Antitrust: U.S. Laws and Regulations
Sep 07, 2010 QuickCounsel Download PDF
By Elizabeth Killingsworth, Esq.
The United States Antitrust laws seek to prohibit anticompetitive behavior and unfair business practices while encouraging competition in the marketplace. As a result of the fear that monopolies dominated the market in the late 1800s, the Sherman Antitrust Act was passed in 1890, and, though it has been expanded and amended by subsequent legislation, still forms the basis of most antitrust law today.
Since the Sherman Act is grounded in the commerce clause and applies only to interstate commerce, many states have adopted statutes that mirror the Sherman Act to govern intrastate trade. For examples, see the Massachusetts Antitrust Act or the Virginia Antitrust Act.
Statutes & Interpretation
Initially passed in 1890, the Sherman Act was intended to govern single-firm and multi-firm conduct deemed anticompetitive. It is divided primarily into two sections. Section 1 focuses on specific anticompetitive conduct and prohibits "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." Section 2 highlights particular results deemed anticompetitive by nature and prohibits actions that "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." Together, these two sections are intended to prohibit all anticompetitive behavior.
The broad language of the Sherman Act produced a series of cases in the early twentieth century with arguably inconsistent results, resulting in the passage of the Clayton Antitrust Act of 1914. The Clayton Act lists additional prohibited conducts, such as price discrimination, exclusive dealing agreements and tying agreements.
The Clayton Act was then amended by the Robinson-Patman Act of 1936, which addressed specific acts of discriminatory pricing or allowances between similarly situated distributors in an effort to maintain local stores' competitive stance against larger chain distributors.
The Clayton Act was most recently amended by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which requires that companies planning significant mergers notify the government in advance. For a more detailed explanation of the premerger notification requirements, see the FTC premerger notification introductory guide.
In addition to the Sherman Act and its amendments, the Federal Trade Commission Act of 1914 prohibits all "unfair methods of competition" and "unfair or deceptive acts or practices" and augments the Sherman Act by providing the Federal Trade Commission (FTC) the administrative authority to close the gaps in or expand upon existing antitrust laws to ban new anticompetitive practices not in existence at the time of the original acts' enactments.
Per Se Rule & Rule of Reason
It is important to note that the existence of a monopoly does not, by definition, run afoul of the antitrust laws. The Supreme Court has interpreted the statutes to apply not to every restraint of trade, but rather those deemed "unreasonable." For example, a monopoly may be permitted to exist unless it was acquired or is maintained through the use of prohibited conduct. In the multi-firm sphere, an agreement may technically restrain trade, so long as the restraint is not unreasonable. The court has determined that some acts are per se unreasonable, while others are subjected to a reasoned analysis.
Section 1 of the Sherman Act defines some actions as per se anticompetitive and violations of the act. Violations resulting from companies engaging in these actions require no further inquiry into the intentions of the company or the conduct's effects on the market.
When examining other potentially anticompetitive behaviors, the court employs a reasoned analysis, examining intent, motive, the conduct itself and outcome to determine whether the conduct encourages or suppresses market competition.
Prohibited Schemes & Applicable Tests
Monopolization: The Sherman Act, Section 2, prohibits monopolization and attempts or conspiracies to monopolize. The courts apply the rule of reason when determining whether there was the intent and the power to monopolize. A successful monopoly is not required for a conviction.
Market Allocation: These are agreements in which competitors divide markets among themselves. These violations are not limited to geographic market division; rather, competing firms may not allocate specific customers or types of customers, products, or territories among themselves. Market allocation is treated as a per se violation.
Price-Fixing: An agreement among competitors selling the same product or service to alter, fix, or maintain the price at which products or services are sold. This may occur at the buyer or seller level and is essentially any agreement among competitors that alters the ultimate price of the goods or services. There are two primary types of price fixing: (1) Horizontal, an agreement among competitors at the same level; and (2) Vertical, an agreement among parties in the same distribution chain (i.e., a manufacturer-dealer or supplier-manufacturer agreement). Horizontal price fixing is considered a per se violation, however, since 2007, vertical price fixing has been determined using the rule of reason.
Predatory Pricing & Bidding: Predatory pricing occurs when companies price their products or services below cost with the purpose of removing competitors from the market. Predatory bidding, a variation on predatory pricing, occurs when a company bids up the price of raw materials or other inputs to prevent competing companies from acquiring needed materials. Both of these predatory schemes are per se violations, however the courts use a two part test to determine whether they have occurred: (1) the violating company's production costs must be higher than the market price of the good or service and (2) there must be a "dangerous probability" that the violating company will recover the loss from above-cost materials or other inputs.
Collusive Bidding: When two or more competitors agree to alter their bids for the purchase or provision of a particular product or service. This practice is a per se violation.
Exclusive Dealing: An agreement mandating that a distributor purchase exclusively from a particular manufacturer. In practice, however, requirements contracts are extremely common and frequently permissible. The court applies the rule of reason when evaluating such arrangements.
Tying Arrangements: Agreements between provider and purchaser wherein the provider will only agree to sell product A on the condition that the purchaser also either (1) buys product B from the provider or (2) guarantees that it will not buy product B from another provider. These arrangements are most commonly subject to the rule of reason; however, in extreme cases where the agreement substantially restricts commerce, then it can be considered a ¬per se violation.
Price Discrimination: This occurs when a provider charges competing purchasers different prices for the same goods (not services) or varies the provision of allowances, such as compensation for advertising or other services, between competing buyers. Often, price discrimination reflects the variable costs of dealing with different buyers or the results of a bidding war for a particular client. In these instances, price discrimination is permissible. In other cases, such conduct may be a violation of the Robinson-Patman Act and is evaluated using the rule of reason.
Patent Owners: The Sherman Act exempted patent owners because public policy favors innovation. However, Walker Process Fraud, the use of a fraudulently obtained patent to create or maintain a monopoly, subjects the individual to criminal and civil prosecution.
Labor Unions & Agricultural Organizations: The Clayton Act provides an exemption for labor unions and agricultural organizations.
Banks: The Securities and Exchange Act of 1934 regulates banking entities and the Supreme Court decided in Credit Suisse Securities (USA) v. Billing (05-1157) that, in cases where securities laws and antitrust laws conflict, securities laws prevail.
Nonprofits: The Nonprofit Institutions Act permits nonprofits to purchase – and vendors to supply – supplies for use by the organization at a reduced price without violating the Robinson-Patman Act.
Sports Leagues: Generally, mergers and joint agreements of professional football, baseball, basketball, or hockey leagues are exempted from antitrust law under 15 U.S.C. § 1291 et seq. However, the Supreme Court recently ruled in American Needle Inc. v. NFL (2010) that the NFL constitutes a cartel of independent businesses and may be subject to antitrust law.
The Supreme Court has established that all violations of the Sherman Act are also violations of the Federal Trade Commission Act, enabling both the Department of Justice, Antitrust Division (DOJ) and the FTC to enforce the antitrust laws. In fact, the two agencies complement each other. Before beginning an investigation, the agencies will consult one another to avoid duplication of efforts. Both the DOJ and the FTC may bring civil actions to enforce the antitrust laws, though only the DOJ may bring a criminal suit.
In practice, the FTC tends to focus on specific segments of the economy, including health care, pharmaceuticals, professional services, food, energy, and high tech industries.
State attorneys general may bring antitrust suits pursuant to both state and federal antitrust laws. For federal suits, they may file on behalf of individuals residing in the state or on behalf of the state as a purchaser.
The most common source of antitrust suits is a private business seeking civil damages for another's violation of the Sherman or Clayton Acts. Private parties may also seek injunctive relief preventing anticompetitive conduct or bring a suit under state laws; however private parties may not file a suit pursuant to the Federal Trade Commission Act.
Additional ACC Resources
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ACC Resource Library - Article
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