Antitrust Law

• Author: Kay Lynn Brumbaugh and Michael K. Lindsey
• Pages: 233-278

233

Antitrust Law

CHAPTER 6

Kay Lynn Brumbaugh and Michael K. Lindsey

Contents

I. The Essential Antitrust Statutes and Principles . . . . . . . . . . . . . . . . . 235

A. Essential Antitrust Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5

1. Sherman Act Section 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

2. Sherman Act Section 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236

3. The Clayton Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6

4. The Robinson-Patman Act . . . . . . . . . . . . . . . . . . . . . . . . . . 2 37

5. The Federal Trade Commission Act . . . . . . . . . . . . . . . . . . . 2 37

6. State Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

7. Reach of U.S. Antitrust Law . . . . . . . . . . . . . . . . . . . . . . . . . 237

8. Non-U.S. Competition Laws . . . . . . . . . . . . . . . . . . . . . . . . . 2 37

B. Essential Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

1. The Per Se Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

2. The Rule of Reason and the Relevant Market . . . . . . . . . . . 238

3. Horizontal v. Vertical Restraints . . . . . . . . . . . . . . . . . . . . . . 24 0

4. Unilateral v. Concerted Action . . . . . . . . . . . . . . . . . . . . . . . 24 0

5. Interbrand v. Intrabrand Competition . . . . . . . . . . . . . . . . . . 240

6. How Franchising Fits within the Framework of the

Antitrust Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

C. Antitrust Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

1. Federal Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

2. State Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

3. Private Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

D. Compliance Programs and Their Impact . . . . . . . . . . . . . . . . . . 24 2

II. Horizontal Restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 42

A. Horizontal Practices Subject to Challenge . . . . . . . . . . . . . . . . . 2 42

1. Horizontal Price-Fixing and Bid-Rigging . . . . . . . . . . . . . . . 242

2. Horizontal Market and Customer Allocation or Division . . . 243

3. Group Boycotts (“Concerted Refusals to Deal”) . . . . . . . . . 24 3

4. Information Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

5. Most Favored Nations Clauses . . . . . . . . . . . . . . . . . . . . . . . 245

6. Employee Non-solicitation Agreements . . . . . . . . . . . . . . . . 2 45

B. Effect of Dual-Distribution Structure . . . . . . . . . . . . . . . . . . . . . 246

234 Fundamentals of Franchising

III. Vertical Price and Non-price Restraints . . . . . . . . . . . . . . . . . . . . . . . 246

A. Vertical Price Restraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6

1. Maximum Resale Price Maintenance . . . . . . . . . . . . . . . . . . 24 7

2. Minimum Resale Price Maintenance . . . . . . . . . . . . . . . . . . 248

a. Leegin and Its Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 8

i. Federal Perspective . . . . . . . . . . . . . . . . . . . . . . . . . 250

ii. State Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . 251

b. Pre- Leegin Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

c. The Colgate Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . 253

d. Suggested Resale Prices . . . . . . . . . . . . . . . . . . . . . . . . . 2 54

e. Minimum Advertised Pricing and Cooperative

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

f. National Account Programs . . . . . . . . . . . . . . . . . . . . . 257

B. Territorial and Customer Restraints . . . . . . . . . . . . . . . . . . . . . . 2 59

1. Location Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

2. Exclusive Appointments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259

3. Area of Primary Responsibility Clauses . . . . . . . . . . . . . . . . 260

4. Profit Passover Arrangements . . . . . . . . . . . . . . . . . . . . . . . . 2 60

5. Exclusive Dealing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1

6. Covenants Not to Compete . . . . . . . . . . . . . . . . . . . . . . . . . . 2 61

C. Terminations/Refusals to Deal . . . . . . . . . . . . . . . . . . . . . . . . . . 262

IV. Tying Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 62

A. Quality Control Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 63

B. Essential Tying Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

1. The Two-Product Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

2. Conditioned Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265

3. Market Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

C. Ramifications of Kodak for Franchise Tying Claims . . . . . . . . . 269

1. Definition of Relevant Market . . . . . . . . . . . . . . . . . . . . . . . 269

2. Information and Switching Costs . . . . . . . . . . . . . . . . . . . . . 2 72

D. Full-Line Forcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 74

E. Allocation Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 74

V. Other Issues of Potential Concern . . . . . . . . . . . . . . . . . . . . . . . . . . . 275

A. Discrimination Among Franchisees Under the

Robinson-Patman Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275

1. Discrimination in Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 75

2. Discrimination in Services or Facilities . . . . . . . . . . . . . . . . 276

3. “Dummy” Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

4. Application to Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . 277

B. Mergers and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 77

C. Trade and Industry Association Participation . . . . . . . . . . . . . . 278

Chapter 6 Antitrust Law 235

I. The Essential Antitrust Statutes

and Principles

Many commercial practices that are common in franchising are regulated by the

principles of antitrust law. This chapter summarizes antitrust law insofar as it

relates to normal business franchising.

In 1890, Congress passed the first antitrust statute, the Sherman Act, as a

“comprehensive charter of economic liberty aimed at preserving free and unfet-

tered competition as the rule of trade.”1 Congress passed the Federal Trade Com-

mission Act and the Clayton Act in 1914. Although there have been some

revisions over the years, these laws remain the three core federal antitrust laws

in effect today. For over 100 years, the antitrust laws have had the same basic

goal: protecting the competitive process to benefit consumers with lower prices

and higher quality.

A. Essential Antitrust Statutes

1. Sherman Act Section 1

Section 1 of the Sherman Act prohibits agreements (“contracts, combinations

and conspiracies”) in restraint of trade in interstate and United States foreign

commerce.2 The Supreme Court added the word “unreasonable” as a modifier

to “restraint,” because, to some degree, all agreements restrain trade.3

An agreement in violation of Section 1 may be formal or informal, written

or inferred from conduct, but must be a “conscious commitment to a common

scheme” to achieve an unlawful objective, and the evidence offered to prove it

must “tend to exclude the possibility” of unilateral (independent) action.4 On

the other hand, truly unilateral conduct is not a violation of Section 1, even in

the case of purely “conscious parallelism,” i.e., where a company adopts the

same pricing, for example, in response to the publicly announced pricing of a

competitor.5

Section 1 also prohibits agreements among competitors to (a) fix or main-

tain prices or price levels, (b) rig bids, or (c) divide marketing territories or

allocate customers. Section 1 is relevant to, but rarely condemns, resale restraints

1. Northern Pac. Rwy. v. United States, 356 U.S. 1 (1958).

2. 15 U.S.C. § 1.

3. Standard Oil Co. v. United States, 221 U.S. 1, 63–64 (1911).

4. Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 763–64 (1984); Am. To-

bacco Co. v. United States, 328 U.S. 781, 809 (1946).

5. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 1966 (2007).