Antitrust Law

Professor Morgan

Fall 2001
Cb casebook
Ns - nutshell

I. Introduction
A. Economic Theories: introduction to the basic assumptions underlying economic
analysis and application to issues of competition and monopoly
1. The Principle of Scarcity: fundamental problem w/ which economics deals most
of us cant have everything we want, how do we get to a point where people have as
much as possible? economists suggest ways to order human activity so as to give as
many people as much of what they would like to have as possible whether they prefer
material goods, career satisfaction, leisure, close friendships, or something else. (i.e.
more than just about $).
2. People Act So as to Maximize Their Own Self Interest: factual assertion says
that individuals, left alone, will seek to exchange the skills and money they have for the
mix of goods or services they want. The normative principle says that the freedom to
do so is fundamental and allows members of a diverse society to experience the lives
they prefer for themselves and their loved ones. People make economic (possibly life)
decisions trying to improve how much they have. Will choose whichever choice will
make you better off. Maximize self-interest. People are different dont all make the
same choices. One of the things we do is trade we can both be better off by
economic exchange b/w people w/ different wants economic exchange is a
productive activity that occurs in markets. Assumption: individuals are increasing their
wants and desires from every individual choice. (consistent w/ overcoming scarcity and
living in a free society).
3. Life is lived at the margin: people make decisions at the margin we dont make
grand choices engage in decisions as to the extra or the next (Do I really want desert
or would I rather a CD). Make decisions at the edge. The choices we make in pursuit
of our self interest typically are not profound or dramatic; they consist of doing a little
more of this and a little less of that. How much more or less is itself a product of our
individual choice; economists describe those choices as being made at the margin.
People are asking themselves whether the marginal revenue from doing something will
exceed the marginal cost of doing it. (okay that not all people do this but accurate as
to how groups of people in general behave).
a. Distinction b/w marginal utility of good vs. money (n.13, pg. 16):
i. Declining Marginal utility of Goods: (economic assumption declining
marginal utility of goods) concept that relates to how much more value is
another unit of the same thing. (How much would you pay for a second hot
fudge Sunday?) Most people pay less for the second.
ii. Constant Marginal Utility of Money: concept that says that the utility of
money does not decline. Money never declines in marginal utility. Implies
that the value of $1 to Bill Gates = the value of $1 to a homeless man.
Remember that money simply represents the ability to buy what a person
would prefer most, that which she does not already have. Regardless of what
you think of the arg underlies many economic args many economic
arguments imply that it doesnt make a difference. Problem w/ these
arguments seem to ignore that there is a decline in the marginal utility of
money. Watch to see if it indeed underlies what is sometimes called the
conflict between efficiency and equity in antt.
4. We Deal With Each Other in Markets: concept of market is a metaphor; cts
discuss product markets and geographic markets. Market sometimes people can
realistically deal w/ each other, sometimes they cant those that can deal are said to

be participating in the market. Market metaphor allows economists to speak of the

enormous number of ways in which free exchanges of goods and services might occur.
Process by which individuals exchange goods and services for things they desire/want.
5. The Quest for Allocative Efficiency:
a. There are three different types of ways that the term efficiency is used in
antt:
i. allocative efficiency: most common, getting the goods to the most valued
user, people who value it the most. Implicit in that is have as much as is
valued that way produced.(c- check this defn)
ii. productive efficiency: how you get the maximum output out of the inputs
you use. Discussed more below
iii. dynamic efficiency: (i) and (ii) look at things, for the most part, in a static
position in time. Arg: when youre talking dynamic efficiency, you are talking
new industry (i-ii almost become besides the point). Focuses on conditions in
which economic life in fact takes place.
b. Allocative: scarcity will never be completely over come but will know have
come close as possible when there is no combination of production or exchange
that could make anyone better off w/o making someone else worse optimal.
(Posner and Kaldor-Hicks different test for optimal level/max economic welfare if
a person profits at the expense of another if the gain of the person benefited is
sufficient to reimburse the other for the loss, whether or not such reimburse is
required b/c such a transaction increases the total welfare of society). The optimal
state is often described as efficient. Allocative efficiency all goods and services
would be appropriately allocated and preferences for leisure met b/c no further
acts cd make the situation better.
6. How Prices are set in Competition: (if you sell pencils for $10/pencil, you will
probably not sell any potential customers will have so many sources of better,
cheaper writing instruments, will not pay $10.)
a. The Demand Side of Setting Your Price: The number of X that you sell will
decrease at each higher price level. When the price is high, the quantity
demanded is lower than the quantity demanded as the price comes down.
Demand will be largely determined based on the buyers alternatives.
b. The Supply Side of Price Setting: You will assess what it would cost you to
produce X and try to make the venture as profitable as possible. Cost will probably
not be constant (i.e. threshold costs more expensive). You will continue to produce
your good until the next item you produce costs more to produce than you could
charge for it.
c. Setting the Price Based on Both Supply and Demand: you will set the price
and number of goods to produce where supply and demand meet.
i. Refer to figures p. 12-14
ii. Consumer surplus: although the market price of X may be $3, there are
always some buyers out there who would have paid $5 (called that persons
reserve price). In effect, those persons have money in their pockets to
spend on something else gap b/w what people wd have actually paid for an
item and the benefit they receive = consumer surplus. Unsung virtue of a
competitive economy.
7. The Distortions Imposed by Monopoly: when there is a monopoly the tendency
is to increase price and decrease the quantity. This tendency creates the welfare loss
triangle (dead weight loss the evil of monopoly) it represents what at minimum
they consider to be the social loss from having an industry in the hands of a monopolist.
Moreover, consumer surplus disappears and that gap becomes producer income (think
about the discussion of the constant marginal utility of money).
a. some arg that the costs to society created by monopoly are much larger than
the welfare loss triangle especially when you consider how much money cos or
individuals are willing to expend to get a monopoly. Other exs. cost to
competitors and concentration of political power.

b. Looking in the course for situations where instead of having firms produce until
supply and demand intersect, they produce to where marginal revenue and
marginal cost (supply) intersect; where quantity provided is less and price is
higher; where there is a Welfare loss triangle (a.k.a. dead weight loss neither
producer or consumer get it); and where consumer surplus shifts to producer
income
c. even monopolists are subject to economic realities cant charge an infinite
amount. If do, wont sell any; if do, will attract others to the market other firms
produce/sell at lower price. Question: how easy is it for those firms to get into the
market? If barriers of entry are high, more likely to believe monopoly. Selfcorrecting character of the market attracting new firms.
8. The Matter of Productive Efficiency economies of scale and transaction
costs: in a great many industries, efficient production of goods and services requires
relatively large scale production units, even if that means a somewhat smaller number
of competing firms. Ex. Law firms large transaction cost associating w/ acting on their
own, cost of contracting for services and training new personnel are real costs of doing
business that tend to decrease productive efficiency. Each law firm in some small
measure reduces the amount of competition in a society, yet few would wish to
exchange the often-considerable productive efficiency thus achieved for the often
infinitesimal allocative efficiency thus lost. Another form of productive efficiency
network effects if your phone operates one way and mine cant communicate with
it, we might as well not have phones the value in phone system is that people can
interconnect. The more people who are part of the system, the greater the value to
all of them. Even though this is productively efficient allocative inefficiencies
associated w/ a monopoly will follow a one firm monopoly in this network
9. Dynamic efficiency or- Regulation can do more harm than good: Dynamic
efficiency seeks to focus on the condns in which economic life in fact takes place
including the limited information we tend to have and the practical limits on both
productive and allocative efficiency.
a. Dynamic v. allocative and productive: a and p efficiency involve static
determination snapshots of economic activity. Approach inadequate. Allocative
need room for changes in tastes; productive needs to reward inefficiency. In real
world change sis constant, enter dynamic efficiency.
b. An example of dynamic analysis: busy store faces downward sloping
demand curve pricing options include that of monopolist, what keeps it from
exploiting its monopoly status (even just the threat) if it reduces output and raises
prices new firms will enter into competition with it. Dynamic efficiency
examines the barriers to entry and whether existing firm tries to block entry. If
possibility of new entry is considerable, then legal intervention is unnecessary.
Some aspects of monopoly are self-correcting and law can create worse
consequences than the problem it sought to solve (ex. Prohibiting reaching a
certain size, even if producing high quality product and selling at reasonable price,
would make the nation poorer).
10. The Competence Problem: How much can Economic Activity be Analyzed?:
ultimate problem for antt law how to analyze economic info in a way that is
sufficiently general to be practical, yet sufficiently accurate to avoid making matters
worse instead of better. Two types of errors the law can make:
a. Type 1 Errors: break up companies too soon, productive, good, etc. When
the law convicts the innocent, i.e., prohibits economically productive activity our of
excessive concern to prohibit misconduct.
b. Type 2 Errors: happen when we fail to break up a cartel, too timid. When the
law fails to prohibit genuinely harmful conduct.
B. Common Law Antecedents of the Sherman Act: concern with monopolies and
restraints of trade extends at least as far back as the early periods of the developing British
law of prop and commercial transactions

1. Common Law (CL) did not tolerate the grant of monopoly!: see The Case of
Monopolies (Kings Bench 1603; cb p. 1):
a. Facts: Darcy v. Allein Queen Elizabeth I had issued a patent giving Darcy (a
nobleman) exclusive rights to importing playing cards into England. Queen
granted monopoly over playing cards (at that time patent was = to a monopoly).
Darcy had authority to make decisions about playing cards. Allien, a haberdasher
(aka. Salesman) made and sold some playing cards and Darcy challenged this
infringement of his monopoly.
b. Darcy argued: he was performing a public service by this monopoly by
keeping people from playing cards all the time, which would amount to sloth. That
he was a nobleman keeping people (esp. lower class) from sinning. B/c the cards
were a vanity, monopolizing the production of the cards was a virtue.
c. Held: Ct will not enforce monopoly. (NB: the only mechanism for the court
here is not to enforce, today antt laws much more pro-active.)
d. Reasoning: (ns monopoly harms actual and potential competitors, denies
others the opportunity to practice a trade and injures the public through higher
prices and poorer quality.) Evils of monopoly:
i. Loss of jobs: cant stop people from making things that people want to buy.
ii. increase in cost, decrease in quality
e. Government (Gov) v. Antitrust (Antt) Laws: the governments ability to
grant a monopoly versus the antt laws continuing battle b/w the two
2. The Origin of the Rule of Reason: sometimes you must have at least a
moderate restraint of trade Question: is the restraint reasonable? Mitchel v.
Reynolds (Kings Bench 1711): demonstrates that this court understood Ks retrain
trade all the time need to figure out whether that restraint facilitates trade or restricts
trade. Here, limited and reasonable restraint
a. Facts: P leased a bakery from D. Lease agreement had condn that for 5 yrs
the D would not practice bakery in the parish. P was buying the bakery, but also
the trade that went with it (good will). This was part of the consideration that the
D could not compete w/ P for 5 yrs. Concern: if old baker moves across the street
and still bakes, then he keeps his costumers and the P has bought nothing. The
lease enforcement device was a bond if the D breaks the K has to pay a fee
($50). D broke the covenant not to compete and P sued D on his bond.
b. D arg: I have a right to work. The Case of Monopolies: said an arrangement
where someone got a monopoly is against the CL and ct will not enforce. B/c
monopolies are void, any contract that purports to restrain competition shd also be
void. This kind of arrangement is what the CL prohibits.
c. Lord Parker distinguishes b/w general and particular restraints:
i. General (invalid) restraints: (ex. Whole country monopoly - [not at this
time period of course]) not enforced by courts. General restraints condemned
b/c their aim is to limit competition of no benefit to either party. (person
agreeing had to be protected from himself public entitled to intercede b/f he
became a welfare charge or deprived the public of the benefits of his
competitive labors.)
ii. Particular (maybe valid) restraints: w/ a specific restraint, the ct will look
at the context to see if reasonable i.e. look at the costs and the benefits is
it subordinate to the main purpose of the transaction.
a. Later became known as ancillary restraints: these partial or
ancillary restraints were upheld if limited in time and geographical space
and supported by good consideration.
d. In this case: the restraint was an integral part of the transaction. Ct says
buying and selling businesses is good advantageous to have a market in
businesses. In order to have these transactions, sometimes you have to have a
little restraint of trade. In some circumstances, have to permit at least a moderate
restraint of trade, limited in scope + part of deal. Sometimes it takes restraint of
trade in order to have trade at all.

3. Note on the CL context for the Sherman Act (not discussed in class p. 23): CL of
restraint of trade consisted of cases from both England and the US, toward the end of
the 19th, US cases tended to be more critical of cartels, mergers and monopolies.
a. Craft v. McConoughy (Ill 1875): Ct held that the secret combination of 5 grain
dealers (acted separately but divided all profits by formula) created a monopoly
against which the public interest had no protection. Son of deceased grain dealer
seeking his profit, the court of equity would not lend its aid in the division of profits
of an illegal transaction b/w associates.
b. Richardson v. Buhl (Mich 1889): (Co. sought monopoly in matches, trying to
buy up all the match cos.) Ct held that monopoly in trade or in any line of business
in the country was odious to our form of government ct refused to enforce
transaction to help a firm become part of it.
c. Chicago Gas-Light & Coke Co. v. Peoples Gas Light & Coke Co. (Ill 1887):
two comps serving gas to Chicago originally had monopoly territory, but expired
and when they agreed to keep territories but then one infringed on the others, the
ct would not restrict. Ct held the new contract tends to create and perpetuate a
monopoly in the furnishing of gas to the city, therefore, against public policy and
unenforceable.
d. But in England: at the same time as this, English CL was placing greater
emphasis on freedom of contract than upon legal protection of freedom of trade
and upheld practices that wd have been struck down here.
C. The Sherman Act (SA) main sections passed in 1890: (note on page 25 suggests
that the congressional intent behind the SA is unclear): 1 contracts in restraint of trade
are illegal; 2 monopolization is illegal.
1. 1: Every contract, combination in the form of trust or otherwise, or conspiracy, in
restraint of trade or commerce among the several States, or with foreign nations, is
hereby declared to be illegal. . .
a. Prof: prohibits Ks, combos, or conspiracies in restraint of trade; evidence to
suggest adopting English CL
b. 1 requires multiple firm action Ks, combos, conspiracies
2. 2: 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 among the several States or with foreign nations, shall be deemed guilty of a
misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five
thousand dollars, or by imprisonment not exceeding one year or by both said
punishment, in the discretion of the court.
a. Prof: 2 direct attack on trusts devices used prior to time when state
corporations laws were amended to include mergers corporations operated
formally individually, but actually b/c stock held in trust by one person operated
as one. Prohibits monopolies. (I think the fine now are: $10 for
company/corporation; individual $300k; and up to 3 yrs in jail).
b. 2 will usually involve only one firm (conspiracy to monopolize rare).
D. Goals: as you look at the SA and the cases arising under it, try to sort out which of the
following possible goals do or should underlie the analysis in the cases:
1. Allocative efficiency: the allocation of economic goods to the people who value
them most, i.e., most of the issues discussed above
2. Productive efficiency: letting firms achieve the size at which the cost of
production is least, even if that means there will be only a relatively few, large firms in
some industries
3. Dynamic efficiency: the desire to protect the competitive process itself and
especially to preserve the opportunity for new firms to enter existing markets or create
new ones
4. The desire to break up large firms so as to advance the interests of small business
and prevent the concentration of economic and political power.
E. Organize the Concepts: (cb p.31 is there any reason for their order in the chart???)
1. Jurisdiction/Procedure issues:

a. Interstate Commerce
b. Private litigant standing
c. Antitrust injury
d. Summary judgment standards
e. Interplay b/w antt and other federal and state regulatory policies.
2. Horizontal arrangements:
a. Price fixing
b. Market division
c. Group boycotts
d. Monopolization
e. Mergers
3. Vertical arrangements:
a. Resale price maintenance
b. Territorial allocation
c. Vertical integration
d. Exclusive dealing
e. Tying

II. The First 25 Years under the Sherman Act:

Ct struggled with the

meaning of the statute.
A. Jurisdiction and Scope of the Act: In its early years, the jurisdiction and scope of the
act were interpreted to be limited.
1. To have Jurisdiction must be in interstate commerce; manufacturing is not
commerce; scope of the act limited. United States v. E.C. Knight Co. (U.S. 1895):
first case to interpret the SA. Threatened existence of antt regime, significantly little
authority today; (fyi: overruled in Mandeville Island Farms v. American Crystal Sugar
Co. (1948)). Ct thought there were certain kinds of economic activity that werent
meant to be covered by the SA.
a. Facts: The American Sugar Refining Co (ASRC). had acquired the last 1/3 of
the sugar refining industry, thereby controlling 98% of the countrys sugar refining
capacity. ASRC was a trust.
b. Govs legal theory:
i. Violated 1 SA b/c combination in restraint of trade
ii. Violated 2 SA b/c it was a monopolization of the sugar industry (had
98%). Purchase created the sugar trust classic form that 2 was supposed
to get at.
c. Issue: Whether conceding that the existence of a monopoly in manufacture is
established by the evidence, that monopoly can be directly suppressed under the
act of Congrs in the mode attempted by this bill. Aka. Can the SA get at this
monop?
d. Ct rejects govs legal theory: (Justice Fuller)
i. Ct says real dilemma about how broad the SA was intended to be unless
congrs is meaning to take away jurisdiction from the state (there were state
laws on the same subject), Ct is concerned about states rights. (now we
have concurrent system can prosecute for state and federal violations).
ii. Prof: K in restraint of trade is not narrow language Ct makes distinction:
Ks w/ respect to things in interstate commerce would be covered. But here,
Ks dealing w/ refinery took place in one state, not in interstate commerce.
iii. Ct says congrs must have meant to leave state law to govern things that
do not cross state lines.
iv. NB: Ct found that sugar happened locally and therefore not in interstate
commerce. In another case, Ct also found that Baseball is played in stadiums
and states locally and therefore was not in interstate commerce (took
congress to say baseball is in interstate commerce).

Price-fixing

e. Ns: Ct refused to apply the statute to the sugar trust, which controlled over
98% of the countrys sugar refining capacity. The Ct held that the law ignored
restraints affecting merely the manufacture of commodities, noting that commerce
succeeds to manufacture, and is not a part of it. B/c the trusts refining capacity
was concentrated in PA, the gov had not proven a direct restraint on ic w/in the
SAs jurisdiction. If followed, E.C. Knight wd hv interred (buried) the Act, at least
for manufacturing monopolies.
f. Justice Harlans Dissent: (cant ask about activity have to ask about
impact!) this is absurd, this is not just K law and states rights; what we are dealing
with is a phenomenon that has national and international consequences and
therefore is a federal issue. Statute should be construed to reach this national
issue. Any combination, therefore, that disturbs or unreasonably obstructs
freedom in buying and selling articles manufactured to be sold to persons in other
states or to be carried to other states a freedom that cannot exist if the right to
buy and sell is fettered by unlawful restraints that crush out competition affects,
not incidentally, but directly, the people of all the states; and the remedy for such
an evil is found only in the exercise of powers confided to a government which, this
court has said, was the government of all, exercising powers delegated by all,
representing all, acting for all. (cb p. 35)
i. Prof: Why not leave it to the states b/c companies can find the friendliest,
least regulatory state and then we have a race for the bottom. (J.Harlan
hints at this)
2. SA could not reach actions in foreign jurisdictions. American Banana Co. v.
United Fruit Co. (US 1909): (Remember that the SA purports to regulate both
interstate and foreign commerce) (WE will see later that the Antt laws have been
significantly broadened so as to reach any action any where affecting US business will
be potentially subject to American antt laws.)
a. Facts: P started to build a RR in Panama to get his bananas into the market.
United fruit Co., had monop of the banana trade and formed cartel with
competitors, demanded P join the cartel. When he refused, D got the govt of
Panama to prevent the RR. P argued that Ds acts were monopolization and
violated 2 of the SA.
b. Held: Ct refused to so extend the application of the SA. Events took place
outside of the US and were not tortuous where they took place. Ct said SA cd not
render acts illegal that were legal in the nations in which they occurred.
B. Horizontal Combinations in Restraint of Trade: horizontal arrangements concerted
acts that restrain competition between firms at the same level of production or distribution.
1. SA means what it says - 1 says forbids all Ks in restraint of trade means all
Ks, not limited to unreasonable restraints of trade. United States v. TransMissouri Freight Association (US 1897): (first 1 case to reach S.Ct, still good law
today, central case in development). When you have a group of competitors (multi-firm)
that agree on price, they violate 1 even if price is reasonable. It is true even though
this industry was regulated and needed protection against competition.
a. Facts: Eighteen western railroads (RRs) created an association the Trans
Missouri Freight Assn (D), in order to establish rates and regulations affecting RR
traffic in the West. Fedl govt instituted an action under SA contending that D had
entered into agreement in restraint of competition price fixing. D moved to
dismiss on the grounds that its rates were reasonable and therefore its agreement
was not unlawful at CL or under the SA. Lower ct granted the motion.
b. summary: D arg economic concerns about monopoly not implicated here
cant reduce service. ct says = statutes reaches every contract in restraint of trade
that crossed state line, even if reasonable. Fact that it was a transportation
industry did not matter and reasonableness of rates was not a defense Analysis
is not whether result is reasonable, but whether process is (still good law).
b. D arg:

Dont forget
Horizontal
Arrangements
include:
1. Price-fixing
2. Market
Division
3. Group
boycotts
4. Monopolization
5. Mergers

Price-fixing and
Market Division
allocating
customers to
whom
individual
conspirators
would sell

i. that the D was trying to establish standards fro rates, etc. they said that
there were a mess of fairs, rates, etc. to quote a price to someone about
going on different trains, need to know what prices were. Idea was to have a
rationale and get a handle on all different rates by the individual RRs. ARG:
Interstate Commerce Commission (ICC) created 3 years b/f SA whole
point of was to get the rates/prices upD arg just trying to come up with
rates to give to the ICC.
ii. that rates need to be stabilized (cb note pg. 53) Natural Monopoly
theory: RRs considered to have natl monopolies a market in which firms
marginal cost of production does not increase with an increase in output, at
least not over the relevant ranges in production. (ex. RR once tracks are
laid it is as cheap or cheaper to carry 100,000 ton-miles as 1,000). A related
effect of this phenomenon is that the marginal cost of a firm in an industry wit
natural monopoly characteristics is consistently below its average cost the
result is that, if forced to price competitively, a firm in a natural monopoly
situation will tend to be willing to carry goods at any price at or above marginal
cost rather than lose the business and get no revenue from the shipment at
all. Means such firms are consistently willing to price such services below
average total cast. If the firm cannot charge above average total cost for
something else it will ultimately go out of business. (on the other hand, ICC
and state reg agencies may have set different rates than the D).
c. Three fundamental issues in Antt law illustrated by this case:
i. Whether or not the court is to apply a reasonableness test to a given
restraint of trade.
A. Dissenters (4 J. White) arg: antt laws are designed to get at only
unreasonable restraints of trade, congrs adopted British CL. The words
restraint of trade imply unreasonable not in restraint of trade if
reasonable.
B. Majority (J. Peckham) arg: Congrs said in 1 every K includes
reasonable and unreasonable, if congrs meant to say unreasonable Ks,
would have said unreasonable. Majority recognizes that there are some
contracts i.e. accompanying a sale of property that are not in restraint
of trade. The Majority is worried that f the defense can be that the result
was reasonable no standard for determining reasonableness Cts are
in no position to judge the results of the given process (wont assess
reasonableness of results), all the cts can look at is what the process
was by which rates were reached. Ct looks at the process of how the
rate was achieved look at the practice instead of the outcome Ct
will ask is this practice reasonable? Ct will not look at impact in a
given case. Accordingly, reasonableness of price is no defense.
ii. Whether the ICC (or any regulatory agency) means that antt laws are no
longer relevant to a given situation:
A. D arg: this is a process all part of investigation. RR argues not a
conspiracy, but part of the ICC regulation.
B. Ct: (1) There is nothing in the ICC Act that says SA does not apply.
(2) There is no indication that this regulatory statute was meant to render
SA irrelevant. (3)ICC Act had certain purposes in mind designed to get
at price discrimination. Antt law doesnt undercut what ICC is supposed
to be doing there is no conflict. + No indication that RRs not intended
to be reached by SA
iii. Historical Purposes of the SA: congrs concerned; RR ran a lot of other
businesses out of business Congrs though world would be a better place if
there were a lot of small businesses. This argument leaves out: (1) constant
tension in growing economy b/w allocative efficiency (desire to keep
expectations) versus dynamic efficiency (destructive impact - not self-evident
that abolishment of small businesses is bad); (2) Monopolistic/cartel-like

behavior actually sustains some small businesses ex. RRs raise prices
barges become competitive again.
2. Judge Taft suggests meaningful bounds for the SA only restraints of trade
that are allowed are the ones that are ancillary to an otherwise lawful contract.
United States v. Addyston Pipe & Steel Co. (6th Cir. 1898): this is an important case
involving a classic cartel; case has a cult following offers insight. NB: US S.Ct
affirmed result on EC Knight grounds i.e. in interstate commerce violated SA Ct
did not affirm the ancillary restraint analysis. Many people hail this analysis as
reconciling the problems discussed above ex. Sometimes need restraint to have trade
at all. This appellate court case picked up on the theme of cartel, it came up with
insight to sort out and put meaningful bounds on the Act Only restraints of trade that
are allowed are ones that are ancillary to an otherwise lawful K. For ex. The Mitchell
bakery case above.
a. Facts: majority of pipe manufacturers in the U.S. entered into an agreement to
artificially regulate the price of caste-iron pipe. The government sought to dissolve
this agreement as violative of the SAs prohibition against combinations in restraint
of interstate commerce. D argued that they still had to meet the price set by their
competition and lacked the power to absolutely fix prices. The price charged was
fair, D argued, and competition was not restrained.
i. the agreement: group of pipe salesmen made agreement each reserved
their own home towns if you sold pipe in my city, you had to pay me for the
right to come into my town. They also set up bidding system for towns and
cities the one who bid/ paid the most into the common pot would get the K,
the rest of them agreed to bid higher prices so the guy would get the contract
appearance of a competitive bidding process.
ii. Prof this is not a hard case on the merits: the price was higher than
competition would have produced (a non-conspiracy member pipe person
would have liked this b/c wd not have been excluded and because the bids
were higher, could underbid). The demand was relatively inelastic
government needs the pipe thus, government procurements are attractive
and easy to corrupt b/c it is the classic illustration where conspirators are
capable of raising the price. (see notes 8/29 graph, output probably lower
too.) Prof: this is the most classic cartel we will see.
b. D args:
i. we are not hurting anyone and if we dont we will go under (like TransMissouri). We need to do this to have orderly competition in our pipe industry.
A. Distinguish from RR: Ct says no to this argument, like TransMissouri. Did not need this for the industrynot even like railroading b/c
railroading has low fixed cost, in pipe business a lot of variable costs.
B. Ct says: doesnt matter cant do this b/c it is restrains trade!
ii. we are just a drop in the bucket cant reduce output or raise prices b/c
only control 30% of the industry
A. Ct says: the only six firms in the area are involved. This industry
involves a product that is not easy to move looking at national market
shares was not helpful. Ct said had to look at smaller region.
c. Bid rigging on govt contracts is a classic antt violation therefore, this
case a classic conspiracy and violation easy case. Dicta explaining what
the SA is about is important.
a. SA and its relation to the CL according to Judge Taft: SA transformed
the law of restraints of trade from judicial inaction (we just wont enforce
Case of Monopolies) to a regime making it affirmatively illegal to restrain trade
(i.e. criminal, subject to an injunction, and could result in treble damages). SA
put teeth into what was considered inappropriate at CL. One proposition that
Trans-Missouri stood for was that the CL and its propositions were not
necessarily true today can go b/y the CL, SA reaches things that CL had not
decided.

b. Judge Taft does not believe that every contract in restraint of trade
means every contract: He believes that sometimes you need restraint of
trade to have trade at all. Sometimes ancillary restraints of trade are okay.
Five examples (p.57): covenants in partial restraint of trade are generally
upheld as valid when they are agreements (1) by the seller of property or
business not to compete with the buyer in such a way as to derogate from the
value of the property or business sold; (2) by a retiring partner not to compete
with the firm; (3) by a partner pending the partnership not to do anything to
interfere, by competition or otherwise, w/ the business of the firm; (4) by the
buyer of property not to use the same in competition w/ the business retained
by the seller; (5) by an assistant, servant, or agent not to compete with his
master or employer after the expiration of his time of service. (see page 58
though in order to be upheld must be reasonably necessary, or legit ends,
or for prevention of possible injury, or to protect from danger of loss of
business). He thinks that every K in restraint of trade cannot mean every
contract.
c. Judge Taft doesnt go against the US S.Ct and suggest a rule of
reason: on the contrary, he thinks that a rule of reason would set sale on a
sea of doubt. Doesnt tell us anything, i.e. no real standard but it is clear
that his approach is an intermediate approach the kind of restraints that
are legitimate are those that are ancillary to the main purpose of a contract
(like the bakery). Look at the main purpose of the contract and see if restraint
of trade is necessary or ancillary to an otherwise lawful main purpose
legitimate restraint of trade. Selling a bakery w/ a covenant not to compete
the covenant is ancillary to the otherwise lawful main purpose of the sale of
the bakery.
d. Today, many people hail this analysis as reconciling the problems w/ antt laws
ex. Sometimes need restraint to have trade at all. This analysis is considered by
many to be the most sensible analysis we can have in this area. Seeks to
recognize that some restraints are needed to have business take place.
e. Analysis applied here: Ds agreement to restrain trade was not ancillary
therefore, did not pass.
f. S.Ct: affirmed result on EC Knight grounds - if in interstate commerce then
violation of SA; if not in interstate commerce (i.e. if bidder in home case won the
bid), it would not violate. D argued that bidding on a citys busns took place in the
city itself and thus not in ic. J. Peckham rejected this argument but in deference
to EC Knight, the Ct ordered the decree modified so it did not reach price-fixing
and market division that occurred within a single state.
3. Economics and the Operation of Cartels:
a. Cartels: collective effort firms act as one to do together what any one would
do if were a monopolist. Ex. Addyston Pipe classic cartel a group of
competitors who conspire to raise prices above those that would prevail in
competition. BLL: A cartel is a group of firms who should be competitors, but who
have agreed with each other to fix their prices in order to earn monopoly profits.
Cartels are analyzed under 1 of the SA, which prevents contracts, combination,
and conspiracies in restraint of trade. Price fixing is said to be naked when it is
unaccompanied by any joint venture or other integration of the participants
business activities. [We shall see later, i.e. below, that naked price fixing is per se
illegal under 1. Socony-Vacuum Oil (1940) second period.]
b. Current example OPEC: Organization of Petroleum Exporting Countries
(OPEC). Every few months OPEC ministers meet to try to raise the price of oil
above prevailing prices. In doing so, as one sold expect, they have to get their
members to cut oil production to an amount that can be sold at the target price.
c. Problems faced by any cartel:
i. Consensus on objectives: determining the groups objectives is tough; at
any given time needs and expectations of members may differ. Agreeing on

common strategy is hard. Addyston- acted in private secret meeting before

bidding where they sorted out their objectives solved the problem, but acting
in secret may increase price. Trans-Missouri acted openly, believing they
werent violating the law reason they were caught.
ii. New entry or others in the market: cartel may not include all of the firms
in the market. Prices set by US firms, for example, are not dictated by OPEC
cartel, and producers of pipe not within the Addyston Pipe conspiracy
sometimes won the bids. The point is that if a cartel raises prices, consumers
will often buy from firms outside the cartel instead.
iii. Cheating: big problem cheating by parties to the cartel agreement.
Person agrees to raise price and then doesnt. A cartels members may want
this agreement, but one of the members sells for less b/c shell make all the
money. Cartel may have to find ways to do business tat maximize the
chances of fellow cartel members detecting the cheating. In Addyston Pipe,
pipe was sold through public competitive bids thus, all cartel members knew
what price their competitors were supposed to bid and could verify. (that is
probably why to this day bid rigging is the most popular form of conspiracy
and why it is the antt violation most likely to be prosecuted as a crime). In
Trans-Missouri, no problem either b/c rail rates had to be published and the
ICC had a staff to enforce those rates.
iv. assigning production to the most efficient member: a problem may be
assigning production within the cartel to firms that \can produce most
efficiently and thus receive maximum benefit from the monopoly price. In
Addyston, they had an auction among themselves for the right to get a
contract. The effect was that the winner was forced to share some of its
monopoly profit with the other members of the cartel.
4. Some Early Group Boycotts:
a. Group boycott: when firms agree not to do business with somebody else
antt violation. An agreement among competitors (combination or conspiracy) to
boycott certain other firms.
b. W.W. Montague &Co. v. Lowry (US 1904): an assn of CA wholesalers and
eastern manufacturers of tiles and other fixtures wholesalers agreed not to buy
from non-members and manufacturers agreed not to sell to non-members at less
than retail. P had not been invited to join and cd not get his products except at
higher prices. J. Peckham found the 1 violation plain.
c. Eastern States Retail Lumber Dealers Assn v. U.S. (US 1914): combination
involved retail lumber dealers; some local wholesale dealers had begun selling
directly to building contractors and other high volume users whom the retailers saw
as their own customers. Members of the D assn circulated a list of such
wholesalers to each other, and although there was no direct proof of the effect of
the list, it was understood that members would not buy from listed wholesalers.
Violations of 1 o- J.Day any individual retail dealer could refuse to deal with any
wholesaler, but circulation of this list tended to directly restrain the freedom of
commerce by intimidating the wholesalers from selling at retail.
d. Labor unions?: if every combo in restraint of trade is illegal, and group
boycotts constitutes such restraints of trade it is not much of a step to conclude
that labor strikes violate SA 1. It actually did for a little, but Clayton Act (CA) 6
was adopted and moderated the use of SA 1 in labor settings.
C. Monopolization and Merger
1. Intro: BLL: 2 of the SA condemns every person who shall monopolize the
offense of monopolization is aimed most directly at the evil with at which the antt laws
have historically been concerned persistent monopoly pricing by the dominant firm in
the market. A monopoly is defined as a market dominated by a monopolist, which is
defined as a single firm that controls a sufficiently large share of the output in any
market that it can effectively control the total market output, and therefore increase its

profits by reducing production. A merger is the acquisition by one firm of all or part of
the stock or assets of another firm.
2. The Rule of Reason enters SA antt jurisprudence. Standard Oil Co. of NJ v.
US (US 1911 cb. P. 82): J. White wrote for the Ct. Found that Rockefeller resisted or
created barriers to new competitors that would normally enter the market i.e.
prevented the normal operation of the market place, which would fix it or prevent him
from having a monopoly. Not the fact that his business was big, but that he prevented
normally entry into the market, which would have prevented him from charging too high
prices. Rule of Reason.
a. Facts: Rockefeller was from Cleveland, OH. The Oil was in PA. Oil was being
used for lighting (used to use whale oil, but we were running out of whales). His
problem was transportation he wanted to set up refineries in Cleveland area. So
he went to the RR stations trains arent always full, struck a deal. He figured out
a way to make it profitable to refine oil in Cleveland (where cost was low) and get it
back to the east coast (where people needed it). He tried to combine all of the
entities he eventually acquired into a trust OH attny general prosecuted broke
up the trust. Rockefeller took assets to NJ where mergers were permitted. Tried
to create Standard Oil of NJ. Rockefeller had 90% of the industry but wanted the
10% of the industry that he didnt own so he was hard on them, refused to let
them use his pipelines, which led to this suit.
b. Chief Justice White: runs through the history each contributor adds
something of significant Adopts rule of reason:
i. CL had forbidden (1) Ks intended to reduce output and raise price; (2) Ks
with unreasonable restraint of an individuals freedom. Shows tension or
struggle b/w freedom of K versus Ks creating unreasonable restraints. CL
forbid unreasonable restraints, but not reasonable (like bakery Mitchell). CL
also forbid state granted monopolies b/c reduced output and raised prices.
ii. SA was to forbid Ks that led to these evils can tell legality of arrangement
in part by evaluating its consequences. If does not lead to evil, then not
unreasonable, then not prohibited by 1 or 2. [Prof: much more
sophisticated analysis than Addyston Pipe]. Has to be a context for
businesses and courts to know what is likely to be illegal and what is not.
iii. C.J White says other cases decided correctly on their facts, ex. Trans
Missouri (limits these cases to their facts).
c. Harlan concurrence concerned about the rule of reason: So much
uncertainty about what is reasonable versus what is unreasonable. His concern:
rejection of a bright-line test in the old days, we knew what was illegal and what
was legal (Prof: this is a massive overstatement). Now, great uncertainty.
d. Application of law to facts what about Rockefellers conduct made this
deal illegal?:
i. He did not use normal methods of industrial conduct or commerce he
used dirty tricks
ii. Intent: Ct focuses on intent here. Sometime Intent to Monopolize is said
to be a requirement in antt cases. Ct explicitly finds that he had an intent to
monopolize (from the techniques he used), i.e. an intent to exclude others
from the business. In this case, intent was a relevant element in finding him
guilty.
iii. Potentiality of Competition: (p. 92) In many circumstances, the fact that
a company becomes big is not illegal b/c it is always possible for others to
come in, i.e. enter the market, and compete with that company. However, if a
company seeks to prevent others from having an opportunity to compete or to
enter, then it is illegal. Here, like Gates with Netscape, Rockefeller sought to
prevent that type of entry. (i.e. he prevented the market from correcting itself
similar to what J. Jackson says in Microsoft)
e. Divestiture Remedy: divided all the stock Standard Oil Co. was broken up
into 33 smaller companies mirroring the prior companies it came from. [NB Prof:

this firm was built up out of many Microsoft would be different and difficult to
break up b/c it has always really been one company.]
i. Terminal RR (US 1912 note case page 100): Ct is aware that sometimes
the costs of divestiture exceed the benefits In this case the government
sought divestiture of 15 RR companies that converged at St. Louis they had
bought the only three means of crossing the Mississippi River and had
excluded others from using it. Here, the Ct says not a monopolization under
the rule of reason b/c only one way in and out of St. Louis. It was an
essential facility though and as such the Ct required them to share it. The
combination would be rendered lawful, the Ct said, if it were what is claimed
for it, a proper terminal assn acting as the impartial agent of every line which
is under compulsion to use its instrumentalities. Thus, non-member rrs had
to be given the rt to buy an ownership interest, and even those who did not
buy an interest had to be given access to the facilities on non-discriminatory
terms.
ii. Prof: The Terminal RR case is odd b/c the Ct posed a remedy w/o actually
saying there was a wrong. It is also odd b/c there will be no incentive to build
these facilities if you have to share.
f. Note: this case was a 2 case (remember Addyston was a 1 case). It
introduced the rule of reason. Think about: should intent to be a monopoly be
enough SA 2 prohibits this; should it be enough to show that this company
wants to be a monopoly?
i. intent can be a relevant factor, but never the sole factor; wanting a
monopoly is in itself illegal In fact, we want companies to want to be
monopolies; what is illegal is setting up to get one.
ii. Swift v. US (1905) (did not go over in class, note case p. 99): proving an
attempt to monopolize requires showing dangerous probability of success.
D. Vertical Restraints of Trade Resale Price Maintenance
1. Introduction: vertical pertaining to a relationship b/w a buyer and a seller e.g.,
an agreement b/w a supplier and a retail dealer is called a vertical agreement. Resale
Price Maintenance (RPM): sometimes called vertical price fixing an agreement b/w
a supplier and a dealer that the dealer will resell the suppliers product at a stipulated
price. Since 1911 (Dr. Miles) RPM has been per se illegal under the SA, subject to
some very important exceptions.
2. Resale Price Maintenance is per se illegal. Dr. Miles Medical Co. v. John D.
Park & Sons Co. (U.S. 1911 cb p. 102): ns the antt significance of this case lies in
its formalistic reliance on property law doctrines to decide whether a vertical restraint
violates the SA. NB: case decided b/f rule of reason. Manufacturer set prices that
retailer had to sell at ct said not an agency agreement, violates rule against alienation,
if all retailers got together and did this it would be illegal. Violates 1.
a. Facts: Dr. Miles Medical Co. (P) manufactured homemade medicine under a
secret process. It required all wholesalers and retailers dealing in its products to
sign contracts providing a minimum price schedule for the medicines. Park & Sons
(D) refused to sign the contract but managed to obtain quantities of the medicines
from other sources. It then sold them at a discount. P brought an action against D
for interference with contractual relationships. D claimed that P could not legally
require retailers to observe the price restrictions. The d.ct dismissed the action on
this basis. P alleged that a manufacturer is entitled to control the disposition of its
product, and since the process was secret, no competitor had been injured.
i. nb: Park & Sons was an intermediary ultimate retail seller was
department store. This is a case about discount sellers. Dr. Miles is scared
his pills will end up in a department store (which now would be the equivalent
of COSTCO).
ii. FYI: Dr. Miles was selling pain medication now a part of Bayer.

ii. Procedural point: P (Dr.) seeks an injunction here the Court says no.
This is similar to the Case of Monopolies (discussed above) illegal
arrangement in violation of the Antt laws will not be enforced by the Court.
b. Rule RPM is illegal: a manufacturer may not set the price at which its
wholesalers and retailers may sell its product violates 1 SA.
c. cn - Holding and decision: restraints on alienation are generally invalid. It
must be found to be reasonable both with respect to the public and to the parties
(**Ask Prof about this? Is this really a per se rule then?). The restraint must also
be limited to what is fairly necessary for the protection of the covenantee. P is
dealing with a large number of wholesalers and retailers. It is dealing in interstate
commerce. The restraints allow retailers to charge a higher price for the products.
No benefit really accrues to P. the profits flow directly to the retailers. The price
restricts prevent competitive prices from wholesaler to retailer and from retailer to
the public. While P owns the product, once it has sold it to others it can no longer
control their actions with respect to the product. Otherwise, any manufacturer
could dictate the price at which its merchandise could be sold. The fact that there
is no outside competition b/c of the secret process is immaterial. Under this
rationale, any monopoly holder could dictate the price at which its goods were
sold. Since the price-fixing agreement involves a conspiracy between
manufacturers, wholesalers, and retailers, it violates antt law.
d. Consignment/Agency Agreement argument by Dr. Miles: P argued that this
was an agency/consignment agreement. The idea is that P sold pills to the
consumer through his agent the title to the pills remained w/ Dr. Miles until sold
to the customer. Ct rejects: says no the agreement itself says buying and
selling this is not an agency arrangement. Prof: this is an example of how not
to draft a consignment agreement dont say I am allowing the retail agent to
purchase goods b/c then they own it and Dr. Miles does not.
e. Ct Concludes that the Agreements are illegal and in violation of 1 of the
SA: While you can always set your own price, when you attempt to limit someone
elses freedom you are putting a restraint on alienation. (i.e. like rule against
perpetuities.) These Ks purport to restrain someone elses ability to enter in Ks.
Ct concerned the Ks cover too many buyers and have a significantly greater
reach and impact than the single K; all competition would be eliminated if the
injunction were enforced.
f. J. Holmes dissent: (Prof: J. Holmes hated antt laws) The discipline of the
marketplace will keep prices where they should be. The value of competition is
greatly exaggerated. Price is determined by supply and demand. There is no
reason to extend our vague concept of public policy into a new sphere. There is
no law or precedent which requires such an action. The marketplace will
determine the price at which the product can be sold.
i. J. Holmes thought that what determines the market price is the competition
of similar products. This is different horizontal restraints are a problem, but
vertical are not the determinate is what people think its worth and what other
aspirin is available. Consumers determine what aspirin is worth in light of the
alternatives.
A. Prof excellent insight this insight has caused people to think we
should have a completely different attitude towards vertical restraints.
ii. Answering J. Holmes: The Ct thinks that the drug retailers are actually
doing it if they were the ones doing it, then it is a horizontal restraint and
would have no problem saying that it is illegal. Dr. Miles just acts as an
enforcer or agent for cartel of local druggists; prof: far-fetched maybe
communication problem.
g. Prof: What incentive would Dr. Miles have?:
i. increasing prices may make consumers think the product is better. If this is
true, he could simply sell at a higher wholesale price.

ii. Promotional incentive to get retailers to push his medicine he wanted to

encourage dealer to do some of his work for him, ex. Advertising, promotion,
etc. Arises in some situations when some products need a dealer to
demonstrate the product.
iii. Cartel among pill makers that the dealers enforce for them. all of the pill
sellers are doing this and setting same retail prices, creating a cartel at the
dealer level.
3. But 1 is not violated simply by making a unilateral private decision about
whom you will deal with. US v. Colgate & Co. (US 1919 cb p. 112). This is called
the Colgate doctrine (ultimately not the rule now **Ask Prof, but very critical case).
a. facts: Colgate said heres the price list you dont have to agree, but if you
Resale Price Maintenance is
dont sell at these prices (and well check), then we wont supply to you anymore.
illegal per se it has been
b. Held: Colgate had only done what any firm may do: In the absence of any
since Dr. Miles and was
purpose to create or maintain a monopoly, the act does not restrict the long
reaffirmed to be in
Monsonto (1984). That
recognized right of trader or manufacturer engaged in an entirely private business,
means that whether or not
freely to exercise his own independent discretion as to parties with whom he will
the D had market power and
deal; and, of course, he may announce in advance the circumstances under which
regardless of the Ds
he will refuse to deal. A single firm did not violate 1 by failing to unilaterally deal
motives (ex. Combating
free-riding), it is illegal per
c. NB: 1 requires multiple parties, not just one firm. The indictment alleged a
se. EXCEPTIONS to per se
combination under SA 1, but the prosecutor had named only Colgate. It further
rule:
alleged no K b/w Colgate and its dealers, nor did it identify any conspiracy. Dr.
1. Colgate exception for
Miles had involved contracts which undertook to prevent dealers from freely
unilateral resale price
maintenance.
exercising the right to sell. In Colgate, there was no actual K restricting, just
unilateral act by Colgate not to sell.
[nb there is a note on pg 301 that suggests that unilateral refusals to deal may be
a 2 offense. It of course would have to meet the other 2 requirements, but
keep this in mind]
E. Adoption of the Clayton and Federal Trade Commission Acts: President Wilson
sought to clarify and strengthen the SA. Goals (1) eliminate uncertainty and (2)
businessmen desire advice give them guidance, enter FTC.
1. Clayton Antitrust Act:
2 (Prof: unimportant) Price discrimination
3 Will be important for tying and exclusive dealing (forbids selling/leasing
property on the condn that the lessee not use anyone else.
4 Private right of action for treble damages
5 Finding violation in government action result in prima facie proof of violation in
a civil case
6 exempts labor unions from antt attack
7 deals with mergers
16 provides a private right of action for injunctive relief.
2. Federal Trade Commission Act: made the Bureau of Corporations into an
administrative agency with prosecutorial powers.
5 forbids unfair methods of competition

III. The Rule of Reason Period 1915 to 1939:

A. Cases Giving Definition to the Rule of Reason: remember that Standard Oil of NJ
introduced the rule of reason into American Antt jurisprudence ns: the Ct created a new
rule of uncertain content which emphasized behavior and recognized that agreements
between firms have many possible effects; yet it also acknowledged that some conduct may
be inherently unreasonable.
1. J. Brandeis and the Rule of Reason applied to a 1 case Bd of Trade of City
of Chicago v. US (US 1918 cb p. 119): Prof: best interpretation of the rule of reason
look to effect and purpose of restraint to determine if reasonable. Purpose in this case
allow people to sleep at night; Effect in this case very little effect. Did not truly limit,

very minimal. Government did not carry its burden. [Prof M thinks that the case cd
have been decided under the ancillary restraints test.]
a. Facts: ns - the govt charged that a grain exchange rule requiring members to
adhere to their closing bid on the call (which in effect confined price competition
to the time the exchange was open) was illegal because it fixed prices during part
of the business day. The call rule required exchange members to establish their
off-hour trading price for to arrive grain at a special call session. The government
claimed that the rules purpose and effect was to fix the price for trading to arrive
grain after the exchanges daily and weekend closing times; members could not
change their price during this time to reflect fluctuating condns-as they would in an
unregulated market. Yet the clall rule did not seek to set the level of the to arrive
price; participants in the call session were free to compete on the price for the to
arrive grain.
i. class notes: govt sought to get rid of the call rule, which set a cap on the
time in which one could make purchases. Chicago Bd of Trade is the biggest
grain dealer. Three ways grain was traded: (1) spot sale Ive got it here on
the shelf sell it to you no; (2) future sale give it to you in the future,
speculative activity to lock yourself in at a price; and (3) To arrive grain
grain that is in transit to Chicago, but hasnt arrived yet call rule. Call rule
time frame to purchase, at the end of that had to buy at that end price. So
from 10am-2pm had spot sales at whatever price; then from 2-2:30 bid for
price of to arrive grain; then from 2:30 until 10am the next day had to agree
to sell at that price. Period of time where anyone who deals on the board
must trade at fixed price or loose their seat.
b. Ds arg: this is a reasonable rule. If we didnt and if you didnt encourage, then
we would have a world in which the price was set by the grain operator. This rule
breaks down the power of the grain dealers. Plus, this rule lets people go home
practical rule.
c. D.ct granted govts motion rationale: Trans-Missouri says that all Ks in
restraint of trade are illegal, this is a K in restraint of trade, therefore, it is illegal.
d. J. Brandeis for the Court explains the rule of reason analysis: Says, no,
the rule of reason applies now. Every K restrains trade (stupid to say that all Ks
are illegal). Question is whether the K promotes or suppresses competition
(similar to Mitchell). There are some restraints that make competition/market work
better. The legality of an agreement or regulation cannot be determined by so
simple a test, as whether it restrains competition. Every agreement concerning
trade, every regulation of trade, restrains. To bind, to restrain, is of their very
essence. The true test of legality is whether the restraint imposed is such as
merely regulates and perhaps thereby promotes competition or whether it is
such as may suppress or even destroy competition. To determine that
question the court must ordinarily consider the facts peculiar to the business to
which the restraint is applied; its condition before and after the restraint was
imposed; the nature of the restraint and its effect, actual or probable. The history
of the restraint, the evil believed to exist, the reason for adopting the particular
remedy, the purpose or end sought to be attained, are all relevant facts. This is
not b/c a good intention will save an otherwise objectionable regulation or the
reverse; but b/c knowledge of intent may help the court to interpret facts and to
predict consequences.
e. application to this case: ns following these directions (i.e. from J. Brandeis)
the Ct ruled that the exchange requirement restricting its members hours of
operation and prices while the exchange was closed was reasonable. In doing so,
the Ct continued its practice of not examining actual prices or their
reasonableness. Instead it found that the rules fostered the exchange market; and
regulating competition, in contrast to preventing it was not always to be
discouraged. The critical factors for evaluating the call rule were its purpose and
effect, which according to the Court were: to regulate the exchanges hours of

business, to break up the monopoly previously held by a few warehouses willing to

make evening purchases which was thought to prey on unsuspecting country
dealers and farmers and to perfect the operation of the exchange by increasing
the number of transactions made there. While analysis of each rationale suggests
an equally persuasive contrary result (if monopolistic warehouse operators were
exploiting country dealers more in line w/ the SA to increase competition in the
market at the off-hour), the Court concluded that the call rules primary aim was to
create a public market where commodity prices could be determined competitively.
To the Ct, the rule sought to further rather than to suppress competition, and in this
light it was reasonable.
i. class notes: was the restriction adopted reasonable? Pro-competitive:
this rule drove deals onto the exchange forced public to deal; moved all
three kinds of transactions to public exchange minimized dealer power;
maximized competitive price; made it easier to be a trader (could go home for
dinner); price of grain not dependent on private deals.
f. Two other things to think about:
i. downside something else might have been going on (note 5 page
124): commissions on the board of trade were fixed by agreement so board
members had an incentive to want trades to occur there (and to trade on the
bd you had to do your off market deals at the call price, even though could
have made more money with an after hours off market deal) arguably, the
cartel of grain traders were taking an excessive tax from grain farmers. Prof:
suggestion this was really a conspiracy to run a cartel in high/fixed
commission rates.
ii. one of the problems with the rule of reason: have to know a great deal
about the industry to lay out the pluses and minuses. Arguably, J. Brandeis
got excessively excited about the nice home for dinner story and lost sight of
the fixed commission and how most transactions have to occur on the trade.
2. 2 and the Rule of Reason. US v. United States Steel Corp. (US 1920 cb p.
124): result is troublesome for rule of reason monopolists who are nice to their
competitors will survive a 2 challenge even though antt laws are about protecting the
consumer and a nice monopolist is still hard on consumers. Not as egregious on its
face as Standard Oil. Consistent w/ Standard Oil b/c in that case, Rockefeller got in the
way of new entrants.
a. Facts: Combined companies into a single trust US Steel accounting for 8090% of domestic steel. Justice Dept thought this case was just like Standard Oil.
President of US Steel, EH Gary, invited every one (even his competitors) to dinner
where they talked about cooperation, working together, not beating up on each
other. US Steel did not use hostile tactics very social atmospheres. By the time
this case got to trial US Steels market share had dropped to 41%.
b. Why wasnt this a violation of 2?: Ct lays down principle: The law does
not make mere size an offense, or the existence of unexerted power an
offense. It, we repeat, requires overt acts. Mere size even a large market
share is not what 2 forbids (maybe 7 of the CA though?), having a monopoly is
not itself the offense of monopolization- requires suppression of competitors, overt
acts. Ct finds no suppression of competitors here. D led by example not by nasty
conduct here. Ct also says that 40% market share is not a monopoly need at
least 50%. Gary dinners were violation of 1, but not 2.
c. Dissent (J. Day): Gary dinners violated 1 (majority agrees); any time you
create a firm large enough to have a monopoly (>50%), by violating 1, you have
violated 2. Determine how this firm got so big, if it was illegal, then bust it up.
(like Standard Oil).
d. Prof upset with majority: US Steel got a monopoly, then bled the country
dry for a bunch of years, then took its foot off the gas, but could put it back on.
Anytime you draw conclusions about the state of the industry at the time of the
case you invite the defendant to play games.

i. What advice would you give your client under US Steal?: raise the price,
lower maintenance or dont worry about service; smile all the time dont be
mean to competitors; dont let your market share get above 50% - especially
troublesome b/c disincentive to invest.
ii. Problem with Rule of Reason under US Steel: leaves firms with advice
take your profit, smile, dont have aggressive market growthproduces
increase in potential loss for consumers we want companies to grow and
expand if good for the consumer.
B. Problems with the rule of reason ex. Trade Association Cases: these cases raise
practical issues involving trade assns but also suggest more general problems of
characterization that courts face any time the motives and effects of firms actions are critical
to the courts decisions. We saw price-fixing in the pre-1914 period in Trans-Missouri and
Addyston Pipe these were clear price-fixing, but often times the first step in such cases is
characterizing the conduct as price fixing. For ex. Trade assns can be seen as giving small
firms benefits they might not otherwise get or as sophisticated cartels.
1. The problem of market information and collusion: ct must distinguish
information producing activities (most generally exchanges of price and output
information by competitors) that make the market operate more efficiently from those
that might facilitate collusion.
a. Ex. BLL In American Column & Lumber Co. v. US., the Ct condemned an
exchange among competitors of detailed reports concerning the production and
price charged by each. On the one hand, the lumber producers were clearly
concerned about overproduction, and their motive may have been cartelization.
On the other, there were 365 members, and they collectively controlled only 1/3 of
their market. Cartelization seems implausible. Further, many of the members
were isolated and had poor knowledge of market condns. Many buyers, by
contrast, were large and well informed. The price information exchange was more
likely competitive than anticompetitive.
2. American Column & Lumber Co. v. US. (US 1921 cb p. 133): [NB: none of the
Posner oligolopy (discussed below) apply. Idea is to share info about particular
transactions. This info allows you to monitor other oligopolists. Summary data, avg
data is less suspect. Important aspect ask whether agreement to share info
constitute a K or agreement or conspiracy? What kind of agreement counts for 1?]
a. ns: even under a rule of reason approach, programs for data dissemination still
can be condemned as unreasonable trade restraints. The open competition
plans (which admittedly sought to keep prices at reasonably stable and normal
levels) were held in early cases, like American Column to violate the SA. In
American Column, a trade assn whose members produced 1/3 of the nations
hardwood lumber had adopted a plan requiring member firms to submit price lists,
detailed daily sales and shipment reports (including invoice copies), monthly
production and stock reports, etc. The plan as implemented was held to violate 1
of SA. The assns central office summarized the reported data and sent the
membership weekly reports that listed each transaction, the parties, and the price,
and noted whether the price departed from the members listed price. Moreover, in
frequent meetings the members not only discussed market condns but strongly
urged each other to restrict output and maintain prices. By any standard, the Ct
concluded, this was not the conduct of competitors but is . . . clearly that of men
united in an agreement, express or implied, to act together and pursue a common
purpose under a common guide. Nonetheless, the case was not easily decided.
There was no agreement to limit production or charge a fixed price, as the Ct
openly acknowledged, and the contention that it is shown by the disposition of
men to follow their most intelligent competitors hardly supplies the missing link
especially since market conditions were not conducive to price leadership or other
efforts to curb output. (The plan involved only 1/3 of the industry and 365 sellers.)
In pointed dissents, J.J. Brandeis & Holmes argued that the SA should not be used

to stifle discussion or require business rivals to compete blindly without relevant

information.
b. Class facts: trade assn set stds, statistics. Facts: 365 members of the assn,
operating 465 mills were members of the plan. Amounted to only 5% of the
number of mills engaged in hardwood manufacture in the US, but produced 1/3 of
the total production in the US. Members from all over, but most from the
Southwest. Charge: Plan constituted a combination and conspiracy to restrain
interstate commerce in hardwood lumber by restricting competition and
maintaining and increasing prices (1). At issue: the Open Competition Plan
members got a lot of info to conduct business on exs. Daily report of all sales,
shipping report, monthly production, inspection reports. There was never a
specific agreement to restrict trade or fix prices but Ct infers.
c. Court found that the purpose of the plan: statements by Mr. Gadd showed
that the meetings and plan was to induce members to cooperate in restricting
production, thereby keeping the supply low and the prices high. Statements by
members showed that the purpose of the organization and its meetings was to
bring about a concerted effort to raise prices regardless of cost or merit, and so
was unlawful. Convinced, as we are, that the purpose and effect of the activities
of the Open Competition Plan, here under discussion, were to restrict competition
and thereby restrain interstate commerce in the manufacture and sale of hardwood
lumber by concerted action in curtailing production and in increasing prices, we
agree with the d.ct that it constituted a combination and conspiracy in restraint of
interstate commerce w/ in the meaning of the SA.
d. dissents:
i. J. Holmes: A combination to get and distribute such knowledge,
notwithstanding its tendency to equalize [prices], not necessarily to raise,
prices, is very far from a combination in unreasonable restraint of trade. Not
attempting to override market condns, attempting to conform and no
sanctions if they dont. Agrees w/ J. Brandeis.
ii. J. Brandeis: Q whether the Open Competition Plan either inherently or
as practiced by these concerns violates the Sherman Law? Merely a
combination to obtain information. The market works better if people know
more. (see Bd of Trade?). Want people to know to arrive at a market price.
Small firms can benefit from this scheme. Prof: J. Brandeis is a populist. We
want a rule that encourages this sharing.
e. What is the basis for saying this information does not reduce competition:
i. firms still have freedom to use the info as they like. Most likely, firms will
act strategically (thereby promoting competition among the firms).
ii. if this was a cartel, then it would be difficult for the entire group to agree.
Further, the members of the cartel would likely cheat.
iii. As long as there is new entry, there are 7000 firms w/o information who
would like you to raise prices above a competitive level.
f. Is it plausible to believe that there is a conspiracy here?: Prof: always ask
this question!! Use Posner page 147 to analyze described below.
i. concentrated market with fringe in this case, no
ii. std product sold based on price in this case, yes
iii. high ratio in this case, no
iv. inelastic demand in this case, dont know
v. entry take a long time in this case, no.
g. Maple Flooring: Ct almost overruled American Column said that competition
doesnt become less free by becoming more intelligent held the assns actions
not illegal under SA.
h. Sugar Institute (1936): validated American Column
3. The Broader Problem of Dealing with Oligopoly (note page 146-49):
a. ns on oligopoly: the theory of oligopolys basic postulate is that where the
market contains only a few sellers, all sellers recognize that they are largely

interdependent. Therefore, each seller accounts for its rivals reactions when
setting output and prices. This means that oligopolists will not drop prices to
increase market share b/c they expect that any gains will be cancelled immediately
when rival seller retaliate with similar price cuts. As a consequence, oligopoly
sellers focus on coordination and anticipation. (limited) Competition occurs
indirectly by disguised price cuts (through improved quality, credit terms, delivery
service, or secret selective price reductions) and nonprice competition such as
product differentiation, advertising and sales promotions. In monopolistic
competition, by contrast, rivalry forces profits to normal levels b/c there are many
seller, each seeking to increase her market share at her rivals expense; hence
effective interfirm coordination is impossible. The primary theoretical difference
then oligopoly markets price and output decisions are made while anticipating
the reactions of ones rivals. Neither the competitive firm (competitive seller has no
impact on her rivals) nor the monopolist (monopolist has no close rivals) considers
the reactions of others. We didnt go into this in class so if interested refer to ns.
b. the suspicion of conspiracy was implicit in American Column is part of a
broader concern among antt enforcers that firms sometimes may be collectively
reducing output and raising prices even when not formally meeting and obviously
violating the law. Some believe must be able to reach these implicit cartels or will
be missing an important anticompetitive evil. But think about the problems with
overt cartels discussed above will be magnified w/ cartels that dont
communicate. In an industry with many firms, implicit agreement would almost be
impossible. Oligopoly however, is the term often used to describe an industry
w/ relatively few firms, an industry in which such an implicit agreement might work.
Imperfect competition if three firms, one will not drop price b/c knows that a
price-war will ensue and no one will make money. Critics arg everyone sets
price at profit maximizing point, and all competition is interdependent.
c. Judge Posner: must take the problem of identifying and dealing w/ oligopoly
seriously better to deal with oligopoly problem directly, if there is one, rather than
indirectly (which we often do by prevention of mergers or dissolution of large
firms). Prof: useful to discover whether plausible oligopoly is a conspiracy. Very
much like the modern merger guidelines. J. Posner suggested a two step
analysis of situations in which one suspects prices are higher than competition
would have yielded:
i. one should ask whether conditions in the particular market are indeed
conducive to such implicit conclusion: J. Posner cites several condns
favorable to the occurrence of implicit collusion in an industry:
A. Concentrated market of sellers and a lack of a fringe market of
small firms: no magic number, but if the largest four firms do not total at
least 50% of the market, the need to worry is arguably low. Likewise,
four firms w/ 100% of the market would be likely to find it easier to
monitor each others conduct than would two even larger firms that had
to keep track of each other plus the conduct of many small competitors.
B. A Standard product sold primarily on the basis of price: there is
much less to agree upon and more to keep track of when seller offer
different stds of quality, different sales terms, etc. Associated with this is
the sellers operating a t the same level of the distribution process and
with the same degree of vertical integration. Agreement is also easier
and thus more likely when all firms have roughly the same costs.
C. The need or incentive to collude: for ex, one might be a high ratio
of fixed to variable costs such as we saw in the rr industry with its fear of
destructive competition. Another might be a static or declining demand in
which cutting output might seem particularly important to firms survival.
D. Inelastic demand at the competitive price: this factor is true by
defn this condn simply means that at the competitive price, a

reduction in output would in fact yield more net revenue. (see fn 9 p. 148
for more explanation of inelastic demand)
E. An industry in which entry takes a long time: this is also true by
defn the point is that entry is rarely impossible but in some industries a
higher than competitive price takes longer than usual to self-correct.
ii. If yes to #1, one should then ask whether such pricing can be
observed?: an enforcement agency presumably should not waste its time
looking for oligopoly pricing in an industry that does not have the above
characteristics. Even if such an industry, Posner suggests, a ct shd not
sustain a case unless one or more of the following tell-tale signs of implicit
collusion are observed:
A. Fixed relative market shares
B. Price discrimination
C. Exchanges of price information
D. Basing point pricing in the industry
E. Industry-wide resale price maintenance
F. Significant parallel price and output changes not related to changes in
cost.
G. Evidence of new entry and declining market share of leading firms
C. The Interplay Between Patents and Antt Law: there are special issues surrounding
patents and patented products. The rule of reason period was not the first in which such
issues were raised; the interplay of pants and the antt law had been a problem for the cts
since the earliest days of the SA. However, this was the period in which important principles
were established that in many cases are still applicable today. To obtain or defend a patent
an inventor must demonstrate that an invention is a new and useful process, machine,
manufacture or composition of matter, or any new and useful improvement thereof; the
invention must be novel, and non-obvious; the application must fully describe the invention
so that the public receives the benefit of the insight the patented invention represents. If the
paten office agrees that these criteria have been met, a patent will issue giving the inventor
the right to exclude others from making, using or selling the invention throughout the US. If
someone infringes the patent, the inventor may seek an injunction, damages, or both, plus
reasonable attny fees. A patent is presumed valid, but the d may argue that the patent was
not infringed, that it is invalid, or that it shd not be enforceable b/c the inventor misused the
patent. Problem b/w patent an antt laws: patent is a legal monopoly. Where do those
monopoly rights end and antt principles applicable to all begin? Once one has conceded
that a patent holder is entitled to earn a monopoly profit, the question becomes whether
there is any principled reason to limit the ways its seeks to earn it. Prof: A patent is an
intentional grant of a monopoly, but is okay b/c it is incentive for innovation. When dealing
with patents, we are dealing with authorized monopolies. Cannot isolate antt from patent.
Cannot reward more for a patent than that which was given.
1. In consignment agreements, the owner may set the resale price (i.e. RPM
allowed) for his agent to sell at. A patent holder may require her licensee to sell
the patented item at a certain price. US v. General Electric Co. (US 1926 cb p.
159):
a. Facts: Previously, the three Ds (GE, Westinghouse Electric and Manufacturing
Co) were involved in antt litigation, in which the gov sued to dissolve an illegal
combination in restraint of ic in electric lamps of the 3 Ds and 32 other corps. A
consent decree was entered after which, the combo was dissolved, the
subsidiary cos surrendered their charters and their properties were taken over by
GE, after the decree GE came up with this new sales plan. GE had patent
(actually 3 patents) on electric light bulbs. At issue, GE sold light bulbs by
distributing bulbs to agents who negotiated and delivered bulbs to consumers and
GE also granted a license to Westinghouse to make light bulbs and sell them.
(remember dont want to reward more for patent then was given i.e. monopoly).
GE kept patent rights and could take them back when they wanted, but placed risk

of loss with licensee (c as opposed to its genuine agents where GE kept the
risk of loss??).
b. Issue 1: whether, in view of the arrangements made by the company with
those who ordinarily and usually would be merchants buying from the
manufacturer and selling to the public, such persons are to be treated as
agents or as owners of the lamps consigned to them under such contracts:
answer is no consignment agreements are an exception to the per se rule
against resale price maintenance.
i. Prof: Ct views this as Colgate case prices set by GE, and K was drafted
well (as opposed to Dr. Miles where P claimed a consignment agreement,
but the agreement actually said he was selling it to merchant.) This rule
applies whether or not there is a patent.
ii. The owner of an article patented or otherwise is not violating the common
law or the Anti-Trust Act by seeking to dispose of his article directly to the
consumer and fixing the price by which is agents transfer the title from him
directly to such consumer.
iii. BLL: In US v. GE Co., the Ct held that the rule against RPM does not
apply to consignment agreements, b/c there was no transfer of title from
manufacturer to reseller. As long as the manufacturer retained title, it should
have the power to control the resale price. (Ct was heavily persuaded by fact
that product was patented.)
iv. ns: Dr. Miles condemned the challenged price restraint b/c it denied the
retailer purchaser her CL right to resell (i.e. alienate) her property. Q then
arose as to whether the per se rule against RPM applied where the retailer
was the manufacturers agent and, instead of taking title to the products,
received them on consignment. Could the manufacturer then set the resale
price US v. GE Co. the Ct said yes where it is clear that the arrangement
is legitimate and the manufacturer both retains title and bears substantial risks
of ownership (e.g. losses from acts of good), the antt laws allow her to dictate
the terms of sale including retail prices. Under GE, a manufacturer can
avoid the rule of Dr. Miles by appointing retailers as her agents and by selling
to them under a consignment agreement.
c. Issue #2: Had GE as the owner of the patents entirely controlling the
manufacture, use and sale of the tungsten incandescent lamps, in its license to
the Westinghouse Company, the right to impose the condn that its sales
should be at prices fixed by the licensor and subject to change according to
its discretion?: answer is yes
i. class: GE licensed to W as long as they did not sell bulbs for less than
GEs set price. GE as the patent holder has the right to exclude others from
making, using, or selling. GE allowed W to make, use, and sell bulbs. Ct
says GE did not have to let W sell could have had them make and GE could
have sold them. However, GE allowed them to sell on one condn price not
less than GEs. Therefore, this was not excessive and was within the patent
holders right. One of the reasons GE licensed is b/c they did not have the
capacity. GE could have raised royalty rate and let W sell at whatever price
they wanted to (caution see ns) GE licensing this deal w/o knowing Ws cost
structure. There was a market division in the royalty rates. Concern is when
are you using techniques to expand rights that you were granted? Also arises
when competitors cross license see Standard Oil (Indiana) below this is
called patent pooling Prof: patent pooling is good b/c it decreases
litigation. On the other hand, it really is a cartel. Use patents to establish a
cartel arrangement. The cartel is essentially legally created. Obtaining a
patent by fraud violates SA 2.
ii. ns: GE had licensed W to manufacture and sell lamps under GEs
patents. Prices were to be maintained at the same level as GE fixed for its
distributors. Upholding the price-fixing condn in GEs licenses, the Ct

The second exception

to the per se rule
against resale price
maintenance (Dr.
Miles) is the
[recall #1 Colgate]
2. Consignment and
Patent Exception
United States v. GE
Co.

(switched grounds earlier had justified it on had right to exclude others from
patent and so also had the lesser included right of requiring sale of patented
article at certain price) justified the condn as reasonably adapted to secure
for the patentee the pecuniary reward of its patent rts. The Ct feared that if
GE cd not set the price at which W sold the lamps, W might sell them at a
price which wd render GEs lamp production and sales unprofitable.
A. W as more efficient? On the other hand, if W can make and sell the
item much cheaper, it arguably shd be encouraged to do so (and
therefore , price fixing shd be prohibited). Yet, if faced with this option,
GE might decide not to license W to manufacture and sell these lamps.
Nor could GE necessarily protect itself by adjusting the royalty. If it
overestimated Ws costs, the royalty rate wd be too low; yet if it set the
rate too high, it cd make the manufacture and sale of lamps by W
unprofitable. In other words, setting a minimum price may be the most
efficient way to protect the patentee , to encourage licensing, and as the
Ct said, to assure that GE obtained its monopoly reward.
B. Cartel? There is another possible explanation for the GE license to
W, however. The two firms may have used the price-fixing license to
help form and operate a cartel. If the validity of GEs patent was
questionable, GE, rather than risk a ruling of invalidity, may have
licensed W in order to share its market (while still maintaining the
monopoly price). If this explains the GE license, as seems likely, the Cts
approval of the price-fixing condn is erroneous. Point brought up by
prof: these sorts of licensing agreements reduce the likelihood that
patents will be challenged by the cartel.
2. Patent pooling/Cross-licensing: briefly touched on in class but problems arise
when you have cross-licensing of patent holders are they expanding the rights they
have been granted, i.e. are they abusing? This occurred in Standard Oil Co. (Indiana)
v. US (US 1931) [**NB: this will not be one of the 5 cases you need to know for exam
question number 1].
a. ns: several refining cos held competing patents on a cracking process for
extracting addl gasoline from crude oil. To avoid further litigation of their claims,
four refiners pooled their patents, cross-licensed each other, and agreed to share
in some fixed proportion the royalties they received (mainly from others) under the
multiple licenses. The government attacked this pooling arrangement for
eliminating competition in royalty rates among the patentees. The agreement to
divide royalties was alleged to violate 1 of the SA and enable the ds to maintain
royalties at monopoly levels. Accepting the govs conclusion that the pooled
patents were competing, the Ct nevertheless upheld the cross-license
arrangement and royalty division. It applied a rule of reason test, observing that
settlements which exchange patent rights and permit royalty divisions are often
necessary if technical advances are not to be blocked by litigation; the interchange
of patents on reasonable terms to all manufacturers desiring to participate may
promote competition. Moreover, royalties cannot, the Ct said, fix or adversely
affect prices where the patented cracked gasoline constituted only 26% of total gas
supplies.
D. Testing the Limits of the Rule of Reason: the problems of characterizing practices
and clarifying issues for antt juries were not eliminated by the rule of reason, in anything,
they were made worse.
1. Price fixing is per se illegal maybe (in the end it is Socony, but these cases it is
questionable). US v. Trenton Potteries Co. (US 1927):
a. facts: D and others entered into a combination to set prices for vitreous pottery
to limit sales. the govt sought to dissolve the combination under 1 of the SA. At
trial, the judge removed from the jurys consideration the question of whether the
restraint was reasonable. D appealed an adverse finding on this basis.

b. class: agreement to set prices for toilets. Issue: whether this was a cartel? D
wanted to present to jury why it was reasonable. D.Ct says no you are not. This is
an out and out price-fixing arrangement. Supreme Ct affirmed. Where there is
neither a valid purpose or minimal effect, the agreement is illegal per se. Rule of
reason does not permit you to go to jury each time.
c. uniform price-fixing by those controlling in any substantial manner a trade or
business in interstate commerce is prohibited by the Sherman Law, despite the
reasonableness of the particular prices agreed upon.
d. ns Ct dispelled that price-fixing warranted reasonableness std: In
Trenton Potteries, the makers of 82% of toilets and other bathroom fixtures
belonged to an assn that had fixed the prices of sanitary pottery and had limited
sales to legitimate jobbers. Since the ct of apps had reversed a criminal
conviction on the ground that the jury had not been allowed to consider the
reasonableness of the prices fixed by the defendants, the issue of whether
reasonableness constituted a defense was squarely before the Ct. Justice Stones
response seemed unequivocal: The aim and result of every price-fixing
agreement, if effective, is in the elimination of one form of competition. The power
to fix prices, whether reasonably exercised or not involves power to control the
market and to fix arbitrary and unreasonable prices. The reasonable price fixed
today may through economic and business changes become the unreasonable
price of tomorrow. Once established, it may be maintained unchanged b/c of the
absence of competition secured by the agreement for a price reasonable when
fixed. Agreements which create such potential power may well be held to be
themselves unreasonable or unlawful restraints, without the necessity of minute
inquiry whether a particular price is reasonable or unreasonable as fixed and
without placing on the government in enforcing the Sherman Law the burden of
ascertaining from day to day whether it has become unreasonable through the
mere variations of economic condns. Read literally, this analysis holds that proof
of the mere existence of a price-fixing agreement establishes Ds illegal purpose
and that the prosecution need demonstrate nothing more. It need not show that
the prices fixed are unreasonable, that the ds had the power to impose their
wishes on the market, or that the agreement injured anyone (by causing them to
pay supracompetitive prices). That is, the action of agreeing to fix prices is in itself
(per se) illegal. On the other hand, the ds control 82% of the market itself
evidenced market power (although the tr record suggested that pricing discipline
was weak and that exhortations not to sell at off-list prices were often ineffective);
nor did the Ct apparently doubt that the arrangement had an undesirable impact.
These implicit limitations on the holding in Trenton Potteries were seized on by the
Ct only six years later Apalachian Coals v. US.
2. Appalachian Coals v. US (1933): [did not have to read]: coal corporation formed
joint coal something ct says it was a reasonable agreement b/c we are in tough times.
Ct said antt laws were charters of freedom i.e. Antt laws are flexible.
a. Ct reversed a lower ct decision that had adhered closely to the analysis in
Trenton Potteries and condemned the arrangement. Emphasizing the essential std
of reasonableness the Ct called for a close and objective scrutiny of particular
condns and purposes in every case: realities must dominate judgment. The
mere fact that the parties to an agreement eliminate competition b/w themselves is
not enough to condemn it. Socony, however, discussed below, ends up being the
rule price fixing save for a few exceptions is per se illegal.

IV. 3rd Period: The Per Se Rule and Focus on Market Structure
1940-1974: period developed many of the important principles to which modern period
cases respond. Evolution of the doctrines Ct tried to give warning of practices considered
illegal, avoid prohibiting practices that might in fact be pro-competitive, and make the issues in
antt cases simple enough that they could be tried b/f ordinary judges or juries. Depression had

lasted 12 yrs and many people blamed it on the concentration of wealth and the then-current
approach to antt. NB W/in about a decade of the Socony Vacuum decision (1940 decided) the
Ct had clearly established that three kinds of horizontal, multi-firm conduct price-fixing, group
boycotts, and market division were illegal per se under 1 of the SA. Per se procedurally:
Once government has made its case that the actions of D were X (X being whatever is per se
illegal, for instance group boycott) that is the end of the case; as opposed to the Rule of
Reason where (1) government puts on case; (2) firms get a chance to come in and say primary
effect not restraint of trade and overall effect pro-competitive.
A. Horizontal Combinations in Restraint of Trade: reminder horizontal= pertaining to a
relationship among competitors. This section looks at horizontal price fixing, market division
and group boycott cases brought under SA 1. During the per se rule period formation of
the market was critical issue to horizontal cases did not really look at economic
consequences.
1. Price fixing: agreements by competing firms to fix prices are a primary concern of
1. Reminder: a cartel is a group of firms who should be competitors, but who have
agreed w/ each other to fix their prices in order to earn monopoly profits. (other pricefixing cases we have already seen: Trans-Missouri; Addyston Pipe; Standard Oil of NJ
(enter rule of reason into antt jurisprudence); Chicago Bd. Of Trade; Trenton Potteries
Co.; Appalachian Coals).
a. There is a per se rule against price fixing: any combination formed for the
purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the
price of a commodity is illegal per se. United States v. Socony-Vacuum Oil
Co.:
i. facts: Beginning around 1926, increased production in the oil industry
resulted in falling prices. The Natl Industrial Recovery Act and regulations
promulgated there under in 1933 proved unable to reverse the trend.
Beginning in 1935, several oil cos. (D), representing 83% of all oil sold in the
Midwest, formed a gentlemans agreement whereby they would purchase oil
and gasoline on the spot-market to prop up prices. A minimum price for spotmarket purchases was established. The federal govt charged D with pricefixing in violation of 1 of SA. A jury returned a guilty verdict. The ct of apps
reversed and remanded holding that a rule of reason shd be applied to
alleged price-fixing, rather than the per se rule applied by the district court.
Ds activities were not unlawful, the concluded, unless they constituted an
unreasonable restraint of trade. S.Ct granted review.
ii. class/book:
A. dealing with oil industry in E. Texas. Area where large amount of ail
discovered. Problem price was going down b/c there was too much oil.
Govt sued them b/c govt effort to coordinate activity in this area. Group
arranged that large producers bought oil from small producers. The
large producers would then store the oil rather than have small producers
sell and bring down the price in the market. System of dancing partner
dancing cards arrangement to determine who bought whos oil. Ds
market share was over 80%.
1. Fedl Govt was trying to fix the oil problem. The Petroleum
Administrative Bd appointed Arnott to head up a voluntary,
cooperative movement to deal with the price wars. He then went
ahead and made a mess of everything by establishing a program
that fixed prices. His plan was not approved by the fedl govt
(which I believe the President had to approve) and thus he had no
antt immunity.
B. D.ct said it was illegal for someone w/ a large share of the market to
raise price. [?The actual price is irrelevant. Unless you can show price
was raised by agreement, the D is not guilty.?]
1. D.ct charged the jury that it was a violation of the SA for a group
of individuals or corps to act together to raise the prices to be

charged for the commodity which they manufactured where they

controlled a substantial part of the interstate trade and commerce in
that commodity. The ct stated that where the members of a
combination had the power to raise prices and acted together for
that purpose, the combination was illegal; and that it was immaterial
how reasonable or unreasonable those prices were or to what
extent they had been affected by the combination (i.e. per se
illegal). It further c\charged that if such illegal combination existed, it
did not matter that there may also have been other factors which
contributed to the raising of the prices. The court then charged that,
unless the jury found b/y a reasonable doubt that the price rise and
its continuance were caused by the combination and not caused
by those other factors, verdicts of not guilty should be returned.
C. Ct of app said look we are in a depression so d shd have a chance to
explain why the price is reasonable.
1. ct of ap held this charge reversible error it was based on theory
that such a combination was illegal per se. in its view respondents
activities were not unlawful unless they constituted an unreasonable
restraint of trade (Appalachian Coals). That issue was not
submitted to the jury- reversed.
D. S.Ct said that an agreement to fix price is a per se violation of 1. A
conspiracy with the purpose to raise price and having at least some
effect on price is a violation of 1. The fact that competition is not
eliminated does not constitute a defense. Price fixing does not require
fixed price fn 59 page 206. Held: Ct of app reversed, d.ct affirmed.
1. In Trenton Potteries, this Ct sustained a conviction under the SA
where the jury was charged that an agreement on the part of the
members of a combination, controlling substantial part of an
industry, upon the prices which the member are to charge for their
commodity is in itself an unreasonable restraint of trade w/o
regard to the reasonableness of the prices or the good
intentions of combining units. This Ct pointed out that the so-called
rule of reason announced in Std Oil had not affected this view of the
illegality of price-fixing agreements.
2. price-fixing agreements are unlawful per se under the SA and
that no showing of so-called competitive abuses or evils which those
agreements were designed to eliminate or alleviate may be
interposed as a defense.
3. the d.cts charge that the jury must find the d caused the price
rise was more favorable to the respondents than necessary: Proof
that there was a conspiracy, that its purpose was to raise prices,
and that it caused or contributed to a price rise is proof of the actual
consummation or execution of a conspiracy under 1 of the SA
4. Competition was not eliminated (not a defense), but it was clearly
curtailed and that was enough.
5. Any combination which tampers with price structures is engaged
in an unlawful activity. Even though the members of the price-fixing
group were in no position to control the market, to the extent that
they raised, lowered, or stabilized prices they would be directly
interfering with the free play of market forces.
6. it is unimportant that the prices paid by the combination were not
fixed in the sense that they were uniform or inflexible they are
fixed b/c they are agreed upon (here, the fair going market price).
Characterized as stabilization doesnt matter: in terms of market
operations, stabilization is but one form of manipulation. And
market manipulation in its various manifestations is implicitly an

artificial stimulus applied to (or at times a brake on) market prices, a

force which distorts those prices, a factor which prevents the
determination of those prices by free competition alone.
7. Proof that a combination was formed for the purpose of fixing
prices and that it caused them to be fixed or contributed to that
result is proof of the completion of a price-fixing conspiracy under 1
of the SA. (in this case it was necessary for jurisdiction to show
that prices were actually raised)
a. Footnote 59: However, conspiracies under the SA (like
others) are not dependant on any overt act other than the act of
conspiring. It is the contract combination .. or conspiracy in
restraint of trade or commerce which 1 of the Act strikes
down, whether the concerted activity be wholly nascent or
abortive on the one hand or successful on the other. A
conspiracy to fix prices violates 1 of the Act though no overt
act is shown, though it is not established that the conspirators
had the means available for accomplishment of their objective,
and though the conspiracy embraced but a part of the
interstate or foreign commerce in the commodity.
i. distinguish from 2: The existence or exertion of
power to accomplish the desired objective becomes
important only in cases where the offense charged is the
actual monopolizing of any part of trade or commerce in
violation of 2 SA. Crime under 1 is legally distinct from
that under 2 though the two sections overlap in the
sense that a monopoly under 2 is a species of restraint
of trade under 1.
b. In this case, the evid supports that the combination had the
purpose and effect of price-fixing.
iii. BLL: output reduction schemes: sometimes the cartel will merely
devise a way to reduce output, and then let each cartel member establish its
own price Socony involved each of the defendant major oil companies
buying up the production of one or more independent oil producers. In the
process, the major producers could reduce their own production
proportionately and total production on the market would decline.
iv. ns: Socony-Vacuum explicitly adopted a rigid per se rule condemning all
price-fixing arrangements. W/ some exceptions, Socony remains a
foundation for SA analysis of horizontal price-fixing cartels today. Facts: the
oil refining industry ws depressed and independent producers faced panic
market conditions. Decreased demand was aggravated by increased
supplies of gasoline. Independent refiners lacked storage facilities and had
been dumping gasoline at give-away prices. In East TX, crude oil prices fell
to 10-15 cents per barrel, and gasoline ws sole for 2 1/8 cents per gallon. In
response, a group of major refining cos agreed to buy surplus (distress)
gasoline from the independents, disposing of it in a more orderly manner so
as not to depress prices. The arrangement assigned a major firm to each
independent as a dancing partner and the major firm bought its partners
surplus gasoline. This gas eventually reached the market, but its effect on
prices was thought to be weaker. The Ct believed that the Ds, by
manipulating the relatively thin spot market, kept gas prices above the level
that competition wd otherwise have yielded. Although the ds had not explicitly
agreed on the price at which they would sell their gas, the Ct easily found that
the arrangements purpose was to curtail competition and raise prices.
Invoking Appalachian Coals, the Ds argued that their buying program served
to stabilize the market by doing no more than curing competitive evils. But
the Ct rejected this view as having no legal justification; the reasonableness

of fixed prices was no defense. Even the limited aim of price stabilization
i.e. placing a floor under the market was condemned as illegal. Finally, in
rejecting the argument that the Ds lacked power to control prices, the Ct, in its
celebrated fn 59 went so far as to indicate (in dicta) that effective power to
implement the purpose was not necessary to prove illegal price-fixing; the
offense is the illegal purpose as shown by the agreement. While the Cts
language can be read as condemning any price-fixing agreement whether or
not the parties cd affect prices, a more sensible reading does not deny a de
minimis limitation. The concern expressed by critics of this fn is more
theoretical than practical. If the parties actions cannot affect prices, no
reason would exist for them to agree to fix them. The Cts ruling sought to
condemn market-rigging arrangements having less than total domination or
control over a market; the latter may also cause at least temporary injury and
are not tolerated under the SA. (watch for later cases involving maximum
price-fixing per se rule).
v. Prof: how do we get a rule like this? Easy for a ct to apply efficient.
(1) the per se rule gives counsel a clear std to tell a company you cannot do
this provides notice. (2) More efficient for a ct to decide case based on
conduct rather than effect.
b. The Parker doctrine/ State action doctrine: Ct decided that the framers
of the antt laws did not intend to interfere too substantially in the ability of the
individual states to displace competition in certain markets by creating regulatory
regimes of various kinds. Parker v. Brown (US 1943 cb p. 210) discussed in
class but did not have to read.
i. Ca case raisin producers decided how many raisins could be sold. B/c it
ws a state regulation issue it was held to be exempt from SA. Ct said Antt
laws aimed at private conspiracy not state regulations. State simply ratified
raisin producers plan. Difficult to decide when to apply this rule.
ii. BLL: In the Parker case, the Ct held that a state-mandated allocation
scheme that reduced the supply of raisins grown in the state cd not be
condemned by the antt laws. Clearly if this scheme had been carried out by
private parties it would have been a cartel subject to condemnation under 1
of the SA.
c. Final notes:
i. K, conspiracy, combination terms have been combined, dont have to
prove which one.
ii. agreement in price-fixing: does not have to be an agreement to fix price,
cd just be an agreement with the purpose and effect of affecting price.
d. maximum price-fixing is per se illegal: Kiefer-Stewart (US 1951) (note
p.236) the Ct relied on the principle of Socony to condemn as illegal per se an
agreement by two distillers to set maximum prices that they would allow their
distributors to charge. Ct says yes maximum price-fixing is illegal b/c it cripples
freedom of traders and restrains ability to sell using own judgment. (per se rule
against agreements to set maximum prices was reaffirmed in Arizona v. Maricopa
County Medical Society (US 1982) maximum price-fixing discussed below).
2. Group Boycotts: ns - since early in this century, courts have interpreted 1 to limit
the ability of competing firms to agree not to deal with or to isolate another firm. Unlike
many cartels where all competitors voluntarily join to fix prices (and share monopoly
rewards), concerted refusals to deal usually involve a subset of all market participants
who band together to gain market power by destroying or coercing their rivals. Such
organized refusals to deal with a particular firm are usually given the pejorative label of
group boycotts.
a. Group boycotts are per se illegal under 1. Fashion Originators Guild of
America v. FTC (US 1941 cb p. 221): (nb ct never mentions a specific section
of the SA says that the plan goes against the policies of the CA and SA, but b/c
multiple actors 1).

i. Class notes:
A. facts: Designers formed guild to prevent designer knockoffs; case of
style piracy. Guild refused to sell to stores that had knock offs. Guild
sent shoppers around to inspect stock.
B. FTC Act: FTC has latitude to determine violations of antt laws. FTC
concluded that this was a classic group boycott.
1. If the purpose and practice of the combination of garment
manufacturers and their affiliates runs counter to the public policy
declared in the SA and CA, the FTC has the power to suppress it as
an unfair method of competition.
2. Here, FTC concluded in the language of CA 3 unlawful to sell
goods on the condn that the buyer will not deal in the goods of
sellers competitor that these activities substantially lessoned
competition and tended to create a monopoly, correctly held that this
practice constituted an unfair method of competition.
C. Ct: affirms FTC action b/c not only is it in conflict w/ the CA, but also
it is proscribed by the policies declared in the SA: the plan (1) narrows
the outlets to which garment and textile manufacturers can sell and the
sources from which retailers can buy; (2) takes away the freedom of
action of members by requiring each to reveal to the guild the intimate
details of their individual affairs; (3) subjects all retailers and
manufacturers who decline to comply with the guilds program to a group
boycott; and (4) has both as its necessary tendency and its purpose and
effect the direct suppression of competition from the sale of unregistered
textiles and copied designs. Additionally - in reality this is extragovernmental agency, which prescribes rules for the regulation and
restraint of ic and provides extra-judicial tribunals for determination and
punishment of violations- violation. Per se illegal getting together and
not allowing sales to a certain group. *Remember Colgate unilateral
refusals to deal do not violate 1, must be more than one, like here. Ct
says it is okay for the FTC to nip this in the bud i.e. go after the guild
before problems exist. If a group of firms act together to affect a group it
is per se illegal
1. okay that there was not yet a monopoly FTC meant to be
prophylactic. it was the object of the FTC Act to reach not merely in
their fruition but also in their incipiency combination which could
lead to these and other trade restraints and practices deemed
undesirable.
ii. BLL: In Fashion Originators, Ct condemned an arrangement under which
the creators of original clothing designs collectively refused to sell their
products to stores which also purchased clothing from design pirates i.e.
firms who copied the designs of the original creators and manufactured
similar clothing. The S.Ct upheld the FTCs refusal to listen to Ds free rider
defense, thus effectively applying the per se rule.
A. Free-rider: a firm that takes advantage of a product or service
offered by someone else w/o paying for it. Resale price maintenance,
vertical nonprice restraints and many joint ventures are undertaken by
firms in order to solve free rider problems.
B. Here, unquestionably the design pirates in this case were engaged in
free riding. They waited until a piece of designer clothing was available
on the market, reverse engineered it (in this case by pulling the stitches
and tracing a new pattern), and then manufactured copies.
Unfortunately, however, lower courts at the time had already held that
clothing designs could not be protected under either the patent or the
copyright laws. Thus the members of the guild were attempting to
discipline the pirates even though the law refused to recognize that the

pirates were guilty of any offense. The court did well to refuse to listen to
the defense, particularly since the arrangement contained a large
potential to facilitate price fixing.
iii. ns: The Ct faced a boycott whose aim was to eliminate troublesome
competitors, enhance the groups general economic interests, and promote
compliance with the common law (and state) stds of business conduct.
Womens garment manufacturers who claimed to be creators of original dress
designs sought to curb style piracy by which other manufacturers copied
their designs and sold these copies at much lower prices. To stop the practice
the guilds members agreed to refuse to sell to retailers who also sold
garments copied from a guild members designs. The members were trying
to prevent an allegedly illegal or tortuous act (but see BLL above?) (the
copying of original designs); however, the guild was taking the law into its own
hands and, in the process excluding rivals from the market. The Ct declared
that the guild agreement was both an unfair method of competition
proscribed by the FTC Act and a SA offense. Concerted action by a powerful
combination could not be justified, according to the Ct, and the FTC therefore
correctly did not hear evidence of the evils of style piracy or of the illegality of
the copying practice under state law.
3. Market Division
a. introduction: ns prices can be controlled not only by direct price-fixing
agreements, but also indirectly by agreements among firms not to compete with
one another. Think about Supply-Demand: by withdrawing supplies from a market
moves the supply curve to the left , which raises the equilibrium price. That is if
company A withdraws from a market, available supply is reduced, and the supply
curve will move left. W/o a change in demand, equilibrium will be achieved by an
increase in price (where the moved supply curve crosses demand).
i. Agreements to divide markets take many forms: firms can agree to
allocate markets geographically; or can agree to assign customers
functionally by class (one serving wholesalers and the other retailers); or by
product type (e.g., professional v. amateur video equipment.
A. arg for: Such agreements are justified on the ground they permit
more efficient production and marketing. Production facilities can be
rationalized and scale economies achieved; distribution costs can be cut
and transportation limited.
B. arg no: The flaw in the argument for more rational organization is
that if market efficiencies supported it, firms would seek such gains w/o
market allocation agreements. Greater profits would justify
specialization, making such agreements unnecessary.
ii. Affect on competition: in some respects, market division agreements
can affect competition more severely than price-fixing. By eliminating
competitors, the sole remaining market occupant albeit in a limited territory
has a monopoly and is freed of competition not only with respect to prices
but also w/ respect to service, quality and innovation. Moreover, market
allocations can avoid the internal divisions b/w different cost producers that
often cause price agreements to crumble. On the other hand, many tensions
that undermine price-fixing agreements also beset market allocations. If the
remaining firms sets its price above marginal cast, new entrants appear; if
entrants are co-opted by swift inclusion in the scheme, then the same spoils
must be further split, making the arrangement less attractive.
iii. Generally: cts treat market division agreements - as per se illegal. Kind
of saw in Addyston Pipe where Ds agreed not to compete w/ each other in
various areas and devised a system to allocate business among participants
but focused on price-fixing. The first case that division of markets among
competitors directly ruled unlawful Timken, discussed below.

b. Market division globally is per se illegal under SA 1 (so too would

domestic market division be per se illegal). Timken Roller Bearing Co. v. US
(US 1951):
i. Facts: Joint company agreed to sell in parts of the world global market
division (territorial division of the world market for antifriction bearings)
creating monopolies for each other in respective areas. This case is a
division of the world market. Involves Timken, British Timken, and French
Timken. British Timken is a joint venture b/w Timken and Dewar. What
created the problem? Allocated trade territories among themselves; decided
prices for what they will sell, established penalties if a division sold in another
area.
ii. Gov charge: 1 the complaint charged that Timken combined,
conspired and acted with British Timken, and French Timken to restrain
interstate and foreign commerce by eliminating competition in the
manufacture and sale of antifriction bearings in the markets of the world.
iii. D.ct found: that under the agreements b/w the cos the parties have (1)
allocated trade territories among themselves; (2) fixed prices on products of
one sold in the territory of the others; (3) cooperated to protect each others
markets and to eliminate outside competition; and (4) participated in cartels to
restrict imports to and exports from, the US.
iv. D arg: that the restraint on trade can be justified as reasonable and
therefore does not violate the SA. It is reasonable b/c they are ancillary to
legal main transaction namely joint ventures (also argues trademark). D
essentially arguing they are the same corporation - that they are not
competitors it makes sense for a single entity to fix prices. Intra-enterprise
conspiracy not an offense can have a per se violation if two companies in
a family price-fixed, market divided or boycotted. However, this case has
been overruled.
v. Ct rejects ancillary arg: cites to Socony the ancillary arg is pass
now we have the per se doctrine. the fact that there is common ownership or
control of the contracting corporations does not liberate them from the impact
of the antt laws. a trademark cannot be legally used as a device for SA
violation.
vi. Foreign Trade Aspects: (D also tried to arg that reasonable in view of
current foreign trade condns) its effects are import and export of commodities
this is why SA can regulate in this area this is still good law.
A. This position ignores the fact that the provisions in the SA against
restraints of foreign trade are based on the assumption and reflect the
policy that export and import trade in commodities is both possible and
desirable.
v. ns The Ct condemned a worldwide allocation of territories b/w the
dominate American producer of tapered roller bearings and British and French
firms (the latter controlled by Timken and its British rival).
vi. note - intra-enterprise conspiracy: (note p.237-38) Timken charged
with intra-enterprise conspiracy govt charged the members of an integrated
corporate family with conspiracy to restrain trade. Kiefer: holding whollyowned subsidiaries of the same corporation had conspired under 1.
Commentators criticized the intra-enterprise conspiracy (next the DOJ wanted
to go after a corporation and its own officers and directors). Copperweld (US
1984) SA 1 draws distinction b/w unilateral and concerted action,
coordinated activity of a parent and its wholly owned subsidiary must be
viewed as that of a single enterprise for the purposes of 1; the Ct said
however that we do not consider under what circumstances, if any, a parent
may be liable for conspiring with an affiliated corporation it does not
completely own. NOTE Copperwelds narrow holding Keifer should be

retroactively exonerated but not Timken b/c of the public holdings in British
Timken.
vii. Note Conscious Parallelism: there was confusion in this period
centered around how much direct evid was necessary to prove a combination
or conspiracy under 1. business behavior is admissible circumstantial
evidence from which the fact finer may infer agreement, but this Ct has never
held that proof of parallel business behavior conclusively establishes
agreement or, phrased differently, that such behavior itself constitutes a SA
offense. Conscious parallelism has not yet read conspiracy out of the SA
entirely. Conscious parallelism is an when someone acts parallel to
someone else. Ct held that acting in a parallel manner w/ no agreement to do
so does not violate 1, even if effect is to reduce output and raise price.
4. Cases Testing the Limits of the Per Se Rule: there were important SA 1
prosecutions for horizontal price-fixing, group boycotts and market division during the
1950s and 60s, but few of them made new law. Two cases, however, raised difficult
problems of characterization and tested just how far the per se rule could be extended.
a. Exchange of information b/w competitors Ct says illegal per se, but
really looking at more transitional case to the rule of reason. United States
v. Container Corporation of America (US 1969 cb p. 240): prof - Transitional
case.
i. facts: Govt brought an antt action against container manufacturers ,
including D alleging that D freely exchanged price information on request with
the expectation that there would be reciprocity when such information was
needed. While the arrangement was informal and sporadic, the govt
established that the container market was inelastic, price being the basic
variable. D tended to meet the price of their competitors , and the pricing
exchange arrangement tended to reduce competition. The district court
refused to enjoin the practice .
A. Practice involved honestly answering competitors questions reciprocal request for info. Specific requests about price info from
specific customers. ??This was a practice in an injury. From time to time
they would call to confirm a price. I
ii. Ct: Issue here is this an agreement or a business practice? Ct says there
was an agreement to furnish price info whenever requested. No written K
needed. Ct will call it an agreement even though no one sat down to agree.
Prof: ct getting sloppy about actually finding a deal effect of the practice
was not obvious and neither was whether there was an agreement which is
needed under 1. That concerted action [furnishing information upon
request] is of course sufficient to establish the combination or conspiracyof
a violation of 1. Ct points out that this is a small industry, boxes are a std
product prices paid depend on price alternatives. So, it is a market subject
to informal pricing. Ct focused on the market: container industry dominated
by relatively few sellers, the product is fungible and competition for sales =
price; demand is inelastic; exchange of price data tends towards uniformity; a
lower price does not mean a larger share of the available business but a
sharing of the existing business.. This practice contributes to likelihood that it
will result in price-fixing. [??This argument goes both ways: can make them
faster to respond or slower.] Price stabilization is per se illegal under 1
here the exchange of price has a had an anticompetitive affect.
iii. Concurrence: J. Fortas: this is not really per se. Merely exchanging
price information is not a per se violation of antt law. It is only where, as here,
it is used for an impermissible purpose which can be independently
established that it becomes unlawful.
iv. Dissent: led by J. Marshall says: this is not Socony-Vacuum; would not
said violated b/c not sure this is anticompetitive. This is a growing industry.
Entry is relatively easy and the number of manufacturers has almost doubled

in eight years. It is not so oligopolistic that the mere exchange of price

information stifles free competition. There is no showing that it has been
restricted and the natural pressures of a free market appear to be working
here.
v. Prof: This is a modified per se rule. This case should be seen as a rule of
reason case and thus not likely to be unreasonable.
vi. BLL Market information and collusion: ct must distinguish info
producing activities that make the market more efficient from those that facility
collusion - remember discussed above w/ American Column. In Container
Corp, same concern.
vii. ns 18 firms shipped 90% of the cardboard cartons supplied in the
southeast. They established an informal price exchange whereby suppliers
gave each other, on request, price information on their most recent sales to a
particular customer. Not surprisingly, once a firm had received this
information, it would often quote the same price to that customer, and buyers
commonly divided orders among suppliers. The market loosely resembled an
oligopoly; and the industry had excess capacity despite rapid increases in
demand. On the other hand, entry was easy and frequent, and capacity had
expanded rapidly. Conceding that these facts fit none of the precedents, the
Ct condemned this information exchange b/c the exchange of price data
tends toward price uniformity. The court explained that 1 bans stabilizing
prices as well as raising them and quoting Socony, added that stabilization
is but one form of manipulation. Despite the harshness of its language,
subsequent opinions made clear that Container was not announcing a new
per se rule for price exchanges. Information exchange b/w competitors would
today be governed by the rule of reason (in fact the Ct may have been using
one here).
b. Per se illegal horizontal territorial division. United States v. TOPCO
Associates, Inc. (US 1972 cb p. 247): became frustrated with per se rule; case
now viewed as wrong.
i. Facts: a number of independent grocers formed a cooperative called
Topco (D). D allowed members to purchase goods at the same price as chain
stores. D expanded into different areas as it grew in size. The low prices at
which goods could be obtained from D allowed its members to compete with
the chain stores in these areas. D members were assigned exclusive
territories so that they would not be competing with each other. The Govt
brought an antt action under 1 of the SA to enjoin these practices as an
impermissible restraint on trade. Govt alleged that the arrangement
constituted a horizontal restraint to eliminate competition b/w the grocer
members.
A. class facts: Topco was a buying cooperative, members were
independent small grocery stores. Topco distributed private label goods
i.e. generic made up brand that is not one youve ever heard of that
the store sells at a lower price. These cheaper goods allowed them to
compete w/ large supermarkets. The wholesale price of name brand
goods was more than private label goods even though they may be the
same quality. It was valuable to be a part of Topco b/c of the private
label.
ii. Problem?: restraint rule in the group was that new members had to be
voted in to be a part of the cooperative and needed 85% vote if within 100
miles of another member (in reality could not get 85%). So here Market
Division and Group Boycott.
iii. Prof how would you defend: needed to be able to compete with big
companies; permitted members of Topco to survive and compete w/ national
chains. Why not have multiple Topco members in the community? B/c
arg: private label brands would be competing. Free riding: b/c the relatively

small Topco chains were attempting to compete w/ larger chains they had to
advertise if a territory contained several Topco brand store owners, ones
advertising would benefit all, and each would be tempted to free ride on the
efforts of others (Ct will finally address this problem of free riding in GTE
Sylvania, discussed below vertical territorial division). None of them would
get the benefit of Topco b/c private labels competing.
iv. Holding and Decision: Per se violation of the SA. D members are all
independent businessmen who wd normally be in competition with each other.
Any practice which would restrict or eliminate such potential competitors is an
unlawful restraint on trade. Exclusive territorial assignments constitute a
horizontal restraint which is a per se violation of the SA. It is immaterial that
the motive behind the exclusive territorial grant ws not motivated by an
impermissible purpose or that this is the only way in which the independents
can successfully compete with the chain stores. Unless permitted by specific
legislation, all horizontal restraints are unlawful per se.
A. Class - Marshall majority: not all Ks are illegal, start with rule of
reason some kinds of practices are so likely to be illegal and therefore
arent worth the effort of figuring them out. So, market division held to be
a naked restraint of trade. Therefore, unless congress will have to
change the law if dont want this result (Prof: this is really odd to blame
congress when the Ct got us into this per se ness). Other reasons:
Philadelphia merger you cant set-off anticompetitive effects in one
market for pro-competitive in another freedom to compete implicit in
such freedom is the notion that it cannot be foreclosed with respect to
one sector of the economy b/c certain private citizens or groups believe
that such foreclosure might promote greater competition in a more
important sector of the economy.
v. Dissent J. Burger: these territorial restrictions were ancillary restraint to
a valid agreementrestrictions necessary to the overall K to go forward.
Market division w/ no price fixing and enhancing competition. This type of
ancillary restraint is okay. (Think back to Addyston ancillary)
vi. ns market division case (remember above Timbken): std for horizontal
territorial arrangements in Topco Ct explicitly ruled that market allocations
are per se illegal whether or not ancillary to price-fixing or other market
rigging arrangements. Facts: a group of small- and medium- sized grocery
chains w/ 6% (I dont think our cb tells us this fact, i.e. does not specify 6%) of
the market created a joint subsidiary to market private label (house brand)
products through their stores in competition w/ larger supermarket chains.
The latter each had their own branded goods, and the Topco participants were
generally too small to market private label goods on their own. The formation
of the joint venture to market goods under a private label was not challenged,
but the arrangement was condemned for its dividing markets for the sale of
Topco branded goods. In reaching this result and applying a per se rule, the
Ct specifically rejected the lower courts analysis that the D supermarkets
lacked market power, that the arrangement did not reduce competition among
them or in the market, and that the restrictions were necessary for the joint
venture to succeed. The Ct said these areas were for congress to assess and
observed that courts are ill-equipped to measure whether restraints on
competition in one area are overcome by increased competition elsewhere.
Since the market division necessarily eliminated competition among sellers of
Topco private label products, the agreement restrained competition and was
per se illegal.
A. criticism of the Ct for failing to evaluate the economic necessity
and competitive benefits of the arrangement: argument that
concerns the justification for the territorial allocation Topco feared that
without the protection of exclusive territories, their retail participants

would not promote the product aggressively, provide customer service, or

otherwise seek to penetrate the market. Each licensee would be
concerned that sellers of Topco labels in adjoining areas would free ride
on advertising or services that it provided. Not having incurred
advertising or other cost, neighboring sellers then would be able to
undercut the price. Thus, the exclusive territories arguably were integral
to the success of the Topco venture. Without them, competition would
suffer from the loss or reduced vigor of the Topco enterprises.
(Remember this when we do BMI and NCAA which put for the principle
that collaboration among competitor s was an essential element of the
product or service being marketed).
B. criticism of the Ct for ignoring that the participants lacked
market power and therefore could not have affected competition
adversely: argument involves Ds stature in the market b/c the
restraint had significant pro-competitive merit, the Ct should have
considered the Ds lack of market power in assessing eh magnitude of
possible anticompetitive effects from the arrangement. The Topco
licensees faced strong interbrand competition rivalry from other firms
selling similar products under different brands. An agreement dividing
territories among those holding only 6% of sales generally cannot force
the seller of the other 94% to follow its prices, quality or service. Thus,
not only did the joint arrangement offer genuine procompetitive benefits,
but there was little reason to fear that the operation could curb interbrand
competition.
C. The above two criticisms are consistent with Sylvania discussed
below, but remember that Sylvania did not overrule (at least not explicitly)
Topco Sylvania dealt with a vertical territorial division. Also, watch for
the Rothery case, below, where J. Bork tried to say that Topco was
overruled (D.C. Cir. only lower ct to say this s.ct has not).
B. Monopolization: so far above we have looked at 35 yrs of developments involving
multi-firm horizontal arrangements analyzed under 1 of the SA. Now, we turn to parallel
developments arising under SA 2. the Cts begin with calling for a de facto per se
approach, a sharp departure from Std Oil and US steel. Remember: 2 of the SA
condemns every person who shall monopolize. The offense of monopolization is aimed
most directly at the evil which the antt laws have historically been concerned: persistent
monopoly pricing by the dominant firm in the market. Real issue in monopolization cases is
the defn of the market b/c % of the market determined whether there was a monopoly.
1. In effect, a per se rule in 2 (but not in theory) as well as 1. United States v.
Aluminum Company of America (ALCOA) (2d Cir. 1945 cb p. 255 J.Hand): S.ct
cd not get a quorum to hear the case referred to a circuit court (mandated by statute).
Later, this case was expressly affirmed by the S.Ct. so in effect S.ct decision. One of
the most famous antt cases.
a. Facts: Alcoa (D), a producer of virgin aluminum ingot, entered into four
successive cartels with foreign manufacturers of aluminum. D secured
covenants from the foreign producers either not to import ingots into the US at all
or to do so under restrictions, which in some cases involved the fixing of prices. As
a result of these and other practices, the Govt filed suit against Alcoa in 1912, in
which a consent decree was entered, declaring several of these covenants
unlawful and enjoining their performance. In 1937, the Govt again filed suit,
seeking addl relief, including dissolution of D for violating fedl antt law against
monopolistic behavior. The tr ct ruled in Ds favor, finding that D had only 33% of
the market share. In arriving at that figure, the court included both the virgin ingot
and the secondary (scrap) aluminum market. The Govt appealed.
i. class facts: Alcoa dominates the aluminum industry. Started with patents
(patents not anticompetitive). Made agreements with Canadian producers not
to import into US (violated 1 ended in 1912 w/ consent decree). Electricity

 engaged in restrictive agreements with electricity manufacturers cut off

ability of others to get Group boycott (violation of 1 ended in 1912).
b. Issue: Whether Alcoa had illegally monopolized the aluminum industry.
c. Holding and decision: An unlawful monopoly exists where a company has
sufficient market power to dominate an industry and where it acquired that power
by engaging in anticompetitive, or monopolistic, acts. However, a company is an
innocent monopolist where the dominance has been thrust upon it by its own skill
or efficiency. Alcoas size has never been anything other than a monopoly, and it
utilized that size for abuse. Give Ds position in 1940, it was not an innocent
monopolist. The D.ct incorrectly included the secondary market in this calculation
of Alcoas market share. Ds market share of virgin ingot market ws over 90%.
Thus, its monopoly of ingot was the kind covered by 2 of the SA and that part of
the judgment that held it was not must be reverse.
i. good monopolists: there was no sign that D ever charged high prices.
Arg: like Std Oil good monopolists not exploiting their monopoly. In
general, Alcoa was a good monopolist. J. Hand does not accept as a defense
that Alcoa was a good firm. The fact that you have acted well is not a
defense if you have the power to act badly: Be that as it may, that was not
the way that Congress chose; it did not condone good trusts and condemn
bad ones; it forbade all. Moreover, in so doing it was not necessarily
actuated by economic motives alone. It is possible, b/c of its indirect social or
moral effect, to prefer a system of small producers, each dependent for his
success upon his own skill and character, to one in which the great mass of
those engaged must accept the direction of a few. These considerations,
which we have suggested only as possible purposes of the act, we think the
decisions prove to have been in fact its purposes. i.e. congrs wanted a
world of small producers (Prof: is this right, calling for a world of backyard
aluminum makers? Is it good?).
ii. Is a large market share per se illegal?: J. Hand would say no if a
monopoly is thrust upon you merely b/c you have superior skill or foresight,
then not illegal. For example, there is only one guy in the country now who
makes violin bows left standing dont want to throw him in jail). But Prof:
think about it, this really barely ever happens so Prof understands that this
is not exactly a per se rule, but in practice actually is a per se rule.
iii. What did Alcoa do wrong?: when demand went up, they increased their
capacity to meet the demand.* These are exclusionary tactics: we can think
of no more effective exclusion that progressively to embrace each new
opportunity as it opened, and to face every newcomer with new capacity
already geared into a great organization, having the advantage of experience,
trade connections and the elite personnel. Only in case we interpret
exclusion as limited to maneuvers not honestly industrial, but actuated solely
by a desire to prevent competition, can such a course, indefatigably pursued,
be deemed not exclusionary. So to limit it would in our judgment emasculate
the Act; wd permit just such consolidations as it was designed to prevent.
(this language was quoted and adopted by the supreme court). So, effectively
per se rule in 2 as well as 1.
A. *Prof: argument against if that is evil to increase capacity to meet
demand? This is not John Rockefeller, not trying to prevent others; just
pushing their product always ready to produce at a higher quality and
lower price than anyone else; if thats bad, what is good?
iv. Intent: J. Hand says you have to have intent to do what you did to violate
2. That is the only intent that is necessary, i.e., do not need specific intent to
monopolize. I.e. govt does not have to show that there are these letters that
say we are going to get rid of all of the competition. (Comes up later with
Microsoft Bill Gates email I want to wipe out Netscape.) J. Hand says
whether or not it is relevant specific intent is not necessary.

v. Concern: leads to even more of the passivity that we saw under US Steal;
like here, if you have effective companies seems you may be forfeiting the
benefit of those companies b/c they will only operate at the level of the 2 nd
best guy. You are forfeiting the benefits of the company if you let the
standards be set by the 2nd or 3rd company consumers are not benefited by
this attitude.
A. advice to client: be very careful if you get a large market share.
vi. How do you define the market share: (illustrates issues that arise in
defining the market) J. Hand concludes that Alcoa has 90% of the market. 2
components go into defining the market: (1) what is the product market; and
(2) what is the geographic market. (most common geographic market is the
US i.e. national market).
A. what are the possible products defining the market here? (a) virgin
aluminum (first produced) 18%; (b) secondary aluminum (recycled)
26%; (c) imported 10%; (d) fabricated (Alcoa produces al and al
products like pots and pans) 46%. J. hand comes up w/ 90% by
including everything but imported al. Hand = a+b+c/a+b+c+d = 90%
(Hand thought that secondary should be excluded b/c Alcoas
determination of how much to produce must have involved or taken into
account secondary; J.Hands exclusion of secondary is questionable.
District ct= a/a+c+d = 18/54 = 33%. Compromise (prof thinks this would
be right) = a+b/a+b+c+d = 64% (includes secondary in the denominator
b/c out of Alcoas control). Market share calculations are not always self
evident.
B. How do you figure out what goes into the equation? We are testing,
w/ market share, to what extent do they control price Al is sold and do
other people set the price. J. Hand says, Alcoa only needs to respond to
imported Al, and Alcoa controls everything else. CA is secondary Al is
competitive w/ Alcoas virgin Al. J. Hand argues that Alcoa decides how
much al to produce in the 1st place (analogy to text books).
C. ns: task of determining what market shares to assign various classes
of industry participants. The parties in Alcoa generally agreed that ingot
aluminum consumed in the US was the appropriate market. Obviously
this included all virgin ingot produced and sold on the open market. If
this were all, Alcoa was conceded to be a monopolist, being the sole US
producer. But what of secondary aluminum clippings, trimmings, and
second-hand ingot available from aluminum fabrications previously sold
and processed as scrap which was an almost perfect substitute for
virgin ingot? Or what of virgin ingot that Alcoa used in its own fabrication
plants? Or imported ingot, both virgin and secondary? The extent to
which this addl aluminum was included in the market (denominator)
caused Alcoas market share to swing b/w 33 and 90%. Thus, it is
instructive to note why J. Hand included some source of the metal and
excluded others, especially since his opinion is till a leading antt case.
(for more on this see ns p. 114-116).
v. Final notes: J. hand never imposes a remedy, much of this opinion is
dicta. This is not a per se rule, there is an exception but unlikely to ever be
used. Difficult to define the market and the market share if conclude have
90% then not much more to say. Defining the market is the hardest part of
the case parties fight hard about this defines the case. Prototypical 2
case.
d. The Supreme Court affirms J. Hand American Tobacco case (US 1946
note p. 270): :the material consideration in determining whether a monopoly
exists is not that prices are raised and that competition actually is excluded but that
power exists to raise prices or to exclude competition when it is desired to do so.
Makes no difference whether existing competition is put to an end or whether

prospective competition is prevented same evil. In order to fall within 2, the

monopolist must have both the power to monopolize and the intent to monopolize.
- does not require specific intent.
i. discusses conspiracy to monopolize. Never used in 2 cases b/c easier to
prove in 1. there is a natural monopoly exception where there is only one
company in the market. Arises in the Microsoft case.
e. The Supreme Court refines its test for monopolization a look at US v.
Griffith (US 1948 cb note p. 272): Anyone who owns and operates the single
theater in a town, or who acquires the exclusive rt to exhibit a film, has a monopoly
in the popular sense. But he usually does not violate 2 of the SA unless he has
acquired or maintained his strategic position, or sought to expand his monopoly ,
or expanded it by means of those restraints of trade which are cognizable under
1. For those things which are condemned by 2 are in large measure merely the
end products of conduct which violates 1. Std Oil NJ. But that is not always true.
2 is not restricted to conspiracies or combinations to monopolize. Monopoly
power, whether lawfully or unlawfully acquired, may itself constitute an evil and
stand condemned under 2 even though it remains unexercised. For 2 is
aimed, inter alia, at the acquisition or retention of effective market control. See
Alcoa. Hence the existence of power to exclude competition when it is
desired to do so is itself a violation of 2, provided it is coupled with the
purpose or intent to exercise that power. The antt laws are as much violated by
the prevention of competition as by its destruction. It follows a fortiori that the use
of monopoly power, however lawfully acquired, to foreclose competition to gain a
competitive advantage or to destroy a competitor is unlawful.
i. intent not important if have monopoly then intended. If violate 2 then
violate 1. Takes Alcoa test even further.
2. The danger of antt law a good, productive company can get destroyed.
Operating under the per se rule under 2. United States v. United Shoe
Machinery Corp. (D.Mass 1953 cb p. 274): S.Ct in effect adopted this opinion as its
own affirmed. J. Wyzanski was the first to use an economic expert.
a. Facts: United Shoe (D) controlled approximately 85 % of the domestic shoe
machinery business in the US. It had achieved this position of dominance through
patents, excellent machinery, prompt free repair service, and close working ties
with shoe manufacturers. Each year D spent millions on research seeking to
improve its machines. It produced a full line of all machines necessary to handle
the many steps necessary to producing shoes. Its major machines were leased
rather than sold. Typical leases were for 10 yrs with favorable terms and deposit
returns if the machines were kept for the full period or replaced by D equipment.
Equipment actually sold was based on a sliding rate. If D had competition in the
market, it operated on a small profit margin. If no competition existed, it charged a
higher price. Govt brought antt action against D. it alleged (1) D had secured its
monopoly position through unlawful methods in restraint of trade in violation of
1 and 2 of the SA (Alcoa); (2) that D had the power to exclude competition and had
exercised it (US v. Griffith); and (3) that D had violated a broader approach
suggested in Griffith by acquiring market dominance through the use of methods
which were not solely the result of unfettered free competition. The govt argued
that the long-term leases, price differentials based on the existence of competition
and free service had, as its primary purpose and effect, the establishment and
perpetuation of Ds monopoly position. These practices placed entry barriers on
the market and were secured by Ds market dominance.
i. class facts: D had patents, now expired, but successor patents people
could still make shoes w/o Ds machines, but everyone wanted them. D
leased them pay a royalty for every pair of shoes you made. You did not
have to pay for repairs D basically brought a manufacturing plant to you.
Made shoemaking industry easy to enter (1500 manufactures huge
industry). Cost of making 2% of the price of the shoe b/c production efficient,

the price of shoes went way downrevolutionary. The leases were for 10 yrs
and the lessee had to pay D for shoes it made if it had Ds machines at all
leasing price was different from machine to machine (more valuable
machine). Gave favorable terms for renewal and most did. Why did D set up
these rules - Secondary market problem: did not want to compete with itself
did not have to because no body got the used machines (this is why only
leased). (Alcoa could have leased out its aluminum and avoided, but harder).
D set up a system of servicing to make customers happy. D was a really
good company created a world of jobs and companies.
b. What was wrong with Ds techniques: (remember w/ a per se rule govt
only has to show that D was anticompetitive and then Ds saintly qualities are
irrelevant.)
i. barriers to entry Arg: raising rivals costs discouraging new entry
making it more expensive for competitor to go into business; competitor would
have to provide service no one would develop b/c D is like Maytag that is
who you call anticompetitive. If you are going into shoe machinery, youve
only got 10% of the market coming on line each year (10 yr leases). Leases
tended to foreclose sales opportunities for new entries. D gave bonuses for
renewing very favorable leasing terms.
c. What was the basis for 2 liability? (remember dont have to show specific
intent, enough to show power to monopolize Alcoa Defendant intended to
engage in the leasing practices and pricing policies which maintained its market
power. That is all the intent which the law requires when both the complaint and
the judgment rest on a charge of monopolizing, not merely attempting to
monopolize. D having willed the means, has willed the ends. ) Govt contends
satisfies three approaches
i. unreasonable restraint of trade under 1? Cd argue that lease is a
contract and in restraint of trade J doesnt rely on this b/c prior decisions
had already determined that leases not violations. If the matter were res
integra, this court would adopt the first approach, and as a preliminary step to
ruling upon 2 would hold that it is a restraint of trade under 1 for a
company having an overwhelming share of the market, to distribute its more
important products only by leases which have provisions that go b/y assuring
prompt, periodic payments of rentals, which are not terminable cheaply, which
involve discrimination against competition and which combine in one contract
the right to use the product and to have it serviced but cant b/c precedent
says leases are not in restraint of trade.
ii. power to exclude competition and plans to or has?
iii. having a large market share w/o superior skill?
Judge says either ii or iii.: this court finds it unnecessary to choose b/w the
second and third approaches. For, taken as a whole, the evidence satisfies
the tests laid down in both Griffith and Aluminum. The facts show that (1)
defendant ahs , and exercises, such overwhelming strength in the shoe
machinery market that it controls the market, (2) this strength excludes some
potential, and limits some actual competition, and (3) this strength is not
attributable solely to Ds ability, economies of scale, research, natural
advantages, and adaptation to inevitable economic laws.
A. leases are so drawn and so applied as to strengthen Ds power to
exclude competitors.
B. to much resistance for potential competition and affect on actual
competition
C. The three principal sources of Ds power have been the original
constitution of the co, the superiority of Ds products and services, and
the leasing system. The first two of these are plainly beyond reproach.
d. Remedy phase: not broken up, it was unified , had grown up as one company
(as opposed to Std Oil). It was a single operation in one building (Microsoft looks

like United Shoe rather than Std Oil). Would destroy the whole thing to break it up.
Instead created conduct remedies need to get them to change their practices
so less likely to exclude competition (theory if they change their practices, then
market forces would reduce their monopoly didnt work). Made them do 5-6
things including shorten leases, change pricing allow client to buy machines. 15
yrs later D only fell a small amount b/c people kept buying from United Shoe
b/c they made good machines. So, the S.ct ordered that United Shoe be broken
up into 3 parts now there is n no more shoemaking in this country. (machines
developed in Japan and Germany lower wage countries, but this case has
something to do with it.)
e. ns: while Ds dominance derived mainly from its research and development,
the court found that the companys policy of refusing to sell its machines and its
imposition of specific lease provisions further enhanced its monopoly position.
Entry by rivals was blockaded, the court concluded, by the lease only policy and
the lease terms. Ds policy of repair w/o separate charges also was said to deter
independent service organization. Despite its exemplary record probably few
monopolies cd produce a record so free from any taint of predatory practices Ds
lease policies were seen as restricting competition and supporting monopoly.
Accordingly, it had violated 2. But whether Ds restrictive leasing policies were
improper or effective to continue its monopoly power is questionable. While raising
entry barriers, each policy also may have served valid nonexclusionary ends
such as assuring the quality of the machines and forstering the provision of
manufacturer services and information to customers. To the extent that it limited
customer choice, the lease restriction are likely to have required United to give
price concessions to its customers. United Shoe reaffirmed Alcoas retreat
from the abuse theory by holding that it is enough to show that the
continued monopoly power resulted from exclusionary practices that were
deliberate even though not otherwise illegal. (i.e. restrictive leasing by a nonmonopolist is not contrary to the antt laws.) Foreshadowing: 2 cases since the
early 1970s generally have retreated from eh stringent approach of Alcoa and
United Shoe and have adopted a narrower view of behavior that satisfies the 2
conduct requirement.
4. Monopoly power in a relevant market cross-elasticity of demand. United
States v. E.I. Du Pont (US 1956): (NB: BLL -b/f a firm can be convicted of
monopolization, it must have monopoly power in a relevant market. market power is
the power to reduce output and raise prices above marginal cost, and to make a profit
by doing so. Monopoly power is simply a large amount of market power.
a. facts: DuPont (D) controlled 75% of the cellophane market. The govt argued
that D was an unlawful monopoly under SA 2. The D.ct found that cellophane
was merely one segment of the flexible packaging material market. There were
sufficient competitive alternatives available to prevent D from being able to control
or affect prices. D argued that the fact that its patents and know-how prevented
competition in the cellophane industry did not constitute a monopoly due to the
existence of other competitive substitutes. (this was a suit by govt to enjoin the
alleged monopoly.)
b. two important things in this case: (1) definition of the market and (2) the
definition of the market suggests that the S.ct recognizes that the Alcoa test is
being taken too far.
c. what is the relevant market in which cellophane is sold? (i.e. is cellophane
its own market and thus a monopoly? Or was it part of a bigger market?):
i. D.Ct said that almost all of cellophanes qualities can be duplicated by other
materials, but none had all of cellophanes qualities. Market defined as
flexible packaging materials.
ii. S.Ct: How do you define the market? -- In terms of cross-elasticity of
demand: if the price of A goes up, what happens to the sales of B. For ex.
There is no relation between cereal and cars (if the price of cereal goes up,

nothing happens to the sales of cars and vise versa). If when the price of A
goes up and the sales of B goes up, then high elasticity of demand.
A. Cross-elasticity of demand defined: The concept of cross elasticity
of demand enables the ct to compare two relatively tangible products and
compare the rate at which customers will turn to one in response to a
price increase in the other.
d. Holding and Decision:
Where competitive substitutes are available,
dominance over a single process does not constitute monopolistic control over the
market. In order to determine the existence of a monopoly, the entire market must
be considered.
The market is determined by considering all reasonably
interchangeable alternatives based on price, use and quality. If other products
may be used instead of the alleged monopolistic product and their cost and quality
is comparable, no monopoly exists. The d.ct found that cellophane only
constituted 7% of the flexible packaging material sold. Several other processes
were available for any use to which cellophane could be put. D could not arbitrarily
set the price for cellophane w/o an adverse effect on demand. Finally, D could not
exclude competitors from the market even as to cellophane (though this is
immaterial). B/c D cannot set price or restrict competition in the flexible packaging
material market, it is not a monopoly within the meaning of 2 of the SA.
i. S.Ct upheld the decision b/c as the price of cellophane went up there would
be some substitution. Intuitive reason they do many of the same things
cant do it with cars and cereal.
e. The Cellophane Fallacy:
i. Dissent: you cant know whether D has a monopoly strictly by looking at
whether an increase in product As price correlates to increased sales of
product B. Even for a monopolist, there is a downward sloping demand curve
some people wont buy any more if you raise price. You will always see
substitution, it may help to look at what they are substituting, precisely b/c
even monopolists have a downward sloping demand curve. If a product A is 7
times the price of product B then they are in different markets. Ex. If
aluminum got that expensive, people would make steel cans.
ii. NS - If D was already charging a monopoly price for cellophane, the high
cross-elasticity for cellophane may have signified only that D could not have
raised its price still further without substantial loss of sales Ct failed to
consider that a finding of high demand cross-elasticity may mean only that the
firm already has exercised monopoly power by raising pricing price to the
profit-maximizing point. Thus, the concept of demand cross-elasticity helps
establish whether two products are close substitutes only when both are sold
at competitive prices.
In Cellophane the high cross-elasticity was a
misleading measure of the relevant product market.
5. The end of the per se period. Utah Pie Co v. Continental Baking Co. (US
1967): (BAD use of the per se approach)
a. preliminary note: remember that the important thing in American Tobacco had
been that the big 3 tobacco cos had cut their prices below cost in order to regain
market share they had lost. Even though the term predatory pricing was not
used and 2 does not require proof that firms were actually driven out of
business, allegations of predatory behavior have been an important element in
several 2 cases. Utah Pie arose 11 yrs after Du Pont and 21 yrs after American
Tobacco. Not only a 2 SA case, but also 2 CA Robinson-Patman Act:
prohibits price discrimination with respect to the sale of goods of like kind and
quality. Class: this case arises under the CA as well so some of the terms may
be different then we have seen -- 2 CA aka Robinson-Patman Act forbids certain
instances of differential pricing (i.e., charging two different buyers different prices
for goods of like grade and quality) price discrimination. Look at this case as bad
practices of a monopoly case.

i. Predatory pricing: BLL -the attempt by one firm to drive one or more
other firms out of business by temporarily charging very low prices; so that the
predator can charge monopoly prices later. Analyzed by courts as an attempt
to monopolize under 2 (? Can be abuse of monopoly power??) of the SA, or
occasionally as a violation of the Robinson-Patman Act (RPA). Class:
historical marking of abusive monopoly form; sells goods at a loss drive
everyone else out of business raise prices to make all the money you lost
back and more.
A. Theoretical difficulties: what is below cost? Hard to drive all
competitors out even harder to keep them out.
ii. Primary-Line Robinson-Patman Violation: BLL a violation of the RPA
in which the victims are the violators competitors; lawsuits based on a
predatory pricing theory under the RPA are called primary-line cases.
b. facts: frozen pies. Utah Pie (P) small town operation, sold 2/3 of pies sold in
Utah. Competitors wanted to expand into Utah CA pie cos: Continental Baking
Co, Carnation Co and Pet Milk Co. (D). D came into Utah and undercut the price.
Technical violation: D charging less in Utah market than in CA, CO, and other
states. (Under RPA they had to show discriminatory pricing, but then question is
this anticompetitive? cb p. 309 Sellers may not sell like goods to different
purchasers at different prices if the result may be to injure competition in either the
sellers or the buyers market unless such discrimination are justified or permitted
by the act.). As a result, Utah Pie was losing market share (66% to 45%). Jury
verdict for Utah Pie. Ct of app: reverses b/c now there is more competition says
this is crazy: arg this is not a case that should be in court under the antt act b/c
not anticompetitive there is now more competition!! competition went up now
we have four firms in the Utah frozen pie market that is what the antt laws are
supposed to like.
c. Holding and reasoning: S.ct reverses app ct. J. White arg: Utah had to
reduce prices to an all time low and felt the financial pinch (Q: isnt that what
competition is about), erosion of competition behavior produced a lessoning of
competition, memos Utah Pie intent by other firms to put pressure on Utah Pie.
i. Predatory Pricing when competitor A charges less for product/service
than it costs to produce in order to drive competitor B out of business and
once competitor B is driven out Competitor A will increase price to make up
for the loss and then some.
A. arg v.: some firm can always come in and replace (when the price
goes way up new entrants likely). Questionable whether it is ever
really possible to make the money from predatory pricing back. Look to
the end state: here, there will always be a 3 firm market in Utah so
couldnt.
B. theory: you only have predatory pricing when the price is below the
long run marginal price not avg (cb p. 313) no pricing should be
deemed predatory if it is above the short run marginal cost of the firm
using it. If it is rational and profitable for a firm to price in a given way, it
should be legal to do so.
d. Peculiar: even if Utah Pie had been driven out of business there would have
been 3 firms left competing. Prof: UP is an example of competition at its best.
Alcoa, Shoe and UP created a rule against vigorous competition.
e. BLL in Utah Pie, the S.ct condemned the pricing activities of three wholesale
pie baking cos that operated in several geographic markets. The cos were not in
collusion. Their victim was a small co that operated in the Salt Lake City area.
During the period involved in the litigation there was an intense price war in this
area, and the three defendants sold pies at lower prices than they sold the same
pies in other cities. However, the P-victim made a profit the entire time and always
had a market share larger than any of the three defendants. Ct cited a declining
price structure as evidence of predation. More likely the three Ds were stripping

the P of its monopoly position. Ct almost certainly condemned hard competition on

the merits rather than predation.
C. Vertical Arrangements Perceived as Exclusionary: Tying and Exclusive Dealing
(Characterized as vertical restraints).
1. Introduction: so far in the per se section, we have examined horizontal
arrangements price fixing, group boycotts, and market division in violation of 1 of the
SA, and monopolization, attempts to monopolize, and conspiracies to monopolize in
violation of 2. In these cases, we have looked at doubts about what was going on,
but it was relatively clear how at least the moving party though the alleged practices
might reduce output and raise the prices paid by consumers. Now vertical
arrangements:
recall resale price maintenance, territorial allocation, vertical
integration, exclusive dealing and tying.
a.
Vertical arrangements:
involve transactions b/w firms that are not
competitors, but rather are at different levels of the distribution process.
Theoretical impact on competition is less direct. Recall Dr. Miles: Ct concluded
there was an impact on competition largely b/c it believed that resale price
maintenance was the product of a conspiracy of retail dealers rather than
representing a policy that served the interest of Dr. Miles itself.
b. Two specific types: in this part, examine two specific kinds of vertical
arrangements exclusive dealing contracts and tying agreements. Cts often have
believed that these contractual arrangements have an exclusionary effect that
helps firms to obtain monopoly power or keep it. (ask if you think anticompetitive;
and ask (b/c there are so many possible explanations for many tying
arrangements) ask whether you think shd be per se illegal)
i. exclusive dealing: a vertical arrangement by contract under which a
buyer agrees to purchase all its needs of a particular product from the seller
i.e., the buyer agrees not to deal in the same product with a different supplier.
ii. Tying arrangement: a condn imposed by a seller or lessor that a buyer
or lessee may obtain a desired product (the tying product) only if it also
agrees to take an addl product (the tied product), which may or may not be
desired.
c. 3 CA: prohibits leasing or selling goodsor other commodities, whether
patented or unpatentedon the condn , agreement or understanding that the
lessee or purchaser thereof shall not use or deal in the goodsor other
commodities of a competitor or competitors of the lessor or seller, where the
effectmay be to substantially lesson competition or tend to create a monopoly.
Many of the cases in this section rely on SA 1 as well, but CA 3 is often the
more important provision in tying cases.
2. Tying case it is unreasonable, per se, to foreclose competitors from any
substantial market. per se type ruling (i.e. anticompetitive effects are
presumed from foreclosure of a certain dollar volume here $500k in the tied
product). International Salt Co. v. US (US 1947):
a. facts: International Salt (D), the largest producer of salt for commercial use,
tied the lease of two patented machines (one for dissolving rock salt into brine for
use in industrial processes, and the other for injecting salt into canned products) to
the lessees purchase from it of all the salt used in operating the machines.
i. class: had patents on 2 machines one made brine (salt water) keeps
food from spoiling; other ws cubes dropped into cans. If you were going to
use their machine had to get salt from them. Lessees could shop around
and could buy other, but only if at equal quality and lower price on 1 of the
machines on the other had to buy Ds but would give going price.
b. procedural: govt brought action to enjoin D alleged that lease restrictions
violate 1 of SA and 3 of CA.
c. Holding and decision: summary judgment affirmed -violates 1 SA: K in
restraint of trade (cant buy some one elses; attempt to foreclose market

competitors); violates 3 CA: leasing on the condition that lessee (1) shall not
use competitors product and (2) where the effect may be to substantially lesson
competition or tend to create a monop.
i. Ds arg lease allows to purchase competitors: The fact that D said
that the lessee could buy it else where if equal quality and lower price unless
D would set an equal price does not save from being unreas or having a
tendency to create a monop. A competitor would have to undercut
appellants price to have any hope of capturing the market, while appellant
could hold that market by merely meeting competition.
ii. Ds arg reas b/c good for machines: The D argues that b/c it must
repair and maintain the machines it was reas to confine their use to its own
salt b/c its high quality assured satisfactory functioning at low maintenance
cost. Ct A lessor may impose on a lessee reasonable restriction designed
in good faith to minimize maintenance burdens but competitors offer salt at
the same level of quality required. Ct says you can establish quality stds
but you cant say it has to come from you. Ct is saying form is improper.
iii. Ct says: it is unreasonable per se to foreclose competitors from
substantial portion of the market (NB: victim here is the competitor)
d.
Prof:
was there a likelihood that competitors wd be severely
disadvantaged under this rule - 3 (not 1)? Under 3 CA consideration did
D dominate the market for salt? Salt is a huge product used for all kinds of
purposes. The idea that there would be a tendency to monopolize is
preposterous. Ct found substantial lessoning of competition b/c D sold $500,000
worth of salt for these machines in 1944. Issue turned on the dollar value, not
relative to the share of the market. Important point b/c one of the elements at this
time was market share (?) sign that the dollar amount affected by tying not
required for monopoly simply required not insubstantial. Note page 320: there
was no way that D could have obtained a monopoly of the sale of all the nations
salt by requiring use of its salt tablets. The market for the tied product salt-was
far too large for that to be a possibility.
e. BLL: Intl Salt: tie-in case at first glance appears to be a case involving price
discrimination. The D leased its salt injecting machines (for canned food) only to
lessees who agreed to purchase the Ds salt as well. However, the lesees were
required to purchase the salt from the D only if the D was willing to match the
prevailing market price. If a lessee was able to purchase salt cheaper elsewhere,
he was free to do so. Since tying arrangements work as price discrimination
devices only if the lessor can charge a monopoly price for the tied product, it is
unlikely that the Intl Salt case involved price discrimination. In this case the tying
arrangement was probably being used for the reason that the D argued to make
sure that only high quality salt, suitable for its machines was used by the lessees.
f. ns in finding violation 3 CA - the Ct relied on Ds patents as creating market
power in the tying products (the machines) market (I dont think we mentioned this
in class but case says patents confer a limited monopoly of the invention they
reward.) and on the substantial dollar volume of business in the tied product which
was foreclosed to competitors (here about $500,000/yr) as providing the requisite
competitive effect. Once these minimum threshold elements were shown, the Ct
held that a violation was proven: it is unreasonable, per se, to foreclose
competitors from any substantial market. The volume of business affected by
these contracts cannot be said to be insignificant or insubstantial and the tendency
of the arrangement to accomplishment of monopoly seems obvious. Again the
defense that the condn was needed for quality control was rejected: But it is not
pleaded, nor is it argued that the machine is allergic to salt of equal quality
produced by anyone except international.
g. Std Oil of CA describing Intl Salt: that decision, at least with regard to
contracts tying the sale of a nonpatented product to a patented product, rejected
the necessity of demonstrating economic consequences once it has been

established that the volume of business affect is not insignificant or insubstantial

and that the effect of the contracts is to foreclose competitors from a substantial
market. It was establishedleased machines and sold about $500k worth of salt
for use with those machines. It was not established that equivalent machines were
unobtainable, it was not indicated what proportion of the busns of supplying such
machines was controlled by D, and it was deemed irrelevant that there was no
evidence as to the actual effect of the tying clause upon competition.
h. Tying arises when the seller has sufficient economic power to compel you to
take the package against your will. Ex. Cars are packages: radios, tires, AC,
etc. Manufacturer of car requires you to buy package of elements not
considered tying. This case power to compel the consumer to buy something
against their will derives from the patents. At this time, patent equaled power.
Now modified, if you use your patent to compel buying of other item by defn
illegal tying.
2. Why a firm might or might not want to engage in tying:
a. leverage theory - extend monopoly:
i. completely different product: if a seller of a tying product could extend
its monopoly of that product to obtain a monopoly of something completely
different, it would greatly increase its profits by doing so.
ii. tied product only used w/ the monopoly tying product: ex. Wd Intl
Salt make more money if it could require buyers of its machines to buy a
concrete base that wd make it operate more quietly? No: the value of Intl
Salts machine is going to based on how much the machine saves users over
adding salt some other way. All the value added by the machine is recovered
by Intl Salt whether it sells the base of the machine itself or lets others do so.
Suppose for ex the machine that costs $500 to make can be sold for $1000 if
it has a base. Suppose the base costs an addl $100 to make and that other
firms would compete to sell it for that amount. Intl Salt cd charge $900 for the
machine and allow the base to be sold competitively for $100, or it might sell
the package for $1000. Either way, Intl would get the $400 monopoly profit.
If you see package selling in such a case, the reason for it is not likely to be
sinister. (NEED to ask Prof to explain this again why cant Intl charge
$1200 for machine with base isnt it the fact that people want the machine
and so will buy even if more $? Confusion.)
A. In class example: tennis racket you want to sell can you make
more money by requiring it be strung by you? Suppose $500 for the
racket strung cost to you of stringing is $50; Why cant you make any
more money with stringing? $450 unstrung pick up all of monopoly
patent profit, no addl profit to you. Why would you? You think you can
string it better (internl salt?).
b. Price Discrimination/metering devices: A manufacturer w/ a monopoly of
one product could increase its profits by requiring that purchasers also buy a
product used in variable quantities Intl salt tablets. That would give the
manufacturer an ability to charge more to larger users of the machine than to
lesser users. It is often the most likely explanation of a tying arrangement. If the
practice is labeled price discrimination it sometimes triggers a visceral negative
reaction, but if the manufacturer had leased the machine for a price based on a
metering of its usage, we would likely not have thought a thing about it. (significant
theoretical argument in favor of this kind of price discrim see fn 4 cb p. 321). We
would not have imagined that use of a meter illegally allowed the manufacturer to
reduce output and raise prices. Why dont manufacturers just use meters: answer
varies, but sometimes it is simply thought to be easier to disable such a meter than
to avoid using the tied item.
i. in class example: back to tennis racket ex would you want to sell all the
balls that are used with the tennis racket? Idea if you are selling an item in
different amounts to each purchaser of underlying item. Tennis balls people

who play a lot of tennis and would have paid $600 for the racket you can
make a little extra on the balls by overcharging. (cd not do it with strings.) If
you sell a variable cost item you can price discriminate charge the person
who uses it more. Legally: could put a counter on a machine and charge by
the use/unit (Xerox used it, but if Xerox made you buy Xerox paper illegal
under per se rule.)
c. Quality control: intls argument better than the Ct thought? Would it really be
just as easy to specify stds for salt tablets used in the machine as to sell the
tablets directly; how cd the manufacturer prove that the lessee or purchaser had
not used salt of required quality; who would have the best access to the evidence;
wd it be costly for the manuf. To conduct unannounced inspections.
d. final thoughts: cb if we are right that often indeed, possibly most often
when a firm sells a package of products or services it does not reduce output or
increase the prices paid by consumers, what does that suggest abt making tying
illegal? Prof: why do we care? Dont look simply at form; tying cases simply
ways of knowing who used it more people who do use it more, pay more. Arg:
tying arrangement should only be illegal if economic effect on competitors;
however, at this time, did not look at economic effect.
3. Exclusive dealing Rule of Reason Std Oil Co of CA v. US (US 1949): still in
part good law exclusive dealing Ks today still dealt with under Rule of Reason
a. facts: Exclusive supply Ks with independent dealers - D said if you are going
to be a Std Oil dealer you have to buy all the products used in your station from
D. ns: the largest seller of gas in seven western states made exclusive dealing
contracts with independent stations constitute 16% of all retail outlets, whose sales
involved almost 7% (or $58 mill) of all retail gas sales in the area.
b. gov: violates 1 of SA and 3 of CA. Ct never examines 1 in opinion
i. Prof: govt though this was an easy case under intl salt b/c Ks
prevented purchaser of Std Oil from buying competitors. A lot of gas affected.
Gov thought under Intl Salt that money amount would be the only issue
easy to see effect ($58 mill) (did not think market share would be an issue).
c. Ct examines 3 first Rule of reason: ct is struggling with the std to apply.
D.ct used (similar to Intl Salt) the quantitative substantiality per se approach.
The Ct is determining whether the requirement of showing that the effect of the
agreements (requirement contracts) may be to substantially to lesson competition
may be met simply by proof that a substantial portion of commerce is affected or
whether it must also be demonstrated that competitive activity has actually
diminished or probably will diminish. Ct looks at precedent and then analyzes
whether exclusive dealing contracts are like tying arrangements:
Tying
arrangements serve hardly any purpose beyond suppression of competition.
Requirements Ks on the other hand, may well be of economic advantage to
buyers as well as to sellers, and thus indirectly of advantage to the consuming
public. Can benefit buyer (local dealer), seller (Oil Co.) and newcomers
(entrants). Ct adopts a Rule of Reason: suggests looking at various thing
including: evid that competition has flourished; conformity of the length of their
term to the reasonable requirements of the field of commerce in which they were
used; status of D struggling newcomer or established competitor; most important
- Ds market control.
d. Fundamental Distinction from tying analysis: if a requirements contract or
an exclusive dealing K then it will be subject to a rule of reason.
e. Ct applies rule of reason under 3 to Std Oil: even though being analyzed
under Rule of Reason still illegal effect is to greatly minimize competition.
relative share of the business which fell to each [major supplier that has been
using requirements contract] has remained about the same during the period of
their use, it would not be farfetched to infer that their effect has been to enable the
established suppliers to individually to maintain their own standing and at the same
time collectively, even though not collusively, to prevent a late arrival from wresting

away more than an insignificant portion of the market. 3 does not require proof
that competition has actually diminished.
f. Free-rider problem: Prof says this was a case of the free-rider problem
indicator of quality goes with std oil corrupts the value to all std oil dealers (i.e. if
they think they are getting std oil, but the store sells other crap too.)
g. J. Douglas separate opinion: The elimination of these requirements
contracts sets the stage for Std and other oil cos to build service-station empires of
their own. No more mom and pop stations. If the vertical arrangement reflects
substantial gains in efficiency, denying the firms this opportunity by contract will
only force them to achieve these ends by acquiring the formerly independent
outlets or vertical expansion.
h. Tampa Electric Co. v. Nashville Coal Co. (US 1961 note 2 p. 332): the Ct
confirmed that in exclusive dealing cases it is market share, not absolute sales
(Intl Salt), that determines substantiality of effect on competition.
i. The parties had entered into a 20 yr requirements K for supply of what was
estimated to be 2.25 mill tons of coal each yr to meet the needs of a large
electric generating facility. The min price was $6.4 per ton and the total value
of the sales over the 20 yrs ws estimated at $128 million. Apparently the price
of coal rose. The seller wanted out of the contract and asserted that it ws an
impermissible exclusive dealing arrangement in violation of CA 3. S.Ct
rejected the fact that $128 mill was a big number was not controlling. Nor
ws the fact that this contract wd be for about of all the coal consumed in FA
each yr; most other consumers used oil or natural gas. The firms foreclosed
by this K from sales to Tampa Electric, the Ct observed, produced and sold
most of their coal up and down the east coast. This 2.25 mill tons was less
than 1% of the total output of the firms that might have sold to TE. Such a
proportion is not significant the Ct said so coal co forced to honor the K.
ii. class notes: effect on competition determined by the market share.
[Question: I dont see how this is so different than Std oil above didnt the
Ct look at market share there? Maybe not b/c only like 7% or something?
Ask Prof.]
4. Lets go back to tying:
a. tying? CDs w/ multiple songs product or package; lifesavers mixed set to
get pineapple. Single product? No tying.
b. When am I looking t a single product and when is something a tied
package? - leading case Times-Picayune Publishing Co. v. US (US 1953
note page 334): Publisher said that in order to put an ad in the morning paper, you
had to also put it in our evening paper. DOJ said violation of 1 b/c monopoly of
the morning newspaper market was being used to compel merchants to buy
evening ads they did not want. Tying? Arg yes b/c would not buy ad in competing
evening paper. Majority says no concluded that a newspaper add was fungible;
an ad in the morning paper was not something different than an ad in the evening
paper. An ad is an ad. Single product. Ask whether it is one or two products.
c. Franchising cases (336-38): is requiring franchisee buy things from firm that
granted franchise tying?
i. Susser v. Carvel (2d Cir. 1964): franchise selling soft ice cream from a
distinctively shaped building franchisees were required to buy the ice cream
mix from Carvel, as well as cones and spoons; paper products, machinery
and equipment could be bought on the open market as long as they met
carvel specifications. 2nd cir upheld but divided. J. Lumbard dissent:
trademark could be a tying product; thus, requiring purchase of any items as
condn of using franchise trade mark shd be per se illegal. J. Friendly for the
majority: items Carvel required to be purchased were a single product
with the trademark uniformity and quality of the ice cream were what the
franchise was about further, no showing market power Carvel 1% share of
the market.

ii. Siegel v. Chicken Delight (9th Cir. 1971): required franchisees to buy their
cooking equipment, dry mix coating for the chicken and special packaging
from the franchisor. Ct concluded that CD did have market power (trademark
did although not dominant); that the franchise did not exist to distribute the
franchisors chicken in the way that Carvel to distribute franchisors special ice
cream. The franchisor is entitled to set performance stds, but may not
require its franchisees to buy their supplies.
iii. Principle v. McDonalds Corp. (4th Cir. 1980): Ask whether they are
integral components of the business method being franchised . Where the
challenged aggregation is an essential ingredient of the franchised systems
formula for success, there is but a single product and no tie in exists as a
matter of law. Ct held McD could require the franchisee to enter into the
lease: distinctive shape of building associated w/ trademark and expert
selection of building location part of formula for success.
iii. Hypo: KFC franchisees required to buy chicken only from KFC tying?
Under Carvel: some franchises are product distribution franchises simply
distributing product that everyone who comes to Carvel/franchise expects to
buy. Under Chicken Delight, many kinds of franchises are business method
franchises, get store, etc, but chicken is just chicken. Prof: blend of spices
okay; spork
A. Q: Why did KFC make franchises buy sporks? Counting device. If
you cant make them buy the chicken from you you cant figure out how
much is selling. One spork in every box = counting. Books can be
cooked. Permissible kind of counting device b/c spork is an integral part
of KFC.
c. Test: Tying arrangements are unreasonable in and of themselves
whenever a party has sufficient economic power with respect to the tying
product to appreciably restrain free competition in the market for the tied
product and a not insubstantial amount of interstate commerce is effected.
(once meet this test per se illegal) Northern Pacific Railway Co. v. US (US
1958): We still use this test today for tying arrangements!!! case had a powerful
impact on the development of the tying doctrine and the per se rule generally. (no
patent involved in this case). FYI case not brought under CA 3 b/c land is not a
commodity.
i. Facts: as an inducement to build a rr, D was given vast amounts of land by
the fedl gov and a number of states. It later sold or leased a large portion of
this land. As a condn of lease or sale it was agreed that any shipping to be
done would be given to the rr if it met the price of competitors and gave equal
service. The gov argued that this type of tying violated the SA, and that the
vast amount of land owned by the D gave it a position of economic
dominance so that buyers had no choice but to accept the arrangement. The
D argued that it was not a monopoly w/in the meaning of Time-Picayune and
the restriction was not unreasonable per se. it further argued that it had
agreed to meet the price and service of its competition.
a. class: 37 mill acres of land given to D by congress in exchange for
building the transcontl rr. D said if you want to buy or lease land from us
you have to ship on our rr only if our rates are as good or better than
the other rr.
ii. gov: action to enjoin tying agreements in leases and deeds to real
property. unlawful and unreasonable restraints of trade under 1 SA.
iii. ct describes tying: tying arrangement may be defined as an agreement
by a party to sell one product but only on the condition that the buyer also
purchases a different (or tied) product, or at least agrees that he will not
purchase that product from any other supplier. serve hardly any purpose b/y
suppression of competition. The deny competitors free access to the market
for the tied product, not b/c the party imposing the tying requirements has a

better product or a lower price but b/c of his power or leverage in another
market. (Leverage theory, discussed above). Per se International Salt if
you have a tying of two separate products never good per se illegal.
iv. Rule: Tying arrangements are unreasonable in and of themselves
whenever a party has sufficient economic power with respect to the tying
product to appreciably restrain free competition in the market for the tied
product and a not insubstantial amount of interstate commerce is effected.
(still use today).
A. Ct says where the seller has no control or dominance over the tying
product so that it does not represent an effectual weapon to pressure
buyers into taking the tied item any restraint of trade attributable to such
tying arrangements would obviously be insignificant at most.
B. Note that rule does not require monopoly power or dominance over
the tying product as a necessary precondition for application of per se
unreasonableness to tying we do not construe this general language
as requiring anything more than sufficient economic power to impose an
appreciable restraint on free competition in the tied product (assuming
not insubstantial amt ic affected).
v. Prof: sufficient economic power? How do we arg that they are a
monopolist they have less than two per cent of the land on what basis
could you conceivably say they have all this market power? Arg: reason they
have market power is b/c they have rr running through it. The vast land
holdings with preferential locations (near the rr) gave D a position of economic
dominance that it used to restrain competition. Circular, but makes sense.
Dominance is merely sufficient economic power to restrain free competition
on the tied product. Having been established here, the arrangement is illegal
per se, and reasonableness wont be considered.
vi. Prof: point of case ct in per se state of mind doesnt take much for
court to decide when you force someone to buy a second product that it is
anticompetitive. Prof: thinks there is something goofy about this rule, but we
still use it today.
vii. Dissent: w/o info as to Ds control over the land market, how can the
majority justify its position? B/c most of the rrs land was near its tracks,
purchasers would be expected to use them. (class: RR rates were regulated
at this time, these land owners were going to use this rr any way its right
next door.)
d. Another example of tying being per se illegal. United States v. Loews,
Inc. (US 1962).
i. Facts: The fedl gov filed separate civil antt actions against six major
distributors including loews (D) of pre-1948 ed motion picture feature films.
Gov alleged that each distributor had engaged in block booking in violation of
the SA by conditioning the license or sale of feature films upon the
acceptance of a package or block containing unwanted or inferior films. The
d.ct issued an injunction find that each copyrighted film block was a unique
product, feature films were not fungible and since s gave each distributor a
monopolistic position, sufficient economic power was present. The cases
were consolidated on appeal.
A. class: block-booking wont sell single pictures, sell packages; had
to buy about 99 films to get the one you want.
ii. gov block booking is a tying arrangement and illegal under 1 SA.
iii. STd: the std of illegality is that the seller must have sufficient economic
power with respect to the tying product to appreciably restrain free
competition in the market for the tied product. (no. pac. Rr). Ct says that
market dominance some power to control price and to exclude competition
is by no means the only test of whether the seller has the requisite
economic power. Even absent a showing of market dominance, the crucial

economic power may be inferred from the tying products desirability to

consumers or from the uniqueness of its attributes. The requisite economic
power is presumed when the tying product is patented or copyrightes.
iv. Holding and decision: Block booking is prohibited where the product is
unique and the arrangement wields sufficient economic power to impose an
appreciable restraint on free competition in the tied product. The requisite
economic power is presumed when the tying product is patented or
copyrighted. Moreover, a valid patent on the tying product establishes a
distinctiveness sufficient to conclude that any tying arrangement involving the
patented product would have anticompetitive consequences. Furthermore, a
copyrighted feature film does not lose its legal or economic uniqueness b/c it
is shown on tv rather than on a movie screen. There, adverse effects on free
competition resulted from the illegal block booking contracts, and sufficient
economic power was present to restrain free competition.
A. arg: although you didnt have patent, you used the copyrighted films
that people wanted to compel them to buy a bunch that they did not
want. (same argument for albums each song is ed)
B. Concern: although no one could make you show these other films in
the block if you got this package you would not have it in you to
through them away which takes away from the amount you will buy
from other distributors.
C. Should this be illegal? S.ct thinks so. Arg that this should not be
illegal: The presumed idea behind this is that blocking them together is
all to get more value out of Casablanca than it is really worth. However,
the point to see is that you dont make any more money this way if there
is only one film the consumer wants to buy (like strings to tennis
racket). Ask Prof to explain strings again
D. As a technical matter this does indeed violate 1.
v. Should it violate 1? Is there something anticompetitive about it? If you
are going to throw away all the others than no. In reality, however, the money
your paying for the package is not only the value to you of Casablanca if
you get some marginal benefit from the addl movies you are in fact forcing
the consumer to buy yours rather than the competitors.
vi. Consider this ex: (note 3 pg 350-51)
New York
Atlanta
Burbank
Gone with the Wind $400
$1000
$300
Bedtime for Bonzo
$200
$100
$1000
Manhattan
$1000
$500
$300
A. price each film individually: if set at $1000 would only sell one copy
of each
B. price sufficiently to sell 2 copies of each: require $400 for GW, $200
Bonzo, and $500 Manhattan; even selling two copies at those prices
only make $2200 total
C. price to sell 3 copies of each: market price for each will have to be
lowest any of the cities willing to pay GW $300, Manhattan $300,
Bonzo $100 total after 3 of each sold only $2100.
D. if you sold the three films as a package: each city would be willing to
pay $1600 total $4800 when people value parts of a package
differently, they will tend to be willing to pay a higher package price
than the sum of the competitive prices of the pieces of the package.
E. Is this anticompetitive does it raise concerns that tying is supposed
to prevent? Should lifesavers stop selling packages containing 5
flavors? Must record cos stop selling albums that contain more than one
song.
F. missed last half hour of class did we talk about end product
royalties? ASK SOMEONE.

e. Another tying case - Fortner Enterprises, Inc. v. US Steel Corp. (US 1969 cb p. 352): GET NOTES FOR THIS CASE
i. Facts: US Steel offered attractive credit services to home builders who
agreed to buy prefabricated houses (which the P claimed were over priced
and defective) from D.
ii. args: The Ds special credit terms, such as 100% financing at rates below
market levels were said to be unique, thus demonstrating Ds special
economic power in the credit market; and sales of more than $9mill of
prefabricated houses by D in three years across the country, allegedly
foreclosed by the tying arrangements, were not an insubstantial effect.
iii. Ct: The Ct curtly rejected Ds arg that the tie-in was, in effect, a
competitive price cut made possible through scale economies resulting from
both the tie-in and avoided costs, such as credit controls otherwise imposed
on lenders. Ct asserted that the tied product shd instead have been offered at
a lower price. B/c the Ct was reviewing a grant of sum judgment, the decision
established only that a violation of the SA could be found if the P proved that
D had economic power in the credit (tying product) market. Thus, the case
was remanded to tr ct for evid.
f. Final notes on tying:
i. Problems:
A. price discrimination (is this really a problem?cg): charge some
people more than others
B. might be setting out to monopolize market for tied product
C. avoiding price control (avoid price control on product consumer did
want, by controlling the one the consumer doesnt want)
ii. seller will typically assert another reason for tying quality control,
counting, et. Cases discussed above dont really explore b/c we are dealing
w/ a per se rule.
D. Dealing with Dealers (type of vertical restraints): by examining the cases above in
the period over 25-35 yrs we know that price fixing, group boycotts and market division
among competitors per se illegal question how do these principles apply to dealings
among firms who are not competitors, i.e., to the manner in which firms deal with entities that
distribute their products. Three kinds of such cases: resale price maintenance (a type of
price fixing saw in Dr. Miles, Colgate, and General Electric); conduct that can be
characterized as a group boycott; and Territorial allocations (like market division among
competitors, i.e. firms creation of exclusive territories for their dealers).
1. Resale Price Maintenance: prominent among antt cases since the late 1950s have
been those involving firms engaged in discount selling. Particularly important have
been private actions brought by dealers terminated (boycotted) for engaging in or
assisting in such conduct. Recall that RPM: (sometimes called vertical price-fixing) is
an agreement b/w a supplier and a dealer that the dealer will resell the suppliers
product at a stipulated price. BLL since 1911 (Dr. Miles) RPM has been illegal under
SA, subject to some very important exceptions (recall BLL characterizes exceptions
#1 Colgate and #2. Consignment and Patent Exception United States v. GE Co.)
a. United States v. Parke Davis & Co. (US 1960 cb p. 368):
i. Parke Davis is a distributor of OTC drugs. It organized its distribution
system: (1) selling to wholesalers (it mostly sold to wholesalers who in turn
sold to retailers); and (2) selling to large retailers. D issued a price
maintenance policy fixing a minimum price by sending out a catalogue to
wholesalers. D said We cant K w/ you to require you to do this, but we wont
deal with you if you dont comply. Peoples Drug Stores (retailer) in Richmond
and DC put ads for OTC (vitamins) and sold them substantially below the
suggested minimum price (actually lower than wholesale price). Park Davis
manager sought legal advice attny advised the co could legally enforce an
adopted policy arrived at unilaterally to sell only to customers who observed
the suggested minimum resale prices; we can lawfully say we will sell to you

only so long as you observe such minimum prices, but cant say we will sell
to you only if you agree to observe such minimum retail prices b/c RPM is
invalid. D said they were going to cut off non-complying retailers could be
called a vertical group boycott. Dart Drug Co got cut off. One of the Peoples
Drug Stores was still advertising at below min price D went there and the
peoples rep said that peoples would stop cutting prices on the Ds products
and D continued to sell to Peoples. Then D had negotiation and Dart and
others agreed not to advertise.
ii. Gov: sought an injunction against D alleging that D had conspired and
combined in violation of 1 and 3 of the SA w/ retail and wholesale druggists
in DC and VA to maintain the wholesale and retail prices of Parke Davis
pharmaceutical products.
iii. D.Ct: held that this was unilateral and sanctioned by law under Colgate.
A. Notes: If Colgate has any force, D should have opportunity to discuss
with retailers and try to get them to comply.
B. Gov concedes that under Colgate doctrine a manufacturer, having
announced a price maintenance policy, may bring about adherence to it
by refusing to deal with customers who do not observe that policy. Gov
claims here went b/y mere customer selection and created
combinations and conspiracies to enforce RPM in violation of 1 and 3
of the SA.
iv. Majority rejects Ds arg that this is Colgate-like: SA forbids
combinations of traders to suppress competition. Colgate is tolerated but
only when it is the consequence of a mere refusal to sell in the exercise of the
manufacturers right freely to exercise his own independent discretion as to
parties with whom he will deal. When the manufacturers actions as here, go
b/y mere announcement of this policy and the simple refusal to deal, and he
employs other means which effect adherence to his resale prices, this
countervailing consideration is not present and therefore he has put together
a combo in violation of SA. Whether combo is unlawful must by judged by
the parties actions not words. Here, by involving the wholesalers to stop the
flow of D products to the retailers, thereby inducing retailers adherence to its
suggested retail prices, D created a combination with retailers and the
wholesalers to maintain retail prices and violated the SA.
A. Class notes: majority rejects this idea (Colgate) b/c (1) agreement
involved (in Dr. Miles written agreement but ct says dont need written
agreement to violate 1); (2) Colgate rule is not a license to set up
minimum price agreements; and (3) cannot go out and say other people
have agreed not to advertise and you shouldnt either, ct thinks this looks
like D wanted to get rid of as much OTC drugs as possible (what does
this means??????????).
B. arg: could argue that the free market controls this situation, if price is
too high the consumer will buy another brand. Consumer makes
decision based on other alternatives. Therefore, consumer is not badly
hurt by this price-fixing. Counterarg: in many kinds of products, we
dont have 1 for 1 competition. I.e. the cheapest product is not always
preferred by consumer ex. Bayer v. CVS aspirin.
v. ns: drug manufacturer sought to obtain compliance with its RPM plan by
bargaining and mediating w/ retailers in order to gain their adherence and
trade. In effect, the manufacturer sought and received promises of future
compliance. In general terms the goal and primary effort of D was
indistinguishable from that of Colgate; the only evident difference was that the
dealer in Colgate did not comply and was cut off, whereas in Park davis the
manufacturer succeeded and did not need to terminate the dealer. Watch for
the Albrecht case below seems to remove even this distinction, finding an
agreement whenever a dealer succumbs to manufacturer pressure or other

dealers adhere to the manufacturers announced policy even though no

express understanding is shown.
b. Did not read but mentioned Simpson v. Union Oil of CA (US 1964):
consignment sales is not a way of avoiding RPM. Remember the consignment
exception to the per se illegality of RPM in General Electric well, it raised the
problem that manufacturers who ant to engage in legal price maintenance can
quite easily restructure any resale contract to make it into consignment agreement
instead; here the Ct says no you cant: disapproved a consignment agreement
b/w a lg gas refiner and many retail gas stations. Under the K the gas remained
the property of the refiner while it was in the retailers tanks; however, risk of
nonsale passed to the retailers themselves did not qualify for the consignment
exception b/c it covered a vast gasoline distribution system, fixing prices though
many retail outlets. Inference: consignment agreement really just a disguise for
RPM may have to do with where the risks lie. Ct also mentioned that in GE the
product was patented (although this didnt matter in GE). ASK Prof if Simpson
overruled GE. can a consignment agreement still save you from per se
rule?
2. Territorial allocation: (we have seen market division Topco and Addyston
horizontal) territorial allocation refers to vertical restraint restrictions on where
supplier tells dealer where (geographically) it may distribute/sell. This is a type of
vertical non-price restraint: a vertical restriction imposed by a supplier on its dealers,
which does not govern the resale price. (later, in Sylvania we shall se that the Ct
ultimately adopts a rule of reason for vertical non-price restraints.)
a. Ct doesnt know enough yet about vertical territorial allocation to decide
what the std should be (i.e. per se v. R of R) need a trial. White Motor Co. v.
US (US 1963 cb p.382):
i. Facts: White motor is a small independent seller of trucks. Sold some to
dealers and distributors and other to large users like the US. Alleged conduct
that violated 1 and 3 of the SA limited territories with which distributors
and dealers could sell and limitation on who they could sell to. Also, dealer
could only sell to individuals or firms w/ place of business in the dealers
territory.
A. ns White motor sold its trucks to dealers who agreed to resell them
only to customers not otherwise reserved to the manufacturer and who
had a place of business or purchasing headquarters within the assigned
territory.
ii. gov: alleges violation of 1 and 3 of SA concern limitations and
restrictions on the territories within which distributors or dealers may sell and
limitations or restriction on the persons or classes of persons to whom they
may sell.
iii. D arg: that Topco and Addyston did not apply b/c horizontal arrangements
are b/w competitors, this was a vertical arrangement to eliminate competition
among dealers. D said could have just set up own dealers and assigned
them territories which is lawful.
iv. we are in the per se period. Thus it makes sense that d.ct found sum jud
appropriate for gov., but - this case creates a bifurcation b/w territorial
allocation and price maintenance.
v. Ct: We dont know enough of the economic and business stuff out of
which these arrangements emerge to be certain that these would be treated
like horizontal market divisions and vertical price restraints per se. Send
back down for trial We do not intimate any view on the merits we only hold
that the legality of the territorial and customer limitations should be
determined only after trial. Need to determine whether per se or rule of
reason after examining at trial. Bifurcation b/c territorial allocation and
price restraints.
vi. Dissent: the effect is the same as horizontal price fixing.

b. General Motors (US 1966 note p. 390): combined territorial allocation with a
concern about discount selling. People were buying discount GM cars from
discount houses (several GM dealers were cooperating with these discount
houses and selling them the cars at almost wholesale) and GM dealers were
getting upset. The consumer would go to a regular GM dealership for test-driving,
etc., but then buy from discount store. GM argued that in dealing with discounters,
dealers were violating location clauses. J.Fortas: easy case, like Klors and Park
Davis dealers had worked together and with GM to cut off the discounters supply
of inventory and thus inhibit entry. B/c one of the prime purposes of the practices
was to keep prices up, the agreement was per se illegal under Socony. GM
Stands for the idea that enforcement of a territorial clause is per se illegal. (?????
Is that what it stands for????).
c. United States v. Arnold Schwinn & Co. (US 1967): Schwinn sold bikes in 3
ways: (1) sold them to tradl wholesalers and retailers who in turn sold them to the
public; (2) it sold them under consignment or agency agreements w/ distributors;
(3) it sued Schwinn Plan under which customers placed orders through retail
dealers to whom the bikes were shipped by Schwinn for delivery to identified
purchasers. Schwin did not appeal from the D.ct order invalidating its territorial
restrictions as to sales in the first category bikes sold to wholesalers and retailers
for later sale to the public territorial limitations were per se illegal, in part b/c
Schwinn did not appeal this portion. Issues b/f the Ct: (1) whether the d.ct
prohibition shd be extended to consignment and Schwinn Plan sales, and (2)
whether agreements by franchised wholesalers and retailers not to sell to
unfranchiesed dealers had themselves be enjoined. CT: for the consignment
provisions and schwinn plan rule of reason should be applied l- upheld.
d. Maximum resale price maintenance - Albrecht v. Herald Co. (US 1968 cb p.
393): a manufacturer has allocated territories and simultaneously imposed a
system of RPM
i. facts: paper route w/ 1200 customers problem Albrecht was selling
paper above maximum price (10 cents above). Carriers have exclusive
territories which are subject to termination oil prices exceed the suggested
price maximum. Herald sent letter to P telling him of the Ds intent to compete
b/c of his price; and letters to customers indicating the D would sell to them a t
a lower price. Hired Milne Circ Sales, Inc. to solicit customers on his route
got 300; and hired Kroner to take over those. D contd to sell papers to
petitioner but warned that if he contd to overcharge respondent would not
have to do business with him. Later D offered P his customers back he
brought suit.
ii. Plaintiff: Albrecht complaint charged combination in restraint of trade
under 1 SA.
iii. Ct: on the facts, Ds conduct cannot be deemed wholly unilateral and b/y
reach of 1 SA i.e. not Colgate. 1 covers express or implied
combinations, contracts and conspiracies (Parke Davis). Combination b/w
Herald/Milne/Kroner to force P to conform to the advertised retail price.
Restraint of trade by maximum RPM per se illegal.
iv. Class notes: why isnt maximum price limit ok? Any K fixing price is
wrong. Ct says (Kiefer) just as dangerous as minimum. Ct arg: maximum
price (1) cuts down flexibility of vendor to offer more services for more money;
and (2) maximum price is often minimum price i.e. label would end up
becoming determinative factor, everyone will say it is maximum price.
v. J. Stewart dissent: - Agency problem: person you give territory to will
attempt to milk the monopoly some pricing limitation is reasonable b/c it
ancillary. (I dont see where J. Stewart said this CHECK WITH SOMEONE)
D. Mergers: NB: during the 3rd period process was mechanical define an acceptable
market; show that the combined market share was significant or the top firms were highly
concentrated. There was a great presumption against mergers.

1. introduction: Consolidations of large companies have been a subject of antitrust

interest since the prosecution in E.C. Knight (1890s), described above. Traditionally
three kinds:
(1) Horizontal:
involving competitors at the same level of the
manufacturing and distribution process; (2) Vertical: involving firms at different levels of
the process; and (3) Conglomerate: involving unrelated firms who were neither
competitors nor buyers/suppliers.
a. history: Since Northern Securities (1904), it has been clear that some
consolidations could be challenged under the SA. However, US Steel and
Standard Oil of NJ, discussed above, seemed to say that even large
consolidations of actual competitors, if not accompanied by bad practices of the
new firm, might not violate the SA. Thus, 7 of the CA, adopted 1914, sought to
make more certain the ability to challenge such consolidations b/f they were fait
acompli. The language of 7, however, originally prohibited only the form of
consolidation with which congrs in 1914 was most familiar acquiring stock of a
competing company. Key step in development was amendment in 7 known as
Celler-Kefauver amendments.
b. 7 inadequate: United States v. Columbia Steel Co. (US 1948 note p.
418): Celler-Kefauver amendments arose from loopholes addressed in this case.
Ct held vertical integration did not violate the SA. What might have been thought
to be an important issue of the CA coverage was disposed of in a fn saying that b/c
this was an asset acquisition rather than a stock purchase, the CA did not apply. In
1950, Congress adopted the Celler-Kefauver amendments to 7.
2. Brown Shoe v. U.S. (US 1962- cb 419): first case that reached the S.ct under
amended 7. Lays out essential issues in mergers. Most influential single merger
case of its time. Sounded like a rule of reason case Ct looked at reason behind and
at the shoe industry.
a. Facts: a merger ws contemplated b/w Kinney (D), the eighth largest seller of
shoes in the US and Brown Shoe Co (D), the third largest seller. Both cos also
manufactured shoes. Thus, the proposed merger ws both vertical and horizontal.
The govt contended that such a merger could substantially lessen competition in
the manufacture and sale of shoes in the natl market. Brown contended that the
merger would be shown not to endanger competition if the lines of commerce and
the sections of the country were properly determined. Brown also contended that
competition in the shoe industry would not be diminished by the proposed merger
b/c Kinney manufactured less than 0.5% and retailed less than 2% of the nations
shoes. The district court found that the merger of the retail outlets would tend to
substantially lesson competition. Brown appealed.
i. Class facts: Brown 3rd largest seller of shoe and 4th largest maker;
Kinney ran a family style shoe store. Brown was a higher grade shoe. The
shoe business was a crowded industry top 24 only produced 35% of
business. Two aspects of this merger: (1) horizontal and (2) vertical.
b. gov: alleged the contemplated merger would violate 7 of CA. wanted
injunction. Contended that the effect may be substantially to lesson competition
or to tend to create a monopoly by eliminating actual or potential competition in
the production of shoes for wholesale and the sale of shoes at retail, by foreclosing
competition of Kinney and enhancing Browns competitive advantage over other
producers, distributors, and sellers of shoes.
c. Ct: first looks at the industry (concentrated), then discusses the legislative
history of the amendments to 7. then the ct looked at the vertical and horizontal
aspects of the merger:
i. Congress intent in enacting amendments: (these are the ones we
mentioned in class -also see pages 422-23 for more) (1) deal with potential
effects of merger the incipient merger; (2) while 7 does not prevent all
mergers, it expressly rejects approaches under 1 and 2 SA purpose of
CA 7 was to close the loopholes; (3) ct wanted to evaluate merger in light of
the given industry Congress indicated plainly that a merger had to be

functionally viewed in the context of its particular industry; (4) deal with
mergers b/f they are complete defeat mergers b/f they arise. [one other
important congrs used the word may substantially lessen indicating
concern was probable anticompetitive effects not certainties.
ii. vertical: economic arrangements between companies standing in a
supplier customer relationship are characterized as vertical. Vice:
forecloses competitors of either party from a segment of the market otherwise
open to them. CA does not render all vertical merges illegal however,
determination of the relevant market is a necessary predicate to finding of a
violation of the CA b/c the threatened monop must be one which will
substantially lessen competition within the area of effective competition.
Substantially can be determined only in terms of the market affected. Area of
effective competition = product market (line of commerce)+ geographic
market (section of the country).
A. Product market: the relevant lines of commerce are mens,
womens, and childrens shoes. (ct focuses on cross-elasticity of
demand and introduces the concept of sub-markets Prof thinks
submarkets arent very helpful.
B. Geographic market: the relevant geographic market is the nation
C. Probable Effect of the merger: vertical arrangement results in
foreclosure of competition must look at relative share of the market
foreclosed, but will not be determinative. (except - if approaches
monopoly proportions, CA will have been violated and SA - 7 leg hist
indicates tests under it are less stringent than SA; de minimis share of
market cant substantially lessen comp.) In this industry, no merger
b/w a manufacturer and an independent retailer could involve a larger
potential market forecloser. The shoe industry has been having lots of
these vertical mergers likely to substantially lesson competition.
D. ct assumed they would be sole providers of combined retail outlets
thus excluding other suppliers heading off incipient monopoly.
iii. horizontal: an economic arrangement b/w cos performing similar function
in the production or sale of comparable goods or services is characterized as
horizontal. Effect on competition depends on character and scope consider
such things as relative size and number of parties to arrangement,; whether it
allocates shares of the market among parties; whether it fixes prices; whether
it absorbs or insulates competitors.
A. Market defn: Prof lines we draw for market defn are often
arbitrary, but often essential to the case.
1. geographic market: Ct said that the geographic market was
those cities with a population exceeding 10,000 and their environs in
which both Brown and Kinney retailed shoes through their own
outlets. Suggestion is that price of shoes in DC not affected by
price in Boston (that is not true now!). Ct concluded that was a
reasonable market b/c the question is where is there a competitive
market.
2. product market: Ct says there are three: mens shoes,
womens shoes, and childrens shoes.
B. Probable effect of merger: Ct applied a functional std. market
share one of the most important factors to determine probable effect on
competition in relevant market. Ct found that the merger creating a firm
with 5 % of the atomistic market (highly fragmented) is, by itself likely to
diminish competition. Prof: Ct finds the merger would substantially
effect market in Dodge City, Kansas. All you need to prove is a restraint
on commerce in any part of country in any line of commerce to violate
7- standard of substantial lessoning of competition is met if you have a
substantial lessening in one town then the whole merger goes down!

Congress tendency toward concentration in an industry are to be

curbed in their incipiency now.
d. mitigating factors in mergers: mentioned in both horizontal and vertical
analyses:
i. small companies: merger of two small companies merging to effectively
compete. (ct says merger of two small cos more likely not to violate CA even
if identical share of the market foreclosed w/ merger of two big cos, which
would be violative.)
ii. failing firm defense: defense is available if impending failure would
cause the assets of one of the parties to leave the market if the merger doe
not occur. Saw with US Air merger w/ United very high standard
determined if US Air fails would rather have its assets distributed at a
bankruptcy sale.
e. Ct said purpose of antt laws: Protect competition, not the competitor
(congress had a bias for small firms) congress desired to promote competition
thorough use of viable, small businesses.
i. Prof: if firms are to get big how can they do it internal expansion, not
acquisition. Expand internally by making better product. Doesnt necessarily
increase choices. Fn 7 unilateral growth more likely the demand for the
companys products. Expansion through merger likely to reduce consumer
choice.
f. problems with vertical merger: forecloses competition; like tying and
exclusive dealing. Refer to diagram in notes 10/3/01. This merger will make other
cos in the market want to do the same sort of vertical merger b/c it is difficult to
enter the market w/o having both manufacture and retail to effectively compete.
a. Prof: if brown/Kinney merge can sell at lower price than competitor (b/c
no transactional costs). Price is set in terms of market not terms of the cost
though. When people say such mergers are anticompetitive, they mean that
vertical mergers are more efficient. Vertical mergers tend to be procompetitive and more efficient.
3. United State v. Philly National Bank (US 1963 cb 438): did not have to read but
mentioned in class:
a. wanted to merge 2nd largest bank w/ 1st; Relevant product market commercial
banking; Geo market four county area around Philly, people tended not to drive
very far to bank.
b. Ct found that in Philly the result of this merger wd be to produce a bank that
would hold 30% of market. Ct held that we shd presume merger is prohibited
when concentration is so likely to have such anticompetitive effects ex. 30% is to
much, significant increase in concentration. Top two banks wd have over 50% of
market after merger. Wd be presumptively illegal. Ct did not say per se, but
essentially made it.
c. Ct said you out to expand internally, go head to head citing Brown shoe,
problem every time a big bank expands, tends to trample small banks rather than
merging.
d. Arg More competition in one market cant be traded off for lessening
competition in another market: lessoning of comp in Philly market wd be
overcome by comp in the natl market. (comp troller approved b/c wanted a
competitor with the ny market). S.Ct held that you cant trade off an improvement
of comp in one market, for a lessoning of comp in another (smaller) market. 7 if
there is substantial lessoning of comp in any line of commerce cant even though
there looks like there is a real positive.
4. Elimination of Potential Competition is a violation of 7 United States v.
Penn-Olin Chemical Co. (US 1964 cb p. 451): combination short of a merger. The
idea of potential competition is important in the merger analysis ever since this case.
Established: (1) treat joint ventures as mergers under 7 (not per se illegal); and (2)

introduced the idea of potential competition significant in the industry even though
they werent producing anything.
a. Facts: Pennsalt, an Oregon producer of sodium chlorate (NaCl) (a bleaching
agent used mainly in the pulp and paper industry) which it sold in the West, joined
Olin Mathieson, an industrial chemical firm which was an intermediate user of
NaCl, to build a NaCl plant in KY and to sell that product in the Southeast. B/f
Penn-Olin entered this market, only two firms had plants in the Southeast and
controlled over 90% of all sales. B/f forming the joint venture (JV), both Pennsalt
and Olin had considered but not completely rejected the possibility of entering the
Southeast independently.
i. Class facts: Sodium Chlorate used to bleach paper. Produced in lg
volume by chem. Cos; Firms: P produced and sold chemicals. O had
patented process to use NaCl to bleach paper and allowed P to use process.
P in Portland. O in St Louis and Cincinnati. 2 other firms: Hooker and
American producing NaCl in Southeast operated in Mississippi. O chem.
Co. owner of patent and produced other chems. what was their thought
process? They both thought about getting involved in SE market. O thought
about entering, but kept deciding not to do it. P thought abt it, but kept
deciding not to do it. P/O had a deal: O acted as a sales agent, arrangement
said if either of us wants to go into this market separately we will tell the
other. Ultimately Joint Venture P-O co. -- became third seller in this
market SEast NaCl paper bleaching.
ii. JV rather than merger: Well, they didnt merge, formed another co by JV. Putting the worst face on it what can you argue they have done here:
dissenters see it as Addison Pipe as two separate cos. Would not have
been allowed to do this. 2 cos. Each of which could have entered the market
to make 4 firms, but instead they conspired to combine to avoid competing
with each other. If we get together we can take H and A, but dont want to go
head to head so lets get together; conspiracy among competitors to not be
competitors anymore. Per se violation of 1 restraint of trade. If dissenters
they had prevailed, wd have made JVs per se illegal. (The majority says - 7
CA applies to JVs see below.)
b. Gov: seeks to dissolve this JV as violative of both 7 of CA and 1 of SA.
c. D.ct: Relying on the competitive value of an additional entrant, the D.ct upheld
the JV. The govt had not shown as a matter or reasonable probability that both
firms would have entered the market if P-O had not been created. The court
reasoned that one actual entrant was worth more than two on the sidelines.
i. D.Ct says test if both of the firms wd have entered this market so that you
wd have had 4 firms but-for the venture, then it substantial lessoning of
competition. They wdnt have both entered then nothing wrong.
ii. D.ct found that the JV violated neither 1 nor 7.
d. S.Ct: no violation of 1 of SA, but D.ct erred in dismissing the complaint as to
7 CA vacated and remanded.
i. 7 applies to JVs: D arg 7 would not apply to the newly formed
corporation. Std Ct uses: 7 Clayton Act applies to JVs something less
than a per se rule will apply more like rule of reason. Test: is there a
substantial lessoning of commerce or a tendency to create a monop.
Decision to go with 7 rather than 1 is the point. JVs have been very
popular in this country, method of expansion by firms intlly, similarly within
this country saying neither of us wd have entered the market otherwise and
this is something that allows us to enter. (Does 1 SA ever apply to JVs or
are they always handled under CA 7???????????)
A. What makes JV different than a cartel? Ct says JV actually
creates a new competitor cartel eliminates competitors; at the end of
the day in a JV you have more competitors than you had the day before
and therefore this JV shd not be treated as though its a cartel. Maybe

there is a basis for not liking some JVs but they shdnt be viewed as the
same thing. In effect it creates, a maybe better you have something
now that you didnt have before more in the market.
ii. Potential competition: S.ct remanded the case for further findings and
ruled that if one of the rims probably would have entered w/ the other
remaining at the edge of the market, continually threatening to enter, the
venture shd be disapproved. The Ct concluded that the possible elimination
of a potential entrant, even if the evidence failed to show a reasonable
probability of entry by the second firm, would violate 7.
A. Ct says: looking at whether both wd enter the market is not enough.
Have to also ask if one of them wd have entered the market, ex. O?
Then P still wd have been in Oregon as a potential competitor ct says
there is some value to having P potentially going to enter the market.
The idea is what you are trying to do by having multiple firms in market
create comp to drive $ of NaCl to marginal price of producing. If these
firms ever did anything bad, the presence of P as potential competitor
keeps the other firms from jacking the price, it is a sufficiently credible
threat to keep the price lower than it otherwise wd have bn or cd have bn
if they were ever tempted to get price above the competitive level.
B. This idea big in third period. Prof thinks important today, market not
just defined by those in it. Factors that are relevant to the determination
of whether or not P/O wd have been a potential competitor(s): we are
not looking at what the co said it was going to do we are looking at
subjective factors barriers to entry, do you have that type of corporate
resources, had patent rights, experience in industry; look at the indicia of
whether you are able to.
1. objective: Premise you look to see what the firm appears to
be capable of doing thats what becomes the threat assessment
OBJECTIVE, not subjective. It is never enough to say that just b/c
P cd decide not to enter shd never determine the issue. What wd
the threat perceived by the other persons in the industry?
d. Should we favor JVs? Well, good for small firms. TOPCO was arguably JV of
small grocery stores. illegal territorial restrictions, but not JV illegal; JVs
encouraged in research - Research JVs desirable: research and development
can be done by JV register with Just dept analyzed by rule of reason and if
violate only subject to single, not treble, damages. Production: Arg line b/t
research and production is really blurry; Now you can have production JVs it is a
very important aspect of the development of the law in this area. We talk about
mergers, but in an area where you have not literally merged, but have JV is very
common and thought to be a desirable form.
5. Extension of the potential competition theory - FTC v. Protor & Gamble Co.
(US 1967 cb. p. 466): (seen to be if not the kind of extreme case that Utah pie to be,
nevertheless a case that raised substantial doubts, and illustrates just how far the law
developed in this case.). Prof: case expanded 7 to conglomerate mergers; looked
again at potential competition this time never produced product involved and had no
intention (subjective) to enter the market de novo.
a. facts: Clorox was the leading bleach producer in the nation. It controlled
nearly 50% of the market and, in certain geographic areas, controlled a much
larger share. Eighty percent of the market was controlled by four firms. In many
areas of the country, the other three firms did not even compete with Clorox. Other
than Purex, Clorox ws the only firm with more than one plant. The low mark-up
and high transportation cost limited effective marketing to a radius of 300 miles
from the plant. P&G, a giant in the household products field, had been looking for
areas in which to diversify and purchased Clorox. The FTC found that the merger
had an anticompetitive effect. First, it removed P&G as a potential entrant in the
market. Secondly, it would tend to suppress competition for fear that P&G would

retaliate by selling Clorox at a loss while making it up with its other products.
Thirdly, since all bleach has the same chemical formula, advertising is the key to
success in the area. In 1957, Clorox spent $5.4 mill in advertising, P&G spent
$127 mill. With this large of an ad budget, P&G could further dominate an already
oligopolistic market. Ct of app reversed.
i. ns: P&G, a large, diversified producer of detergents and other household
products sold in supermarkets, bought Clorox, the largest seller of household
liquid bleach. P&G accounted for 54 % of detergent sales, but it neither
made, nor sold bleach. Clorox controlled almost 49% of the bleach market;
its nearest rival (Purex) had less than 16% of bleach sales.
ii. Class: P-G makes pretty much everything deod, coffee, pepto,C makes
bleach. P-G makes zero bleach. (crucial makes this case interesting. If PG made 20% and C 50%, nobody wd have blinked when struck down).
b. FTC: proceeding initiated by the FTC charging that P&G acquired C in violation
of 7 of the CA. Action to compel divestiture.
c. Std: 7 CA was intended to arrest the anticompetitive effects of market power
in their incipiency. The core question is whether a merger may substantially
lessen competition, and necessarily requires a prediction of the mergers impact
on competition, present and future. All mergers are w/in the reach of 7 FTC
and Ct note that this is not a horizontal, vertical or conglomerate merger it is a
product extension merger (nb Prof still said this was a conglomerate merger).
d. market: product bleach; geographic national (I think that this is inferred but
never explicitly discussed.)
e. Arg there is not lessening of competition: that there is not a substantial
lessoning of comp or tendency to monop. There is a zero change in the market.
When you added P-G market to C market = C market. It was called a
conglomerate merger at the time merger by two firms who were not in any way
competitors at that time, there was no overlap.
f. S.Ct violates 7:
i. In ruling that Proctors acquisition of a producer of complementary products
violates 7, the Ct relied on two grounds for why competition (actual and
potential) would be reduced by the merger:
A. that the merger would give C (supported by P&G) a decisive
competitive advantage in the bleach market, allowing it to discipline
competitors and raise new barriers to entry: P&G has enormous
advantages ex. Buys so much tv time that they can get it wherever they
want, whenever they want, at typically cheaper price. P-G is going to
make C only that much stronger C will be in a condn to get a larger
share of the market. Merger will make it possible; and
1. ns -criticism: assumes P&G had the ability and desire to drive
out competing bleach producers. Yet, if the entry was as desirable
to P&G as the Ct assumed, P&G cd have achieved that end through
internal expansion and then driven C and others from the market.
(promotional efficiencies working against P&G against merger)
B. P&G was the leading, and perhaps only, potential candidate for entry
into the bleach market: P-G was a potential competitor in this market.
Cd have done it, but whether or not they wd have is not important.
Everybody in the industry knew that if the price of bleach got to high
P&G would have come in. The idea is that P-G shd have started as new
entrant or toehold entry (toehold acquisition get a little guy who
produces bleach, not the biggest).
1. Harlan concurrence potential competition by P&G not an
issue: if the industry is one in which the market price is such that
cannot be raised above the competitive price b/c of the inherent
competitive nature of the industry; then the status of other firms as

potential competitors is not important. Anyone cd have entered this

market if the price got to high, therefore, not an issue.
2. ns criticism: contradicted by the available evid entry into
bleach production ws not impeded by technical barriers; the market
contained many small firms; retail distribution was possible by any
of the large retail chains; large scale economies did not bar smaller
firms. Nor did the ct consider whether other lg detergent producers
cd have entered the market. P&G was probably only one of several
(perhaps many) possible entrants, and its elimination as a potential
competitor through the purchase of C would not have reduced
competition.
ii. Efficiencies: P&G is known for making things so much like C, that it
would be able to achieve market efficiencies (in my notes this word was
inefficiencies?????? But I think it should be efficiencies) of driving the price
down. Is there ever a case where we should allow mergers b/c more
efficient? (see note discussion below) Ct says no Possible economies
cannot be used as a defense to illegality. Congress was aware that some
mergers which lessen competition may also result in economies but it struck
the balance in favor of protecting competition.
g. Note Efficiencies as an antt defense (pg 479): need to look at graph and
read over: notes Is there ever a case where we should allow mergers b/c more
efficient? Even though will drive out others. GRAPH pg. 480. competitive price is
at MC1, P1 on this chart; monop price is P2, merged to monop, but have lowered
the cost from MC1 to MC2. if rectangle on left is bigger than triangle on right than
there is social value. There will be times when efficiencies present a societal value
should ignore. SEE Graph before the merger price set at competition will be
marginal cost Q2; after merger premise reduce output and maximize cost. Arg
consum surplus. Arg new entry will drive cost back down some. Also new
firm may price at old price, but get more profit b/c costs down. -Limit pricing- price
where new entry unlikely. There are circs in which even worse case it wd be more
efficient to output less. Ex, defense industry, allow merger brings price/plane
down; even though reduces # of firms more efficient. Allowed in defense
industry.
h. High Point of Potential Competition The Falstaff Brewing Case (US
1973): D.ct mistakenly applied a subjective test whether Falstaff as a matter of
fact would have entered the market. S.ct says no it is an objective test: if it
would appear to rational beer merchants in New England that Falstaff might well
build a new brewery to supply the northeastern market, then its entry by merger
becomes suspect under 7. J. Marshalls concurrence explained that there are 3
times when potential competition is important:
i. The Dominant Entrant: a firm outside the market may have overpowering
resources which, if brought to bear within the market, cd ultimately have a
substantial anticompetitive effect. If such a firm were to acquire a co within
the relevant market it might drive other marginal cos out of business, thus
creating an oligopoly, or it might raise entry barriers to such an extent that
potential new entrants would be discouraged from entering the market. (P&G
fits this description). Such a danger is especially intense when the market is
already highly concentrated or entry barriers are already unusually high b/f
the dominant firm enters the market.
ii. The Perceived Potential Entrant: even if the entry of a firm does not
upset the competitive balance within the market, it may be that the removal of
the firm from the fringe of the market has a present anticompetitive effect. In
a concentrated oligopolistic market, the presence of a large potential
competitor on the edge of the market, apparently ready to enter if entry
barriers are lowered, may deter anticompetitive conduct within the market.
From the perspective of the firms already in the market, the possibility of entry

by such a lingering firm may be an important consideration in their pricing and

marketing decisions. When the lingering firm enters the market by
acquisition, the competitive influence exerted by the firm is lost with no
offsetting gain through an increase in the number of cos seeking a share of
the relevant market. The result is net decrease in competitive pressure. (Ct
though P&G was a perceived potential entrant).
iii. Actual potential entrant: even if a firm at the fringe of the market exerts
no present procompetitive effect, its entry by acquisition may end for all time
the promise of more effective competition at some future date (i.e. its entry de
novo).

VI. The Modern Development of Antt Law Since 1974:

A. The Transition cases: three cases that marked a clear break from the cases in the 3 rd
period (1940-73).
1. A merger case w/ a change from the principle that the government always wins
finally doing more than relying on rigid market share data. United States v.
General Dynamics Corp. (US 1974): 1st case in which there was an explicit focus on
economics and the economic setting. (new appointments to the Ct made a difference
there were 4).
a. facts: D owned a strip mine D acquired material services corp (MSC)
through merger. MSC owned United Electric Coal (UEC), whose regional coal
holding, when combined with those held by D, gave D significant control in the
regional coal market. The gov brought an antt action under 7 of CA seeking
divestiture on the grounds that the acquisition had an anticompetitive effect. The
gov alleged that the coal industry was really oligopolistic and the loss of even a
single competitor had an anticompetitive effect by further centralizing control. D.ct
made extensive findings of fact and finally dismissed the action. It found that b/c of
the presence of so many alternatives to coal, the relevant market was the energy
market, which ws not oligopolistic and which was highly competitive. It found that
coal had declined in importance, and this was the major cause of the oligopolistic
tendency in the market. Most coal was being purchased by utilities or under longterm leases. It found that United had already committed most of its resources to
long-term contracts, and it had insufficient reserves to compete with any other
producer. Moreover, the distance b/w Ds mines and those owned by United was
too distant to allow for effective competition. Finding that these and other factors
negated the anticompetitive effect inference raised by the govts statistical
information, no violation of 7 was found.
b. notes: S.Ct only common rule in cases prior was that the gov always wins.
Define market, trend, share so that the gov going to win. Overall coal not being
used as primary energy source, environmental concerns now, vastly increased
focused on the sources of power. Coal is unpopular, not many cos can afford to
use it, homes are no longer being built with coal burners. The merger is not evil, it
is b/c the world has changed (liked Grocery store case Stewart argued in dissent
people liked to go to lg stores). Here arg decline in local firms reflects changes
in society. Have a merger here that was going to reflect 20% of the market. The
kinds of firms that they were selling coal to were utilities contracts ran long term.
While it is true that 20% of the coal used next yr would be from these combined
comps those sales were made a yr ago. The cos were not making market
decisions next yr about how much coal they would sell. This was all
predetermined including the price. The question is how much coal they had to sell
in future years. Essentially these cos had precommitted to sell all available coal.
Basically there operations were now production, not sales. only relevant question
is what impact is this merger going to have on the sales of coal next year? It
was going to have zero effect. Focus on economic reality (factually disputed
impart by dissenters cd sell more coal.). Maj: the analysis on these issues has

to turn not on the way we used to analyze these things, but to ask how many tons
of coal were going to be offered on the market next yr. Dramatic departure from a
world in which there had bn routine principle of gov always wins. (Now Burger,
rather than Warren, Ct; Renquist on the Ct). People didnt necessarily recognize
the revolution that was coming, but dramatic expansion of not striking down
mergers and focus on econ reality.
c. Holding and decision: Statistical evidence is only valid insofar as it presents
an accurate picture of the market. Such evidence may always be refuted to
establish that no violation of antt law has occurred. B/c Uniteds coal was almost
entirely committed to existing long-term contracts, it had no power to effect
competition in the market since it could not compete for new business. Moreover,
the decline in market competitors was almost solely related to natural causes
rather than a concentration of ownership through merger and acquaint. Acquisition
of a business which cannot compete should not produce an anticompetitive effect.
We are not dealing with the failing business defense, only Uniteds market
position and the effect of its acquisition on the relevant market. A purely
speculative supposition that United might have strengthened its market position by
future acquisition is unpersuasive and an anticompetitive effect cannot be created
in such a manner. The govs prima facie case was overcome, and it failed to carry
its burden of proof. We need not reach the question of what constitutes the
relevant market since it is unnecessary to our decision.
d. ns: the Ct repeated its admonition in Brown Shoe (??) that statistics
concerning market share and concentration, while of great significance were not
conclusive indicators of anticompetitive effect. Market share was only the
beginning place for analyzing a mergers competitive impact, for evidence of past
production does not , as a matter of logic, necessarily give a proper picture of a
companys future ability to compete. The Ct did more than apply a rigid test
predicated on market share data; instead , it accounted for important qualitative
factors in concluding that market shares based upon historical sales data would
not give a proper picture of the merging parties future ability to compete.
2. Nonprice vertical restraints must be evaluated by a Rule of Reason.
Continental T.V., Inc. v. GTE Sylvania, Inc. (US 1977 cb p. 495): (case that
everyone recognizes as the transition case). Prof: reversed Schwinn, which was a
very formalistic rule. Unlike approach the Ct rejected, the Ct asked fundamental
economic questions about the impact of the activity on competition and expressly
compared the negative impact (intra) against the positive impact (interbrand) Prof
says this is similar to ancillary restraint thinking.
a. Facts: To increase its declining market share in natl tv sales, Sylvania (P)
adopted a franchise plan, limiting the number of franchises for any given area and
requiring each franchisee to sell his Sylvania products only from the location or
locations at which he was franchised. One of Ps franchisees, Continental (D),
protested Ps decision to grant a new franchise only a mile from D's San Fran
location. P later denied Ds application for franchise in Sacramento. As relations
b/w the two deteriorated, P reduced Ds credit line, after which D withheld all
payments owed. P terminated Ds franchises, then filed a diversity action to
recover the moneys owed and the secured merchandise held by D. D crossclaimed, alleging restraint of trade in violation of the SA.
i. class: S made, among other things tvs, had low market share and
developed a franchise plan to increase. Have 2% of the natl shares of tv
market. Set up franchise plan: (like MckyDs) wanted to have S retailers
around, but not too many K didnt guarantee a specific territory, but it did say
that you have to open a store at such and such location. Deal that as long as
you are moving sets out the door, you will be exclusive dealer in that territory.
Worked got them up to 5%, 8th largest firm. Problem in San Fran: (went
from 2% - 2.5% in San Fran) continental making a lot of money b/c raised the
price of TVs (like Albreck) retailer was raising price of tvs, making more

money per set, continental was not moving the sets out as it would if it had a
lot of sales. thats what S was interested in; but C interested in making more
money per sale. S tried to open another franchise in the area about 1 mile
away. Put in a competitor. C got upset and filed an antt case, after S
terminated the relationship with C altogether.
ii. Who brought the antt action? Continental (or C) brought alleging
violation of 1.
b. Lower courts:
i. District: The jury was instructed that, if it found territorial restrictions on Ps
part, it must conclude that a per se violation of the SA had occurred. The jury
did so find and awarded damages to D.
A. class: Distr Ct: concluded that; Schwinn said it was per se illegal to
establish territory on sales when your retailer has bought the license. He
is entitled to sell the set that he is bought wherever he wants. That was
lesson of Schwinn so everyone thought.
i. Ct of App: Ct of app reversed, having concluded that a rule of reason
applied. D appealed.
A. class: Ct of App: Schwinn was a strange case relatively powerful
bike manufacturer; S not powerful; even though Schwinn laid down a per
ser rule, we are going to distinguish as a rule of reason.
c. Majority of S.Ct:
i. summary: A nonprice vertical restrain should be judged under the rule of
reason. The district courts jury instruction in this case was based on the
rationale of Schwinn (1967). However, per se rules of illegality like the one
stated in Schwinn are appropriate only when they relate to conduct that is
manifestly anticompetitive. Vertical restrictions like Sylvanias location clause
promote interbrand competition by allowing the manufacturer to achieve
certain efficiencies in the distribution of his products. These redeeming
virtues are implicit in every decision sustaining vertical restrictions under the
rule of reason. B/c there is no persuasive support for expanding the per se
rule of Schwinn, it must be overruled. Thus, the rule of reason governs the
vertical restriction at issue here, and the decision of the ct of app affirmed.
ii. ns: ruled that nonprice vertical restraints must be evaluated by a rule of
reason. Criticized the approach in many post-Socony decisions of using per
se tests to condemn behavior whose economic effects are not immediately
clear.
iii. Class:
A. Schwinn overruled: under Schwinn, this wd be per se illegal
overruled per se rule established in Schwinn. This is what got everyone:
S.Ct for the last 30 yrs had been decided 1 cases under per se rule
here, the s.ct expressly overrules per se rule and says vertical territorial
restrictions shd be analyzed under a rule of reason.
B. Interbrand competition is the important thing:
1. The price of every one elses tv set (J Holmes dissent from way
back when) ultimately vertical restrictions are not going to
have an impact on price, most significant is interbrand
competition. I.e. Sylvania w/ Zena w/ Panasonic. This restriction is
going to reduce intrabrand competition (among sellers of a single
brand).
2. Ct says intrabrand competition can promote interbrand
competition. A reduction of intrabrand competition, while
conceivably a reduction of one important competition, but may
stimulate interbrand competition. But in Philly bank ct says you
cant trade off one competition for another. What the ct is saying
here is that you can and must compare ask whether decline in
intrabrand comp will stimulate interbrand comp.

C. Franchise plan (i.e. territories) promotes interbrand competition:

By creating these territories what have they succeeded at what you are
going to do is give an incentive to franchisees to invest some capitol b/c
they get the return from their capital (nice store, trained sales force, etc.)
+ induce them to provide a kind of service, support, and able to realize
the benefits they make in their territory incentive to push the product.
By setting up these territories, create opportunity for franchisees to
succeed or fail by the amt of time, etc they put into it.
D. REMEMBER this is a rule of reason does not mean all are per se
legal, just means not per se illegal an analysis must be made of
whether
E. Only nonprice vertical restrictions, i.e. RPM still per se illegal:
Fn 18 on pg 500 Ct says resale price maintenance is really diff
danger of facilitating cartels; more dangerous than territorials; more likely
to facilitate cartel among retailers, manufacturers (dr. miles) for that
reason we expressly do not take the reversal of scwhinn and make it a
reversal of dr. miles; at this time, congrs was really opposed to retail
price maintenance. Ct knew if they moved on both, congrs wd act. So
what they did was reverse this one.
d. J. White concurrence:
i. Factors for R of R analysis: suggests some principle ways to analyze (as
practical matter havent had rule of reas in 35 yrs). Look to see (not blue
print, just ideas): relevant (1) how tight are the territorial restrictions (some
can be more restrictive than others); (2) what is the market share of the firm
that is using the territory (35% of M is different than 2%); (3) how much
interbrand comp is there in the marketplace?
A. In this case it is reas to apply a rule of reason and these are the kinds
of things you want to look at in reality, rule of reason here to stay and
look to White factors for guidance; useful for rule of reas analysis
ii. Should include RPM: White says - Once you buy this analysis, there is
no reason not to apply it to retail price restraints
e. Topco?: What effect does this case have on TOPCO? None really b/c
characterized as horizontal rather than here vertical. TOPCO still subject to a
per se rule. ARG: What seemed to be happening in TOPCO is very much like
what happened here and we should have at least assessed intra vs. inter, but b/c
characterized as horizontal, it was not exactly addressed in Schwinn or here.
f. Philly Bank?: Did not really effect Philly Bank b/c that was a 7 clayton act
case.
g. for criticisms of Sylvania not discussed in class see ns pg. 287-289.
3. Antitrust Injury: P must show antt injury injury of the type the antt laws were
designed to protect. P must show that it was injured by the anticompetitive
consequences of the antitrust violation. Antt laws protect competition not
competitors. Brunswick Corp v. Pueblo Bowl-O-Mat, Inc (US 1977): (in many ways
is almost as important as TV case, in many ways this is a procedural case, in this period
some of these arguably non-substantive cases are having an enormous affect on
ability to file private cases barrier to private cases having a tremendous impact on
the world of antt). Prof cut out whole class of Ps, parties with real incentive (like here
competing bowling alleys) cant file the action.
a. Facts: Brunswick (D) was a large manufacturer of bowling equipment. Starting
in the 60s D began acquiring defaulting bowling alleys who purchased its
equipment and operating them, thus preventing them from going out of business.
Over the years, D, as a result of these acquisitions, became far and away the
nations largest owner of bowling alleys. When D acquired several bowling centers
in the same market as P, the latter brought an action under the CA, seeking
damages and injunctive relief. The d.ct, following a jury verdict, awarded treble
damages and injunctive relief to Pueblo, and the ct of app affirmed. D appealed.

i. Class: Case about bowling. P three bowling alleys that liked the world
b/f B=D came to town. D started to purchase failing bowling alleys. D
transformed bowling invented the pin spotter picks up the pins and
sweeps the alley. Big deal. D had financed most of these alleys, when the
alley that they financed goes belly up. D, to limit their losses, bought failing
bowling alleys for the price of its claim as creditor; and ran the alleys. Ps in
this case other bowling alleys sue D alleging this is an asset acquisition
merger in violation of 7.
ii. NB: Private treble damages are available. Wd this acquisition have bn
protected under failing comp doctrine; or P-G arg (prob protected FCD); For
this case to make any sense, you have to assume that the substantive law wd
have forbidden this merger (i.e. if gov wd have brought wd have won).
iii. Plaintiff? P is competitor bowling alley operator challenging acquisition
of assets of one of Ps bankrupt competitors asserted that its profits would
have increased had D not purchased the failing rival. Claiming violation of 7
CA by acquiring bankrupt bowling alleys that compete w/ P.
b. J. Marshall for the Ct:
i. Class:
A. no antt injury: it may or may not be illegal, but you cant be the one
to tell us this. Is this a standing case no, standing asks did the
individual suffer actual injury so we dont have theoretical causes of
action. Constn only allows fed cts to decide real controversies. These
people had that injury economic injury. They lost b/c the statute was
designed to protect competition not competitors. Antt laws are not to let
you avoid competition. Have to have suffered Antt Injury. Who might
have filed suit? Obviously just.dept and ftc, but also the bowlers who
were upset that D would drive up cost. Yes, but the bowlers dont care.
B. Reason the case is significant: very often the people who care abt
violation, or who are practically injured by the violation are not the
plaintiffs that the antt laws envision. Remains law of the land.
ii. ns: S.ct established the requirement that the private plaintiff in a treble
damage action show that its injury resulted from the anticompetitive effects of
Ds conduct. S.Ct emphasized that the asserted injury flowed not from any
reduction in competition, but from competition itself. Plaintiffs must prove
antt injury, which is to say injury of the type the antt laws were intended to
prevent and that flows from that which makes D s acts unlawful. The injury
should reflect the anticompetitive effect either of the violation or of anticompetitive acts made possible by the violation.
A. significance: the antt injury requirement is an imposing obstacle for
private Ps. (watch for Arco (1990), discussed below.
B. Brown Shoe: J. Marshall quoted the first of Browns two admonitions
about antitrusts concern for competition, not competitors. Significantly
he did not cite that latter passage in which C.J> Warren repeated the
competition, not competitors aphorism, but condemned the merger to
vindicate Congress desire to protect small firms. In Brunswick, the Ct
studied the Janus-like features of Brown and ignored the face of
business egalitarianism.
c. The Passing-On Doctrine (note p. 512): Only the first consumer from the
offending party can sue. For ex. If M sells to W who sells C, then only W can sue
M for price-fixing, not C. This cuts out a lot of people. An indirect purchaser from
an antt D (i.e., someone who did not purchase directly from the D, but who
purchased from someone who purchased from the D may not bring an action for
damages.
B. The Per Se v. Rule of Reason Debate Continues in 1 Cases: Sylvania (1977)
established that the per se rule would be moderated in cases of vertical territorial allocation
since that time recurring question of what other situations wd merit rule of reason treatment

and how that analysis would proceed. Goldfarb (1975) had held that a minimum fee
schedule adopted by a voluntary bar association violated 1 per se; lawyers were told by
the state bar exactly what to charge; (1) even a voluntary fee schedule that is complied with
is price fixing and per se illegal; (2) even though lawyers are licensed by the S.ct, not
protected under Parker v. Brown b/c fee schedule not required by the Ct; (3) real estate
transaction is in ic; and (4) professional activity is a trade or commerce (i.e. lawyers, doctors,
etc.). Since 1977, the Ct has had to integrate the insights of both Goldfarb and Sylvania.
1. Horizontal Price Fixing: price fixing b/w competitors (a primary concern of 1 SA).
I believe the last we saw horizontal price fixing, above in this outline, was Socony
(1940) which adopted the rigid per se rule against horizontal price fixing.
a. Rule of reason is the starting point for analysis of even 1 price-fixing,
some will be per se illegal (but behind that is the fact that it will almost always be
found unreasonable and therefore not worth the Cts time). The defense that
competition is bad is not a defense. National Society of Professional
Engineers v. US (US 1978 cb p. 516):
i. Facts: The Natl Society of Prof Eng. (D) was an organization composed of
seasoned profls in the engineering field. One of the provisions of Ds cannon
of ethics was a prohibition on competitive bidding by members. The stated
rationale for this canon was that the bidding process would result in inferior
work, which would present a public hazard. Instead, the D sought to preserve
the tradl method of selecting an engineer, i.e., on the basis of background
and reputation, not price. The fedl govt filed an action seeking to prohibit
enforcement of the canon, contending that it violated the SA.
A. Class: had to first select engr before talking price, could not discuss
fees until selected. Chose engr based on reputation and background
w/ resumes, references, pictures of prior work (competition based on
everything but price). Society wants to avoid clients picking engr based
only on price and not quality (which they would have); so they wouldnt
go straight to the lowest bidder.
B. Govt: wanted to nullify the assns canon of ethics prohibiting
competitive bidding by its members b/c violates 1 SA restrains trade.
ii. Procedural History: D.ct entered an injunction, app ct affirmed, and s.ct
granted review. D.Ct didnt look at the justifications; wouldnt take evidence
on why they had the agreement. Applied the per se rule dont ask why,
didnt take evidence on why engrs had this rule only hear D if analyzed
under rule of reason.
iii. D arg: public safety wanted to ensure the customer got the higher value
bidding would lead to deceptively low bids, tempt engrs to do inferior work
w/ risk to public safety and health.
iv. Under Socony Vacuum: this agreement would have clearly been illegal
under Socony agreement with the intent and effect of affecting price.
v. J. Stevens for the Court: Restraint on competition in violation of SA 1.
A. distinction with professionals: In Goldfarb, the Court noted that
certain practices by members of a learned profession might survive
scrutiny under the rule of reason even though they would be viewed as
violative of the SA in another context. However, this language from
Goldfarb didnt have much of an effect in this case. See concurrence
below thinks it should have.
B. Rule of reason v. per se: Ct says, in general, you should approach
cases under the Rule of Reason. I.e. Rule of reason is the general rule,
but there are some things that are never going to be reasonable and so
we dont.
1. Congress has foreclosed the issue of whether competition
is good: although the R of R applies, when your only reason is that
you thing competition is bad that is not a reason at all. D has a
defense that cannot be analyzed under the rule of reason.

2. Does agreement enhance competition: only look at whether

or not agreement enhances competition in this case you didnt
give any reason that the court should listen to you. There was
nothing about the agreement that was pro-competitive.
C. ns: Ct engaged in R of R analysis that, it said, required a balancing
of the restraints anticompetitive and procompetitive effects. There the Ct
rejected the Ds justification b/c the inquiry is confined to a consideration
of the impact of the restraint on competitive condns, and the engrs had
not claimed that their ban on competitive bidding enhanced competition.
vi. J. Blackmun concurrence: The language in Goldfarb is serious and
there is a difference b/w professions and businesses. Should be room for
some other factors to be considered.
b. Broadcast Music Inc. v. Columbia Broadcasting System, Inc. (US 1979
cb p. 523): (really changed things like Sylvania there is a rule of reason, but
for horizontal restraints, seemed to reverse Socony.)
i. facts: CBS (P) brought an action under antt and laws against BMI (D)
and others, attacking the issuance of blanket licenses. The basic question
presented was whether the issuance by D to P of blanket licenses to ed
musical compositions at fees negotiated by them was price-fixing per se
unlawful under the antt laws. The lower ct dismissed the complaint, but the ct
of app held that the blanket license issued to tv networks was a form of pricefixing illegal per se under the SA. The lower court found that there was no
legal, practical or conspiratorial impediment to P obtaining individual licenses.
A. class facts: Assns for performers and composers ASCAP and BMI
set up blanket licenses had to buy whole thing. Price based on the
revenue of the license. At the time, networks could own certain amount
of radio stations. CBS was going towards talk radio running a much
lower portion of the licensed music, but still paying based on its total
revenue of the station.
B. blanket licensing solves problems:
1. reduces necessity of negotiating individual license;
2. difficult to police very cumbersome process to monitor
individual records, too hard to monitor on your own. Premise of plan
if issued blanket license would not have to listen to that station.
C. Plaintiff: CBS claims D violates 1 horizontal price fixing by these
blanket licenses in restraint of trade.
ii. arg -Price-fixing: ASCAP and BMI are marketing agents for a group who
would otherwise be competing and setting individual prices transformed a
world of competitive pricing into a world w/ a common price. No matter what
music they are playing, they are paying the same price. Price fixing in the
literal sense: the composers and publishing houses have joined together into
an organization that sets its price for the blanket license it sells. CT rejects
mechanical application of a per se rule here says that Price fixing is a short
hand way of describing certain categories of business behavior to which the
per se rule has been held applicable. Literal approach i.e. two partners set
the price of their goods, they price fix, but are not per se in violation of SA
does not alone establish that this particular practice is one of these types or
that it is plainly anticompetitive and very likely without redeeming virtue.
iii. Always ask first Rule of Reason or Per se???: (this is how we
analyze if it should be per se illegal):
A. Would it almost always restrict competition; is it something that will
increase price and decrease output?
In characterizing this conduct under the per se rule, our inquiry
must focus on whether the effect and, here b/c it tends to show
effect, the purpose of the practice are to threaten proper operation
of our predominantly free-market economy that is, whether the

practice facially appears to be one that would always or almost

always tend to restrict competition and decrease output, and in what
portion of the market, or instead one designed to increase
economic efficiency and render markets more, rather than less
competitive.
B. Is it a naked restraint of trade w/ no purpose except for stifling
competition?
C. Does it threaten the central nervous system of the economy? (we
have doubt about the extent to which this practice threatens the central
nervous system of the economy, (Socony), that is, competitive pricing as
the free markets means of allocating resources.
iv. Not all arrangements among actual or potential competitors that
have an impact on price are per se violations of the SA or even
unreasonable restraints. I.e. Ct explicitly says that not all agreements that
have an impact on price are illegal.
v. Justifications: (these were significant for applying r of r)
A. reduces transaction costs: improves efficiency, this plan makes it
possible for people to deal who would otherwise not be able to
B. creates a new product or new market: blanket licenses where
something new didnt take anything away; something new in the market
place so in fact helped increase competition.
vi. Individual negotiation: prices could be higher if the P negotiated
individually with artists; w/ exception of a few songs cause so low the artist
would end up paying for it. SEE page 536 decline of marginal loss is so
great; P2 is lower than P1 the argument thats its economically beneficial is
that it creates such efficiencies that even though D is pricing with marginal
revenue, it is still lower than the competitive price. Rule of reason should be
applied.
vii. Did BMI v. CBS abolish the per se rule NO: Catalano v. Target Sales
(1980): (one year after BMI) private suit brought by beer retailers against
wholesalers who had agreed together to eliminate their practice of extending
retailers credit without interest for up to 30 days permitted by law.
Wholesalers argued still competed vigorously on price. Unanimous Ct: case
was obviously an agreement not to grant a discount equal to the value of the
money for the 30 days that was a functional equivalent of price fixing and
per se illegal. Reminds us that it is hard to predict how a case will come out.
viii. Question of when r of r v. per se contd? Arizona v. Maricopa Cty
Medl Soc. (US 1982 cb 538 did not have to read): Drs in Phoenix not
employed by HMOs formed an arrangement that was, in effect, an HMO (DRs
agreed on what they would charge and got the okay from health insurance to
reimburse). State challenged price-fixing. Used BMI as a defense simple
process for the consumer and intended to compete with the HMO. S.Ct 4-3:
held that it was per se illegal. (NB if insurance company set this up it would
have been okay.)
ix. uncertainty: after these cases, we were very uncertain about what was
okay this uncertainty to some extent remains
c. Restraint of trade struck down under Rule of Reason. National Collegiate
Athletic Assn v. Bd of Regents of the Univ. Of OK (US 1984 cb 550): first
case in which the Ct applied the R of R and found illegal. Can have R of R and still
be illegal unreasonable.
i. Facts: NCAA (D) was an organization of colleges which regulated the
conduct of sporting competition. In 1951, it implemented a plan to regulate
the granting of television rights to member football games in order to alleviate
the lost revenue from the decrease in attendance owing to tv. The regulations
limited who could broadcast, and it regulated the amount of times a particular
school could be featured nationally. The plan also determined the amount

each school would receive for national and regional broadcasts. The
universities of GA and OK (P) negotiated a tv contract which fell outside the
boundaries of the plan. In response to the NCAAs threat to impose sanctions
on them, they sued, contending the plan violated the SA. The d.ct held for the
Universities and the ct of appeals affirmed.
A. Class facts: NCAA: an assn made up of colleges - NCAA
organized college athletics have rules and regulations regarding how
games are played and who can play. Set up rules about televising
football. NCAA was the marketing agent or exclusive sales agent for the
distribution of televising football games. Networks carry games w/ 2
limits on what could be televised: (1) 82 different teams had to be on TV
(exposed), and (2) could only show a team a certain amt of times, i.e.
only a limited number of games on TV. CFA were popular teams, big
time football schools, who wanted more exposure on TV b/c they were
better and would be good for them. NCAA said that if violated rules
schools would be disciplined (whole athletic program, i.e., all sports
programs). District court enjoins. App ct affirmed
B. Plaintiff: the two Universities claimed that the NCAA has
unreasonably restrained trade in televising of college football games in
violation of 1 of the SA.
ii. Holding and decision: Ct affirmed, but under a rule of reason found
unreasonable.
A. Step 1: does the per se apply? Ct did not apply per se rule b/c wd
not have college football unless there was a NCAA; cant say that when
schools get together, set up the NCAA and agree not to compete on
Horizontal Price
Fixing test:
certain matters per se illegal b/c some of these rules are necessary;
1. Always start with
cant be that the concept of making rules is bad b/c sometimes you need
rule of reason and ask
rules to have competition at all. Have to let NCAA make some kind of
does the per se rule
rules. It is essential that there be a central authority that eliminates some
apply?
2. If not, are these the
competition. Some rules enhance competition. IF no to step 1, go onto
types of rules that
step 2.
enhance competition?
B. Step 2: Are these rules reasonable/ valid are they the types of
rules that enhance competition?
1. NCAA arg: (1) preserves equal competition/competitive balance:
balance among amateur athletic teams makes the product better
off b/c no one wants to pay to watch lop sided games; want to have
an actual contest that is not predetermined. Dont want to have the
same people win all the time. (2) Ticket sales/attendance: protects
ticket sales. (3) BMI arg: marketing system. (4) no market power:
couldnt lower output and raise prices and therefore cant do
anything anticompetitive; Market (world of tv) is much larger than
college football lots of substitutes had no ability to impact
consumers or hurt them.
2. Why arent these sufficient? (1) Market power: market is college
football. Test: whether there are other products that are reasonable
substitute for college football/ is there anything else that a college
football viewer would watch at that time? No, among those viewers,
there isnt anything else; they wont substitute for it therefore,
separate market. (2) Reduction of output: only reason why you
need this rule is that there is a market for them so when you dont
let them supply what consumers want you are limiting output; only 2
games on, there is a market for more games; (3) Protecting gate
recipients is not a valid justification; and (4) Plan didnt equalize
teams, still teams that lost all the time.

C. ns: Ct ruled that agreement to restrict how often each teams football
games could be televised inhibited rather than enhanced competition and
thus violated 1.
i. Ct decides rule of reason - Despite the agreements horizontal
price-fixing and output limiting aspects, the per se rule was
considered inappropriate. In deciding that the tv agreement should
be tested under a rule of reason, the ct emphasized that horizontal
restraints on competition are essential if the product is to be
available at all; the NCAA is a joint venture that required some
collaboration to operate.
A. NCAA reinforced BMIs teaching that various forms of
competitor collaboration could offer procompetitive benefits and
warranted analysis b/y a superficial labeling exercise.
Retreating from the dichotomy model implicit in Socony and its
progeny, the Ct acknowledged, there is often no bright line
separating per se from R of reason analysis. Per se rules may
require considerable inquiry into market condns b/f the evid
justifies a presumption of anticompetitive conduct. Regardless
of the vocabulary used to describe the evaluation process, the
ct observed that essential inquiry remains the same- whether
or not the challenged restraint enhances competition. This
view was a distinct and important advance in antt analysis.
ii. Ct applies the rule of reason: Does the challenged restraint
enhance competition? The issues, therefore, were whether the tv
plan an exclusive, joint marketing arrangement was necessary
for college football to exist (it was not, contrast BMI); whether
college game attendance would suffer if the plan were unavailable
(this defense failed, for it presumed the unreasonableness of
competition, compare Profl Engrs); and whether the plan was need
to preserve competitive balance (again, this arg was rejected b/c it
was unrelated to a neutral std, any readily identifiable group of
competitors or the television plan). In finding a 1 violation, the Ct
indicated that applying a rule of reason did not invariably require an
exhaustive, fact-intensive analysis of industry condns (quick look)
and the Ps could prevail in a R of reason case.
iii. No public interest in not having competition defense. United States v.
Brown University (E.D.Pa.1992): colleges met to decide how to decide how
much financial aid students should get. Scholarship is a discount. System of
attempting to engage in price competition and what the schools did was agree
not to compete. Schools argued we have limited aid and this lets us give to
the most people public interest. Ct: there isnt really a fixed amount of
money so when you agreed not to spend more than a certain amount on
scholarships, you are spending it on something else (non-student related). Ct
wasnt that far off in Profl Engrs didnt want to start down that road of
listening to the stories just going to judge on the impact on competition.
Anybody can justify their restraints on public interest theory.
iv. Summary Defenses to 1 charges:
A. ineffective defense: Competition against public interest: cant make
the simple assertion that it is undesirable in a particular industry to be
competitive. Profl Engrs and NCAA
B. Effective defenses: (1) the practice/restraint makes it possible for
more transactions to occur (BMI and kind of NCAA) or pro-competitive
things occur; (2) an additional defense may be improved efficiency in the
area of the restraint, sufficient to overcome anticompetitive effects (BMI)
Prof: efficiency alone is probably not enough though.

C. Prof: focus has to be on the particular defense at issue under

NCAA the Ct impliedly upheld some restrictions on college football, but
defense needs to go to the restraint at issue tv issue. These principles
apply to price fixing and presumably in group boycott and ______???
2. Group Boycotts by Competitors:
a. Not all group boycotts are per se illegal. Northwest Wholesale Stationers,
Inc. v. Pacific Stationery and Printing Co. (US 1985):
i. Facts: Northwest was a purchasing cooperative consisting of
approximately 100 office supply retailers, acting as a wholesaler and a
warehousing concern for the retailers. P was a wholesaler and retailer of
office supplies and had been a member of D. D had a provision in its bylaws
prohibiting its members from operating on both the wholesale and retail
levels, but Ps rights were preserved by a grandfather clause. When the
controlling ownership of P changed, this change was not officially brought to
the attention of Ds directors apparently in violation of its bylaws. The
membership voted to expel P. The parties disputed the reasons for the
expulsion, P contending that it was expelled b/c it maintained a wholesale
operation. There was no evidence of any competitive injury as a result of the
expulsion. P brought suit alleging that its expulsion from D w/o procedural
safeguards was therefore a per se violation of A. C. ct disagreed and, apply
R of R, found no anticompetitive effect and granted sum judg for D. Ct of
appeals reversed finding a per se violation of 1 SA.
A. class facts: (case a little like Topco; only members got to split the
profits).Pacific was a wholesaler and a retailer; terminated due to failure
to report. Issue: joint venture had to grant procedural due process
before one could be expelled.
ii. S. Ct:
A. Ct relies on Silver v. NYSE: which held that one couldnt terminate
his ability to do business in the JV without procedural due process i.e.
a hearing. Ct doesnt decide the case on this issue factually different:
(1) this is a group boycott In form Ct accepts that - question is whether
Analysis in group
or not this is a per se illegal group boycott? (in third period, group
boycotts to see if per
boycotts were per se illegal).
se rule applicable:
B. Test for whether Group Boycott is per se illegal (stds need to
1. Dominant market
power?
meet these not all of them to have a per se illegal boycott): (1)
2. Is that which they
Boycotting firms were dominant: had a significant ability to enforce what
are withholding
ever they were trying to do b/c of market power; (2) exclusive access to
essential to the
an element essential to compete; (3) no possible argument that it would
boycotted firms
participation?
enhance overall efficiency and be procompetive.
3. Are there any proC. Applied: not clear that theyve lost something essential (Terminal
competitive virtues?
RR case): cd arg didnt need Northwest b/c they are wholesaler
(Prof mentioned the
themselves; hard to make the case that the entity of Northwest was big
Radiant Burners case
here safety std
and dominant: both firms were small; and hard to find pro-competitive
setting cases)
virtue: weakest out of the three, it was efficient and procompetitive for
smaller retailers could reduce prices and maintain their retail stock so as
to compete w/ larger retailers..
D. A P seeking application of the per se rule must present a threshold
case that the challenged activity falls into a category likely to have
predominantly anticompetitive effects. The mere allegation of concerted
refusal to deal does not suffice b/c not all concerted refusals to deal are
predominantly anticompetitive.
E. Prof: Northwest Ct was discussing per se v. rule of reason analysis,
but as a practical matter they are the questions in a Rule of Reason
analysis; although the case was focused on per se or not they are
appropriate issues for group boycott.

b. Rothery Storage & Van Co. v. Atlas Van Lines, Inc. (D.C. Cir. 1986 cb 577):
Judge Bork.
i. Facts: allegations that Atlas Van Lines, a national moving and storage co,
had engaged in an illegal group boycott w/ some of its independent agent
affiliates to deny the use of the facilities of Atlas or its affiliates to other
independent movers. Deregulation of the moving industry had permitted the
agents of Atlas to move goods interstate on their own accounts. In 1982,
Atlas announced that it would cancel the agency contract of any affiliated
mover who continued to handle interstate shipments on its own account as
well as for Atlas. An agent could remain affiliate w/ Atlas and ship goods
interstate on its own account only if the agent transferred its independent
interstate authority to a separate corporation under a new name. Eight
current and former Atlas agents attacked the policy as a per se illegal group
boycott and horizontal pricing agreement in violation of 1 SA.
A. class facts: Atlas moved furniture. Used local companies to move.
Atlas is in effect Atlas is the name of the co, sounds huge, but in fact
relatively small and operate as a coordinating and training, and
trademark granting organization. The real back work is done by the local
agent of Atlas. (prof calls them franchisees, and the truck driver may be
an agent for the local company). Atlas is a web of independent (owned
by other people) cos. Atlas coordinates. In the beginning atlas was also
the holder of the ICC permits that allowed them to do the transporting.
What generated the problem 1981 industry was deregulated. Once
deregulation the licenses atlas had to carry goods over a particular root
were irrelevant anyone could do it. The local agents cd charge less
than atlas and use all of the atlas stuff. Local agents were essentially
cutting their own deals. Atlas said if you do any deals other than as our
agent, you are no longer eligible to be our agent. In this case, some of
the movers got terminated for side deals. B. Plaintiffs: 3 former agents
of Atlas sued alleging that it was a group boycott by who? Had to be
more than Atlas (Colgate); wants to use the Atlas network for his side
deals (i.e. move from dc to Chicago start w/ dc workers, then Chicago
workers unload); so claim it was all of the Atlas agents boycotting.
ii. D.C. Circuit held: affirmed grant of sum judg for Atlas and ruled that the
allegations should be evaluated under the rule of reason.
A. Group boycott in the tradl sense yes: this is a group boycott in
the sense that it fits into the tradl elements more than one firm
knowingly refusing to deal with these other non-network firms. In the old
days, that would have been per se illegal crazy, it is crazy to say that
group boycotts are per se illegal. The S.Ct saw that in Northwest but
ex. GW baseball team cant play in the world series, the Yanks and
Diamond Backs agree not to play with GW, that just cant be a group
boycott; law student, not getting offer at a firm, group boycott by the
partners just cant be that simply b/c something can be formally
classified as a group boycott is per se illegal
B. R of R: (Northwest) reasonable b/c this contributes to the efficient
operation of an integrated economic network. Contributes to the public
interest; enhances consumer welfare by creating efficiency.
A. Free riding problems (1) using Atlas stuff strict liab. (2)
using Atlas equipment, advertising, etc. These firms overconsuming those, if Atlas does not get its cut, then atlas will not be
able to provide those services and the valuable integration of the
activities that are involved here would be lost. (?is this a showing of
procompetive virtue?)
B. Market share: Atlas has about a 6% market share in an
industry where there are about 1000 firms and 6000 agents why

important? B/c they dont have market power cannot raise prices
and reduce output (not dominant by Northwest) no harm no foul
rule kinda if the firms dont have the ability to make anticompetitive effects reduce output and raise prices there is no
point in outlawing.
1. Prof: can even use this arg in price fixing; will see again in
Easterbrook article, becoming more and more a factor in RR
analyses question are there anticompetitive effects of the
arrangement? And the answer has to be no b/c of the market
power of the firm. This simply just doesnt present a situation
that shd be illegal
C. He says that Topco is effectively overruled; S.Ct had backed away
from the extreme cases of the 3rd period. Saying if Topco came up today,
the Ct wd look at it differently, ct of app j doing this as strange and the
S.Ct has not to this day overruled. Resurrects Addyston.
1. ns: After reviewing Tafts distinction in Addyston b/w naked and
ancillary restraints, J. Bork said that if Topco and Sealy rather than
Addyston Pipe, state the law of horizontal restraints, the restraints
imposed by Atlas would appear to be a per se violation of the SA.
From his reading of recent S.Ct decisions such as BMI and NCAA,
however, J.Bork concluded that to the extent that Topco and sealy
stand for the proposition that all horizontal restraints are illegal per
se, they must be regarded as effectively overruled.
iii. J. Wald Concurrence: doesnt go along defense of efficiency not
enough goes b/y what the S.Ct has said and created a sea of doubt that is a
difficult one for the ct to apply.
c. Boycotts as a form of Protest: note pg 587
i. Missouri v. Natl Organization of Women: boycotted states that had not
ratified the ERA, st of MO. Said we thing that is Antt violation 8 th cir. Held
the antt laws were not meant to reach political activity, activities designed to
make social change not antt violation
ii. NAACP v. Claiborne: African Americans boycotting white salespeople
not antt violation. Constlly protected and consumers were not looking to
lessen competition or reap economic benefits of the boycotted market.
iii. FTC v. Indiana Federation of Dentists: Dentists who refused to supply xrays to their insur cos. ct upheld cease and desist order issued by FTC a)
not a union no 6 clayton; b) they were preventing commercial review to
help control fees price increase
iv. Superior Ct Trial lawyers: (1990 see page 588) lawyers who show up and
take assigned superior ct cases. Avg salary - $20k/yr. Went on strike wd
not come back until increase, superior cts came to a halt b/c no one to
represent rt to counsel; got on tv w/ strike and FTC went after. ALJ says yes
this was a price fixing conspiracy, under Indiana Dentists- not a union, but
come on. Anyway FTC takes that to the DC App ct Ginsburg these are
hard cases trying to determine what is political/antt. J.Ginsburg says if they
were doing political then legit; if what they did was using their market power
then illegal. S.Ct Stevens says no, that is just per se illegal. J blackmun
pointed out that they cant possibly have market power b/c judges cd appoint
all lawyers w/o paying them. This kind of political boycott per se illegal
d. Boycotts in Network Industries: note page 590. network industry one in
which the value of the services increase with the more people who use it. The
more people who have tvs, the more valuable the service. More people have
software, more applications. Those like communications networks in which the
advantages of being inside increase sharply as the rate of participants increases.
i. SCFC ILC v. Visa (10th Cir. 1994): Visa and MasterCard; can Sears join
and issue at lower price than banks, V and M said no b/c Sears also issued

Discover card; question group boycott? Held ct app not an inappropriate

group boycott better that issue a competing card, than a lower interest
Visa/Mastercard Prof: is this better are there some industries that you
should allow people to enter.
ii. note seems to suggest that sometimes JVs should be required to admit to
membership or otherwise cooperate with a competitor in the case of network
industries b/c the JV itself is an essential facility to be able to compete. The
fact that it is a network industry should that be a factor? I think maybe yes?
3. Horizontal Market Division:
a. Market division b/w competitors is per se illegal. Jay Palmer v. BRG of
GA, Inc. (US 1990 p. 592 did not have to read but Prof mentioned in class): in
short per curiam opinion Ct cited Socony and Topco as establishing that market
division agreements involving actual or potential competitors are illegal per se.
i. HBJ, a provider of bar review courses, agreed to give BRG an exclusive
license to use HBJs written materials and its trade name (Bar/Bri) in GA.
The agreement also provided that HBJ would not compete outside GA. The
Ct said that the ct of app erred when it assumed that an allocation of markets
or submarkets by competitors is not unlawful unless the market in which the
two previously competed is divided b/w them. The Ct held that an agreement
by firms not to compete in each others territories is anticompetitive and
unlawful on its face w/o regard to whether the parties split a market w/in
which both do business or whether they merely reserve one market for one
and another for the other.
ii. notes: S.Ct: leading bar review course got itself in trouble. Bar Review of
GA and BARBRI went head to head. Reached an agreement. BARBRI
agreed to leave the state and its books in GA and BRG would be the only one
in the state and would pay BARBRI 40%; essentially BARBRI got 40% of the
monopoly price. Lower ct said not market division and not price fixing. Not
market div b/c had never competed outside GA and BARBRI decided to leave
irrelevant. SCT no oral args - said per se illegal Topco (even when you
have firms that had not competed in the industry can still be held to be per se
market decision) Only s.Ct decision
iii. Lower Ct Cases Market division: Po bros case (Easterbrook I cant
find this in the book??): two firms agreed not to carry the same kinds of
merchandise. Ct said when you are talking about the city size of Chicago and
only two stores it makes no sense for it to be per se illegal for them to
decide what they are going to carry in each part of the building. Did not go to
the s.ct, but Prof: think it is right, and suggests Es opinion lack market
power, cant violate antt laws; also suggest that the kind of analysis applied in
BMI, etc. would be applied in group boycott cases.
4. Dealing w/ Dealers: contemporaneously w/ its wrestling with the new law of
horizontal restraints, the Ct also considered price fixing, market division and group
boycotts in vertical relationships. Issues are as old as: Dr. Miles, Colgate; appeared
again in: GE, Klors, Parke Davis, Simpson, White Motor, Schwinn, and Albrecht; then
GTE Sylvania: began the current period by apply the rule of reason to a SA 1
complaint involving how a manufacturer organized its dealers territories. These next
cases join the debate in 1984 same year as NCAA. 1 issues in Vertical: (have
already seen that vertical RR, now, has virtually become per se legal, but have to go
thru analysis; decrease in intrabrand comp is reasonable w/ free-riding and procompetitive effects).
a. Revitalizing Colgate: have to prove concerted there must be direct or
circumstantial evidence that reasonably tends to prove that the manufacturer and
others had a conscious commitment to a common scheme designed to achieve an
unlawful objective. Monsanto Co. v. Spray-Rite Service Corp. (US 1984 cb
595):

i. Facts: Sprayright (P) was a distributor of herbicides, some of which were

manufactured by Monsanto (D). D cancelled Ps distributorship, and P sued,
contending that cancellation was induced by complaints from other Monsanto
distributors concerning the low price at which P sold the products. It
contended this showed a price-fixing scheme in violation of the SA. D moved
for a directed verdict on the basis that P had failed to meet its burden of
proving a price-fixing scheme. The jury found for P, and ct of apps affirmed
the denial of the directed verdict motion.
A. class facts: M had about 3% of the market, (not as small as GTE
but not dominant). Scheme M developed to improve its sales
requirements imposed on distributors to remain M distributors (1) had
to be full time in the distribution bus., (2) got to employ people who can
tell people about the product educate herbicides are dangerous,
EPA, etc., (3) given areas of primary responsibilities had to show that
you were going to hustle and sell in that area. Sprayright was anything
but a poor sales co. it was everything the requirements were not he
was one guy, went out and moved product off the back of his truck at a
cut price. Did Ms program work? Yes, suggested by their market shares
going up. Prof this suggests not selling at unreasonable prices. B.
Plaintiff: Sprayright said this is a straight out price fixing conspiracy
b/w M and its other dealers to get rid of low price sellers and maintain a
network of only high price sellers; args like GM dealers taking orders
and selling to discounters in other areas of the country
ii. Pulling it all together: Ct sees this as a useful case to pull together other
cases Colgate, etc. concerted action vs. individual action; Non-price v.
price
Concerted
Individual
Price
Per se Dr. Miles
OK Colgate
Non-price
R of R - Sylvania
OK - Colgate
Ct says there is now a clear distinction. Dr. Miles: bn around forever, not the
time to overrule it it is old, etc, the ct relied on history and said the case was
tried assuming it was good law. Once again Ct refused to put resale price
maintenance under RR.
A. Real interplay b/w price and non-price. Things you use to justify nonprice: ex. Protecting yourself against dealer who is price-skimming, is
very much what you might be looking at in the price maintenance area.
iii. Concerted price fixing? Ct had to decide when something is concerted
(ct app erred in inferring merely from the existence of complaints or even from
the termination in response to the complaints) (test favorable to D): 598
Thus, something more than evidence of complaints is needed. There must
be evidence that tends to exclude the possibility that the manufacturer and
non-terminated distributors were acting independently. the antt P should
present direct or circumstantial evidence that reasonably tends to prove
that the manufacturer and others had a conscious commitment to a
common scheme designed to achieve an unlawful objective.
A. Really high std. Ct says you need affirmative evid. Here, there was
evid: a distributor wrote letter, saying that sure M wouldnt undercut own
price attributed M; furthermore, M used S as an ex of what wd happen
if you didnt follow the rules; didnt terminate everybody suggested they
werent serious
B. Prof: gave Ds hard to meet test, but then found that test met w/o
persuasive evid.
iv. Court holds: Applying this std to the facts of this case, we believe there
was sufficient evidence for the jury reasonably to have concluded that
Monsanto and some of its distributors were parties to an agreement or
conspiracy to maintain resale prices and terminate price cutters.

A. included: substantial direct evid of agreements to maintain prices:

testimony that M visited price-cutting dealer sand threatened inadequate
supplies if did not maintain suggested retail price. It was withheld w/ one
distributor.
v. BLL: so, for per se illegality had to show (1) actually an agreement b/w
supplier and the second dealer (the first dealer being the terminated) and (2)
rational for termination was the dealers price cutting, not its violation of a
nonprice restriction. (makes sense if you look at the chart the only way to
have per se in vertical concerted + price)
vi. More on proof of agreement (note pg 601): cts have used circumstantial
to determine whether conspire but has to be something more than parallel
behavior
vii. Contg Debate about the Economics of Vertical Restraints (note pg
604): is it necessary for them to engage in restraint as a means of avoiding
free-riding, cant simply pay for educating or compensate individual dealers
that provide, why they would have to engage in territorial or price
maintenance (read this note).
b. Extension of Monsanto Ct finds termination of price-cutter not RPM b/c
lacking an agreement re: price and actually is just a simple territorial allocation.
Business Electronics Corp. v. Sharp Electronics Corp (US 1988 cb p. 606)
i. facts: Business Electronics (P aka BE) initially was the exclusive retailer of
Sharp (D) electronic calculators in Houston. Although D published a list of
suggested minimum retail prices, P rarely followed it and generally sold D
products below list prices. When D allowed another retailer, Hartwell (H)O, to
enter the Houston market, P began to price D products below Hs prices as
well. H frequently complained to D about Ps price-cutting, and eventually
threatened to stop selling D products entirely unless Sharp ended its
relationship with P. D accordingly terminated Ps dealership. P sued D and H
alleging that they had conspired to terminate the dealership, which constituted
a per violation of 1 of the SA.
i. class facts: BE and H were retailers of Sharp electronic calculators
(this was when they were new and expensive). BE and H both sold
below the suggested retail price by S, but BE did it more than H. i.e. H
sold for more. H told S that unless you terminate your BE then we wont
sell in competition with BE; so, you can use us or them. S picked H and
BE sued
ii. ns: involved the termination of a discounting distributor following
complaints of price-cutting by rival, nondiscounting distributor.
ii. lower courts:
A. D.Ct had held that if you terminate a discounting dealer on the
complaint of another dealer you have engaged in a practice that is per
se illegal; tends to keep prices high that is what resale price
maintenance is about. Ns: jury verdict for the terminated distributor
B. 5th cir. Reversed mere termination of one dealer on the request of
another is not resale price maintenance if you dont set a resale price.
Therefore no violation. Ns: 5th cir reversed a jury verdict for the
terminated distributor, finding that the plaintiff had failed to prove an
agreement to set a particular resale price or to set a specific resale price
level.
iii. S.Ct affirms 5th Cir:
A. ns: Cts approach is guided by the premises of GTE Sylvania and
Monsanto: that there is a presumption in favor of a rule of reason std;
that departure from that std must be justified by demonstrable economic
effect, such as the facilitation of cartelizing, rather than formalistic
distinctions; that interbrand competition is the primary concern of the antt
laws; and that rules in this area shd be formulated w/ a view towards

protecting the doctrine of GTE Sylvania. The Ct went on to explain that,

without a common understanding about specific prices or price levels to
be charged, an agreement to terminate a dealer creates no greater
competitive risk than an agreement to impose nonprice vertical restraints.
B. Class: J. Scalia (maj):
1. Start with R of R: RR here, consistent with what we have seen
b/f in this area. Start w/ r of r is not inevitably surprising. Yet, if it is
resale price maintenance then it is per se illegal, even under rr
analysis.
2. Termination of price-cutter: The fact that the person was a
price-cutter, terminate someone that charged less is not in and of
itself a price restraint. You have not had an agreement that will tend
to reduce output and increase price.
3. Ct calls it non-price restraint: J.Scalia calls it non-price b/c if
they were starting out this yr cd have created a single firm
territory; same as territorial allocation cases means not per se
illegal (doesnt mean legal); all of these things are just vertical
restraints and these distinctions dont really matter. This is not
resale price maintenance just a territorial allocation, and the fact
that the firm is the lower seller that you terminated it doesnt
matter; Manufacturers need to be able to select the distributor that is
going to provide the image or the service that the manufacturer
wants; if every time you terminated someone who wasnt doing what
the Manufacturer wanted, the terminated party could file suit then
you would just have sale. You cant call something resale price
maintenance just b/c you happened to terminate someone who sells
at lower price. Often times lower price seller, worst service.
C. Prof: eliminated a whole block of cases; formerly per se into nonprice Rule of Reason category
iv. Dissenters (J. Stevens):
A. This is really a horizontal restraint anytime you have a termination
of a dealer on the complaint of other dealers that is horiz. Furthermore,
not non-price, when the basis of the determination was price. BE low
price sale terminated. This isnt just the selection of a sole source
territorial distributor (White), this is classic GM, etc.
B. Addyson Pipe I dont reject that, but this is not ancillary, this is as
stark a restraint and punishment of a price cutter that you can get.
D. Concerned that if you let manufacturer terminate the low price
distributors that sends a message abt not cutting price.
E. Intrabrand competition is important it is important to consumers, the
fact that you limited it here has to be taken into account; anytime you can
show increase in interbrand comp have to be held accountable
v. Putting it all together (I think watch for this on exam) Private P: think
about Brunswick strict antt injury requirement on Ps (P has to show injured by
anticompetitive conduct; antt laws protect competition, not competitors);
Monsanto and Sharp have increased the difficulty of mounting a successful
attack on RPM under 1 of the SA. None of these decision rejects the
substantive liability rule of per se illegality or abandons Sylvanias formal
distinction b/w price and non-price restraints. Yet, the Ct has minimized
discontinuities in antts treatment of price and nonprice restraints by reducing
the likelihood that challenged behavior will be deemed a concerted vertical
price restraint and summarily condemned.
c. Maximum Price Fixing (note page 618): Atlantic Richfield: (618) ARCO
matched USA Petros price and set maximum for its dealers, not below cost; USA
Petro arg effect took away the cushion, and their ability to sell they claim
injured by retail price maintenance. S.Ct threw it out based on that there was no

antitrust inj (i.e. There was Art. III inj case or controversy) no injury that the
antt laws were designed to prevent the name of the game of antt laws was to
lower price if it was predatory pricing, then that is the kind of inj of antt. But
where you simply complain that your competitor is pricing vigorously is not an antt
injury. (Brunswick v. Pueblomart case?). this P cant bring this case, case thrown
out. Use of antt inj to avoid deciding. Prof: belief that if the Ct was really worried,
wd have taken the case
d. Maximum RPMs treated under the Rule of Reason. State Oil Co. v. Khan
(US 1997 cb p. 619): Overrules Albrecht (1968) (stated that max RPM per se
illegal).
i. Facts: SO said you can charge anything you want but you can only keep
$.0325 above, SO gets the rest. P entered into an agreement with D to lease
and operate a gas station owned by D. Agreement provided that P would
obtain the stations gas supply from D at a price equal to a suggested retail
price set by D, less a margin of 3.25 cents per gallon. Under the agreement,
P could charge any amount for gas sold to the customers, but if the price
charged was higher than Ds suggested retail price, the excess was to be
rebated to state oil. P could sell gas for less than Ds suggested retail price,
but any such decrease would reduce their 3.25 cents-per-gallon margin.
About a yr later, P fell b/h on lease payments, when a receiver (st appointed)
took over the gas station D didnt subject receiver to the price restraints.
ii. the parties:
A. Plaintiff: Khan - alleges violation of 1 of the SA by preventing
respondents from raising or lowering retail gas prices.
B. Defendant arg: agreement did not prohibit P from setting gas prices
and that in substance, respondents did not allege a violation of antt laws
by their claim that Ds suggested retail price was not optimal.
iii. Antt Injury?: (ALWAYS ASK IF ANTT INJ IN ANALYSIS PRIVATE
CASES) Was there antt inj in this case
A. arg no: if it is truly a minimum price (theory behind maximum price
setting is really just minimum price setting disguised) -then whatever
value there is, he is getting he is simply a co-conspirator. D.Ct found
no antt injury
B. arg yes: the purpose of the restriction of max resale price
maintenance restriction was one of pricing flexibility; really what was of
value to Kahn in this case reason there is antt inj if the purpose of
resale price maintenance, to assess the market they are participating in
and come to effective prices, then we have to say this is a properly
situated plaintiff. The point in USA Petro went off on lack of att inj; but
here, using Albrect rationale there was Antt inj. 7th Cir. Found that
respondents could have suffered antitrust injury from not being able to
adjust gas prices (relying on Albrecht and ARCO) and the pricing
scheme was per se illegal under Albrecht reversed the d.ct.
iv. Ct: vacates 7th cir and remands.
A. Overruled Albrecht:
1. case law as it had developed cut all the ground out from under
Albrecht:
a. GTE Sylvania: Ct declined to comment on Albrecht, but
subsequent decisions of the Ct hinted that the analytical
underpinnings of Albrecht were substantially weakened by
GTE Sylvania.
b. Sharp key question interbrand competition enhancement?
Anything that does Rule of Reason. Primary purpose of antt
laws is to protect interbrand competition.
c. ARCO it is desirable to have price cutting. Low prices
benefit consumer regardless of how those prices are set, and

so long as they are above predatory levels, the do not threaten

competition.
2. Ct revisits issues that Albrecht concerns pg. 623. The
Albrecht decision presented a number of theoretical justifications for
a per se rule against vertical maximum price fixing. Criticism
abounds:
a. maximum price fixing by suppliers cd interfere w/ dealer
freedom: what has happened suppliers have eliminated
dealers became dealers: i.e. this ban has actually prompted
many dealers to integrate forward into distribution, thus
eliminating the independent trader sought to protect.
b. maximum prices may be set too low for dealers to offer
consumers essential or desired services: unlikely that a
supplier wd set such a price as a matter of business judgment;
Prof questions
c. maximum price-fixing could be used to disguise
arrangements to fix minimum prices, which remain per se
illegal: ct says this can be recognized and punished under
the R of R.
v. Prof effect raise the cost of litigating these cases. This is the way the
law is moving, but the reason people are critical is there are some
assumptions about the markets, the amount of info that people have, the cost
of litigation that were cavalierly rolled by the Ct according to some
commentators
vi. NB: trend - moved to having the only thing per se resale price
maintenance. Then BE v. Sharp case renamed things that used to be called
resale price maintenance are now nonprice (R of R) termination of people.
And now maximum resale price maintenance in down in Rule of Reason. The
category of per se illegal is so small now, there is no reason to leave it like
that deal with everything under R of R, but ct has left this category of resale
price maintenance cases per se.
5. Pulling the 1 Cases together:
a. Can the Modern Cases be reconciled: some efforts to do so (note p.
628):
i. Calvani approach: several points flow from Cts pronouncements 1st
there is often no bright line that separates per se from R of R analysis
destroying the neat taxonomy; 2nd essential inquiry under both is the same
whether or not the challenged restraint enhances competition. He suggests
how to evaluate horizontal restraints:
A. ask whether the restraint is inherently suspect? i.e. is the
practice the kind that appears likely, absent an efficiency justification, to
restrict competition and decrease output; can you tell a story under which
the firms cd increase price and reduce output under this practice;
B. But if it is inherently suspect must pose 2 nd question is there a
plausible efficiency justification for the practice?: does the practice
seem capable of creating or enhancing competition (e.g., by reducing
costs of producing, creating a new product, or improving the operation of
the market)? Such an efficiency defense is plausible if it cannot be
rejected w/o extensive factual inquiry. If it is not plausible, then the
restraint can be quickly condemned.
C. But if the efficiency justification is plausible, then must ask is the
justification valid?: if it is, it must be assessed under the full balancing
test of the rule of reason anticompetitiveness v. efficiency. Fairly classic
kind of analysis from Chicago School of Antt.
2. J. Easterbrook: proposed approach to cases that would preserve both
the virtue of simplicity and the sophistication of modern economic analysis:

the filters approach presumptions that would quickly screen out cases in
which the risk of harm to consumers was small:
A. Market power: ask first, does this firm have market power that it
could do anything bad (or is it always going to be subject to the power of
the competitive market place)? Focus on how do we get rid of bad cases
if they dont throw the case out. P should have to provide a logical
demonstration that the D(s) had market power w/o it they could not
succeed in alleged anticompetitive efforts.
B. Incentive: must have a story of why they would want to act in a
competitive way; P must show that D has an incentive to behave in an
anticompetitive way and that antt sanctions are necessary to correct Ds
incentives. Eliminates cases alleging conduct that would be unprofitable
to the D.
C. Methods: look at whether all the firms in the industry are behaving in
the same way (if everyone is doing it maybe there is a conspiracy here,
but if only one firm is doing it then if they succeed pro-comp, if not then
theyll stop); if the case survives the first two filters, the Ct should
determine whether firms in the industry use different methods of
production and distribution; if so, competition b/w those methods should
protect the consumers
D. Output Reduced: Ct should look to see if there is evidence that
output really reduced by the challenged practice and look at P positing
if business rival, then practice is probably beneficial to consumers.
3. Klein: three steps (no dichotomy)
A. Is this the type of restraint that is currently recognized as per se illegal
(unadorned price fixing, curtailed output or dived markets).
B. If horizontal agreement isnt per se, then ask whether there is a
procompetitive justification for the agreement. (D must answer). If there
are not, then illegal
C. If there are, determine whether its likely anticompetitive effects
outweigh its procompetitive effects?
b. No Quick Look unless obviously anticompetitive affects California
Dental Assn v. FTC (US 1999 cb p. 631):
i. Facts: CA dentists code of ethics said that you couldnt use false or
misleading advertising or advertising that failed to contribute to esteem of the
public for dentists. Applicants who didnt comply cd be denied membership;
and members could be censured, suspended, or expelled.
ii. FTC: FTC brought a complaint against the CDA, alleging that it applied its
guidelines so as to restrict truthful, nondeceptive advertising, and so violated
5 of the FTC Act. ALJ Found: although there had been no proof that CDA
exerted market power, no such proof was required to establish an antt
violation b/c the CDA had unreasonably prevented members and potential
members from using truthful, nondeceptive advertising, all to the detriment of
both dentists and consumers of dental services. Violation of 5. FTC
adopted ALJ except Market Power: Restriction on advertising found by the
FTC to suppress advertisements about restriction on sharing info about
quality of dental services. FTC found they had market power.
A. What case wd you cite for the proposition that this is illegal, in fact per
se illegal like the FTC found Professional engnrs you can have price
fixing anytime you have a formal restraint on competitive activity.
Namely, on higher quality, lower prices advertising.
B. FTC determined: CDAs restrictions illegal per se. in the alternative,
FTC held the price advertising (as well as the nonprice) restrictions to be
violation of the SA and FTC Acts under an abbreviated R of R Analysis.
iii. Ct of app: quick look doctrine (NCAA) R of R case dental assns
have all kinds of rules, FTC went to far in implying that each and every rule is

subject to per se; the ct said that when we take a quick look (which the FTC
accdg to the ct really did quick look) properly found improper 1) it is a
restriction on competition, restriction on dental services information and
selection of appropriate, lowest cost dentist, etc. 2) there are no pro-comp
justifications.
iv. S.Ct: S.Ct reverses (not expected) -only quick look only when an
observer with a rudimentary economic knowledge cd conclude that it would
have anticompetitive effects this is not the case. Cant conclude that
advertising restriction is anticompetitive with rudimentary knowledge. If you
dont have anticompetitive, dont have to get to question of whether there are
pro-competitive.
v. Prof: Does Ct tell us really how much evidence needs to be taken in this or
other cases? There isnt any per se, quick look, or per se reasonable
category anymore; each case needs as much analysis as the case requires
Prof: not a particularly helpful std.
vi. No two bites at the apple: When went back to CT of App ct said the
FTC cant put forth evid it didnt know b/c that wd give it two bites of the apple.
FTC has to try them all like rr full blown cases
vii. Antithesis of Easterbrook: Ct made it so you will never know if you
have met, until you are done. This is the antithesis of what Easterbrook wd
have wanted. Each case must be bull blown all out.
vii. Breyer dissent:
A. Four questions: (1) what is the particular restraint at issue; (2) what
are likely anticompetitive effects (3) are there offsetting pro-competitive
justifications; (4) do the parties have sufficient market power to make
difference in the market?
B. Applied: (1) restraint applies to all ads; (2) anticompetitive effects
b/c it is a disincentive to be innovative or efficient b/c cant set yourself
apart from other dentists; (3) D doesnt offer pro-competitive effects; (4)
has market power b/c avg 70% of CA dentists are members.
C. The Continuing Concern About Exclusionary Conduct: monopolization; tying and
exclusive dealing; Microsoft
1. Monopolization: Issues of 2 SA limited number of S.Ct cases under 2 in the
modern period, not many brought by gov. (cases that did not reach Supremes brought
by gov include IBM (waste of time and money see pg 646; and AT&T divestiture into
Baby Bells).
a. Careful refusal to continue to participate in a joint marketing plan w/
rival could amount to monopolization. Aspen Skiing Co. v. Aspen Highlands
Skiing Corp (US 1985 cb p 647):
i. Facts: Aspen Highlands Skiing Corp (P) operated a ski mountain facility in
the Aspen area of CO. Three other mountain skiing facilities operated in the
same area. These mountains were operated by Skiing (D). Throughout the
years, the operations in the area offered all-Aspen ticket programs of various
designs, which allowed skiers in the area to utilize all the facilities in the area
w/ minimum of difficulties. Although there were some monitoring difficulties
associated w/ the all-aspen ticket, sales of the ticket were good, and the
program was generally well received. During the 70s, D became increasingly
dissatisfied w/ the ticket and in 77-78 refused to offer such a ticket unless P
would accept a fixed share of the ticket revenues at a level lower than tradlly
achieved by P. For the 78-79 season, the fixed percentage offered by D was
further reduced, and D refused to accept any counter proposals from P. P
attempted to market its own multi-area package, but D made it very difficult for
it to do so. D refused to accept any vouchers from P and refused to sell P any
ski lift tickets that they could package. Without the convenience of the
previous tickets, Ps program met with considerable resistance and Ps

revenues began to drop off. P filed a complaint alleging violations of the SAs
antimonopoly laws ( 2).
A. class: Aspen ski area mountain had three ski cos.; put together a
package for skiing on all of them. Snowmass came along down the road,
owned by the same people who own Aspen mountain (D), now have
three facilities and AH has the fourth. AM decided just to sell combo to
their three slopes and not to AH. Publicity made it look like there was no
AH. AH sued under antt laws. Alleged that D monopolizing. NB D
never disputed that it has monopoly power
B. Lower courts: Jury returned a $2.5 mill verdict, and the district court
awarded treble damages. Ct app affirmed on the basis of the essential
facilities doctrine
1. Ct of App. Issue essential facility concept (not discussed by
s.ct): (Terminal rr case) some particular facilities so essential
we are not saying here that AS has to carry AH financially (i.e.
Improve their lifts), but there may be some key things (i.e. owning
the pole necessary to carry the power- that one pole is an essential
facility and we are going to make you carry); Ct. App. The ticket was
the essential facility identifiable fixture that you do need to make
avail to competitor. Ask if there had never been a 3 mountain
ticket in the past wd anyone have thought that AS shd have to
admit AH. The Jury was frustrated by the fact that they had
terminated something b/f. Prof: but if really essential facility shd
be able to get an injunction mandating admittance, even if not
involved before
C. D arg: their defense was they didnt have any obligation to
cooperate with competitor no duty to prop up our competitor our
obligation is to compete with others; in fact, there is a real question as to
whether we can cooperate (b/f __ Case); dont have to run the valley as
a joint venture.
D. Supreme Court Affirms
ii. Understanding of the law start with the idea of whether the D acquired,
maintained or used its monopoly power to exclude. This isnt a generalized
duty to coop., but cant refuse to coop where refusal is in effect a tool to drive
your competitor out of business.
A. How might firms get to be big in a way that is not illegal superior
product, well run bus, or simply luck it is not illegal to be the dominant
firm in your industry. Idea in AlCOA getting big, have to turn down
opportunities to get bigger; simply not the case anymore, not going to
punish simply b/c big.
B. Large firms dont have to help competitor if they refuse to coop w/
legit bus reasons not to coop (not clear what a legit bus reason is or what
kind of showing is necessary, if at all).
C. Ski Co. is surely correct in submitting that even a firm with monopoly
power has no general duty to engage in a joint marketing program w/ a
competitor. Ski Co. is quite wrong, however, in suggesting that the
judgment in this case rests on any such proposition of law.
D. Intent: ASK PROF MORGAN TO EXPLAIN ABOUT MONP AND
INTENT
1. Lorain Journal attempt to monopolize case under 2
required proof of specific intent to accomplish the forbidden
objective. Specific intent: intent which goes beyond the mere
intent to do the act.
2. Here, charge is monopolization under 2 - evidence of intent is
merely relevant to the question whether the challenged conduct is
fairly characterized as exclusionary or anticompetitive (or predatory

 word used by scholars). No monopolist monopolizes

unconscious of what he is doing improper exclusion (exclusion not
the result of superior efficiency) is always deliberately intended.
E. Business reason? Ds decision to terminate the all-Aspen ticket was
a decision by a monopolist to make an important change in the character
of the market anticompetitive or exclusionary? Does not violate 2 if
valid business reason exists for refusal: If a firm has been
attempting to exclude rivals on some other basis than efficiency, it is fair
to characterize its behavior as predatory. Here, jury could conclude that
the D was interested in reducing competition in the Aspen market over
the long run by harming its smaller competitor.
iii. Bottom line std: cant unnecessarily or arbitrarily exclude or handicap
your competitor in a way that injures consumers prof: goes back to
consumers; does this stimulate comp, or do nothing but hurt competitor and
consumer.
A. First question is D a monopolist: (vigorously disputed at the trial
2 ELEMENTS of the
level and court of app, but not challenged in s.ct) Prior to getting to that
Offense of
you have to determine whether the Defendant is a monopolist. And to do
MONOPILIZATION
that you have to define the market. The jury/ct found the relevant
under 2 SA:
product and geographic market to be: downhill skiing at destination ski
1. the possession of
monopoly power in a
resorts (started out by saying that the market here is in the US). (jury
relevant market, and
found possessed monopoly power)
2. the willful
1. Did Aspen S have monopoly in this market NO. Prof: for some
acquisition,
purposes you never really reach the question If the market is truly
maintenance, or use of
that power by
a natl market, then ASC is merely taking action that may or may not
anticompetitive or
be successful to get skiers to go to aspen rather than Breckinridge.
exclusionary means for
2. The only way get a monopoly here is by saying there is a subanticompetitive or
market (saw in Brown Shoe) prof tricky concept b/c once you
exclusionary purposes
(is the challenged
define sub-market as Aspen it is a given that ASC has a large
conduct
portion, but for whom is that the relevant market. Ct had in mind the
anticompetitive or
idea that there is a kind of skier that only goes to Aspen or that goes
exclusionary? intent is
sufficiently often to be separated from skiers in general.
shown by the act.)
3. Prof: how you understand the relevant market is absolutely
central to whether what ASC was doing in this case was even
ASK MORGAN TO
arguably a monopoly. Somewhat arbitrary (see in Kodak infra is
EXPLAIN SUBthe market the Kodak machine or the world of similar machines;
MARKETS.!!!!
Microsoft operating system v. all ways to do computing; very often
these cases get decided by choices; what are the real substitution
opportunities for consumers) when you are sitting here natl
market; when you get to Aspen 4 slopes market; market
somewhat arbitrary
B. Obligation to deal with your competitor: Ct says no obligation but
can have evidentiary significance. Cited Lorain Jl. if you advertise on
competing radio station, we wont take your ad in our newspaper
monopolization, illegal. There is a limited obligation not to refuse to deal
where the intent of the refusal to deal is to do significant damage to
competitor. Group boycotts violate 1; unilateral refusal to deal not
violation of 1 (Colgate), but can be a violation of 2 if used to exclude
competitor from the marketplace. AH hurt, but also adversely affect the
skier. Theme critical in 3rd period picked up on by J. Stevens impact on
consumers doubly bad. Changed character of market, no bus
justification, etc. J.Stevens suggests anytime you attempt to exclude
your rival on any basis other than your own efficiency say that it is
predatory (code word for intlly exclusionary and likely to be illegal); Prof:
thinks may be a stretch.
iv. final notes:

A. There may be defenses - 2 analysis (student comment). Prof shd

there have to be defenses analysis under 2 is starting to look like 1.
what is the risk of taking that position if you are big you will be a target.
People will assert that your product or service hurt them, and b/c you are
a target you may tend to not compete as hard (concern in US steel);
Consumers hurt want your competitors to compete.
B. Prof: if you read Aspen Skiing the way the European Union much
more aggressive abt establishing gradations of liability of firms based
on size and market share of firms; things that wd not have bn violations
are b/c of size.
C. You have to look very specifically at the particular conduct at issue, it
isnt enough to ask sweeping questions
b. Summary Judgment for conspiracy cases 1(predatory pricing here): (a)
Ps must present evidence that tends to exclude the possibility that the alleged
conspirators acted independently; and (b) must show that the inference of
conspiracy is reasonable in light of competing inferences of independent action or
collusive action that could not have harmed the P. Matsushita Electric Industrial
Co. v. Zenith Radio Corp. (US 1986 cb p 664):
i. Facts: Zenith (P) filed a 1 SA action against 21 Japanese companies (d)
involved in the manufacturing of consumer electronics, mostly tvs. The
complaint alleged that the Ds had conspired for nearly 20 yrs to sell their
products at artificially low prices in the US, in an effort drive US companies
out of the market. P alleged that this conspiracy was underwritten by the
ability of the Ds to keep prices artificially high in Japan, due to government
compliance. At the time the case was filed, P had a larger market share than
any of its Japanese counterparts. The Ds collectively moved for summary
judgment, which the d.ct granted. Finding direct evidence of conspiratorial
behavior in Japan and inferences from this conspiratorial behavior in the US,
the 3rd cir reversed.
A. Tv sets; zenith is the P suing Japanese manufacturers of tv sets
alleging Japanese firms trying to monopolize the market.
ii. P arg J producers had charged high prices in Japan, built large
production facilities in Japan, larger than the market, b/c they had this
production capacity sell them cheap in the US to get rid of; by selling them
cheap would dominate the market in the US monopolize. Alleged
evidence J gov part of this, administrator of trade J required them to sell at
very low price, limited number of distributors in US to monitor prices, met
together in J to set high prices all evidence of conspiracy.
iii. D defense:
A. Complying with Japanese law: what you are charging here is that
the J cos were complying w/ J economic regulations (minister of trade),
in effect then you are charging the J gov with violating the antt laws; arg
if you are complying with independent legal mandate you get a pass
from the antt laws other law can supercede J cos arg just as US
law can immunize, so can J law immunize from US antt laws (Ct does
not address whether or not foreign laws can immunize from US antt
laws) see below discussion of Southern, Columbia, Hartford
A. No antitrust injury to Zenith arg antt inj no- zenith may not
complain abt pro-comp activity
1. NB: if this was in fact predatory pricing that conclusion renders
it more than simply competition; could assert antt injury for true
predatory pricing; what D is saying this is a suit by competitor
complaining about what competition is all about.
B. No motive: you would have to be nuts to do this; no motive; antt
laws ought to assume that business people are rational sensible people;
if charge makes no rationale sense - then shouldnt.

iv. S.Ct throws the case out sum judg.: this case decided on sum
judgment S.Ct throws out as a matter of law there is no predatory conduct
S.Ct establishes a way to go about thinking through these cases STD for
sum jud is there a contested issue of material fact:
A. Exclude possibility Ds acted independently: To survive a motion
for summary judgment or for a directed verdict, the plaintiff seeking
damages for a violation of 1 must present evidence that tends to
exclude the possibility that the alleged conspirators acted
independently. Have to show there is a contested issue with respect to
conspiracy to determine if you allege conduct that is as consistent
with independent conduct as a conspiracy, then you loose (Conduct as
consistent with permissible competition as with illegal conspiracy does
not, standing alone, support an inference of conspiracy.); your allegation
must be more likely to be conspiracy than independent judgment; and
B. Must make sense: must show that the inference of conspiracy is
reasonable in light of the competing inferences of independent action or
collusive action that could not have harmed plaintiffs. The economic
theory of case must make economic sense. (here, claim that predatory
pricing theory didnt make sense many scholars agree b/c after drive
competitors out of business have to recoup losses and so raise high
prices and then new competitors come in).
Ask MORGAN:
C. Criticisms: Tr J must determine whether or not the economic theory
would this sum
underlying the case hangs together can a jury believe this story. Ps
judg std be used
in a case like
cases now cant not threaten to go b/f a jury, settle cases b/f huge $;
Sprayright
what this case seemed to do at the time make the judge the
vertical 1 case
gatekeeper for the substance of the antt claim; had judge deciding which
conspiracy to
experts were more persuasive and the P had to come in with experts at
fix prices?? Or is
it just for
the outset of the case. To many people that latter obligation to think
conspiracy to
through the case at the outset is a good idea, but was a big change fed
monopolize cases
js tend to be more skeptical than juries, pro-D.
c. Thinking about predatory pricing J. Easterbrook: AA Poultry Farms Inc. v.
Rose Acre Farms Inc (7th Cir. 1989) note page 677:
i. facts: Issue of recovery of expenses of the alleged predatory conduct;
hens some days laid smaller eggs then others, when they didnt live up to the
Orders other cos. Would sell to breakers who wd use immediately (i.e. for
cake mixes, etc.) what Rose Acre did was just selling them cheap, packaging
and selling; other cos. Didnt like and sued for predatory pricing
ii. J.Easterbrook three ways to think about predatory pricing:
A. Cost: priced below cost - compare price to cost part of the problem
is you never know what to include in cost. (ex. What do you do with
advertising);
B. Intent: Ds predatory intent (nowadays it is emails, Bill Gates we
are going to wipe these people out); cd just be evid of an aggressive
person, not really have anything to do with real life or what they have the
power to do or what they will do at the end of the day.
C. **Make Sense: ask is this a predatory pricing story that makes
sense if they engage in this behavior will they ever be able to raise the
price above competitive later? Focus on the back end avoid front end
analysis. **S.ct in Brook Group (689) essentially adopts analysis of this
if the firm would have no way of making up its losses then no. look at
market share and industry makeup.
2. Tying and Exclusive Dealing in the Current Period: thus far, tying illegal per
se even though doubts that they were always exclusionary. (See Std Oil (CA),
Intl Salt, Northern Pacific, Loews and Fortner). Tying - Significant now under
Microsoft; 2; underlying economic theory is that someone is excluding someone
else from the market by the choice of business techn; makes impossible for

consumers to use other persons product/services. When we last saw tying above:
per se illegal, See, e.g., Loews; and Fortner - violation of the SA could be found if
the P proved that US Steel had economic power in the credit (tying product)
market.
a. Keeps per se rule for tying where P shows: 2 separate products and
market power to force customer to buy (anticompetitive) (30% of market not
enough here). (I think this is what the case stands for.); but if not per se
illegal can still be unreasonable restraint of trade under R of R.
Jefferson Parish Hospital District No. 2 v. Hyde (US 1984 cb p. 690):
i. facts: Jefferson (D) executed a contract agreeing to require all
consumers of their hospital operating rooms to use anesthesiologists
employed by Roux and Associates. P sued after being denied hospital
privileges based on the K, contending the K illegally tied the purchase of
operating room use w/ a fixed source of anestesiolagical services in
violation of antt laws (SA 1).
A. Class: Denied rt to work at hospital, very garden variety case of
charge of tying. Hospital had exclusive agreement with a group of
anestitialigists; this Dr. said I am licensed, capable and you wont let
me practice. It was not a group boycott b/c it was the hospital as an
entity; he was denied access
ii. Jefferson argued that since only 30% of the market for operating
rooms belong to other hospitals, it had insufficient market share to
manipulate consumers into using unwanted anesthesiologists. (I dont
understand this 30% number).
A. If you were the hospital what would you have argued the
appropriate analysis was exclusive dealing: The hospital would
have wanted and apparently did want it viewed as an exclusive
dealing case had hired Roux to do all of its anestiology. If it had
been exclusive dealing r of r case
B. P wanted: What the P wanted was tying b/c up til this time tying
was per se illegal.
iii. Lower courts: D.ct dismissed the complaint and the ct of app
reversed, holding the contract per se illegal. Ct of app and P called it a
tying K
A. Arg that it is a tying K: patients who needed operation and
who had chosen this hospital to conduct and were compelled to buy
a separate service of anestia from a limited group of people and the
fact that they did it showed that the hospital had the market power;
otherwise people could have said I want this guy to do it.
B. Prof: useful to understand that it wasnt clear to everyone, esp.
dissenters, that this kind of case was a tying case, but perceived
benefit of per se rule was why they argued it was tying.
iv. S.Ct: J. Stevens (plurality): We must decide whether the contract
gives rise to a per se violation of 1 of the SA b/c every patient
undergoing surgery at the hospital must use the services of one firm of
anesthesiologists, and if not, whether the contract is nevertheless illegal
b/c it unreasonably restrains competition among anesthesiologists.
A. rule It is far too late in the history of our antt jurisprudence to
question the proposition that certain tying arrangements pose an
unacceptable risk of stifling competition and therefore are
unreasonable per se.
B. Circumstances under which tying violation: Not all refusals
to sell two products separately can be said to restrain competition.
1. The fact that they can buy the other product separately
elsewhere may have an effect. (If each of the products may
be purchased separately in a competitive market, one sellers

decision to sell the two in a single package imposes no

unreasonable restraint on either market, particularly if the
competing suppliers are free to sell either the entire package or
its several parts.)
2. Rule circumstances under which find tying violation:
Our cases have concluded that the essential characteristic of
an invalid tying arrangement lies in the sellers exploitation of
its control over the tying product to force the buyer into the
purchase of a tied product that the buyer either did not want at
all, or might have preferred to purchase elsewhere on different
terms. When such forcing is present, competition on the
merits in the market for the tied item is restrained and the SA is
violated. Force people to buy something that they dont
want and enough that it is not insignificant in the market.
Presumptively present where you have patent monopoly or
_______.
C. We must consider whether petitioners are selling two separate
products that may be tied together, and if so, whether they have
used their market power to force their patients to accept the tying
arrangement.
1. Two products?
a. Defense: 1st line of defense by hospital arg no tying
b/c an operation involves multiple people in the same
Analysis: Tying is it illegal?
way that an automobile involves multiple parts. So too
1. Is it per se illegal?
when you buy an operation you shouldnt say illegal tying
a. Are there two products
of anesthesia and surgeon.
(determined by demand)?
b. If yes, does the
i. Prof: important case for the Microsoft; M arg when
arrangement involve the use
we sell operating system, browser etc is all part of
of market power to force
package like a car. Important to understand what
patients to buy services they
constitutes tying of multiple products rather than a
would not otherwise
purchase? (30% not enough).
single product.
2. If not per se illegal, then Rule of
b. Ct yes two products forcing them to purchase two
Reason. Does the K unreasonably
separate items:
restrain competition?
i. J. Stevens not the functional relation of the
products that determines whether they are
separate products, it is that there is a different
MORGAN even if there
demand for the two products. They may be used at
are not two products do
different times, etc., but if people assess their
you still go onto R of R
demand for anesthesia services from surgeon
approach and if so, is this
services separately.
even a tying analysis or is
it just a general 1
ii. ARG separate demand for certain kinds of
procedures some people pick their own
anesthesiologists, for ex. Child birth different anast.
Have different procedures and reputations; there are
certain patients who would choose. This is the kind
of situation, as opposed to typical car buyer will not
buy on the basis of windshield wipers; this here,
separate products, b/c will pick anesthesiologist.
2. Second question: (ask after prevail on 2 product q)
Whether this arrangement involves the use of market power to
force patients to buy services they would not otherwise
purchase.
A. Need sufficient market power in the market for the
tying product to force someone to buy the tied product ct
concludes that the hospital does not have the power
roughly had 30% market share. Insufficient to constitute

sufficient market power to be able to force someone to

buy something they didnt want if you wanted another
anesthesiologist, you picked a different hospital. NO one
here was forced to do something you didnt want to do
[B. Criticism by nutshell calling this a per se test, but
pretty elaborate analysis.]
D. B/c no per se liability Rule of Reason: to prevail P has
burden of showing that the K violated SA b/c unreasonably
restrained trade. Requires inquiry into the actual effect of the
exclusive K on competition among anesthesiologists. W/o showing
actual adverse effect on competition, P cannot make out a case
under antt laws.
1. Prof: J. Stevens purporting to show what you needed to
have a per se violation of tying even if you cant show you
could potentially have violation of r of reas he wd say not
violated here.
v. Concur in the Judgment (essentially dissenting in reasoning): J.
OConnor have to satisfy r of reason; says this is what J.Stevens is
doing once you go through all of the tests that J.S. applies, you have all
of the costs of r of reason and none of the benefits of per se rule lets
call it a rule of reason and get serious about a per se rule:
A. show they have power to tie the product
B. substantial threat D will acquire market power in the tied product
market. (diff than what we have seen b/f earlier cases had to
show not insignificant effect on tied product but strictly on the $
value; she is proposing same std as in exclusive dealing cases
whether there is a substantial threat that the person engaged in this
conduct will significantly increase its power or diminish power of
others in that tied market product)
C. coherent economic basis for treating the two products as distinct
(something that you would want to purchase separately; someone
would have to want the tied product w/o the tying product. If you
would only buy together, then they cant be separate. Wd someone
go to hospital and say knock me out. Cant say they are separate.
Prof: only justice who said it that way, but makes sense to prof.)
D. ought to assess whether or not the benefits of the integration
exceed the negative features of it (she would take into account
effects on patient care of this particular arrangement this kind of
arrangement can be defended on the basis that it does provide
security that they will always be staffed appropriately, etc.)
vi. if this case had been seen as an exclusive dealing case
(dissenters looked at it this way as well) J.OC - viewing this as an issue
of whether he was excluded yes at Jefferson, but not in New Orleans
as a whole, looking at it as a larger market, conclude that it is not
unreason; market share small and not excluded. Prof: Wind up very
much where J. O and J Stev came out; requmts K cd have pro-comp or
at least commercial benefits, and so long as it did not create the
exclusionary effects that the antt laws worry about then no problem.
b. Std for Summary Judgment Again Eastman Kodak Co. v. Image
Technical Services, Inc. (US 1992- cb p 704): (nb Supremes step it up a
notch: great back and forth b/w the justices; now see as a case expression
of the ct of very careful economic analysis and susceptible to other economic
issues; prof: part of it is that the case was tried very badly at tr ct)
i. Facts: Eastman Kodak (D), a manufacturer of photocopy equipment,
held a significant segment of the market for this equipment, although the
market remained competitive. D also provided repair and servicing of its

Is monopolization =
to attempt to
monopolize?
J. Bork suggested
and s.ct reiterated
two different intent
stds?

equipment. In the early 1980s, small businesses began to appear

offering independent servicing of D equipment. D responded by limiting
the replacement parts to buyers who agreed to use Ds aftermarket
services. The independent servicers, unable to obtain spare parts,
largely were driven out of the market. In 1987, a class action suit was
brought by various independent servicing concerns.
A. Class Facts: K had very sophisticated equipment. Machines
eventually needed maintenance and K was in the bus of
maintaining but in time others got into the bus and a new market
arose in independent repair people. We want to be in the bus of
repairing these machines. There is a whole industry of independent
repair people. K would not sell parts to an indpdt repair org, wd sell
them to owners of machine who repaired themselves. So, Ps cd not
do their job b/c cd not get the parts.
ii. Lower Cts: D successfully moved for a sum judg in the district ct and
the 9th cir reversed.
A. D.Ct: (prof: tried very badly as per se case) tying product was
Kodak equipment and the tied product was parts and service. If you
bought a Kodak machine, had to buy replacement parts from Kodak.
K won sum judg b/c D.Ct found that (Jefferson) K doesnt have
market power in the machine market. K did not have 30% of the
market for the equipment. Case is tried on the assumption that K
doesnt have 30% of the machine market arg: look at Jefferson
if you dont have 30% dont have power to tie.
B. D.ct got the tying wrong (SCT): tying product are the parts;
tied product is the services. Its not about equipment; the parts are
the tying product and k controls all the parts they either make
them themselves or are the sole source for them. They use parts to
require people to buy the tied product, service, from
C. NB: After P lost below K got sum Jud. A world of amicae
came in to arg that this was a much bigger issue than the summary
grant had acknowledged.
iii. Plaintiffs: 18 independent service organizations; alleging that
Kodaks policies were unlawful under both 1 (tying) and 2 (has
monopolized or attempted to monopolize the service and parts markets)
of the SA.
iv. S.Ct: J. Blackmun should not have granted sum judg - Another
case about the std for sum judgment in antt controversy. The principle
issue is whether the Ds lack of market power in the primary equipment
market precludes as a matter of law the possibility of market power in
derivative aftermarkets.
A. 1 Tying: (To defeat a motion for sum judgment on their claim
of a tying arrangement, a reasonable trier of fact must be able to
find, first, that service and parts are two distinct products, and
second, that Kodak has tied the sale of the two products.
1. Are there two products? Look at consumer demand.
a. K args: not two products same product b/c if you are
going to buy service chances are you are going to require
parts. Vice versa. There is not a market for parts that
doesnt involve service. That is part of the same thing
you wdnt buy one without the other.
b. J. Blackmun (maj): there is doubt about this b/c there
were some cos that were just buying parts to repair
themselves, so market for parts; we also know that some
service does not involve parts. Ct says there is at least

enough question here as to whether these are separate

parts not sum judg appropriate.
NB: The fact that they are functionally used together
does not answer the question (like J. Stevens)
2. Appreciable Market Power in the Tying Market?
(Having found sufficient evidence of a tying arrangement,
[(answered yes to #1)] we consider the other necessary feature
of an illegal tying arrangement: appreciable economic power in
the tying market. Market power is the power to force a
purchaser to do something that he would not do in competitive
market.It has been defined as the ability of a single seller to
raise price and restrict output. The existence of such power
ordinarily is inferred from the sellers possession of a
predominant share of the market.)
a. P: argues K has more than sufficient power in the
parts market to force unwanted purchases of the tied
market, service.
b. D: dont have power over parts look we dont have
market power to get people to buy our machines, how can
we have market power to get them to buy the parts. If
they raise the price of their service or products too much,
people wont buy the machine to begin with people think
through the life cycle, if raised price of parts simply sell
less machines. Lack of market power over machines
derivatively indicates lack of market power over the parts.
i. (Claims this means that it is entitled to sum
judgment b/c the existence of market power in the
service and parts markets absent power in the
equipment market simply make no economic
sense. Masushita sum judmt std. Ct it is not
economically senseless so that no reas jury could
find in its favor.)
c. Ct: D must show that despite the evidence of
increased prices and excluded competition, an inference
of market power is unreasonable. Te determine whether
D has met that need to unravel assumption underlying
its proposed rule: that lack of power in the equipment
market necessarily precludes power in the aftermarkets.
i. cross-elasticity: will consumers stop buying K
equipment if it raised its parts or service prices above
competitive levels. (think about life cycle)
A. The fact that the equipment market imposes
a restraint on prices in the aftermarkets by no
means disproves the existence of power in
those markets.
B. K makes a false dichotomy that there are
only two price: ruinous and competitive. But Ct
suggests that there cd easily be a middle,
optimum price at which the increased
revenues from the higher-priced sales of service
an parts wd more than compensate for the lower
revenues from lost equipment sales.
ii. Does Ks theory describe actual market behavior
so accurately that respondents assertion of K market
power is unreasonable (and thus fails Matsushita)?

A. If true that higher service prices wd lead to a

disastrous drop in sales equipment, then
presumably the corollary is true: low service
prices lead to a dramatic increase in equipment
sales. One wd have therefore expected K to
want low service price, cd have got through ISO
serves. Instead, K adopted restrictive sales
policy designed to eliminate lower priced ISO
service. Has not devastated equipment sales. If
the arg is that you are charging a lot for
machines, why wdnt you want to charge a high
price for the service too. You really ought to
want have cheap service to sell lots of
machines.
B. To reconcile Ks theory with the contrary
actual results K describes a marketing strategy
of spreading over time the total cost to the buyer
of K equipment.
1. you might imagine that people wd
charge very little for the product in order to
get the higher price for services I will give
you a phone if you buy my service plan
2. Ct says if that is what they were doing,
you could expect to see you wouldnt let
your big purchasers who service the
machines themselves buy the parts directly.
If your game was to make your money on
services, you wouldnt let your big
customers get away.
3. Problem this is a hypothetical pricing
strategy, not the one K used, and doesnt
explain actual market behavior.
iii. Significant information and switching costs could
create a less responsive connection b/w service and
parts prices and equipment sales. (Arg K had market
power) Prof: these costs were enough to keep from
sum jud.
A. info costs (figuring out lifestyle): much of this
information on the cost of the package over its
lifestyle is difficult some of it impossible to
acquire at the time of the purchase; This life
cycle stuff is really not true not everyone does
it and requires more sophistication (prof: wrinkle
in this case they changed the rules midstream,
people had already bought the machines).
B. switching costs (getting out of deal)
costs of switching equipment was so high, that
as to people who already bought machines or
leased, K did have market power over them;
locked in; that was enough to have a basis for
finding an improper tying
C. Criticism J.Powell in Matsushita not
thinking anything this sophisticated. Post
Chicago economics most people think
relevant.
d. Dissents (Scalia, OConnor, Thomas):

i. J.Scalia was upset b/c this had been plead as a

per se case and no r of reas charge and Ct bailed
them out on the market power issue. The idea of
lock in anybody who buys a car, fridge, etc. is
locked into that item if we start saying this, then we
have created market power in every manufacturer of
a durable good. Much too broad. Meaningless. 1%
of market being a monopolist of your 1% is absurd.
ii. Information cost? Arg silly issue this is not
unique, in every market someone doesnt have all the
info. You dont need all of the info. How do prices
get set J. Scalia many markets have a lot of
ignorant people, but the manuf cant assume all
ignorant, have to assume that some people are going
to care and have to do their pricing for people who
are smart rather than those who are stupid; market
prices get set by interplay b/w manuf and smart
consumer. K could have sold this product with a
lifetime warranty and if they had wd have been fine,
buying service from them is the same thing. Prof:
Very, very interesting battle of econ args.
e. 2 issue:
i. Majority: The offense of monopoly under 2 SA
has two elements: (1) the possession of monopoly
power in the relevant market and (2) the willful
acquisition or maintenance of that power
distinguished from growth as consequence of
superior product, business acumen, or historic
accident.
A. Relevant market? Ct says that the relevant
market for 2 purposes is K parts (nearly 100%)
and services (80-90%); dissent everyone is
always a monopolist of its own parts.
B. Willful acquisition or maintenance of that
power? K took exclusionary action to maintain
its monop liability turns on whether has valid
business reason K presents 3 justifications
triable issues of fact.
3. The Titanic Struggle over alleged exclusionary behavior: same issues as
above (under monop and tying) but single case (collection of facts) perhaps the
biggest most interesting, most controversial antt case this half-century (our Std
Oil). HO settlement as of last Friday, today substituted the word Ps for US b/c
not all of the states involved have agreed to it. We are in the midst of it, but far
enough to talk about it. Review and confirmation or perspective on the cases we
have looked at. The decision of the Ct of App is the one at play, US S.Ct denied
cert, in principle the case cd go back to the d.ct for the sts that have not settled,
remains to be seen. Most people believe Ct app is a good decision, whether it is rt
or consistent w/ S.Ct is debatable, but is relatively clear for as complicated a case
as it is, and it is unanimous from a bench appointed by both extremes
remarkable feat to pull all this together.
a. History:
i. Background: Microsoft (M) had been b/h Apple (A) in
development of user-friendly computers. 10 yrs ago M based machine
was relatively amateur, whereas A was ahead. M created Windows
(some say stolen from A) graphical interface. The current dispute is
not the first time that M found itself b/h. It came out w/ W, made it

available, tried to require people to install it along with DOS. When all
that was going on the FTC had jur over this problem. [there is a kind of
run in issue as to which of the two enforcemt agencies (FTC or DOJ) has
jur- they have a treaty that lays it out; there are lots of situs where they
had disputes). In 1990, FTC had jur. FTC voted 2-2 not to challenge the
interface of W w/ DOS. 2-2 means didnt file a charge. When they
abstained, the DOJ said can we do it. DOJ did challenge M. Virtually at
the same time they filed the complaint, they filed a consent decree. (First
case)
ii. J. Sporken (D.Ct) (white collar crime prosecutor b/f J, suspicious of
Ds?): when the complaint and consent decree got to him, he blue up
you have not charged them with enough, and giving away the store. A
settlement in these cases has to be approved, and has period of notice
and comment. Vaporware.
iii. Ct of App.: can deny settlement, but cannot tell DOJ what to
prosecute (Vaporware). Reversed and gave to different judge J.
Jackson.
iv. J. Jackson: passes the consent decree. W/in two yrs DOJ is back
saying that they violated the consent decree through integration of the
browser and Windows. (Current).
b. Preliminary notes:
i. Network Externalities:
A. Network externalities explained: Economic reality in the
computer industry that the ct recognized in 98, Jackson recognized
in 2000, and app ct recognized this year what has lead to Ms
dominance in the computer industry? Network externalities once
you get a significant market share it is difficult for any body else to
displace you why? B/c lots of people having it is part of its value
like telephone industry; visa/MasterCard the more people who
take your credit card the more value. There are some types of
industries where value is added when lots of people use the same
product you do, the incentives, accessories, etc. benefit other users
and you. The idea is the first to the game, first to achieve the large
market share has advantage advantageous to it and to everyone
who uses Network externalities. It wasnt clear that it was going to
be M, could have been apple, but now A has lost. When someone
wins, that victory is hard to displace. Not to say never happens
(VHS DVD), but phenomenon is very real.
B. Other effects: What else is true?
1. Cost structure: The cost structure at M now arg once
you have the winner, person operating the winning operating
system has very low cost to produce addl copies of that
program, and can have a very low market price and any one
else trying to entering will have a real cost disadvantage.
2. Software writers: The people writing software want to go
with the winner, so write it for Windows. There will always be
fewer available for the other system.
C. Shd it be inherently improper to have 90% of the market
(assuming cts right)? Is that 90% share something that the ct shd
call monopolization? Why is it that the ct wd not say that it is a
violation of 2 of the SA to have 90% of the market share? The
basic insight is that for all the reasons we have been talking about
consumers benefit from having a firm that produces network
externalities we dont want to set up the kind of system where we
have to give advice to a client to raise price, lower service, etc so
that feds dont come after you. That kind of advice in this world

means that you dont want to have per se rule for getting lg market
share in these kinds of industries.
ii. What do we want to forbid? The consent decree had specifically
forbidden (at issue in 1998 proceeding): three terms (1) M cd not
require a licensee of the operating system to buy or to license application
programs or addl software products (had to be free to get something
else); (2) forbade a term in the license that would say that the licensee cd
not buy application programs from other manufacturers (like 3 of CA
cant reqr deal only in the goods of M); (3) what it expressly permitted
was the production of an integrated product (M cd not by this decree be
frozen into a technology of 1995, had to be able to produce new product
as long as integrated product permitted).
iii. Q: was Ms conduct violative of this agreement? M required that in
addn to licensing Windows (W), that also license the browser Internet
explorer (IE); initially, just sent it to them, and didnt require then they did
require that they installed it w/ W. Did not make them buy it, gave it to
them, but required install IE. Also required that none of it functionality be
disabled (ex. Cd not remove icon f/ screen).
c. United States of America v. Microsoft Corporation (D.C. Cir. 1998 cb
729) (J. Williams): did M violate its consent decree by requiring computer
manufacturers who license its operating system software to license its internet
browser as well? D.Ct said yes and granted injunction; This court reverses.
i. Ct deciding Breach of K case: Std ct says in first case for deciding
whether M had violated the law? (charge here was tying short hand)
Ct says it is deciding a K case this isnt an antt case at all. This is a
case abt whether M violated its K with the gov (consent decree); they
recognize that K was entered into as a result of antt case, so underlies,
but in this type of proceeding to decide whether M should be held in
contempt for violating the issue is construction of the decree.
***Problem FN 13 (734): another charge can be filed against you M.
The ct really laid the groundwork for subsequent action, in fact by the
time this case came out, the gov filed a new case. Ct said nothing we do
today affects another case, Prof: except that it clearly establishes the
framework for how everyone is thinking abt antt.
ii. Two products? Critical issue in this case (as in the current case):
was M selling one product or two when it provides the operating system
w/ the respective browser built into it? What where the parties positions
(prof: blending all 3 opinions really)?
A. Gov args different products: Jefferson not functional
relationship, but whether the consumer wd buy one in the absence
of the other. The controlling authority is Jefferson. As in Jefferson,
the ct is willing to concede you had to have a computer that is
turned on to use Netscape Navigator (NN) or IE, willing to accept
premise that to get to the internet need computer running; same as
anestitioligist and surgeon; but there is a different demand for them.
People cd prefer NN to IE. The fact that you used W operating
system, did not dictate what way you wanted to get to internet. Like
Jefferson, possibility that actions of M were deterring the purchase
of other internet access and therefore
B. M arg one product: all software is a combination of function,
that an operating system starts up the machine, activates other
programs that are built in (i.e. clock, calendar, etc.). Nowadays, it is
meaningless to talk abt an operating system as a thing that has one
function; instead, the operating system is whatever the
manufacturer says it is. Ex. Mercedes Benz puts in a global
positioning system up to MB thats what it means to drive an

MB; meaningless to talk about car separate from wind shield wipers;
same thing here, meaningless to talk abt operating system separate
f/ what manufacturer wants to put into it.
iii. Construing the consent decree: Integrated Product
A. Read it by its terms and in context: Ct saying in construing
this consent decree to construe, you have to read the consent
decree by its terms and in context, you understand that the parties
realized there was such a thing as an integrated product that
consisted of a number of products. Gov accepted the integration of
the graphical user interface w/ DOS to form Ws; so to you have to
say that the integration of another product was within this.
B. In what sense is this in fact integration? ct said if all you
did was bolt two products together then you wouldnt have
integration, but if the manufacturer did something that neither the
consumer or the equipment manager could have done themselves,
then sufficient to be integration. Said have to be deferential to
manufacturer in this context, cts shd not be deciding what is better
integrated, that is for markets to decide. That is sufficient for the
purposes of consent decree.
iii. Tennis racket strings again integration: one other point - could
you make more money selling Ws w/ IE then you cd selling Ws w/o IE?
Tradl tying theory: the consumer wont pay more than a competitive
price for the tied product. Tennis racket and the strings if you buy one
product from a monopolist and the monopolist asks you to buy another
product which is simply an add-on, which you wd have bought anyway,
you can make the same monopoly price whether you integrate or not.
Only reason you integrate, b/c it will be an inherently better product we
dont have to worry about this, Ct says. One of the principal reasons for
engaging in tying is to take advantage of differential demands.
iv. J. Wald (conc/dissent:) worried abt test is way to easily met
deferential and allows companies to define what their product is you
will never have tying; ought to focus on the prohibition of buying other
than M, rather than focusing on the exception. Requires ct to determine
whether there is a real synergy and whether there is a separate market,
and benefit to consumer.
d. United States v. Microsoft (2000 D.D.C Judge Thomas Penfield
Jackson) also below discussion of US v. M (2001 D.C. Cir): Current Case J.
Jackson: (really did some revolutionary things took a phenomenally
complex case and brought it to trial and judgment limited them to 12
witness, direct testimony in writing all happened in slightly over 1 yr; these
cases had tradlly taken 8-10 yrs; remarkable in what he achieved in the
relative ability to handle a 2 case).
i. What had the gov learned? (FN 13 invited this case) Charges
involved here (really 4 or 80 charges depending on how you count it 4
charges f/ fedl gov and 19 states mirrored the charges):
(1) 2 monopolization in operating system
(2) 2 attempt to monopolize the browser market
(3) 1SA/ 3 CA alleged tying arrangement of browser to op
system
(4) 3CA exclusive dealing arrangements whereby firms had
to deal w/ M only
ii. Defining the market: in any of these cases, the first issue is defining
the market. How did J. Jackson define: geographic market is worldwide;
product market - operating system or the personal computer (as distinct
from the network of computers that businesses use) only ones at issue
here were Intel based computers (produced w/ chips from the Intel

system); NB: market that was stacked against M b/c it described the
computer that M was based on.
A. JJ Concluded this was correct market (i.e. analysis): (used
methodology we will see w/ mergers next weeks material) he
looks at the same kind of issue as Kodak switching costswhether people who are used to Intel based system really have
options that they can go to at relatively low cost he says no, they
have learned how to use Intel system, price of computers; hard for
people to change. Ultimately asking: whether the producer (hypo
monopolist) of Intel based computers cd raise price (merger
guidelines 5%) and keep it that way for 1 yr? It wd be costly for
people to switch, they are locked in, gives M power.
1. Prof: thought this was a weak part of the decision
B. Ct of app affirmed: ct of app accepted this though b/c there are
these switching costs and M said there are alternative ways to do
computing ex. Palm pilot; there are lots of ways to perform the
function of a personal computers w/o using. Ct app none of these
products threaten Ms dominance those are still expensive,
perform only part of the functions of personal computer, people wd
have both as opposed to one or the other. While someday it may be
true that personal computer will be just a memory, at the moment
they are the best weve got and the others are just not as good.
1. M argues there are alternatives: M says you can go on
the internet and get onto web cite and use it to do word
processing, etc. and so if youve got web tv can do everything
you can do w/ personal comp. Ct says yes, maybe one day,
but right now no good substitute to personal computer
2. M arg: M says what you are really doing is prosecuting us
for producing a product better than anyone else. Punishing us
for being successful: if we had not made the personal
computer what it is today, you wd not be doing this. We dont
want an antt law that treats people this way for being
successful. Arg failed.
C. Clearly market power: If you assume that the market is how JJ
defined it, is it clear that M had market power? 90%. Once you
define market this way, clearly will have monopoly power no matter
how you calculate it.
D. Shd it be true that no direct proof of market power shd be
necessary to prove its existence? (D.Ct suggestion): ct says
making the computer industry is not a defense should it be? Prof:
equivalent of issue raised in Trans Mo: we set a reasonable price.
If all you do is ask whether the firm is priced high, all the firm will do
is price low when it is going to get sued. Therefore ct needs to look
at behavior it observes rather than the price.
E. Domination of the market itself is not improper now must
ask the question whether it has used its strength in the
market to violate any of the provisions?
iii. 2 Monopolization in Operating System: JJ bought whole the
govs theory of what was going on here, the Ct of App takes almost no
notice of this
A. Govs Middleware Theory JAVA via NN as an Operating
System to compete w/ W: what is middleware and what is the
govs theory abt what M was trying to achieve here. Govs theory
here turns on that middleware was a significant thing. Middleware
inserts itself b/w the op system simplest model is that you have an
operating system that runs machine and then you have application

software to do functions. Middleware is something that runs on an

op sys but that will in turn run applications. Gov theory: if NN
(middleware form) really became a dominant features (as dominant
as Windows),t hen applications writers cd write to run off NN, and cd
have NN as an alternative to Ws, b/c NN contained an operating
system JAVA then people wd write for JAVA instead of Ws b/c
after all you cd always run it off NN. If that is true (questionable),
then NN is not just a way to get to the internet and question is not
whether M just didnt want another way to get to the internet then
it was another way to be Ws and the theory of gov if M were to let
NN to get the hold that it would have gotten absent all these efforts
w/ IE, you wd have had at least two equally powerful op systems
that they wd have written for; what Gates called comodifying the op
system. M was fighting to prevent another way to run the computer
(wd have brought down to marginal cost next to nothing).
1. Illegal: JJ says illegal to eliminate potential competition
Std Oil , United Shoe Machinery not illegal to have monop,
but illegal to engage in activities that are improper and
designed to preserve monop.
B. What else did M allegedly do to preserve the monopoly of the op
sys?
1. Created a JAVA based program of its own phony JAVA,
partial JAVA, frustrated peoples abilities to write real JAVA
programs
2. Created IE in the first place, JJ said the very creation of IE
was to frustrate the development of NN the threat that NN
was to become as popular as Ws, then creation of IE was
conduct designed to maintain the M monop
3. Furthermore, they gave away IE, it was a costly project
they gave people promotional benefits for installing IE, paid the
switching fees, some cases forbade people f/ installing NN.
4. All of these things were forbidden, what was the significance
of the bundle of the selling of Ws with IE for 2 purposes (as
opposed to tying same observed conduct selling of Ws 98 w/
IE both potential tying and 2 violation). If your aim in life is to
discourage people from using NN, when you bundle you
guarantee that everyone who buys Ws already has a way of
getting to internet, therefore, wd have to want NN really bad. A
little like arg in Lowes (bad movies). By bundling the IE w/ Ws
op system, you had reduced the incentive of people to think
seriously abt NN as an alternative to reach the internet and
thereby contd the Microsoft monop. Even went so far in some
cases to reqr that IE be the default browser. (student question
cant make more by giving away IE must be trying to
preserve the monop. Prof: ask yourself if that is persuasive).
C. Ct of App. Says: (dont forget accepted market defn of JJ
very anti-M): accepted JJs rule look to see whether the D
engaged in essentially irrational conduct, that is not pro-comp,
that didnt benefit the consumer in order to maintain monopo.
1. Analysis: Have to look at nature of injury and determine
whether anticompetitive. And then you can ask whether procompetitive aspects. Adopted approach very much like the
S.Ct used in 1 Cases: Once you show there is a monopoly,
must then show that the monopolists act had an
anticompetitive effect (competition, not competitor). If

successfully demonstrate, then the D can offer a

procompetitive justification (if D show, then burden back to P to
rebut). If the procompetitive justification stands unrebutted,
then the P must demonstrate anticompetitive harm of the
conduct outweighs the procompetitive benefit. Focus is on
effect not intent, intent is relevant only to the extent that it helps
understand effect. (App ct undertakes this analysis for each of
the thing that M did pg. 7-16).
2. Ct of app concludes charging little or nothing for IE is
not in itself a violation have to show why that was anticomp or attempt to monop + look to see if it is good for the
consumer, pro-comp. We will not get into establishing a rule
that you have to charge a high price for a product so that the
other Cos can charge for their product. Prof: that is exactly the
kind of conduct that we wd hope that firms wd engage in
(assuming not predatory, and there is no allegation here of that,
to keep its market share though not a violation)
3. Found a violation in the licensing agreement made it
difficult to get rid of IE, you cant make it impossible for
someone to get rid of, ct says that doesnt benefit consumers
no purpose to that, except to try to lock in your hold on
ultimately the underlying monop. Has anti-comp effect, w/ no
pro-comp effect
4. Some of the integration was not beneficial to anyone but M.
5. Exclusivity agreements w/ AOL, AOL wd pretend there were
no other internet access than IE Ct says does nothing but
frustrate consumers ability to make choices. Anti-comp.
6. Serve no pro-comp, no consumer benefit, only made life
harder for NN that kind of restrictive licensing agreement ct
held onto to affirm the 2 Monopolization ruling
iv. 2 Attempt To Monopolize the Browser Market: requires showing
(1) that D has engaged in predatory or anticompetitive conduct (1) with a
specific intent to monopolize and (3) a dangerous probability of achieving
monopoly power.
A. JJ Yes: attempt to monopolize browser market shown by the
efforts to buy off NN earlier. Further by its efforts later that were
successful in improving the market share of IE showing danger of
success
B. Ct app: no attempt to monop under 2 basis: you are
taking evid put in for one theory and trying to use it for another, you
cant get away with that, cant piggy back on op sys market w/
browser market. You didnt ever define browser market the
market that they were attempting to monop. Internet access can be
done by a lot of other things palm pilot, cell phone, web tv. The ct
disagreed completely w/ JJ did not even remand, just through out
the claim. You cant get away with saying M did bad stuff so we
will also call it attempt to monop you have to have a theory of what
market they were trying to monop, and something more then by
the way use the evid we put on b/f.
1. Ps failed to show dangerous probability of success: To
establish a dangerous probability of success, Ps must as a
threshold matter show that the browser market can be
monopolized, i.e., that a hypothetical monopolist in that market
could enjoy market power. This, in turn requires plaintiffs (1) to
define the relevant market and (2) to demonstrate that
substantial barriers to entry protect the market. Ps have not

carried their burden on either prong. And JJ was wrong about

both.
2. Prof: So, app ct supposedly saved M, but found 2
monopolization
v. 3 CA Exclusive Dealing Arrangements whereby firms had to
deal with M only:
A. JJ- No: there isnt any violation; the alleged excl dealing were
the ones w/ internets services such as AOL who agreed to promote
IE and pretend there was no NN. In order to succeed in Exc dealing
case, you have to show that at least 40% of the market was
foreclosed from the alleged Victim. In this case, NN cd have gotten
into the hands of more than 60% - they were giving it away, you
could down load; they just werent foreclosed from the market. JJ
found for M on this one thing.
vi. 1 SA and 3 CA alleged tying arrangement of browser to
operating system:
A. JJ Tying Yes:
1. has to deal w/ the prior ct of apps (98) holding how does
he deal with: he basically says the ct of app was wrong they
messed up. S.Ct is the real authority here and the ct of app
came up with this goofy idea of integration and deference
2. Applying Jefferson and Kodak he says that you have to
look at whether or not there was separate demand (Ct of App
looked at the producer asked whether the producer thought
he made a better product by integrating that is just crazy, if
producer says yes, then deference okay JJ says ct of app
ignored SCt) it is surely the case that some consumers will
want to use NN rather then IE, so even though they are
integrated, have to treat as two separate products
3. Further, S.Ct rejected the idea that the anestitialigist made
better product in Jefferson the Ct did not allow a better
product defense and therefore not here. This is a
straightforward tying case
B. Ct app Tying Maybe sends back down to D.ct (Prof:
basically just ignore JJ again):
1. Yes two products: App ct accepts the finding that now that
we are not construing the consent decree, we are applying
tying law, we have to treat these as separate products. (prof:
thinks didnt want an easy S.Ct reversal). Conceded two
products; conceded M is selling them in a way that requires
people to buy both even though some people might not want;
2. Might not be illegal:
a. the law: how does the ct conclude that this might not
be illegal (Prof: sophisticated analysis) all tyings are not
bad whether tying is necessarily per say illegal it isnt.
Jefferson: appeared to say that a majority held that tying
is per se illegal. Ct app: tying cd be per se illegal if the
condns in Jefferson are met, but it isnt always; therefore,
there is the opportunity to analyze tying under a R of
Reason where it is appropriate to do so (Prof: I think they
are right, but they are taking a step that is clearly not
invited by J.Stevens in Jefferson).
b. applied: On what basis did they say that this is not a
circumstance in which bundling should be per se illegal
tying the old tying cases involved salt machines +salt

tablets or movies or some other kind of physical objects;

What we are seeing now is an industry where we dont
know enough about the industry to know if bundling in this
industry is efficient or not; we recognize that there are
times when bundles make a lot of sense certain
efficiency to it transaction costs (car lot if you had to
buy by picking out transmission, etc.); it may be that we
dont know enough to see whether this is that kind of
industry what is it about software industry that makes it
seem like this kind of industry nowadays, everything you
buy is packages, nobody buys one little piece of anything
anymore they buy something that gives you 500 games,
etc. when we look at the industry does everyone bundle
or just M? is it a function of monopoly or is it something
else. That is a plausible result in this industry have to
send back and let the district ct look at whats happening
here. Is this like bundling 500 games or is it something
else? Matter for district ct
vii. So at the end of the day: 2 issues thrown out exl dealing and
attempt to monop; 2 monop violation; remand on tying to see under rule
of reas whether violation give M a chance to explain whether pro-comp.
What do you think about this approach if the S.Ct wd have taken this
wd it have affirmed the approach: Prof seem to adopted J OConnors
approach which prof like; guess they wd have affirmed it.
e. Case back to D.Ct: issues on remand see pg 27 one major issue is
what the remedy shd be:
i. JJ ordered broken up: JJ had ordered break up of M into create
a new co. either IE in new co or Op system in new co. one co. had
monop and one co. had competitive products Remedy like AT&T
broke it up into all the bells AT&T had all the local telephone services
and put them into the baby bells and AT&T retained all the competitive
products. Analogy was an important one for the purposes of what JJ was
doing there was precedent for it parties had agreed upon as part of
the consent decree there was precedent in a lg industry telecom
that it did work
ii. Ct of app on that remedy said that JJ didnt give good reason
for this remedy; ct app sent it back to determine whether it was
appropriate. JJ had said I dont trust M, they are dishonest, they lied in
ct, every time they come in here they act as if they didnt do anything
wrong therefore, need to be hit over the head ct of app said it isnt
contempt to file an appeal or to say you didnt do anything. You have to
figure out if the remedy is justified. United Shoe Std Oil: Std cd be
broken up b/c product of merger; united shoe was a single plant and
broke it up and none of the parts survived. You need to ask what you are
doing to the industry by doing this. Pt is must consider the practicality
of the remedy and whether it is justified by the facts of this case.
f. Issue that went to the S.Ct - Judicial misconduct: this is the issue M
took to the S.Ct asked to reverse the whole D.Ct decision on the ground that
JJ was biased. Why dont we permit Js to talk to reporters? B/c it removes
the illusion that cts are not bias. B/h the curtain we know that people have
opinions and make generalities so impart it is an illusion. Once you are
showing off for the reporter, you are kind of stuck with it, you cant take it back
changing your mind shows up in the media. There is some virtue in not
allowing Js to talk to the media in part, the ability to take it back; tendency to
show off for reporters; and some people are going to know how this case is
going to come out very valuable information reporters wont keep it quiet.

You are upsetting the hope that the J goes to the end, looks back over, and
decides the case.
g. Settlement: (I dont think this is important may want to take a look at)
involves: US gov we are not going to pursue the structural remedy (i.e.
breaking M into two parts); 10 points to settlement HO: M would be prohibited
from discriminating against anyone who doesnt use M products; There will be
non-discriminatory licenses; Make available the M codes for any new version
of M that is going to come out so that people who are designing software will
have head start and be able to get into the market; will assure that the M
operating system will not use gremlins (make other products fail); will offer
licenses to anyone who wants to use their IP for a royalty, but a nondiscriminatory royalty; create a arbitration panel to hear complaints that M has
violated any of these terms. Also in house compliance officer to hear these
complaints. Agreement expires in 5 yrs the industry is changing so much,
but if M engages in intl conduct can extend to 7yrs by ct. Private parties are
not able to rely on this settle as prima facie case for private cases.
D. Merger Review: Antt as an Administrative Process:
1. Introduction: (remember that a merger is the acquisition by one firm of all or part of
the stock or assets of another firm).
a. cb 770:
i. 60s challenging mergers under CA 7 was the most active field of antt law
b/c market defns were flexibly tailored, market shares led to presumptive
invalidity of many mergers, and a perceived loss of potential competition
became the basis for challenging yet other combinations. After General
Dynamics (1975) brought some realism back into the analysis, however, the
number of mergers that wound up in ct dropped sharply.
ii. one reason they dropped legislative: Hart-Scott-Rodeo Act of 1976
made changes in antt process that have had a profound effect on the merger
practice. Became 7A of the CA: requires that firms give Justice Dept and
FTC 20 days advance notice if they plan a merger and certain condns are
met- basically that one of the firms has annual sales or total assets of over
$100 mill, the other has annual sales or total assets over $10 mill, and the
acquired holdings of the acquirer in the acquired is over 15% or $15 mill worth
of the acquired firms voting securities or assets.
iii. Requirements transformed merger practice (at least for big cos.): the real
litigation over the merger is in the meetings the parties try to satisfy possible
agency concerns about the transaction if clearance is obtained can
proceed w/ only the risk of private challenge. If agencies are not satisfied,
they may ask for more info, seek to enjoin, or both. Delays may cause
merger to fall through financing.
iv. merger regulation remains controversial in large part b/c of the wave of
mergers in the 80s and 90s created a new tendency towards concentration.
b. notes: area of enormous activity but much of it happens b/h the scenes, there
are relatively few cases which go to ct. practically though very significant. The
problem w/ remedies for mergers under 7 is that mergers are not leisurely affairs
and often not public, the discussion takes place in strictest secrecy and not let out
till very end; also hostile takeovers subject to merger rules, so cos about to be
taken over have sought protection under antt laws. Hart-Scott-Rodino Act thus
passed 20 yrs ago, if the size requirements are met, merger must be submitted 30
days in advance to the FTC and DOJ and is then subjected to review if the
agency who is reviewing it needs more info or more time will often ask for more
facts and it can take more time (extended), but they have to ultimately render
decision on it in a certain amount of time CA 7a, this negotiating process w/
agency is why this section is called antt as an administrative process. This is an
area of supplying mass amts of data, negotiating w/ administrators, and trying to
get approved

2. A P seeking injunctive relief under 16 of CA must show antt injury. Cargill v.

Monfort of CO, Inc (US 1986 cb 771): (case shows that private challenges of
mergers are now not really more than a theoretical possibility)
a. facts: Monfort (P) operated three beef-packing plants. A competitor was Excel
(D), which operated five beef-packing plants. D signed a merger agreement with
Spencer Beef, another meat-packing concern. P brought an injunctive action
under 16 of the CA, alleging that the merger would give D and its owner, Cargill
(D) a larger market share which would impair Ps ability to compete. D.ct granted
the injunction and the court of appeals affirmed.
i. class facts: Meat packing industry firms involved 2nd largest firm is
buying the 3rd largest, so will be almost the same size as the largest. Monfort
is now #4. DOJ let the merger go through about to be closed. Question
whether Monfort could challenge this merger?
Monfort argued that it could challenge this merger b/c by merger wd create a
squeeze make it more expensive and lower the price that M cd get on the
market and make it hard for M to stay alive (arg like Utah Pie) going to put
under pricing pressure. M prevailed below enjoined the merger
b. Issues bf S.Ct: whether a P seeking relief under 16 must show a threat of
antt injury? And if so, whether loss or damage due to increased competition
constitutes such injury?
i. Must a 16 P show antt injury?
A. P args NO: falls under 16 (remedy for injunction) of the CA v. 4
(provides remedy for treble damages) - antt injury did not inevitably
apply. Shd not treat the two the same b/c 4s nature of treble damages
cd open the floodgates of litigation. Antt inj was really going to a belief
that we dont want to permit a suit to go forward where we wdnt want to
grant a remedy of damages to somebody for a harm that we wd hope the
competitor wd inflict. Whereas the injunctive relief, (antt inj relevant in
damage case b/c you shdnt get damage), someone seeking an
injunction is really a private attorney general (Brunswick case P cdnt
get treble damages). If we really believe this is illegal, there ought to be
a way for someone to bring this b/f the court.
B. Ct rejects Ps arg - 16 P must show antt injury: two sections
were meant to address the same thing; antt injury required under both
. Antt inj is not about damages, or whether we want to give you $, it is
a question about whether you are the type of party who ought to be
bringing this if you let somebody who has the wrong kind of injury make
the decision as to whether or not you can frustrate this merger where the
govt has made the decision not to challenge the merger, then you are
creating more limitations on mergers than you want to have (decided
same yr as Mitsushu threw out predatory pricing case on sum jud; ct in
the busns of getting rid of private antt cases; same yr as Sharp bad
period for private plaintiffs. This decision has not been reversed)
ii. Do loss or damage due to increased competition constitute such
injury?
A. P argued in lower ct: it could challenge this merger b/c by merger
wd create a squeeze make it more expensive and lower the price that
M cd get on the market and make it hard for M to stay alive (arg like Utah
Pie) going to put under pricing pressure.
B. Ct did not find antt injury: said that they were only alleging
essentially normal competition. Simply that there profits would go down.
That is not enough to constitute antt injury or inj of the kind that antt
laws are designed to prevent
c. Dissent: JJ Stevens/White: frustrated. What we were observing in the 80s
Regan administration significantly less intrusive than prior administrations had
been, substantially let more mergers thought firms wdnt engage in unless

more efficient. JJ S/W a lot of mergers taking place and not being challenged
(by gov) when cd be, in this kind of environment, the private action is a check, we
ought to preserve the ability to file these suits as an independent check when the
dept fails to do so. Wont be a lot of them b/c really expensive. Shdnt throw out
on antt inj
d. Prof: focus is substantial on the acts of agency, there isnt a lot of
independent ability to challenge; note 777- harder once merger goes through to
challenge. Hard to unscramble the eggs.
3. The Merger Guidelines: (need to read, not for details but for the concepts they lay
out, tended to remain constant over last many yrs) (see pages 777-79, and appendix B)
a. introduction:
i. Not force of law: 86 first that came out. Are the guidelines something
that you can cite to a ct to compel or resist agency action? You wouldnt cite
them DOJ and FTC are quite explicit that these are not meant to be
authoritative in the sense of binding them; or being a regulation, dont have
any independent force of law. Meant to guide parties.
ii. Good for arguments: If they acted inconsistent w/ the guidelines you
wd arg: its taken in some cases as an admission by the DOJ that certain
conduct is proper this doesnt mean you cant ever loose, but they do have a
limiting role on the dept; you see that they are cited in the cases though, it
has become the language of discussion both in the cases and even more in
the dept will ask questions about these issues
iii. Point is: although they are not formally statutory, they are important, very
useful and has done a lot to give people in an environment of the rule of
reason (remember that there was per se rules b/f which made it easier to give
advice your client as to what is lawful) having the guidelines gives you some
of the benefits of the per se rule in a world where we have R of R.
b. Guidelines define when mergers are a problem. The fundamental issue that
the guidelines are exploring is Market Power:
i. MARKET POWER the idea is that we are trying to identify or prevent
firms from obtaining market power ability to maintain prices above market
value for a non-trivial amt of time defined as price going up 5%
sustainable for a yr
c. Guidelines say 5 issues in review of a merger: These 5 questions become
the organizing principles of the remainder of the guidelines
i. Will the merger increase concentration in the market (math issue)?
ii. Does the increase in concentration have consequences that are significant
enough to prevent them?
iii. Is it likely that this is the type of industry that new entry can correct any
problems (Rose acre farms)
iv. Efficiencies? Are there pro-competitive features?
v. Whether one of the parties to the merger would have likely failed anyway
(failing firm issue) (Brown Shoe)?
d. MARKET CONCENTRATION: have to define the market in the first instance;
how is that done consider theoretical monopolies thought experiment
imagine that there is only one firm that sells X (so one firm in the market) could
that firm raise prices 5% and sustain that for 1 year that thought experiment
defines the market b/c if one firm sells X and raises price will people substitute
something else for X. if the answer is no, then can be
i. that is how you think through the market boundaries there is a boundary
somewhere where people will substitute.
ii. Imagine this monop and see if people will substitute at this type of hurt and
if wouldnt then you have a market.
iii. Do the guidelines treat the firms ability to do recycling as part of the
market? Arg was that you can consider the ability of new firms to enter and
take advtg of the price increase that the firm has made, but the focus

iv. see p.778 ex. Of measuring concentration.

v. We used to measure concentration by taking an arbitrary # of firms and
added their individual market shares and then became the 4 (or #) market
ratio
vii. HHI: Now, take all the firms, square each firms shared % and add all of
those shares squared the math of this makes the presence of larger firms
more significant by squaring the larger you get a larger #.
viii. Is this an improvement? It does pick up other firms; Prof: it works, but
there is no magic to it, it is not necessarily better than any other way of adding
up market share. It yields larger numbers so arguably more convenient.
This is the language in which your concentration analysis will take place
ix. Guidelines set up some significant breaking points
A. below 1000 will likely be an unconcentrated injury; if the post merger
HHI is less than 1000 will likely not be challenged.
B. 1100-1800 moderately concentrated once your in the middle range
the question is how much more concentrated is this merger making the
industry. Less than a 50 pt increase after merger, is de minimis and not
likely to be challenge. If it is more than 100 pt increase then likely to be
challenge.
C. If the post merger HHI is over 1800 and the point increase is more
than 100 then the merger is presumptively invalid and that must be
overcome. Have to justify/defend the merger.
x. Brown shoe wd not have even been challenged under the current regime;
Cargill pre-merger 1000, post merger 1300, cd have/might have been
challenged under these guidelines substantive pt that Montrof was making
was not frivolous.
d. Significance of the increase in market concentration: likelihood that
creating market power as result of the merger: what are we looking at in this?
i. Worried about ability to collude. (896-900) whether the products are
differentiated or very similar; is this an industry in which they are selling
essentially a common item sold on the basis of price; is it an industry in which
they can detect cheating; knowing others prices - whether knowing that info is
more competitive or less competitive depends on whether they can engage
in collusive practices
e. New entry one of the things is what does it take to enter this industry
i. how long; how much investment; are there a bunch of surplus equipment
lying around or is it complex to enter (1 year is kind of the guideline, take
more than a yr then entry is not likely)
ii. is it profitable to enter? Suppose the price goes up 5%, and now you can
come in you must think about the fact that the price may come down.
Are there firms who wd enter even at the competitive price hard to
show b/c they didnt- got to be profitable to enter even if the price comes
down Prof: interesting wrinkle; very helpful way of thinking through new
entry for all sorts of purposes.
f. Efficiencies (saw in Procter and Gamble)? Have to show merger specific
efficiencies has to take a merger to get the efficiencies that there isnt another
way that doesnt involve merger to get these efficiencies. Burden on the merging
parties (affirmative defense) have to be able to show w/ fairly specific points, ex.
Unused productive capacity.
g. Failing firm defense: one of the firms has to be in danger of imminent failure:
requires that they are unable to meet financial obligation (now or in near future);
unable to reorganize under chapter 11; unable to find another buyer who wd have
less negative effects
4. Preliminary Injunction: FTC v. Staples Inc & Office Depot (D.D.C. 1997)
a. Facts: these are the largest and second largest office supply superstores
wanted to merge. Submitted 2x and then got to the FTC who challenged the

merger they then come up with a consent decree, FTC still votes down; the FTC
wanted a temporary injunction to have more hearings and do more investigating
b. FTC seeks: preliminary injunction of the consummation of any acquisition by S
of OD pending final disposition b/f the FTC of administrative proceedings to
determine whether such acquisition may substantially lesson competition in
violation of 7 CA.
i. DDC ultimately grants: Got a prelim injunction to stay the merger while
they determined whether it should be found illegal (so have not decided to
challenge w/ in the time necessary needed more time)
c. Issue: whether the FTC can have injunction? Std: (commission has burden)
(1) ct has to decide whether there is enough of an arg that it is illegal that the FTC
can go on likelihood of success on the merits; (2) determine whether harm
would be so great that shd allow merger and then unwind later if necessary
irreparable harm failure to let go through wd harm the public?
i. Not a determination of the merits, but an analysis of the merits vigorous
form of probable cause.
ii. Ct must look at: (1) Line of commerce or product market in which to assess
the transaction; (2) section of the country geographic market; and (3) the
transactions probable effect on competition in the product and geographic
markets.
d. Market relevant here: geographic- metropolitan areas, specifically 42 cities
where they compete (sounds like Brown Shoe). Prof people in the metropolitan
areas are not limited to buying there Prof says this ignored esp. the internet
makes it more likely national market, but Staples and OD prob have internet. Cd
have bn issue but not.
e. Product market is at issue here:
i. Ds said product market shd be office supplies in N. America combined
they were 5% - very small
ii. FTC defines only consumable office supplies (not computers, furniture
that you see at staples only talking about paper and pencils, etc) sold
through super stores if that is the market, these are the firms; these are at
least 2/3 biggest firms other than office max you are looking at the entire
industry
ii. CT says determine the market
A. ask what products are interchangeable. Office supplies sold at office
supply superstore are the same as sold at CVS or a Bookstore, or
Target; the products sold at S and OD 95% of them are sold elsewhere
and are exactly the same product.
B. Then you ask whether office supply super stores are a separate
market? If there was only one superstore, whether it could raise its price
5% and sustain for 1 yr w/o the growth of new superstores. Yes they
could do that. Prof: what is frustrating about this these stores have
charged less and thats why we benefited greatly from this penalty for
lowering the price and creating this new mechanism of distribution is you
are now a new market raise price 5%, still below others and so no new
entries; Prof: perversion of the thought experiment to penalize firms
who price cheaper
f. Probable effect on competition:
i. Concentration? HHI: Ct asks who are the competitors in the market and
what is the HHI it is 7000, huge (10,000 is the maximum HHI 100%^2 is
10,000 largest you can imagine) 7,000 is huge concentration. WE have a
concentrated industry. Now, give the Ds a chance to rebut the presumption.
Affirmative defenses in effect
ii. New entry at one end it is easy to enter b/c lots of suppliers; but this is a
hard market to enter b/c a lot of the other firms in the industry are already so
efficient and price already so low hard to get in and compete, there is

reason to believe that this is very hard. Prof: frustrating that the reason so
hard to enter is b/c these firms are doing so well and nice guys finish last, why
did I go to all this effort to be so successful if it is going to be thrown back in
my face?
ii. Efficiencies: ct finds that there (remember there has to be merger
specific efficiencies) these firms didnt need a merger to be efficient. In fact,
they were very efficient by beating/competing w/ each other. Consumers
would lose the benefits of this industry.
iii. Equities: Ct concludes that cant unscramble the eggs have to grant
injunction today so that there will not be a problem later on; ultimate result
ended the merger rather than go through trial
g. Criticism heavy handedness by FTC, punishing firms for being more efficient
Consumer may arg we are better off having them compete.
5. Federal Trade Commn v. HJ Heinz (D.C. Cir. 2001 handout p. 39): FTC tried to
enjoin merger here pending merger review; d.ct refused and the ct of app stepped in to
grant the injunction
a. Market here:
i. Product market - Jarred baby food veggies, fruits, meat
ii. Geographic national market
iii. In this case, instead of looking at the consumer (office depot) they looked
at the producers who were selling into a market that was national, in reality
this cd have been seen as a classic market extension merger b/c they were
selling in different parts of the country. (no loss of competition, except
potential, if werent competing b/f ) not issue here b/c they call it a natl market
iv. Heinz and Beechnut and Gerber wd be about 90% of market.
b. Arg: this is a merger that that has very serious problems
i. Step 1: highly concentrated industry HHI 4775. Gerber 65% comes out
to about 4000 in its own rt. The others much smaller.
ii. Step 2: concentration is significant b/c you created a two-firm industry; arg
there is no easier industry for a coordinated pricing then a two-firm industry;
dealing w/ a product that is similar relatively similar; these products are
toward the end of cardboard boxes very interchangeable, not like piano
different levels of quality. Prof: how many brands does the shopper usually
see when go to the store usually see 2 brands.
A. D thought this significant little competitive lost any consumer in
the country will see the same level of competition as the day b/f. Prof:
thats not a bad point if there is no impact no substantially lessoning
of comp, and no tendency to create a monop. D.Ct thought this was
important
B. CT of App thought that the other cos were competing to be the
second company; you and I would not see, but the store owner instead of
having beechnut and Heinz beating each others brains out to be the
second kind of baby food, the merchants would find themselves w/ only
two choices
1. Prof: is that persuasive? Arg yes: although you and I would see
two brands the grocery stores wd wind up paying more for the
second brand and that wd raise the price for consumers benefits
of competition would not make there way down to us at the
consumer level. That kind of competition wd be lost and that was a
significant lost
iii. Step 3: high barriers to entry
iv. Step 5: efficiencies what kind were arguably achieved? Heinz was the
largest seller of baby food in the world, but in domestic had 40% excess
capacity; cd have a single plant that operated at full capacity and would have
genuine merger specific efficiency. Ct said data was at least ambiguous on
this, Prof: this is one area that the d.ct may have been rt and the ct of app

stretching here remember the guidelines says it is things like better use of
efficiencies.
6. To sum up: private suits are relatively unusual in the merger area. Clearly the
action in mergers is in the public agencies. Critics suggest there is no law in this area.
But on the other hand the merger guidelines not law, but do organize the questions
we will ask:
a. how much increase in concentration? Same as the 1960s questions, but
instead of arbitrarily adding up the market shares; we try to capture the variety by
using the HHI take the square of the market shares of each competitor in the
industry add them together b/f and after the merger compare
b. is this the type of industry where concentration will make a difference
really asking if the industry is one that is subject to the likelihood or significant
possibility of oligopoly prices (Posner after Am Column). Is it more like cardboard
boxes where decision is based basically on price alone or is it technical.
c. What are the possibilities of belief in the economic model new entry is
potentially the corrector of a lot of antt problems ask how much capital does it
take to open a new business, etc.
d. Are there efficiencies created by the merger that could not be created
equally well in another way? Merger specific efficiency; even with some
increased probability of decreasing output and increasing price is there a situation
where consumers will benefit so much
e. are either of the merger partners likely to fail if the merger doesnt go
through? (more likely to permit merger b/c competition would go out anyway;
also, however, have to consider better way, is there some other merger partner.
E. The Interplay between Regulation and The Antitrust Laws:
1. State Regulation
a. Parker v. Brown discussed when we discussed Socony. Parker: a cartel of
raisin growers set a ceiling on how many raisins you could sell to keep prices up
(after Socony where people went to jail for something like this seemed like raisin
guys) but the cartel arrangement was pursuant to a state statute that required
them to destroy raisins. Ct said the antt laws were never meant to get at what the
state laws required. (supremacy clause???)
b. Noerr v. Motor Frieght: group organization to seek state regulation was also
protected b/c preparation to lobby state legislature and would otherwise raise
significant constl questions to forbid essentially a cartel to get together and try to
get regulated by the state.
c. Goldfarb: state had not compelled the minimum fee schedules and the mere
fact that their might be some kind of state prosecution in the future.
i. There are a number of cases in the area some of them confirm the idea
that it was state compulsion that was involved even if sought by industry
ii. On the other hand California Retail: set the price of wine directly
contradicted the ban of RPM s.Ct said even RPM could be ordered by the
state if: (1) the state policy had to be expressed; and (2) the program was
explicitly administered by the state itself. (p. 804)
d. Ct is extremely deferent to states. Southern Motor Carriers v. US (US
1985 p. 804):
i. facts: the various motor carriers, regulated truck lines got together and
agreed on what rates they would submit to the state groups (these were state
programs comparable to the Interstate Commerce Commisions).
ii. Think about Trans-Missouri: If these were companies preparing to
submit rates to ICC, then it would have been a violation of SA authority
Trans-Missouri (RRs out west getting together and deciding what rates to
submit to the icc). ICA was going at something different than SA they were
looking out whether the rates were too high or price discrimination
A. When will Fedl Law preempt antt laws: what we derived from that
is when fedl regulation will be sufficient to take precedent over antt laws

 the regulation will only preempt: (1) if the statute says firms subject to
this regulation will not be subject to the antt laws; (2) idea was you had
to show that the regulatory policy would be essentially gutted if you
permitted the antt laws to apply in this area. (this was big in AT&T time
idea was that one of the reasons AT&T was created as monopoly phone
co was b/c their was a policy against having multiple phone cos. ct
didnt through case out b/c FCC cdnt regulate) Point in order for fedl
regulation to mean that the normal antt rules will not apply: (1) express
exemption; or (2) regulatory scheme that is so comprehensive that
it is clear that the antt laws were not to apply.
B. NB: If this was fedl would have been illegal
C. However, dealing with state sovereignty, dealing w/ intrastate
commerce subject to California v. Midcal Test govnt says fine but
the Midcal test not satisfied
iii. One of the issues where and how is state policy to be expressed: in
Mississippi there is no legislative/statute on this policy. Ct said that states
can figure out their own ways of adopting state policies s.ct was not going to
say that the only way for state to adopt policies is through legislature. What
this case is saying it is not for the s.ct to decide how st law is to be
formulated.
iv. Q: whether there was a state policy adopted by anybody none of
the states required that rates be submitted through the rate bureau
A. govt said it would be one thing if the state said we want a cartel and
a single figure the govt says this is one option among many govt
says how can you talk about a state policy when it can be done in a
number of different ways there is no compulsion here and Midcal
should not be satisfied.
B. CT says: Midcal doesnt require compulsion; this is an expression of
permissive state policy the state said it was okay and that is enough; Ct
also says supervision prong is satisfied b/c the st regulatory agency was
deciding whether to approve the rates in effect, what they did was say
they will go into effect unless anyone objects.
v. This case is an example of just how soft the Ct has been in application of
Midcal and deference to states.
vi. Ticourt title case: no evidence that the commission even met Ct said
Midcal not satisfied there has to be some supervision, but as Southern
Motor shows not much.
vii. Dissent: in the first case, we ought to view the Parker exception as an
exception and a fairly difficult one to take advantage of that fedl antt laws
were meant to be enforced and that the compulsion test was the right test b/c
involved the high std that the ct meant. There is certainly no point in creating
a system where it is easier to get exempted by a state regulatory scheme than
a fedl regulatory scheme. More broadly they are afraid: that st legislatures
are relatively undercovered by the news media, they are relatively secretive,
and if you permit state administrative agencies to adopt these policies you
will have a good ole boys network go in and get yourself a local exemption
and you will be off to the raises (public choice theory people will pay
campaign contributions for benefit that imposes bad on public easier to do
in secretive and smaller orgs).
3. City Regulation: cities create more cartels then states start or license bus lines,
cable companies, municipal golf-courses there have been a lot of these kinds of
cases and once you recognize that cities can be accused of antt violation or better yet
that they better have the authority to be exempt.
a. City of Lafayette: city wanted to sell power only; if you wanted to get city
water (which was the only water) had to buy city electricity found to have violated
antt laws. Cities are not sovereign

b. Community Communications Co: (US) held home rule status did not meet
the specific state authorization requirement of anticompetitive agreements
imposed by City of Lafayette.
c. Fisher: (US) action claiming rent control ordinance enacted by ballot initiative
violated 1 and 2 SA by setting rent levels. Ct said this kind of regulation was
unilaterally imposed by the City and not a conspiracy among the residents
themselves, or the residents and the city. Unless the city becomes a participant in
a private agreement or combination, there could be no agreement and no violation
of 1.
d. Columbia v. Omni Outdoor Advertising (US 1991 cb p. 818): Columbia
outdoor is the local billboard co would provide advertising as a public service to
the local city official free advertising to politicians. Omni comes in from Atlanta
and wants to put up billboards in the Columbia City Counsel meeting adopted a
moratorium on billboards; said this town would look nicer without and therefore, we
adopt a policy of no more billboards, by limiting the number of billboards will
beautify the city.
i. Omni argued (Fisher) (1) city didnt have any authority to do this (earlier
case said that the city had to have real authority to avoid antt); (2) even if
there were authority - violation of SA 1 city officials conspired w/ local firm
to exclude us.
ii. Ct - J. Scalia: neither contention of Omni is sustained; the city had the
power to zone and therefore it had the authority to regulate billboards. (prof:
it may be that the zoning order was actually used then more weight). More
interesting point is the point about conspiracy likelihood that there was
some hanky panky going on here as payback to the politicians J.Scalia
says whatever we may have said loosely in Berkley it just isnt going to fly to
enforce a conspiracy exception essentially all legislation is a conspiracy
there is no way to discern what legislation is a result of lobbying and what is
part of conspiracy; people always coming in and trying to get protection from
the legislature and there is no way for the ct to get involved and determine
when it is valid or invalid.
iii. Dissent: Case of Monopolies remember your history go back to the
origin of the antt laws and the first thing that was held to be illegal was a
Queen granted monop to her friend we have got to step in here we are
equipped to decide the difference b/w conspiracy and a law. Cities are more
likely to be subject to this type of conspiracy premise: cheaper to by state
city counsel than the congrs small units more likely to conspire. If we
thought Southern Motors was bad, we have really got a problem here if every
city can state that it has some authority and use it to neutralize the remedies
under the antt laws.
e. Sham litigation: whether or not a firm can engage in litigation to defend its
interest. Noerr-Pennington case said that litigation is different than legislation if
you have sham litigation to impose costs on competitor may be violation to antt
(NOTE p. 828)
i. Columbia Pictures (US 1993): owned both the tapes and the machines in
hotels to view the movies what this D was doing was buying discs and leasing
them for less money than Columbia to its hotel customers. Columbia sued for
violation of - response you are merely just trying to beat up on us. Ct held in
order for something to be a real sham it must be meritless, no basis to file; and
it must be the litigation process that would bankrupt competitor not a winning
verdict.
A. Concurrence: cited ex of where you dont care if you win or loose just
want to get rid of the other one (this was an earlier ex. By Posner) shd be
illegal under SA
B. Majority: didnt buy that let jury decide whether meritless.

3. The State of the Interstate Commerce Requirement: looks like SA can reach
most things Summit Health (US 1991): CA Dr, Ca hospital, conduct occurred in CA
had sufficient effect on ic to have SA jur.
4. Regulation in the International Area: Controlling standard today Banana intl
ask someone about this. Hartford Fire Insurance Co.: (US 1993) lots of this had to
do with envl liability; liability insurers for lg cos. Companies would be accused of
enormous for ex. Superfund liabilities for conduct that had occurred 30 yrs ago firms
were being held liable for big dollars today they would go to these insurance cos and
say you covered us 30 yrs ago we want you to cover; and would go to their current
insurance cos and say we want you cover us for this today. They were asserting that
this happened sudden and __ and even if it wasnt true the ins cos had to represent
them b/c if they didnt and turned out to be true insur cos would be in a lot of trouble.
So the ins cos wanted to put into their policies terms that said only claims that were filed
in the year you were holding policy were covered; and retroactive cutoff date; and
wanted to get rid of this sudden and accidental clause; and wanted to create a packman
clause meaning the defense would eat up the liability cost so capped and the p
would be encouraged to settle b/c every day causing them money (Prof: this was not a
group of people meeting in the middle of the night they thought they were facing a
serious problems, and if you thought the US firms were facing liability Lords of
London were these people who had reinsured were facing catastrophic liability under
the US environmental laws. So the ins cos go first to the cos who right them forms
say write us a form that we can all use that will deal with this problem; second, they said
to Lords you agree that you will not reinsure anything not on these forms. Suit
brought.
a. Two issues:
i. was this the business of insurance under the McCarran Ferguson Act or
was it a group boycott? History of boycott Captain boycott sent to Ireland to
collect payments, they wanted him to reduce payments; whereupon the Irish
boycotted him- refused to sell him food, give him place to stay
ii. whether principles of intl whether we can reach the London reinsurers
under US antt laws for agreement not to reinsure?
b. J. Suter (majority opinion on this issue): says clearly intl law does not
prohibit the exercise of jur there are sufficient contacts for this to be reached;
there is no conflict b/t US law and British law on this point. If the British Parliament
had prohibited their reinsurers from entering t hat would have been a different
case; but they didnt therefore not outside the reach of the US antt laws
(essentially the rule applied to states b/f Midcal and Southern Motor)
i. J. Scalias answer - dissent: he doesnt deny that the fedl cts could
constlly and as a matter of intl law apply to this situation; he says the
question is whether the antt laws were meant to apply to these acts shd the
ct voluntarily refuse to apply the antt laws if it was in conflict Parliament did
it a lot like Southern Motor Carriers a lot of permissive legislation (a lot of
critics self-reg by a cartel not likely), but suggestion by Scalia is that it is
possible for another country to think otherwise the US should not be telling
Great Britain how it ought to regulate the management of its reinsurance
agencies.
ii. NB: Case foreign policy disaster shifting liability to reinsurance cos
and holding liable under antt
c. Shd Ct come up with a different level of deference for st, fedl, and foreign law
and if so which one should get the most deference? The argument of J. Scalia is
that intl should.
d. guidelines in place now a cartel of foreign producers who make substl
sales in the US is under reg of the SA. It was under this provision that the prior
administration collected huge amounts of money from foreign cos for violations.
Guidelines also deal with effect of foreign govt involvement pg 842: foreign
sovereign immunity; foreign sovereign compulsion: issue in Hartford and Mitsishu

decided in Hartford had to be backed up by compulsion including penal or

___ to be compulsion; act of state doctrine; and the application of Noerr to
lobbying of foreign govts: that act is protected as much as it is if you are
petitioning congress or st legislature
e. Treaty that if their DOJ subpoenas and gives us records, we will reciprocate
(hasnt happened yet);
f. EU: Reach of the EU into US industrial policy: EUs equivalent to 2 is
somewhat like Utah Pie Prof: once we go around suing other countries, you can
imagine there may be a little payback