Transcript Standard Setting in High

Class 8
Antitrust, Winter, 2015
Group Refusals to Deal &
Joint Ventures
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
773.702.0864/[email protected]
Copyright © 2000-15 Randal C. Picker. All Rights Reserved.
July 21, 2015
Federal Trade Commission
2
Act, Sept 26, 1914
“That unfair methods of competition in
commerce are hereby declared unlawful.
The commission is hereby empowered to
prevent persons, partnerships, or
corporations, except banks, and common
carriers subject to the Acts to regulate
commerce, from using unfair methods of
competition in commerce.”
July 21, 2015
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Federal Trade Commission Act, Sept 26, 1914
FTCA Sec. 5

Sec. 45. Unfair methods of competition
unlawful; prevention by Commission
(a)
Declaration of unlawfulness; power to prohibit
unfair practices; inapplicability to foreign trade
 (1) Unfair methods of competition in or affecting
commerce, and unfair or deceptive acts or
practices in or affecting commerce, are hereby
declared unlawful.
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FTCA Sec. 5
 (2)
The Commission is hereby empowered and
directed to prevent persons, partnerships, or
corporations … from using unfair methods of
competition in or affecting commerce and unfair
or deceptive acts or practices in or affecting
commerce.
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“It shall be unlawful … to … make a sale or
contract for sale of goods … on the
condition, agreement, or understanding that
the … purchaser thereof shall not use or deal
in the goods … of a competitor … where the
effect of … such condition … may be to
substantially lessen competition or tend to
create a monopoly in any line of commerce.”
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Clayton Act, Oct 15, 1914
What Does that Mean?

Is an unfair method of competition …
Something
distinct from things that violate
Sections 1 and 2 of the Sherman Act or the
Clayton Act?
Or is the FTC to assess legality under the
Sherman Act and the Clayton Act and then act?

What is at stake?
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Fashion Originators’ Guild (1941)

Key Facts
Fashion
Originators’ Guild of America organized
private property rights system
Claim was style piracy of dress and fabric designs
Group insisted on agreements with retailers not to
sell pirated-design dresses
Federal copyright law did not protect these at this
time, but may have been state tort
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FOGA

Mechanism
Created
design registration bureau for garments
and textiles
Trial and appellate tribunals to assess copying
claims
Also limits on advertising, discounts etc.
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Assessing Market Power

Market Position
136
companies with 60% of higher-end market,
38% of lower-end

Do we think that these companies had a
monopoly? That there actions tended towards
monopoly? In what market or markets?
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Assessing Market Power

Difficult to Find Market Power
Should
expect vigorous competition within 136
company segment, so shouldn’t expect monopoly
profits
But competing against companies with similar
cost structure (spending dollars to come up with
designs); that will result in higher equilibrium
prices
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Assessing Market Power
Entrants
without those costs would push prices
down
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Is This Different Than … ?



Trans-Missouri?
Interstate Circuit?
Broadcast Music?
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Selling the News

Hypo
Chicago
Tribune is organized as a corporation
It has four employees who write newspaper
stories
Trib forbids those employees from selling the
stories that they write for the Tribune to its main
competitor, the Chicago Sun Times

Section 1 violation?
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Focusing on Entities

What is the relevant entity for Section 1
analysis?
Should
we think of the four employee corporation
itself as a contract in restraint of trade?
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Focusing on Entities

Copperweld Corp. v. Independent Tube Corp.,
467 U.S. 752, 767 (1984)
“The
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distinction between unilateral and concerted
conduct is necessary for a proper understanding
of the terms “contract, combination … or
conspiracy” in § 1. Nothing in the literal meaning
of those terms excludes coordinated conduct
among officers or employees of the same
company.
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Focusing on Entities
“But
it is perfectly plain that an internal
‘agreement’ to implement a single, unitary firm’s
policies does not raise the antitrust dangers that §
1 was designed to police. … For these reasons,
officers or employees of the same firm do not
provide the plurality of actors imperative for a § 1
conspiracy.”
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Starting a Newspaper Joint Venture

Hypo
Newspapers
A, B, C and D decide to start a joint
venture to share news
Initial investment I split four ways
Probability of success, p; of failure, 1-p
Worthless if it fails, worth V if it succeeds

Section 1 violation?
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Admitting New Members

More Hypo
Assume
the venture succeeds
E wants to join and even offers to pay I/5—the
amount that E would have paid had it been there
in the beginning—to join

If the JV refuses the offer, Section 1 violation?
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US v. AP: News Geography
AP
NY Times
Chi Trib
Chi Sun T
NY Post
Den Post
LA Times
LA Her
INS
Dal MN
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Miami Her
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Key Organizational Issues


Local monopolies or duopolies
Bylaws determine broader access to
information
Can’t
supply information to anyone outside the AP
network
Local competitor has certain blocking rights
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Evaluating the Practices

Key Practices
1.
Local Block: Chi Trib could force entry fee
payments (see fn 5) and vote by entire
membership if Sun-Times sought to join AP
3. Membership v. Ala Carte Sales
 Bundled Access to News vs. Piecemeal Access
 Grantback Obligations
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Analysis and Result

Classify This
Per
Se?
Rule of Reason?

Bylaws as entry barrier?
Very
difficult for local entrant, as can’t access
outside news network
Means must enter at national scale to enter locally
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Analysis and Result

Bylaws as facilitating local competition?
Local


quarantine would solve problem
Natural monopoly/public utility?
Creates Nondiscrimination Duty
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Klor’s (1959)

Key Facts
Klor’s
competed with Broadway-Hale (and many
others) in selling electronic goods in SF
Allegation was conspiracy among BH and
manufacturers to deny goods to Klor’s
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Analysis




Harm to Consumers? Increased Price?
Reduced Output?
Why is this an antitrust issue?
If not antitrust, what? Nothing?
Free-riding?
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Analysis


Court treats this as a group boycott
Incipient Monopoly?
“It
clearly has, by its “nature” and “character,” a
“monopolistic tendency.” As such it is not to be
tolerated merely because the victim is just one
merchant whose business is so small that his
destruction makes little difference to the economy.
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Analysis
Monopoly
can as surely thrive by the elimination
of such small businessmen, one at a time, as it
can by driving them out in large groups. In
recognition of this fact the Sherman Act has
consistently been read to forbid all contracts and
combinations “which ‘tend to create a monopoly,’”
whether “the tendency is a creeping one” or “one
that proceeds at full gallop.”
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Drafting the Complaint in Klor’s

How would you draft a complaint that would
survive a motion to dismiss under Twombly
and Text Messaging?
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Radiant Burners (1961)

Setup
Klor’s

applied in another context
Key Facts
Radiant
built a ceramic gas burner
It sought the “seal of approval” of the American
Gas Ass’n
Twice submitted, twice denied
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Radiant Burners (1961)
Claims
excluded from the market without the
certification

Lower Courts
District
Court: Dismissed complaint for failure to
state claim upon which relief could be granted
7th Cir: Affirmed
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Analysis

Apply Klor’s
“We
think the decision of the Court of Appeals
does not accord with our recent decision in Klor’s
….”

Is this Klor’s? AP? Fashion Originators’?
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Northwest Wholesale Stationers
(1985)

Setup
The

end of per se analysis of group boycotts
Key Facts
100
office supply retailers create wholesale
purchasing cooperative
Anyone can buy through the coop, but only
members get purchase rebates
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Northwest Wholesale Stationers
Pacific
Stationery operated at retail and
wholesale; eventually excluded from the coop
Note relative sizes: Northwest: $5.8 million in
wholesale sales; Pacific: $7.6 million in wholesale
and retail sales
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Northwest Wholesale Stationers

Lower Courts
District
Court: Not per se, do rule of reason; no
anticompetitive effect, so SJ for Northwest
9th Cir: Reverses, group boycott, so per se liability
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Analysis


Economic benefits of purchasing cooperatives?
Legitimacy of membership rules?
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Analysis

Holding
“Unless
the cooperative possesses market power
or exclusive access to an element essential to
effective competition, the conclusion that
expulsion is virtually always likely to have an
anticompetitive effect is not warranted. … Absent
such a showing with respect to a cooperative
buying arrangement, courts should apply a rule-ofreason analysis.”
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Vertical Organization of Oil Industry

Steps in the Process
Find
crude oil
Produce crude oil
Refine crude into gasoline (branded or
unbranded)
Ship to distribution points (where additives may be
added)
Ship to gasoline stations
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Retail Price Fixing Hypo

Hypo 1
Shell
and Texaco are fully-vertically integrated
They agree on prices to be charged at the pump

How should we evaluate this?
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Wholesale Price Fixing Hypo

Hypo 2
Shell
and Texaco are fully-vertically integrated,
save for gas stations, which are independently
owned and operated
Shell and Texaco agree on prices to be charged
at wholesale, meaning the price charged to gas
stations

How should we evaluate this?
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Merger Hypo

Hypo 3
Shell
and Texaco are fully-vertically integrated
and want to merge, up and down, the chain

How should we evaluate this?
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Shell Price Setting

Hypo 4
Shell
and Texaco are fully-vertically integrated,
save for gas stations
Shell has 1000 shareholders
At the annual meeting, the shareholders vote on
the price to be charged to gasoline stations

How should we evaluate this?
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Exiting Refining

Hypo 5
Shell
and Texaco are fully-vertically integrated,
save for gas stations
Shell and Texaco decide to exit the refining
business and sell all of those assets to a new
independent entity
That entity sets its own price to gas stations

How should we evaluate this?
July 21, 2015
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The Number of Brands

Does it matter how many brands the new thirdparty entity sells?
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Joint Venture Exit

Hypo 5
Shell
and Texaco want to exit refining as before
Form two new companies, Equilon Enterprises
LLC and Motiva Enterprises LLC, and dump
refining assets into those
Shares in LLCs divided in proportion of value of
assets (56% Shell, 44% Texaco)
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Joint Venture Exit
New


entities set prices to sell to gasoline stations
How should we evaluate this?
Does it matter how many brands of gasoline
are sold by the new entities?
July 21, 2015
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Quoting the Dissent in CA9

From the Dissent
“In
this case, nothing more radical is afoot than
the fact that an entity, which now owns all of the
production, transportation, research, storage,
sales and distribution facilities for engaging in the
gasoline business, also prices its own products.
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Quoting the Dissent in CA9

From the Dissent
“It
decided to price them the same, as any other
entity could. What could be more integral to the
running of a business than setting a price for its
goods and services?”
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