Antitrust Questions and Answers: a Primer for Practitioners
| Publication year | 1995 |
| Pages | 521 |
| Citation | Vol. 24 No. 3 Pg. 521 |
1995, March, Pg. 521. Antitrust Questions and Answers: A Primer for Practitioners
Whether engaged in manufacturing, distribution, retail or professional services, at some point a client will come face to face with the interplay between the antitrust laws and business decisions. Transactional lawyers are confronted every day with clients who want to take aggressive action to insure their place in the market. Litigators will hear the cry of "unfair competition" from those who perceive some wrong at the hands of their competitors. The Clinton Administration has increased the funding of the Anti-trust Division of the Department of Justice ("DOJ") and of the Federal Trade Commission ("FTC") despite other government cost cutting.(fn1) As a result of all this, attorneys engaged in litigation or transactional work should become familiar with an area of law designed to promote competition, lower prices and enhance consumer choice---in short, the antitrust laws.
This article discusses the purpose, penalties and provisions of major federal antitrust legislation,(fn2) and identifies and analyzes some of the most often-encountered issues involving potential anticompetitive conduct.
Antitrust laws are the outgrowth of early English common law, which prohibited all "restraints on trade." Eventually, those laws were refined so that "reasonable" restraints were permitted. Those concepts were later codified by the states until the first federal antitrust law (the Sherman Act) was passed unanimously by the United States Congress in 1890. President Theodore Roosevelt first used the Sherman Act in his battles with railroad, oil, sugar and mining interests. Then, antitrust enforcement dropped off during the 1920s until a revival initiated by Franklin D. Roosevelt's administration. Since then, the Sherman Act and its statutory progeny have waxed and waned and have been amended and interpreted many times. However, their influence on American commerce remains an integral part of the economic landscape.
Put in simplest terms, the antitrust laws are designed to "promote competition." Whether the law in question prohibits price fixing, challenges a monopoly, stops a merger or requires an "even playing field," the underlying objective is to allow the "unfettered flow of competition" so that consumers may benefit from the market forces which result in innovation, efficiency and (sometimes) lower prices.(fn3)
Given that purpose, attorneys should be alert as to whether a transaction or potential lawsuit will unreasonably impair competition. Obviously, many actions may have some effect on competition. The key is recognizing those which may pose a risk under federal or state antitrust laws.
On the federal level, "per se" violations can result in criminal fines and incarceration. For example, a violation of the Sherman Act can lead to a felony conviction, imprisonment for up to three years and fines not to exceed $10 million for corporations or $350,000 for individuals. Alternatively, the court can require a violator to pay up to twice the amount of losses incurred by the victim of the crime.(fn4)
Of equal and perhaps even more concern are the civil remedies available to private parties. Treble damages, attorney fees and costs and injunctive relief are all included within the antitrust arsenal.(fn5) Since 1976, state attorneys general have been able to recover damages on behalf of consumers who have been injured by price-fixing conspiracies. These paren patriae actions also provide for the recovery of treble damages and attorney fees.(fn6)
A number of antitrust laws can trap the unwary, including the Sherman Act, Clayton Act, Federal Trade Commission Act, Robinson Patman Act, Hart-Scott-Rodino Antitrust Improvements Act and the Colorado Antitrust Act of 1992. A brief summary of these laws follows.
Section 1 of the Sherman Act provides that
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.(fn7)
Nearly identical language is found in the Colorado Antitrust Act of 1992.(fn8) While the language of the Sherman Act is fairly simple and straightforward, its meaning has been derived from a long line of U.S. Supreme Court decisions, beginning with Standard Oil Co. v. United States.(fn9)
Today, it is generally agreed that there are three elements required to establish a violation of Section 1 of the Sherman Act: (1) there must be an "agreement" among two or more persons; (2) the agreement must be in or affect interstate commerce; and (3) the agreement must "unreasonably restrain trade." The first element of "an agreement among two or more persons" can be shown by writings, conduct or oral statements.
The agreement need not be explicit. As one court has held, "a knowing wink can mean more than words."(fn10) In one case, a competitor announced its intention to increase prices, regardless what others did. When the "others" also raised their prices, the court found an "agreement to restrain trade in violation of Section 1 of the Sherman Act."(fn11)
On the other hand, unilateral action by an entity does not violate Section 1 of the Sherman Act. For example, a parent corporation cannot agree or conspire with its wholly owned or controlled subsidiary.(fn12) If an individual or a corporation unilaterally imposes terms or conditions on its distributors or customers, there is generally no "agreement" in restraint of trade.(fn13) In other words, unless there is an agreement or understanding to act between two or more separate entities, there is no Section 1 violation.
The second element of a Section 1 violation requires proof that the restraint of trade is in "trade or commerce among the several states." This is generally regarded as the easiest element to establish. The U.S. Supreme Court has held that the activities of local real estate brokers in New Orleans(fn14) and of a hospital and its medical staff in Los Angeles(fn15) meet this test.
The primary question to answer (once an agreement and interstate commerce are established) is what action constitutes an unreasonable restraint of trade. The courts have developed two tests for answering this question. The per se test holds that certain restraints are so "plainly anticompetitive" that they will, per se, be assumed to injure competition.(fn16) Such restraints include horizontal arrangements among competitors which result in price fixing or the allocation or division of markets and customers. Tying violations (the purchase of one product conditioned on the purchase of a second product) may or may not be per se violations (see discussion below). However, even if a restraint does not meet the per se test, the antitrust laws may still apply.
The second test used by the courts when analyzing anticompetitive restraints is known as the "rule of reason." In Board of Trade of City of Chicago v. U.S., the Supreme Court explained this test as one which balances the anticompetitive effects of a restraint against the procompetitive effects within a particular market.(fn17) This test has been most often applied to vertical arrangements other than those involving price. Conduct subject to the rule of reason includes vertical restraints created by distributors concerning territories, customers or products sold by retailers.
While the antitrust laws allow a manufacturer unilaterally to impose restraints on its retailers or distributors, that right does not extend to situations in which competitors at the retail level have an understanding to limit competition with one another. If retailers, dealers or distributors assist in enforcing such a restraint (i.e., reporting violations) and there is a continued course of dealing which demonstrates that the supplier encourages or goes along with such activity, an agreement in restraint of trade can be shown.(fn18)
The U.S. Supreme Court's decision in Monsanto Co. v. Spray Rite Service Corp. held that complaints from distributors do not alone establish a conspiracy.(fn19) As the Court pointed out, "[T]here must be evidence that tends to exclude the possibility that the manufacturer and non-terminated distributors were acting independently" and that "reasonably tends to prove that the manufacturer and others had a conscious commitment to a common scheme designed to achieve an unlawful objective."(fn20)
Some courts have suggested that there is a gray area that falls somewhere between the per se and rule of reason tests known as "soft core" per se (or "hard core" rule of reason).(fn21) These types of restraints are viewed as "inherently suspect" by enforcement agencies and only require a truncated rule of reason approach.(fn22)
Section 2 of the Sherman Act prohibits monopolies by single entities and combinations of entities, as well as attempts to monopolize. Specifically, the law states:
Every person who shall monopolize, or attempt to monopolize, or combine or conspire to monopolize 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 felony.(fn23)
Section 2 cases involving actual monopolization require proof of (1) possession of monopoly power in a relevant market and (2) deliberate acquisition, use or maintenance of that power.(fn24) An...
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