is unavoidable by definition, just an attack on a big ass corporation with monopoly power

• Evolution of Framework: ○ Alcoa (1945) ‐> almost no fault

§ Economic analysis first used in defining the market ‐> DuPont Cellophane (1956) ○ Kaysen & Turner (1959); Neal (1969) ○ Enforcement policy 1969‐1980

§ AT&T, Cereal, Oil, Xerography, Bread ○ Judicial retreat (1980 ‐ present)

§ Berkey Photo v. Kodak (2nd Cir. 1979) ‐> monopolist not required to disclose new product to competitors b/c otherwise would allow free‐riding + reduce incentives to innovate

§ IBM (9th Cir. 1979) ‐> IBM didn't violate 2 when they redesigned their mainframes that wouldn't accept old peripheral shit b/c IBM has no duty to design new shit that had to be compatible with competitors shit

○ Contemporary law & economics ‐> Aspen Skiing v. Aspen Highlands (1985)

2. SUBSTANTIAL MARKET [MONOPOLY] POWER {PRONG [1]}? • Direct Evidence:

○ Price and quality effects § Actual effects § Possible future harm (e.g. future innovation/product development) § Past lessons

○ Evidence of intent § General desire to prevail vs. logic and consequences of exclusionary plan

• Circumstantial Evidence: ○ Durable + Substantial Market Share ‐> used to infer market monopoly power

§ What is durable? □ Dynamism

® Technology ® Transportation ® Communications

□ Modern Illustrations ® Photocopying ® Software ® Search

§ What is substantial? □ Market definition:

® Cellophane ‐> market composed of products with reasonable interchangeability for the purposes they are produced for ‐ considering product [i] price, [i] use,

and [iii] qualities ◊ K: "Cellophane fallacy" problem ‐> high demand elasticity helps establish

two products are close substitutes only when both sold at competitive prices, du Pont may have already been exercising its monopoly power

i. du pont (cellophane)1965: here they looked at the fact that you can interchange the products. When the price went up for cellophane, people switch to other products (fallicy) if the price goes really high, you will eventually switch. so this does not indicate that you dont have market power. high profits here also shows that they kinda have a monopoly, so substitution really is not indicative of not having market power. but du pont was able to

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rebut this.® IBM ‐> market was ALL peripheral products, not just ones compatible with IBM

machines, b/c as the developer, IBM necessarily already had full monopoly power over IBM‐compatible products

® Alcoa ‐> market share could be 33% ‐ 90% depending on whether market included virgin or secondary (scrap) aluminum

◊ Court excluded ALL secondary aluminum (K: mistake b/c they were identical substitutes ‐> didn't matter Alcoa originally produced some of it)

◊ Court also included imported virgin aluminum, which cut Alcoa's market share 10%

d. Alcoa: goals: dont want monopoly because they deadens innovation. This is also for political and social good. market power: had 90% of market (look across) if the secondary was included alcoa would have around 60% market, but with it out 90%. a better number.conduct: must show improper conduct. cant punish those who succeed, after they were pushed to compete. so must have improper conduct. size does not mean you are trying to monopolize. monopoly alone is not against the law.

e. what alco did wrong was that they increase capacity, that when competitor came into market they could boost production to drive prices down. They exclude compteitors by using their capacity to fullfil every need. (strategigic entry deterrence)

□ HMG standards for market share ‐> [SEE ALSO MERGERS SECTION] ◊ Monopolization ~70 % ◊ Attempt to monopolize ~50 %

® But see US v. Microsoft ‐> "monopoly power ordinarily may be inferred from predominant share of market, BUT the possibility of competition from new entrants could make looking at current market share alone misleading" i. For monopolization market power is above 70%, but the ones that win are 80% and above.

intel 80-90,kodak 100,

3. IMPROPERLY EXCLUSIONARY CONDUCT {PRONG [2]} (ANALYSIS TO USE ON TEST• Analysis for distinguishing exclusionary v. competitive conduct [US v. Microsoft*]:

§ * K loves this analytical structure o [0] Show market power (above 70%)○ [i] exclusionary conduct must harm competitive process (thus consumers), harm to competitors is

not enough ○ [ii] must show 's conduct has anticompetitive effect (any type of evidence)

o Actual or likely effects of anti competitive effect○ [iii] if establishes a prima facie case under § 2, can rebut with a pro‐competitive justification

for its conduct (i.e. efficiency or enhanced consumer appeal) o (burden shifts her to defendant if plaintiff shows prima faciea case from the first hree steps)

○ [iv] must rebut or show anticompetitive harm of conduct outweighs the pro‐competition benefits of the justification

o (this is the balancing stage, if there is no justification then no balancing) in microsoft they really did not do balancing because there was no real justification.

• Case: US v. Microsoft (DC Cir. 2001) ○ [1] Substantial Market [Monopoly] Power

§ Market definition ‐> Intel‐based operating systems (does not include Apple, PDAs, middleware i.e. Netscape)

§ Share of Intel‐based operating systems ‐> 90% in < 5 years ○ [2] Bad Conduct

§ Bill Gates' memo [intent] where he worries about Netscape and Java as potential threats and the way Microsoft could minimize this threat by limiting their competition's experience

§ Tying deals with OEM computer makers to only bundle Windows § Bundling Windows apps and deliberately made other apps non‐compatible with Windows

□ Changing interface so that it "pollutes java" making it hard to run Java on Microsoft OS □ Microsoft argues "the programs are bundled, but people want that; like giving people

radios in their cars" (better product and consumer experience) □ Didn't deny Netscape 100% access to end users, just A LOT harder ‐> Microsoft said

this is not exclusion (K: "dude can still drive to NYC, even if slower") o Here netscape who was a complement started to become a substitute. so they wanted to block this

move. They did bundling, they integrated the browser more deeply into the o/s. tie essential features so

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you cant delete it. Also make the os and netscape incompatible. Also degrade performance of JAVA by making it incompatible. Also had arrangments so that the OEM (dell inc) did not change windows or the icons

available.o Vapor wear: Dupont and Microsoft: announce that you are coming out with something new and say not

to buy the competitor, then delay coming out.4. PRICE ‐ BASED EXCLUSIONARY CONDUCT? • Predatory Pricing: s who allege predatory pricing as the bad conduct prong [2] of Sherman Act § 2 [OR

pricing discrimination in violation Clayton Act § 2] must: § [A] "prove the prices complained of are below an appropriate measure of its rival's costs"

□ Prices > average total cost (sum of all fixed + variable costs, divided by total output) ‐> lawful

□ Prices > average variable cost AND < total cost ‐> rebuttable presumption lawful □ Prices < variable cost ‐> presumptively unlawful only when also structural conditions

b/c predatory pricing schemes rarely successful and have to be maintained in order to recoup costs, see Brooke Group

‐ AND ‐ § [B] "demonstrate that the competition had a reasonable probability of recouping its

investment in below‐cost prices", Brooke Group ‐> intent not enough unless the plan was also feasible, need to show [BOTH]:

□ [i] production capability after driving competitor out □ [ii] no barriers to entry preventing someone else from taking competitor's shares

○ Economic Principles § No rule ‐> Bork, Easterbrook § Price < avg. total cost ‐> Areeda/Turner; Utah Pie (1967) (price > average total cost + intent) § Recoupment (price‐cost relationships too difficult; the first and only threshold question

should be "if the D destroys its rival, can it take advantage of the opened up market share?") ‐> Joskow/Klaorick, Elzinga

§ Game theory ‐> e.g. reputation for toughness, "noisy" predation, multi‐market contact ○ Case: Brooke Group v. Brown Williamson Tobacco (1993) ‐> SCOTUS sustained dismissal of 's

suit b/c (Liggett) failed to show B&W could recoup its investment in below‐cost sales □ Market power ‐> B&W's market share was only 12% (not significant by itself, but

Liggett accuses all the brand name cigarette makers of "tacit coordination" based on long history of collusion of tobacco industry and B&W is the hit man for all the brand name manufacturers)

§ [A] Court didn't say what measure of cost (average total or average variable) but evidence that price < average variable cost

§ [B] needed to show recoupment to demonstrate that "the structure and conditions of the relevant market" would enable the alleged predator to engage in sustained super competitive pricing once its prey was subdued

□ Evidence B&W had intent to recoup ‐> 3 periods of internal documents that said "for every dollar we spend on attacking Liggett in generic sales, we get $1.10 back in protecting our branded market" + "its working" + "it worked"

□ But intent not enough unless the plan was feasible, needed to show : ® [i] B&W had production capability after driving Liggett out ® [ii] no barriers to entry that prevent someone else from taking Liggett's shares

instead of B&W □ Plausible that recoupment was reducing cannibalization of brand name cigarettes by

generics, but not enough evidence B&W's conduct posed "an authentic threat to competition"

® K: dislikes this b/c dismissal of a jury verdict aka no reasonable jury would find evidence to support verdict

® Really permissive rule b/c like in Matsushita, Court was really scared of making antitrust suits a tool for keeping prices high

□ K: this is a "make‐up call" by a ref trying to contain the Kodak decision and as a result extremely difficult for s to prevail in predatory pricing cases

o Court was not sure here that B&W could recoup their losses. Ligget testify that there was no collusion ever with the cigarette industry, but in order for the strategy to work, they had to collude. so liggett just blew up its own case. Section 2: alco (intervention minded) matsushita (more non intervention)In this case, the recoupment part is what made the court rule for the defendants. For P to win, high standard to show recoupment will happen.

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• Bundling: bundled discounts are anticompetitive only if establishes that, after giving the discount on the entire bundle of products, sold the product below its average variable cost, see Cascade Health v. Peacehealth (9th Cir. 2007) (relying on SCOTUS in Brooke Group ("above‐cost pricing will NOT be considered exclusionary conduct for antitrust purposes")

o In lepage, the court ruled that 3m bundling was illegal. 3m did the larger the number of things you buy from us the bigger the discount. It did not matter that 3m was more efficient. (improper exclusion) This was over ruled by Cascade health 3m had a test of looking at all the proffts of the bundle and see if the profits are above the variable cost.

○ Case: Cascade Health v. Peacehealth 2008‐> rejected 3rd Cir.'s holding in LePage's Inc. v. 3M (more open‐ended test that does not require showing bundled discounts constituted below‐cost pricing)

§\as long as price of the product [minus the total discount] is > average variable cost, the discounting is NOT anticompetitive o Cascade health. Defendant here says, if you make us your prefered person for everything in the bundle

then we will give you a bigger discount. P says that because they don’t do all the services offered by D, they are using what we cant do to exclude us by bundling. D market share was 80+. D here says the P should go and create their own bundle Test to use: 1) monopoly power, the want a cost base test how to attribute discounts: 3m, look at all profits dont look at each individually. here they looked at, Attribution of discounts: for each individual product lines, look at the revenues for these and look at the profits for each, and see if its above cost for each. The key threshold once you establish that there is profit from bundle, the next step is look at average variable cost. So p must proof that after allocating the discount given by the D on the entire bundle of products to the competitive product or products, the D sold the competitive product below its average variable cost of producing them.

○ See also AMD v. Intel ‐> $1B fine from EU b/c Intel said "we need some breathing space to catch up to AMD's new dual core technology, so we need to set up loyalty program to stall AMD where computer manufactures got a discount at 80% but nothing if below"

o (bundling or loyalty discounts AMD v Intel. if you order a percentage from us you get a giant disocunt, under this amount no discounts))

o Exlucsive dealing. This is another price base way. where the monopolist over others by offering exclusive deals. (if you advertise only with us, you get better slots and better price, you don’t advertise with any other.

o Alco: also did exclusive dealing, where they act electric companies not to supply other aluminum companies (this is wrong)

5. NON ‐ PRICE ‐ BASED EXCLUSIONARY CONDUCT? • Refusals to Deal: [A] Sherman Act doesn't restrict a private firm's right to deal with whoever they want,

Colgate; [B] but can be held liable if the sole purpose (i.e. no valid business purpose) of the refusal to deal is to create or maintain a monopoly, compare Aspen and Kodak (a monopolist violates § 2 if it excludes a rival from the monopolized market by restricting its relationship without an adequate business justification), with Trinko (limiting Aspen's holding to the termination of pre‐existing relationship)

○ Case: Aspen Skiing v. Aspen Highlands (1985) ‐> monopolist 's refusal to deal was monopolization b/c 's behavior was predatory, not motivated by efficiency concerns but just to exclude its rival (bad conduct + no justification)

§ Market Power: only 2 firms in market getting together to set a price § Bad Conduct: joint marketing agreements (collaboration) are OK, but the problem is that

the s back out of the agreement after loses significant business □ Shows they are trying to run Highlands into the ground (but anti‐competition law

protects competition not competitors) □ However, the consumers are being hurt after the dominant firm tries to stop the All

Aspen Pass b/c the consumers LIKED the product (direct and circumstantial evidence) § Justification: needed to get rid of the coupon system b/c it was drawing in unruly college

kids (bad argument) □ K: better argument ‐> continuing the coupon system was like forced cooperation

("why would we continue to help this dying resort") + safety argument ("Highland was having serious quality control issues that could be a huge liability"

o aspen has 85-90%. Conduct: here by not going with the agreement, customers were complaining. they liked the agreement. After gov show satisfy its burdento show market power and conductthe burden shifts to aspen to showefficiency inc. they sited admissions was bad, unreliable accounting, inferior facility. these were not accepted. because, aspen ran the administrationthe coupons were same as credit carsthe accounting services weredone by a godd company, andif the resort was inferior thenthey would only ski aspen AT&T discon has a different viewwhere they give parties more leeway in

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determining who you do ventrueswith.. also with this you have to make sure you don’t violate the other article of the anti trust

statute.o rule: substantial market power course of dealing + renigining+ material change+ hurt consumers,

burden shift to reniger to prove justifications. (From aspen and kodak)○ Case: Kodak (1992) ‐> a monopolist may refuse to deal with rivals ONLY IF there are legitimate

competitive reasons for the refusal (i.e. stuff that increases profits is a justified business move) § Market Power: > 80% o Kodak had only 20% market power for copiers, the court focused on government buyers who once you

sell the copier, you have pay high prices for the life long maintenance, so competition in after market is important. kodak justification is that when the machine stop working, kodak would be blaimed.

§ Bad Conduct: existing relationship that Kodak withdrew from (unilateral modification) + injury to consumers

§ Justification: nothing about quality control, efficiency, etc ○ Case: Verizon v. Curtis Trinko LLP (2004) ‐> not be liable under §2 b/c no evidence of 's refusal

to deal being motivated by anticompetitive malice like in Aspen; was compelled to work with other firms, not voluntarily (so they couldn't have started with an intent to fuck over other firms)

§ Limits §2 liability under Aspen to the narrow set of facts where a preexisting relationship is being terminated

o In verizon, you are trying to not have false positives Matshutida (is rules for sJ) Verizon (standard for motion to dismiss Tombly (takes mashutia presumption of dismissal to section 1) (need) to show evidence to get pass SJ) Credit suits case if you have sufficient regulation then no need to add anti trust regulation Inkllein: is there a basis to deal, if not, then the price of dealing and conditions is not something the court will look at as an anti trust cause of action

• Standards Setting: lying about holding a patent when trying to set an industry standard can be the "bad exclusionary conduct" for a §2 violation

○ Compare Unocal ‐> Unocal's "bad act" ‐> lying when helping set gasoline standards in CA, then trying to collect royalties

○ With Rambus ‐> same scenario as Unocal but in private standards setting ‐> DC Cir. came out the other way and decided for Rambus, holding that the FTC didn't show causation, that but for the bad act (the failure to disclose pending patents), the standard wouldn't have been set using Rambus' patent anyways

• Refusals to License IP Rights: [A] unless IPR obtained by fraud, a monopolist's unilateral refusal to license its IP is generally NOT "exclusionary conduct" (\ asserting an IPR is a "presumptively valid business justification"), [B] but the presumption can be rebutted if asserting IPR is just a pretext to fuck over competitor

○ Compare Kodak (9th Cir. 1997) ‐> generally a patent holder can exclude/deal with whoever they want, but that was not Kodak's motivation; protecting IP rights was just a post facto justification for anti‐competitive practices

○ With CSU v. Xerox (Fed. Cir. 2000) ‐ Fed. Cir. protects patents so they push back at the Kodak decision, concluding a court shouldn't look for "pretext" ‐> violation ONLY IF the patent is obtained by fraud

o In re gotti: As a lawyer you Cant mis- represent your identity to gain information. you cant say your a dr when your a lawyer to get info.

• Product Innovation: [A] design or development activity is immune as long as monopolist can show it was improving its existing product offerings, EVEN IF one of the firm's goals was to exclude rivals, see Berkey Photo ("any firm, even a monopolist may generally bring its products to market whenever and however it chooses"); [B] but deliberate efforts to create incompatibility without offering performance enhancements or cost reductions is actionable, see C.R. Bard (violation b/c gave substantial evidence that manufacturer made changes in the product only for predatory reasons, i.e. preventing entry instead of improving the product)

○ Case: Berkey Photo v. Kodak (2nd Cir. 1979) ‐> monopolist's disclosure of a new product to competitors was not required b/c it would allow free‐riding and reduce incentives to innovate

○ K: firms have freedom to design and operate their businesses as they saw fit, but NO OBLIGATION to design products to fit other people's shit and/or disclose of the changes to competitors

• Essential Facilities: must prove [A] control of essential facility by monopolist; [B] competitor's inability to practically or reasonably duplicate the essential facility; [C] the denial of the use of the facility to competitor; [D] no valid business reasons for denial of access; and [E] the feasibility of providing access to the facility, MCI (7th Cir. 1983) + Aspen (adding [D])

○ SCOTUS in Trinko says they don't endorse "essential facilities" ○ K: "essential facilities" is not distinct from ordinary refusals to deal

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• Leveraging Monopoly in Another Market: is OK ‐> only unlawful when a firm actually monopolizes or attempts to monopolize in the specific market, see Spectrum Sports (using monopoly in 1 market as leverage in another different market is NOT a violation unless actual monopolization or attempt to monopolize in 2nd market)

6. ATTEMPTED MONOPOLIZATION? • Sherman Act § 2: violated by "every person who shall monopolize, or attempt to monopolize, or

combine or conspire with any other person or persons, to monopolize any part of the trade or commerce . . ."

○ Attempted Monopolization, Spectrum Sports § [1] predatory or anticompetitive conduct

+§ [2] specific intent to monopolize o (improper conduct: here its the same conduct as those for monopolization exclusion inc)

+§ [3] dangerous probability of achieving monopoly power, see Spectrum Sports (dangerous

probability can't be inferred from predatory conduct alone ‐> must assess market power and < 50% market share presumed NOT dangerous)

[4] Look at market entry○ K in class:

§ [1] intent (as to bad conduct) § [2] market power, but relaxed standard ~50% § [3] dangerous probability of success (entry is difficult)

○ Case: US v. American Airlines where CEO of AA tells his rival that "you and I can make a lot more money if we collude ‐ we can do whatever the fuck we want" ‐> even though the invitation to collude was declined, the Feds said it was still a form of illegal attempt at monopolization

o Attempted monopolization does not satisfy plurality requirement of part 1 sherman act. Here American had over 50% market If party doing the asking does not have 50% of the market, say 20% and calls someone with another with 10% and the guy says no. Here there is no plurality of the agreement so the first part of the act is not satisfied. and no monopolization because no market power. However FTC act section 5 blocks any attempt to monopolize.

o Section 5 FTC Act. The only sanction is forward looking equitable relief, only injunction not to do it again. no criminal charges inc. The assumption is that the FTC will use their 5 experts and the court of appeals will give them Deference.

o However section 5 has not been used often, bc the entire power is not defined and FTC is not seen to be much more expert than the court. If you make a public declaration and the person you are trying to collude with is there and its obvious that you are targeting them, FTC says this is

o Lorain v. US. (attempted monopolization) they basically refuse to deal with advertisers who advertise in a new radio station, at the time, the newspaper was the only one. this was an attempt to put the radio out of business. The radio was its only competitor. Radio got all money from advertisers. Lorains action took away most of their advertisers. (they did not make an efficency argument)

o So test. 1) market power 2) conduct 3) justification 4) if justifications are plausible then weigh the Remedy (look at number 3)

o UK vs US: Uk have a market power threshold at or greater than 40%, US aboe 70%. For attemp monoplization US 50% market share EU in vergin case: need to show market power, injury. so Vergin won the case. The EU have no recoupment requirement In the US, case dismiss because no market power, and BA failed to recoup its cost. Here these differences influence policy, easier for sanctions in the EU.

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I. Vertical Agreements/Restraints [Sherman Act § 1 / Clayton Act § 3]

1. VERTICAL AGREEMENT • Vertical agreements: coordination agreements between firms who are not competitors but perform

distinct functions at different stages of complementary products ○ Intrabrand restraints: affect competition between sellers of the same band (i.e. territorial

restrictions on rival Chevy dealers, Burger King franchises, etc) § Concerned about collusive effects

○ Interbrand restraints: limit competition between competing brands (i.e. exclusive dealing arrangements or "tying" agreements)

§ Concerned about exclusionary effects

2. VERTICAL AGREEMENT [INCORRECTLY] CHARACTERIZED AS GROUP BOYCOTT? • Vertical agreements between ONLY 1 buyer + 1 supplier:

○ [1] are NOT subject to [per se ban] b/c they are not the same as group boycotts / concerted refusals to deal (a species of price‐fixing that are subject to per se treatment, see SCTLA)

○ [2] instead judged under rule of reason, like all other vertical restraints [SEE BELOW] • See NYNEX v. Discon (1998) ‐> per se group boycott rule does not apply to single buyer + single supplier

b/c freedom to switch vendors is part of the competition antitrust laws encourage ○ Maybe some other liability (BoC, tort fraud, violation of NY state regulations, etc), but freedom to

switch suppliers is not a basis for an antitrust violation o This is also to allow firms to deal with the ever changing business climate to pick the downstream partner the

want. The court feared that single damage would become treble damages.○ SCOTUS concluded group boycotts are more or less "per se illegal" in Klors ‐> K: but SCOTUS really

meant "group boycotts for which there are no justifications are really, really looked down upon" ○ In this case the justification ‐> buyer made a rational choice to switch suppliers (based on a

normal business decision) and the courts won't interfere with that

3. VERTICAL PRICE (RPM) & NON ‐ PRICE AGREEMENT [ INTRA BRAND]? • Vertical price (RPM) & non‐price agreements: are both judged under the rule of reason, Sylvania,

Leegin, with nearly a presumption of legality for all vertical restraints, see, e.g., E&L Consulting, Ltd. v. Doman Indus. Ltd. (2nd Cir. 2007) (an exclusive distributorship is a vertical restraint on trade but is presumptively valid unless a can show actual adverse effects on competition ‐> in this case already had full market power so nothing to gain)

○ Guidance Leegin Court provides on RPMs: (Resale Price Maintenance) § [1] situations where RPMs are likely to be anticompetitive:

o Whenever there is a private party, they need to show as in brunswick that there is anti competitive effect not behavior that increase it.

□ Facilitating manufacturer's cartel keep members of the cartel from cheating

□ Facilitating dealer's cartel □ Used by manufacturer with market power to protect its power by incentivizing dealers

not to sell products made by smaller rivals □ Dealer with market power solicits minimum RPM to delay distribution

§ [2] factors to analyzing RPMs under the rule of reason: □ Scope of minimum RPM use in market □ Source of restraint, i.e. originated from dealer or supplier □ Market power of supplier and dealer

Here you would stifle competition and service here when there is market power because no interband competition. (dessent: this would take too much resource to apply this test.

§ [3] pro‐competitive justifications: □ Encourage dealers to invest in services/promotional efforts □ Give consumers more options on goods/level of service □ Removes free‐riders □ Efficient way of making dealers provide certain levels of service

® Assuring quality to protect manufacturer's reputation ® Reduce possible product liability from un‐reputable retailers

□ Help new firms enter/expand in markets For leegin, the plaintiff could have used BMI the quick look, as an alternative although bmi

was horizontal. or a polygram like system in the middle S Court says state can enforce there own RPM laws. NYC and Ca still follow Dr. Miles.

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Because of this, Leegin has very little effect now. Federal rules changes but for state it has not relating to leegin.

○ Case: Continental T.V. v. Sylvania (1977) ‐> vertical, intrabrand, non‐price restraints should not be treated under per se ban, instead under the rule of reason

§ Under rule of reason the restrictions reducing intrabrand competition might be OK if they benefited interbrand competition

□ [3] possible justifications for vertical intrabrand restrictions: ® Induce retailers to carry and promote new products ® Induce retailers to be more competent at such ® Assuring quality to protect manufacturer's reputation ® Reduce possible product liability from un‐reputable retailers ® Reduce free‐riding

§ K: but practically, almost ALL vertical, intrabrand, non‐price restraints are pro‐competitive in the interbrand market, thus making them almost never violations Sylvania had a location clause, and retained high selling stores, they also wanted them to sell

exclusively sylvania. They did not renew with continental and they sue. This location requirement violated schwinn, Court says the competition between sylvania retailers is not important. How sylvania compete with other tv markers are important. however if sylvania had market power then it would look at there retailers. Court says per se is used only where there is a [demonstrable economic effect.]

Dr. miles had held that once the thing is sold you cant control the price. per se illegal. If manufactor held title not illegal to set price Cogate, said if you have a policy and the retail stray from it and you cut them off its not an agreement so legal. Schwinn tired to control location, court said per se illegal.

○ Case: Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007) ‐> overruled Dr. Miles; held that ALL vertical minimum RPM agreements were to be evaluated by the rule of reason, NOT per se

§ All the same justifications for allowing intrabrand non‐price restrictions in Sylvania applied equally to price restrictions

§ Court reminds there are situations where vertical RPMs are still illegal per se Bh v kors bh told stores to stop selling Kors stuff because they are price cutting (free rider).Bh says this

is not anti competitive. S ct says where the only thing that is taking place is between manager and retail not to sell something, then its illegal boycott. illegal per se

4. EXCLUSIVE DISTRIBUTOR [VERTICAL INTRA BRAND RESTRAINT]? • Exclusive distributorships: (a commitment by a supplier to limit the number of distributors in a certain

geographic area, limiting intrabrand competition) are vertical restraints on trade, but are presumptively valid unless a can show actual adverse effects on competition: E&L Consulting

○ Exclusive distributorship ‐> constrains SELLER (intrabrand completion limited) ‐NOT‐

○ Exclusive dealing ‐> constrains BUYER (interbrand competition limited by distributor limiting access between dealers and rival suppliers) • Case: E&L Consulting, Ltd. v. Doman Indus. Ltd. (2nd Cir. 2007) ‐> presumptively valid unless a can

show actual adverse effects on competition and in this case the already had full market power, \ had nothing to gain and no injury to competition ( irrelevant) by switching exclusive distributors

○ Former exclusive distributor (E&L) was butt hurt their supplier (Doman) decided to go with another exclusive supplier

○ But a dominant supplier 100% OK to switch from a multiple distributor network to a single distributor (K: look at Amazon.com destroying Barnes and Nobles ‐> Amazon took advantage of distribution fluidity)

§ Note we are not talking about ANY horizontal competitors in this scenario ○ When manufacturers are just searching for the best way to get their products to the general

public, they have deference to do what they want ○ In the U.S. the distribution network of companies really fluid and adaptable, thus SCOTUS is not

going to fuck around and mandate laws the could slow down the process and harm general consumers, see, e.g., NYNEX v. Discon

5. TYING + EXCLUSIVE DEALING [VERTICAL INTER BRAND RESTRAINT]? • Interbrand Restraints ‐> limit competition between competing brands (i.e. exclusive dealing

arrangements or "tying" agreements) ○ Concerned about exclusionary effects (vs. collusive effects of intrabrand restrictions), see, e.g.,

Brantley (9th Cir. 2011) • Tying/Leveraging ‐> where the seller of a product conditions the sale of one product upon the buyer's

agreement to buy another product, enabling a firm to leverage monopoly power in market in another, may lead to violations of Clayton Act §3 or Sherman Act §1: IBM; International Salt

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○ "Per se" rule [~*structured/truncated rule of reason]: tying arrangements illegal when proves: □ *but not at all like "per se" rule in Socony (horizontal price‐fixing), where market

power was irrelevant § [i] two separate products

□ But see Microsoft (DC Cir. 2001) ‐> "character of [consumer] demand" [for determining if separate products] is not applied in cases of newly integrated products

b/c by definition, there is separate demand for the new product.f. Most of the discussion is whether its one or two products. Classify as one or two products based on a real

benefit to product, if no benefit of having bundle then two products§ [ii] buyer required to buy tied product to get the tying product

□ Quality control defense ‐> older cases didn't accept this defense (that service from only Mercedes dealers was needed to give customers confidence in the product)

□ Compare IBM (rejected quality defense b/c other less harmful alternatives available) □ With Microsoft (~quality argument OK ‐> "integration is so complete that if you take

out Internet Explorer, the whole OS will crash"). Microsoft argument was that this was more efficient. (more capability)§ [iii] the seller has "appreciable economic power in tying market"

□ See Jefferson Parish (hospital's 30% market power not enough to invoke "per se" rule) □ K: <30% market power now a "safe harbor" for tying agreements g. If you don’t have substantial market power, how can I force you to buy something that I’m tyingh. For patent/trademark/copywrite, if there are good substitutes then there is no market power

i. If no substitutes then instant market power.ii. For franchies, the other competition make it no market power,

i. However earlier cases made patent/trademark/copy write instant market power. illinois tool changed this.§ [iv] tying arrangement affects substantial amount of commerce in the tied product's market

Older cases does not allow justifications, but newer cases now allows some justification New analysis as far as where things are going (use test above test, but mention where analysis is going. theory of harm

j. anticompetitive effectsk. Conduct

i. You denying your rival experiments, this stops rivals from using their products as substitues.

l. Market power Justification (evaluation of efficiency)○ Case: Jefferson Parish Hospital v. Hyde (SCOTUS 1984) ‐> per se rule still applies to tying, but

concluding hospital requiring patients to use affiliated anesthesiologists was OK b/c: § [i] surgery and anesthesia were not separate products § [ii] hospital didn't require ("force") buying tied product § [iii] hospital didn't have enough market power (30%) to invoke the "per se" rule

• Exclusive Dealing ‐> may lead to violations of Clayton Act §3 or Sherman Act §1 when a manufacturer sells on only on the condition that buyer does not deal in a competitors' goods; examined under modified rule of reason that looks at the effect of foreclosure to other sellers, considering:

§ [i] extent of market foreclosure ‐> generally no liability if < 30%: Jefferson Parish § [ii] duration of agreement ‐> short periods presumed reasonable: Omega Environmental

As long as they turn over quickly or easy to walk away from, then other companies have the opperutnity to say buy mine instead so reasonable. Longer Ks unreasonable

§ [iii] entry ‐> no liability of entry into affected market is easy [iv] how much commerce is involved.Where this is going new analysis going ahead-Now is if there is an effect on imputs. (how much you forestalls/limit access to needed imput.

-This is you denying your rival experiments, this stops rivals from using their products as substitutes-Justifications, evaluation of efficiency claims

○ Exclusive dealing ‐> constrains BUYER (interbrand competition limited by distributor limiting access between dealers and rival suppliers)

‐NOT‐ ○ Exclusive distributorship ‐> constrains SELLER (intrabrand completion limited)

VI. Horizontal Mergers Among Competitors [Clayton Act § 7]

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1. MERGERS • 3 types of mergers:

○ Horizontal ‐> between competitors ○ Vertical ‐> between firms and their suppliers/customers ○ Conglomerates ‐> between firms with neither substitutes or complements

• Motives for mergers: ○ Reduce costs or improve products in ways a firm can't do on its own ○ More profit by changing control over acquired assets ○ Tax benefits ○ Desire for market power <‐ only motive that raises antitrust concerns b/c:

§ Lowering # of competitors can help coordinated collusive conduct § Exclusionary anticompetitive effects (i.e. limiting rivals' access to inputs or distribution) § "Merger to monopoly"

2. CLAYTON ACT STATUTORY FRAMEWORK • Clayton Act § 7: prohibits [any type of] merger that may substantially lessen competition or tend to

create a monopoly in a relevant market §No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or . . . assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be

substantially to lessen competition, or to tend to create a monopoly. ○ Most mergers (vertical or horizontal) reviewed under Clayton Act § 7 (1950 amendments) b/c an

anticompetitive merger often doesn't involve an "agreement" per Sherman Act § 1 ○ Gov. can challenge mergers before any actual anticompetitive effects, i.e. before merger is

consummated due to the word "may" • HSR: requires pre‐merger notification for transactions above certain $, converting mergers from

litigation to a regulatory review ○ Process required certain mergers to notify FTC and DOJ, then 30 day waiting period to see if

FTC/DOJ objects and issues requests for changes ○ If government issues 2nd request for changes, parties obligated to make changes ○ Then final waiting period ○ Designed to give government chance to sue before merger completed

• K: SCOTUS last look at merger law was in 1975, but Baker Hughes might be a good indication of how the Court might decide a merger issue today b/c Thomas, Ginsberg, and sat on the Baker Hughes court and are now the justices

3. STRUCTURAL PRESUMPTION OF ANTICOMPETITIVE EFFECTS IN HORIZONTAL MERGER? • Anticompetitive effect is presumed: when shows the horizontal merger would [1] produce a firm

controlling an undue % of the relevant market, [2] resulting in a significant increase in market concentration (foreclosing competitors from market), Brown Shoe; US v. Philadelphia Nat'l Bank, [3] but can rebut presumption by presenting evidence that the merger is unlikely to enhance future market power / lead to anticompetitive effects, General Dynamics; Baker Hughes

○ Case: Brown Shoe Co. v. US (1962) ‐> SCOTUS affirms D.Ct. in enjoining the merger even when market share %s are tiny b/c the Court focuses on the general trend toward market concentration ‐> spiral effect and if 5% OK now, so might be 10%, 20% later (may substantially lessen competition" as prohibited by Clayton Act §7)

§ K: political atmosphere REALLY influenced this opinion, doubtful would be same justification today (SCOTUS probably wouldn't favor protecting small businesses over market efficiency) o Court also had concern that concentration cause political issues (nazi)o They pointed that congress made a policy to protect small business. But this will change.

because of brunswick. "its competition not competitors○ Case: US v. Philadelphia Nat'l Bank (1963) ‐> proposed consolidation of banks enjoined for

violating Clayton Act § 7 b/c result would "inherently lessen competition substantially" b/c: □ [1] consolidated bank would control an undue % of the relevant market (at least 30%) □ [2] consolidation would lead to significant increase in the concentration of

commercial banks in the area (33% owned by 1) m. 1st burdent: gov shows that this is a concentration in relevant market 2nd: burden shift to D, to

rebut by offering justifications that the numbers are not correct or their is some other justtification.

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Its hard to rebut the 30% threshold, over time this threshold comes down, and make justification harder. SC court in P& G said cost reduction increase out put better quality is irrelevant to the rebutal of prima fice case of market share. also efficiency arguemnt is no good

n. In von's, the market share requirement was lowed to 7.5%, in Pabst it was 4.5%.○ Case: US v. General Dynamics Corp. (1974) ‐> gov. failed to show anti‐competitive effect b/c

exercise of market power is the central inquiry required by §7, NOT firm size or industry concentration and impossible for to exercise market power in the future

§ K: the real question is can you can compete in the next period ‐> so must use a correct measure when trying to predict the future

§ General Dynamics had no "uncommitted reserves", thus they effectively had zero chance of gaining market in the future (their bad business decision not to keep "uncommitted reserves" turned out to be beneficial for their argument in this case)

So here past production sales was not a good prediction of future sales. "RIM"would also use this argument. Historical sales does not give you an idea of how to compete in the future. The court says that while statistics are important, they are not conclusive indicators. so we will look at other factors. example boeing and Mcdonal. here this was allowed because mcdonal had lost its ablity to compete, although had 60% market share. So merger was allowed.

○ Case: US v. Baker Hughes (DC Cir. 1990) ‐> rebutted presumption by showing government was making inaccurate predictions (and actual evidence shows the merger wouldn't actually lead to anticompetitive effects) b/c: [i] market was tiny (~20 things sold per year); [ii] this was not paving roads, products are custom shit not conducive to cartel; [iii] buyers were sophisticated so there are no worries about fucking them over) [iv] Government can also show that market entry is difficult to add to their case, D can rebut this by showing market entry is easy.

§ Big market share numbers [~70%] only gets a prima facie case but still can rebut § Rebutted with evidence of why the merger won't actually lead to coordinated effects ‐>

explains why coordination in THIS particular industry was impossible as a practical matter § K: unlike previous courts, this court doesn't say it's a set in stone presumption ‐> just a

"starting point" ‐> though SCOTUS makes it much more than just a "starting point" The more evidence the gov has the more the defense must rebut, if gov only have market share data (structural

presump) then the burden on the D is not as strong to rebut. D can say market too volatile for market share to be relevant, and power brokers play manufacturers against each other so no chance to collude.

4. EVOLUTION OF DOJ/FTC HORIZONTAL MERGER GUIDELINES (HMG): ○ K: unlike Brown Shoe, PNB, Heinz, NEW HMG => less reliance on market power presumptions

1982 HMG In the past they feared coordination of horizontal mergers. they also feared coordination that was outside the reach of sherman act: after merger the firms that left over would coordinate without agreement by responding to price increase by others. they believe this would happen when there were only 5 players. 2010 HMG, thinks this will happen when its down to 5-4 players, last few years they go after 4-3 or less. RPM, VP, Group boycott, tying arrangement , price fixing and market allocation was all bad

1992 guidelines unilateral effect: if 2 major players merge, they may have such a market that they can raise their prices without fear that people would substitute. Also after merge they can raise the price for one product because people are inelastic, and the ones that switch, will by the other product they have because they merged. They own the next best options. ec. pepsi merge with coke.

o. New laws BMI analysis, NCAA

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5. LIKELIHOOD MERGER WILL HARM COMPETITION UNDER HMG 5 ‐ STEP ANALYSIS? • [1] Market Power:

Do they have ability to affect prices individually or collectively if they change their output? Relevant market: Heinz“A relevant market has two components: (1) the relevant product market (SNSNIP test)

and (2) the relevant geographic market.... The ‘relevant geographic market’ identifies the geographic area in which the defendants compete in marketing their products or services.

○ OLD Market Power Analysis: □ [i] define market by looking at buyer substitutions: Du Pont

® Markets delineated according to the customer's view of which products/ geographic locations were acceptable substitutes

□ [ii] high market share % => circumstantial evidence of market power (infer anticompetitive effect): NCAA

§ Definition of market changes 's market share □ See NCAA (market defined as college football broadcasts, so NCAA controlled 100% of

market share, leading to Court to infer market power and anticompetitive effect; but if market defined as broad entertainment, the NCAA's market share would have been much lower, and would not have provided inference of market power)

□ See also U.S. v. E. I. Du Pont (1956) ‐> DuPont successful arguing relevant market was ALL flexible wrapping materials (so DuPont's market share = 25%) instead of ONLY cellophane market (DuPont's market share = 75%, aka monopoly power, allowing

anticompetitive effects to be inferred) § Thus s typically argue for narrow markets (so s have big % market share) and s argue for

broader market definitions ○ NEW Market Power Analysis:

§ [i] Define Market ‐> directly measuring what customers regard as close substitutes: HMG § 4 ® K: if you travel from DC to NYC, do you take train, bus, car, walk?

□ Submarkets ‐> Brown Shoe and later case suggests OK change definition to make market share bigger or smaller

□ Hypothetical Monopolist Test (HMT) ‐> if the merged firm slightly raises prices, the other products consumers migrate to shows the relevant market

® I.e, if Chex and Wheaties cereals merge, raise the price 5‐10%, what other products will consumers migrate to?

® Cherrios, Corn Flakes, but probably not shit like pop tarts, jelly donuts ‐> thus can figure out the market definition

H&R Block: Relevant Product: The Supreme Court has set forth the general rule for defining a relevant product market: “The outer boundaries of a product market are determined by the reasonable interchangeability of use [by consumers] or the cross-elasticity of demand between the product itself and substitutes for it.”

§ [ii] Measure Demand Elasticity ‐> directly instead of using market share % (only an indirect proxy measurement): HMG § 5.2

® K: today's technology can get very specific and detailed profile of how each sale and how adjustments in price affect the amount sold and demanded (preciously the data needed to directly determine market power)

□ SSNIP Test ‐> price that drives away customers o H&R Block: In the merger context, this inquiry boils down to whether “a hypothetical profit-

maximizing firm, not subject to price regulation, that was the only present and future seller of those products likely would impose at least a small but significant and non-transitory increase in price (“SSNIP”) on at least one product in the market, including at least one product sold by one of the merging firms.” The “small but significant and non-transitory increase in price,” or SSNIP, is typically assumed to be five percent or more. For this you can use different simulation models. or natural experiment test (where you use raw data from the past)

® Will it be easier for the merged firm to engage in price discrimination (i.e., charge more for business class airline tickets)?

® I.e., small increase that drives large # of customers away => evidence showing small/weak market power

® Small but significant non‐transitory increase in price

• [2] Anticompetitive Effects:

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What is the story of why the merger would be harmful from perspective of consumers? ○ [i] Adverse Effects: HMG § 2

□ Unilateral effects: HMG § 6 ® Directly measure post‐merger price to see effect on consumers ® See Staples (court enjoined merger b/c Staples' prices were 11.6% lower when

Office Depot was also in neighborhood + economic analysis showed merger would raise prices 7% in markets where Staples and Office Depot competed)

Relevant market here was determined by the fact that staples checked on office max prices and sales and not the bigger stores like walmart. Sub markets: 1) pricing evidence: compare price of stores where similar stores were. In places with walmart the price was higher, in areas with office depot the price was lower. that proves that office depot was their competitor. 2) practical indica: staples own data said that office depot was a competitor

whole foods, wild oats merger, there were the only two in the organic market. relevant market was those two and WF wanted to merger to get rid of while oats, so a unilateral effects. they would be able to raise prices because the other alternatives walmart, giants are so distant from WF and WO. So highly profitable to them without any effect of the the competitors. Unilateral effects, raise price after merge without concern for competitors becasue they are so distant. but her competitors usually will change to try to compete. giants will also raise price and sell healthy things (repositioning). unilateral effects falls apart if it is easy to reposition. but if substitutes are distant then

□ Coordinated effects: HMG § 7 ® Post‐merger big market share % facilitates collusion ® See HCA 1986 (Hospital enjoined from buying 4 others b/c market share 14% ‐> 26%

in concentrated market would make collusion really easy) Factors here was: 1) inelastic demand, 2) tradition of cooperation between hospital, 3)

cooperation would enable them to resist external pressures to lower prices (provide incentive to collude).

§ Affecting Price / Quality / Innovation □ Value of diverted sales □ Upward pressure on price (UPP) ‐> price due to removing rival: Staples; Whole

Foods (merger in niche market would price 25%) ® I.e. more concerned about merger between Mercedes + BMW than Mercedes +

Ford due to niche product ‐> merge 2 proximate substitutes creates mega UPP Maverick: H&R block: How to know if a firm is a maverick (you look at there behaviors in the past) a

maverick has been defined as a particularly aggressive competitor that “plays a disruptive role in the market to the benefit of customers.” Merger Guidelines § 2.1.5. one of the merging firms may have the incentive to take the lead in price cutting or ... a firm that has often resisted otherwise prevailing industry norms to cooperate on price setting or other terms of competition

o Does technologically different thingso Don't want the merger of a regular firm and a maverick, because this may reduce competition.o However, because you are a maverick now does not mean you will be later. The smaller you are the

easier it is to be a maverick, but as you grow it becomes more difficult to bet it all and be a maverick.○ [ii] Market Concentration:

§ Based on sales in market ‐> measure firms' shipments, production, capacity § Herfindahl‐Hirschman Index (HHI) looks at # and relative size of firms in market

® Example: 3‐firm market w/market shares of a, b, c, HHI = a^2 + b^2 + c^2 ® Monopoly with 100% of market => HHI of 10,000 (100^2) ® No firm with more than 1% => HHI close to 0

□ Increase in HHI = pre‐merger HHI ‐ post‐merger HHI § Large HHI # increase => "prima facie" case (merger presumed anticompetitive)

□ But CANNOT rely on concentration alone see Baker Hughes (gov. cannot just prove market power and win the case when rebutted with evidence the gov.'s data was misleading + ease of entry)

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• [3] Entry: What is entry's effect on deterring or counteracting adverse effects (how easy it is for firms outside of market to take away market share?)

○ 1992 HMG ‐> a constraining entry must be an entry that can happen < 2 years ○ NEW HMG § 9 ‐> in order to be constraining entry (preventing competitive harm), must be:

§ [i] timely entry, determined upon the relevant market (not just < 2 years) § [ii] likely entry § [iii] sufficient entry to actually push prices back

○ Compare HCA (Posner finding entry difficult b/c state had to license new hospitals) certificate of need, needed to show need to approve new hospitals but if merger there would be empty beds in

those that collude so if patents want new lower prices, another hospital could not enter becasue of no need.○ With Waste Management ‐> the second we would try to raise prices there would be a million

other firms in the market b/c entry is so easy ("all you need is some trucks") § Court says this is a big gap in the government's argument § Government argues that this is a mob related business so entry is actually a lot harder

("people end up dead trying to enter the market") ○ And US v. Syufy ‐> Judge Kozinski calls government idiots for not considering the fact it was super

easy to enter into the movie market (just buy a building and some licenses) • [4] Efficiencies:

Are there procompetive justifications to the merger? ○ Baker Hughes and Cardinal ‐> entry and efficiencies cannot be ignored as rebuttal possibilities

(gov. cannot just prove market power, anticompetitive effects and win the case) § Even if shitty argument, lawyers start with this b/c the efficiencies argument is more

accepted today as a rebuttal ○ NEW HMG § 10 ‐> efficiencies must be cognizable ([i] substantiated and verified + [ii] merger

specific, i.e. they could not be achieved by other less anti‐competitive means) § Not cognizable if harms competition by reducing output or service § See Heinz (benefits from better recipes not [ii] "merger specific" b/c can do it other ways

and was [i] too speculative that a certain company size was needed to make new products) Staples: must substantiate your claim that their will be savings. Have to have proof. Need to proof this thru the

documents that you have as to why this will save money, why you want to merge. Have to show that you will pass savings on to customers. Show that their are competition that will push cost down after the merger.

• [5] Failing Firms: Even if possible harm, is the merger with a failing firm?

○ NEW HMG § 11 ‐> failing firms defense allows the acquisition of a firm even when possible harm to competition if [ALL]:

§ [i] firm unable to meet its financial obligations and can't reorganize § [ii] it made unsuccessful good‐faith efforts to find buyer less harmful to competition § [iii] the assets of the failing firm would exit the relevant market without the merger

Heinz: D argued that merger is not anti competitive because, 1) they dont compete with each other (ones high end the other is not) 2) Efficiency: They would sell less expensive baby goods (Heinz had big plant, and beachnut have great formula.

The court does not buy this because entry is difficult. furthermore, here the merger would go from 3-2, so when its that few players, the structural presumption is strong. They have never allowed a duopoly under similar circumstances.

Reasons facilitating collusionReduce number of competitionAbsence of competitive alternativeRegulatory limtation on output expansion (certificate of needHighly inelastic demandTraditional cooperation among rivals

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Cooperation permit them to resist external pressures

Reasons frustrating tacit collusionServices are complex and heterogeneousSellers are heterogeneousIndustry is undergoing rapid technological and economic changeBuyers are large and sophisticatedFTC investigation was triggered by competitor complaint. (they are worried about the competition)Efficiency

Important to note that the courts does not defer to the FTC, the FTC may know more about it but the courts dont like to give them deference. They could but they really dont.

1992/1997 hmgo 1) market definitiono 2) market shareso 3) competitice effects

coordinated unilateral

o 4) entryo 5) efficiency

2010 processo 1) evidence of competitive effects performance n past, internal records, how they competeo 2) market powero 3) competitive effects: competitive effects that matter are effects on price, quality, and innovation.

A) unilateral (allows you to define little nitches and get rid of deal that way. This singles out niches. so GOV go for this one.

B) coordinated C) exclusion

o 4) constraints A) entry (timely likely and sufficient B) power buyers

o 5) efficiency In practice, they still do the old test.

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VII. Vertical Mergers Between Firms & Suppliers/Customers

1. MERGERS • 3 types of mergers:

○ Horizontal ‐> between competitors ○ Vertical ‐> between firms and their suppliers/customers ○ Conglomerates ‐> between firms with neither substitutes or complements

• Motives for mergers: ○ Reduce costs or improve products in ways a firm can't do on its own ○ More profit by changing control over acquired assets ○ Tax benefits ○ Desire for market power <‐ only motive that raises antitrust concerns b/c:

§ Lowering # of competitors can help coordinated collusive conduct § Exclusionary anticompetitive effects (i.e. limiting rivals' access to inputs or distribution) § "Merger to monopoly"

2. CLAYTON ACT STATUTORY FRAMEWORK • Clayton Act § 7: prohibits [any type of] merger that may substantially lessen competition or tend to

create a monopoly in a relevant market § No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any

part of the stock or . . . assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.

○ Most mergers (vertical or horizontal) reviewed under Clayton Act § 7 (1950 amendments) b/c an anticompetitive merger often doesn't involve an "agreement" per Sherman Act § 1

3. VERTICAL MERGER? • Vertical Mergers ‐> (either forward integration of a firm buying customer OR backward integration of

firm acquiring a supplier) may violate Clayton Act § 7, so long as: ○ [1] gov. must show a likelihood that the merger forecloses competition in a substantial share of

relevant market: Brown Shoe § BUT 2‐3% foreclosure was enough here by NOT ENOUGH in newer cases

□ 40% market share foreclosure by itself wasn't even enough □ Practioners routinely tell clients that 20% market foreclosure is nothing to worry

about for vertical mergers § Post‐1980 cases also require:

□ Looking at effects of merger □ Alternatives available to other retailers and manufacturers □ Assessment of efficiency claims

○ [2] and there was a market trend towards integration (suggesting strong entry barriers) • Case: Brown Shoe (same concerns as other vertical restraints, that vertical integration will foreclose

competitors by limiting their access to supplies/customers) ○ [1] merger between Brown Shoe and Kinney would only affect 2‐3% of the retail outlets (so tiny

effect), but presumption is that having 2‐3% of market foreclosed to other retailers and wholesalers meant it was anticompetitive, and burden shifted to Ds to rebut how efficiencies justified the merger

○ [2] but assumption was there was trend of reducing retail outlets, and once merged, they would stop buying other products

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Modern Analysis. Do you have the ability to foreclose

a. How many options the party to be foreclose on have. Look at how many other manufactures (. If there are many other manufactures they have very little effect on rival retailers.

Do they have the ability to foreclose and would they do it.b. For brown, would I make more if I foreclose and use my integrated chain vs using others

If the answer in 1 and 2 are yesc. What are the efficiencies for doing it.

i. Transaction cost saving (however having contracts are cheaper) COURT HAVE NEVER REPUTIATED BROWN SHOE, JEFFERSON HAD A 20-30% FORECLOUSRE AND THAT WAS NOT ENOUGH,

FRAND COMMITMENT: you can use my product, we wont have an agreement, but in the future I’ll charge this amount.

Discloure mandate: if there is a mandate you cant lie, if you lie it’s a violationNo discloure mandate: they don’t need to disclose.

EXAMEssay (told what side you’re on and you answer) some case assume the facts of a particular case, if this additional fact would it turn out the same. They decided this case this way, how would they decide today (look at cases that have not been over turned but the court would view different.. Give you a proposition about doctrine. For merger ask why is this fact significant. Nothing about EU.

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