Sherman Antitrust Act - Assignment Example

Question 1 Sherman Antitrust Act famously regarded as Sherman Act 1890 was the first comprehensive commerce Act in the United States that dealt with unfair trade practices (Blake, 1984). The Act requires the United States government to intervene and investigate companies, trusts and organizations which are suspected of engaging in unfair trade practices that are contrary to the provisions of the Act. This was the first Federal Act that sought to limit cartels and monopolies and it has been used as a base of antitrust litigations in the country. The case of Howard Tool Company can be comprehensively analyzed under Sherman Act. A. It has been observed that for the last seven years, the price charged by the five producers have been substantially uniform. During the same period, price changes have been initiated by Howard and other four followed the price in few days. Therefore it is evident that Howard is in a position to control the market price owing to the fact that it is the major producer among the five top players in roller-bit industry. Howard produces half of what the other four major players produce. Therefore, Howard may take this advantage to influence the price in the market. It may also be due to the fact that Howard producers the Howard bit which are mainly used in deep well drilling. According to Section 2 of Sherman Act, monopolizing trade is considered a felony and attracts a penalty. This section states that any person who monopolize or makes an attempt to monopolize, or conspire with other persons in order to take part in monopolize of trade in any states, or with foreigner nations, is considered guilty of a felony and hence convicted to a punishment imposed through a fine not more than $10,000,000 for a corporation, or$350,000 for a person (Blake, 1984). The punishment on persons may also be substituted by an imprisonment which does not exceed three years according to what may be deemed fit by the court of law. In light of the above, it is evident that Howard has been engaging in unfair trade practices through using its market position to influence price. Sherman Act clearly prohibits price fixing. In trade restraint, Sherman Act prohibits price fixing as a part of horizontal restraint. In consideration of the provisions of the act, Howard can therefore be convicted of a criminal offense as it violates the provisions of the Sherman Act. B. The act of the five producers lowering their prices in order to force out a new entrant amounts to monopolizing of trade and price fixing. Price fixing, which is outlawed in Sherman Act, constitutes conspiracy between two or more sellers to sell a product at a give price in order to take advantage of the market situation. In this case, the five roll-bit producers lower prices in order to make it difficult for the new entrant to sell their products at the same price and hence force them out of the market. Price fixing is prosecuted as a criminal federal offense under the Section 1 of Sherman Antitrust Act. Price fixing is a form of collusive scheme which are liable to criminal prosecution under Sherman Act. Therefore the five roll-bit producers have been engaging in unfair and collusive scheme to fix prices in order to force their new entrants into their market. This case could be argued more based on the Section 2 of Clayton Act which was enacted to modify the Sherman Act. Section 2 of the case cites prices discrimination which is likely to reduce competition as criminal offense. C. Although Howard is patented in production of cone shaped bits, this does not mean that other companies are not entirely rocked out of carrying out their own experiments in a bid to come up with cones bits. Howard is patented to produce its model of cone bits and other companies should be allowed to engage in experiments to come up with their own model of cone bits. The practices which Howard has engaged in of suing other companies which engage in experiments to develop their own bits even without having an opportunity to examine the bits they challenged should be considered unfair and an attempt to trade monopolization under Sherman Act (Blake, 1984). One of the most debated issues as far as antitrust laws are concerned has been patenting and its relations to antitrust laws. Although patenting has existed in the United States for many centuries, the enactment of antitrust laws set for upholding of standards which looked into invalid patenting as monopolizing of trade. Looking into the Sherman Act, a company which strives to uphold its patenting rights to an extent of refusing other companies to engage in production of the same product or service will be deemed to be monopolizing its position in the business. Patenting in such a way that limits the ability of other companies to develop similar products amounts to holding up of market power which leaves the patented company to control the marketing of the product. However, going by the current trends in legal ruling on patenting, it has emerged that any party challenging patent right must come with convincing and valid reasons which will show that they are not in any way infringing into the rights of the patented company as far as their products are concerned. Under the Sherman law however, Howard can be sued for monopolizing cone bits because it is standing on the way of other companies to develop a similar product. Howard has used all legal means to sue a company which tries to develop cone bits even without going into details of verifying whether the researched products were similar to their cone bit. D. Howard has gone further to put in place a contractual mechanism that ensures that the company is given a chance to repurchase the same products. This can be taken as a tying agreement because the vendees are required to sell their used products back to the company. The contract that Howard enters with oil and drilling companies ensure that it is given an option to repurchase the same cutting equipments when the company decides to sell the cutting equipments again. The contract also ensures that vendees return back the used drilling and cutting bits to Howard so that they can be re-tipped. This is a mechanism that ensures that these equipments don’t go to any other third party except Howard and the oil and drilling companies. This mechanism and contractual agreement has ensured that cone bits remain properties of Howard and it amounts to monopolizing the trade. Therefore the company can be sued for such practices since it is using its position in the market to monopolize cone bits. Question II Dyco’s product, Orange 100 is use in photography process and in agriculture sector. However, the product is highly competitive in agriculture sector compared to photograph sector. Dyco has discovered that sales in the agricultural sector, which accounts for more than 80% of total sales of Orange 100, are affected by prices change in the product or change or price in competing product. On the other hand, sales in photographic sector, which accounts for only 20% of the total product sales is not affected by any prices changes. This implies that the pricing problem for Dyco comes in agricultural sector owing to the high rate of competition. A. In this case, it is evident that the company is faced by pricing difficulties especially in the agricultural sector. As the company has found out, most of the users of its product are in the agriculture sector. At the same time, this sector is highly competitive since there are other products which are used for the same purpose. As such, there is no price fixing and the products are bought based on prevailing market conditions. According to Sherman Act section 2, price fixing amounts to attempts to conspire and monopolize trade which is declared illegal. This complicates the situation for Dyco since it has to contend with the current sensitivity in market prices. B. The market analysis would have been quite different if the cost of production for Dyco product was relatively lower compared to the products X, Y, and Z. This is because Dyco can contend with the prevailing market prices as it would have a higher profit margin compared to the competitors. However, with lower production cost, Dyco may be attempted to lower its prices which amounts to price fixing with an aim of driving the other players out of the market. The only difference here would be that if Dyco cost of production was lower than the competing firms, it would have an advantage for a higher profit margin at prevailing market prices but it would not have an effect on Sherman section 2 since it cannot fix prices. C. In view of the above facts, it is less likely that Dyco can have monopoly of the product in the agriculture sector. This sector is highly competitive and it would be difficult for the company to fix price of the product. The company has already realized that change in pricing of the product of the prices of the competing products is hurting its sales. Price fixing in this case would be difficult. It also becomes difficult for the company to price it products considering that the sale of Orange 100 in the agriculture sector has to go through a number of jobbers and distributors of agricultural sector. This implies that the end price of the product will be determined by these distributors. Since there are other competing products going through the same channel, Dyco is no in a position to influence the distribution channel. Unless is conspires with producers of product X, Y, and Z, it would be relatively difficult for the company to have any impact on prices changes. However, this conspiracy would amount to infringement of the Sherman Section 2 which rules against conspiracy to monopolize trade (Blake, 1984). On the photographic sector, it can be argued that Dyco has monopoly in the sector. The company has discovered that this sector is not sensitive to price changes. Even if the company overcharges, the sector does not respond in any way to price changes which means there are few competitors. Question III Litigation Plan CASE NAME………………………………. DATE……………………………… CASE SUMMARY (i) Liabilities The success or failure of any litigation is based on a balance analysis of liabilities and damages that are likely to be main drivers for the case. They are major determinants on the direction that case ruling will take. In this case, Sweet Co. has liabilities which have evidenced in the preceding indictment by the grand jury. In consideration of the liabilities, the chances of success and loss are fifty-fifty. There are liabilities that Sweet Co. must assume in this case. a. Court ruling has already ruled that Sweet Co. conspired with two of its largest rivals in order to fix the price of SweetStuff. Considering that the world market is now roughly estimated at $10 billion and Sweet Co. accounts for $3 billion, it means it has a substantial market share and hence is in a good position to fix market prices. The grand jury investigation clearly showed that Sweet Co has conspired with its rivals to fix the prices of artificial sweetener and therefore acted against the provision of Sherman Act. Although Sweet Co consequently denied the charges, it was evident from the grand jury ruling that this is liability that is difficult for it to escape. b. After the company vowed to deny and contest the grand jury indictment, an agreement was reached upon which the company agreed to pay a fine of $250 million. This is another clear indication that the company partly accepted the liability although acting in such a way it would contest the ruling. c. Considering the fact that after the jury indictment, a number of private parties sued the company. Their suits were based on grand jury indictment which ruled the company was liable for price fixing in collaboration with its major competitors. Therefore the liability of the company is based on the grand jury indictment, its acceptance to settle for a fine of $250 million, and the private suits filed which indicate the even its customers perceived its liability based on grand jury indictment. (ii) Damages According to the grand jury indictment, Sweet Co. colluded with its rivals to fix price for Sweeteners. This implies that its consumers were forced to pay higher prices for the product. Considering the damagers that have been brought by private parties, the damages are higher and may cripple the chances for the company to defend itself against the private parties. In legal understanding, damagers can be defined as sum of money that is imposed due to a breach or violation of duties agreed on contractual bases. The following are some of the damages that the company is likely to take care of: a. Punitive damages – The grand jury indictment meant that the company was found guilty of an offense as it breached the provision of Sherman Act. The punitive damage that the company was supposed to pay totaled to a fine of $250 million. b. Compensatory damages – The grand jury indictment also led to a number of private law suits which were seeking compensatory damagers. Among these damages included: Drink Manufacturers v. Sweet Co. who sought a to recover three times the overcharge they have paid for SweetStuff during conspiratory period Consumers of SweetStuff which was a consumer class that sought to recover three time the alleges overcharges for prices they paid for SweetStuff Consumer of SweetStuff who bought cereals, soda pop, juices, and cookies manufactured using SweetStuff. This consumer class sought three times damagers they sustained in the period they bought the products during conspiratory period. Considering all these damages, it would be expensive it the court decides that the company should settle all of them. This would force the company to pay a substantial amount of money to settle all the three suits. This would also attract other private suits encouraged by the already settled damages. (iii) Settlement In view of the above liabilities and damages, it is likely that the plaintiff is likely to accept settlement at higher terms. Considering the extent of damages arising from the filed private suits, the company is more likely to pay more damages if the plaintiffs won the case. Therefore the aim of company should be to settle for a lower level of compensatory damages as may be ruled by the case. Considering that the company has been indicted by grand jury, the case for plaintiffs may be stronger against the company. The plaintiffs are therefore likely to accept settlement for half the total damages. Therefore it is highly recommended that the company deny the accusations brought to the court by the private parties and use facts that exonerate it from its liabilities so that it may aim for an out of court settlement with the private parties. The out of court agreement would ensure that the company may end up paying a quarter of the total damages. CASE ANALYSIS The case brought against Sweet Co. by private parties has been elicited by the fact that the company has been indicted by a grand jury. After the company was indicted by the grand jury, private parties followed by suing the company for the damages they incurred while the bought products at fixed price. The private party cases are based on facts which were presented on the grand jury. The key documents that are likely to be presented by the plaintiff against the company include the sale agreements and the payment receipts which are likely to act as evidence of the prices they paid for SweetStuff. This case is based on the fact that Sweet Co. colluded with its rivals to fix prices of their products. In any way, they would have fixed the prices to make more profits, hence exploiting the consumers. According to the Sherman Act, companies which engage in fixing of prices are deemed to have committed a legal offense and hence in this case, Sweet Co. and its rivals committed made their consumers pay for higher prices. Private parities can look to be paid damages they incurred as a result. Considering that the company knew very well they were fixing prices, they are liable to pay damages incurred by their consumers. Facts that can be disputed in this case include the fact that the company did not act alone in fixing the prices and hence if consumers have to be paid, the damages should be met by even its rivals. It can also be disputed that as a the market leader, the company did not collude in fixing prices but it sold its product at price that was set by the company and not in collusion with other rivals. However, the legal issue in this case is that the company acted against the provision of Sherman Act by working together with its rivals to fix prices and hence forced consumers to pay more. Other than monetary compensation, the objective of the private companies would be to have the power to control the prices of the products sold by the company in the future. This could be achieved by having government monitoring the prices of these products. This would be achieved through asking the argument that being a market leader, Sweet Co. would probably in the future act to fix prices again. In order to win this case, the company should not accept liability for these suits. The argument for the case would be the if the company is accused of fixing prices, why have the private parties brought suits against it alone while leaving out the other rivals. It would be recommended that the company seek an out of court settlement with the private parties as this would allow it to pay a little amount of damages and save its name. Question IV Section 1 of Sherman Act provides that any form of conspiracy which is aimed at restraining trade or commerce is illegal and any person who engages in such practice is considered guilty of a felony (Blake, 1984). The conspiracy can be termed as an agreement between two or more parties with an aim of putting in place rules and measures which favors them in commerce and trade. In view of the above provision, there are many ways in which the action which have been taken by the Northern California beetroot farmers and their refiners which can be deemed illegal. First, the three large local refiners have flouted Section 1 of the Sherman Act by conspiring to fix prices they pay for beets bought from farmers. This can be considered as a conspiracy since the three large refiners agreed to fix prices upon in such a way that it favors them. The action of the government to sue them for acting against Section 1 of the Sherman Act is therefore legal and valid. On the other hand, Northern California farmers were left disadvantaged by the action that had been taken by the refineries. They felt that it would be helpful if they selected their representatives in order to go and bargain with the companies in order to create set the most probable price that would fulfill the requirements of the all the stakeholders. In normal circumstance, buyer and seller tend to agree on a given price which satisfies the needs of both parties. However the action of the farmers to get into agreement with the three refiners flouts the basic presumption of a free market economy. While there may not be legal bindings that set the condition for price fixing in a free market, it is expected that market conditions, rather than individual terms, should set the prices. In a normal market conditions, forces of demand and supply usually sets the market prices. However the action of the farmers could have been elicited by fear of loss and the market power of the three refiners since they did not have any other alternative firm to sell their beets to. In light of this point, the action of the three refiners to get into agreement with the farmers can be termed illegal and contrast to the Section 1 and 2 of Sherman Act since they conspire to use their market power in order to exploit the farmers (Posner, 2002). It is obvious that they would agree to fix a price which they feel comfortable with and therefore increase their probability to exploit farmers. On the other hand, the actions of the farmers to get into agreement with the companies can also be termed illegal since they also conspire with the three companies to fix a price that would lead to retrain of commerce. In regard, if another refiner wants to enter into the same area, the refiner would be forced to buy beets at the same price. This amounts to conspiracy to fix prices and therefore acts against the Section 1 of Sherman act. The farmers would have instead of getting into a price fixing agreement option for a legal suit against the three refiners since they had acted against Sherman Act. Question V In this case, Lever is the leading circulating newspaper in Amesville. The owner of Lever also owns Tide, which is an evening newspaper. The two newspapers have a sizable market share and therefore the owner of the two is in a better position to control the market in Armsville with 75% of the circulation, 50% for Lever and 25% for Tide. It has been implemented as a condition that anyone who wishes to place advertisement in Lever must also place similar advertisement in Tide. Although the two magazines circulate at different times of the day, Lever in the morning and Tide in the evening, this practices amounts to infringement of the antitrust laws as outlined in Clayton Act (Hovenkamp, 1999). Section 3 of the Clayton Act provides that it is unlawful for a company to sell goods or services on condition that the purchaser will purchase complementing goods from the same company (Hylton, 2003). This lessens competition in the market since consumers are forced to purchase goods from the same company. In the same manner, it would be wrong for Lever to require that its customers must purchase advertisement space in Tide for them to be allowed to purchase a similar space in Tide. Since Lever is the leading circulating newspaper in Amsville, most people are likely to seek advertising space in the company and in the process also purchase advertising space in Tide which has less market share than Tide. It can be argued that it is a strategy to maintain circulation of Tide which faced severe competition from Time. This argument can be supported by a 1912 ruling by the Supreme Court in Henry v. A.B Dick & Co. In this case, A.B Dick & Co. required users of mimeograph machines to purchase papers and ink produced by the same company. Supreme Court ruled that this was a tying arrangement which amounted to expansion of monopoly. In the same way, Lever is taking advantage of its monopoly in the morning newspaper through Lever newspaper to required advertisers to buy advertising space in Tide. However in view of the modern court ruling, it is likely that this practice may not be considered illegal. The current court rulings have shown that this practice is rarely competitively harmful and may be aimed at ensuring that the company gives the best to its customers. For example in a 1984 court ruling in Jefferson Parish Hospital v. Hyde, the court argued that it was difficult to prove tying arrangement. In this case, the Supreme Court argued that the hospital required its surgical patients to use its approved anesthesiology firm because it wanted its patients to receive services from a firm it trusted. Therefore, the hospital did not cause any harm in competition since the hospital admitted few patients which means there was room for more competition. However, the case for Lever is different. While the above Supreme Court ruling is based on the conditions in the market, the tying arrangement imposed by Lever acts directly and unfairly to Time. This is because most people who are likely to advertise in Lever newspaper in the Morning and Time in the evening would not be in a position to do so. They will be required to advertise in Lever and at the same time in Tide. This means that who choose to advertise in Time will not get a space to advertise in Lever. This is an unfair market practice which is aimed at market protection and adversely driving Time out of the market. Since the company is using its market share advantage of Lever to required customers to purchase advertising space in Tide this can be considered as a tying arrangement which hurts competition in the market. List of References Blake, H. (1984). "Sherman Act." The Guide to American Law. St. Paul: West Publishing Company. Hovenkamp, H. (1999). Federal Antitrust Policy: The Law of Competition and Its Practice. St. Paul, MN: West Group Hylton, N. (2003). Antitrust Law: Economic Theory and Common Law Evolution. New York: Cambridge Univ. Press. Posner, R. A. (2002). Antitrust Law. Chicago: University of Chicago Press. Read More