STRAIGHT PAST GO AND COLLECT $200: A LOOK INTO THE CLAYTON ACT AND VERTICAL MERGERS WITHIN CORPORATE AMERICA.

• Author: Brough, Natalie

INTRODUCTION

In the game of Monopoly, the goal is to purchase and develop as much property as possible while forcing your competitors out of the real estate market. (1) While Monopoly does not directly describe the concepts behind vertical mergers, the ideals of gaining power and merging to ensure ultimate market power are the same. (2) A monopoly is a "market structure characterized by a single seller, selling a unique product in the market ... in a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute." (3) Many view monopolies as anti-consumer, which inflict an overall negative effect on the economy because of their inherit ability to limit choice and, in turn, provide an inferior product due to the lack of competition. (4) This fear has grown exponentially in the last few centuries, and the reality that only a select and powerful few control the wide economic market is now a major concern. (5) When faced with the concept of monopolies, the prevailing thought is that one company controls a single industry; however, more commonly in the current climate, companies are not only merging in their own industry but with industries outside their own, which creates powerful multi-industry empires. (6)

Over a century ago, the United States Congress passed the Sherman Act of 1890 in an effort to combat growing public concern regarding the concentration of wealth and a single entity's economic power in a given market. (7) To continue its efforts, twenty-four years later, Congress passed the Clayton Act of 1914 and the Federal Trade Commission Act. (8) Subsequently, Congress passed the Robinson-Patman Act of 1936, the Celler-Kefauver Act of 1950, and the Hart-Scott-Rodino Antitrust Improvements Act of 1976. (9)

When Congress began passing antitrust regulations, their focus was primarily on regulating the classic monopoly of direct competitors merging, and it was not until the Clayton Act when regulation on non-direct competitors was introduced. (10) The current trend of using the Clayton Act in conjunction with the Sherman Act has led to further regulation of not only direct but indirect competitors. (11) Three major concerns when two companies are allowed to vertically merge pertain to the possibility that: (1) it can lead to exclusionary effects by increasing rivals' costs of doing business and block ways of entry for emerging businesses; (2) it can lead to coordination of pricing and price sharing; and (3) it can facilitate price fixing. (12) When a company merges with another company in a separate industry, a typical horizontal merger is not created; instead, this type of merger is identified as a vertical merger. (13) These vertical mergers still disrupt the markets in a similar way. (14) Historically, vertical mergers have not been prosecuted at an equal rate as horizontal mergers. (15) While the United States Department of Justice ("DOJ") tries around thirty horizontal merger cases a year, it was only recently that they attempted to block the vertical merger between AT&T and Comcast, a first for the DOJ within the last four decades. (16) This extremely rare attempt to block the merger indicates a new initiative by the DOJ to regulate and scrutinize vertical mergers. (17) As will be discussed in detail, the U.S. Court of Appeals of the D.C. Circuit's allowance of the AT&T and Time Warner merger creates conflict and confusion regarding the harm large vertical mergers can have on society and economic markets. (18)

While there is significant case law and statutes regulating horizontal mergers, the same cannot be said for vertical mergers. (19) Without clear guidelines, antitrust regulations, specifically the Clayton Act, cannot perform the purposes they were designed for. (20) This note will (I) examine the legislative history and landmark cases to analyze the purpose of antitrust regulations; (II) analyze the current climate surrounding vertical mergers including recent merger decisions by the Federal Trade Commission; and (III) examine recent Supreme Court and circuit courts decisions regarding vertical mergers to evaluate whether stricter regulation is necessary. (21)

HISTORY

Antitrust regulation began when several goliath businesses, particularly in the railroad and steel industries, created common-law "trusts" that allowed businesses to centrally control an entire industry. (22) While these "trusts" initially started in the steel and railroad industry, they gradually made their way to almost every industry in America, including oil, telephone, cotton, and whiskey. (23) Americans grew very concerned with the power these trusts held, and Congress reacted by drafting the Sherman Act of 1890. (24) In 1890, Congress passed The Sherman Act making it the first piece of United States legislation to regulate monopolies and antitrust behaviors. (25)

Once passed, several questions arose regarding the constitutionality of the government's regulation of businesses and commerce to the extent that the statute allowed. (26) In the ground-breaking case, Standard Oil v. United States, the United States brought suit against Standard Oil Company of New Jersey for violating the Sherman Act. (27) Along with ruling that Standard Oil did violate the Sherman Act by having an unreasonable restraint on trade, the Court also discussed whether Congress exceeded its constitutional power by enacting the Sherman Act in light of the Commerce Clause. (28) The Commerce Clause is an enumerated power that allows the federal government to regulate foreign and domestic interstate trade. (29) The Court held that Congress did not violate the Commerce Clause and did not exceed its authority to regulate commerce. (30)

As the industrious growth in modern America began to exceed what the writers of the Sherman Act imagined, an amendment was needed, resulting in the Clayton Act in 1914. (31) The Clayton Act amended the Sherman Act by including additional provisions. (32) During this time in American history, businesses were growing at an unprecedented rate, and the Clayton Act sought to limit the horizontal combinations of businesses. (33) The amendment also paid special attention to the regulation of "vertical mergers." (34) Congress focused on vertical mergers because it became apparent that solely regulating horizontal mergers did not provide adequate consumer protection. (35) As opposed to horizontal mergers, vertical mergers were previously unregulated deals, slowing market competition and stifling the innovation of goods and services in multiple industries rather than a singular market. (36)

In 1914, Congress passed the Federal Trade Commission Act, which established a Commission to investigate and cease unfair business. (37) The Federal Trade Commission is an independent agent with the United States Government, and within it sits the Bureau of Competition and the Department of Justice's Anti-Trust Division. (38) The Commission works with three main goals in mind; (1) protect consumers; (2) maintain competition; and (3) advance organizational performance. (39)

In recent decades, two additional amendments to the Clayton Antitrust Act have been the Robinson-Patman Act of 1936 and the Celler-Kefauver Act of 1950. (40) The Robinson-Patman Act of 1936 focuses primarily on price discrimination. (41) The Celler-Kefauver Act of 1950 regulates vertical mergers and was passed to prevent unfair acquisitions still permitted under the previous regulations, specifically firms that were not in direct competition with each other. (42) In United States v. Cont'l Can Co., the Supreme Court held that a manufacturer of glass bottles and a manufacturer of metal cans could not merge even though their products were not in direct competition, finding that such a merger would violate the Clayton Act and Celler-Kefauver Act of 1950. (43) Finally, the most recent antitrust regulation went into effect with the Hart-Scott-Rodino Antitrust Improvements Act of 1976. (44) Signed into law by President Gerald Ford, this amendment "provides the FTC and the Department of Justice with information about large mergers and acquisitions before they occur...The parties to certain proposed transactions must submit premerger notification to the FTC and DOJ." (45)

Courts have historically used two methods to examine antitrust violations: the older notion of per se illegality, and the Chicago-based rule of reason approach. (46) The Chicago School of Thought or "competition theory" dates back to 1955 and can be attributed to Aaron Director. (47) This theory focuses on a rule of reason approach, as opposed to the courts widely used per se illegality principal of a monopoly. (48) While the per se rule is based off of black-and-white decision making, the Chicago theory centers around analyzing the possible efficiency and reasoning behind a business's monopolistic actions before declaring a violation. (49) A groundbreaking rule of reason case came in 1899 with Addyston Pipe & Steel Co. v. United States, where the Supreme Court determined whether or not monopolistic activity was both reasonable and merely ancillary to the main purpose of a lawful and legitimate contract. (50) This method of analyzing antitrust cases was further broadened in Board of Trade of City of Chicago v. United States, where the Supreme Court reviewed the nature, scope, and effect of the monopolistic activity and if that activity promoted or restrained competition. (51) The rule of reason theory also supports the economic principle that if there is an injustice in the market, the market will correct itself without the interference of the courts or the government. (52) Since the Sherman Act enactment, courts have used both the per se illegality method and the Chicago School's rule of reasoning approach to evaluate antitrust matters, however, the rule of reason has been the prevailing method for the courts recently, leaving the per se illegality method for the...