MTL vs NATLA and Related Laws - Assignment Example

Part I. MTL vs. NATLA Background Free competition in trade and commerce for industrial development, so as to best serve the public, is the spirit behind the theory which supports antitrust laws in United States. Fair competition among businesses ensure quality product and services at reduced or reasonable prices. Instead, a few companies or associations try to dictate terms by manipulating prices, quality or product’s quantity so as to avoid competing for customers1. Therefore, these try and eliminate competitions through illegal ways for instance, price fixing, bid rigging or division of territories among different competitors within an industry. This is what the case MTL vs. NATLA, to be discussed here pertains to. Antitrust laws however, seek to purge such illegal patterns which threaten the sound business environment, as described above and ensure free and fair marketplace competition. Related Laws Every contract, arrangement in the form of trust or otherwise, or plan so as to restrict trade or commerce among the various States of U.S., or with overseas nations, is affirmed to be illegal2. Every entity or person which shall make any agreement or engage in any arrangement or plan hereby stated to be illegal shall be deemed guilty of an offence, and, on sentence thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court. The word ''person'', or ''persons'', wherever used in sections 1 to 7 of Sherman Act deems to include business firms and alliances existing under or authenticated by the laws of either the United States, the laws of any of the Territories, the laws of any State, or the laws of any foreign country. The main aim of the [Sherman] Act is not to guard businesses from the effects of the market; it is to protect the consumers (public in general) from the crash of the market. The law addresses itself not against operations which are competitive, even critically so, but against ways which inequitably tends to wipe out competition itself3. The courts have interpreted the Sherman act to prohibit only unreasonable restriction of trade. The Supreme Court propagated this flexible rule, called the Rule of Reason4. Under the Rule of Reason, the courts will explore a variety of aspects in deciding whether the particular restriction of trade unreasonably contains competition. Particularly, the court reflects on the composition of the appropriate industry, the defendants' positions within that industry, the capability of the defendants' competitors to counter the challenged practice, and the defendants' intention in adopting the restraint. This scrutiny enables courts to consider the pro-competitive effects of the restraint as well as its anticompetitive effects. Case Analysis In the case of Midwest Truck Leasing (MTL) vs. North American Truck Leasing Association (NATLA), an evidence of violation of Sherman Act under Section 1 for restriction of fair trade is found. The discussion here will further elucidate the nature of violation, in terms whether it is a ‘per se’ violation or needs to be scrutinised under ‘rule of reason’. In brief, NATLA is an association of truck leasing companies consisting about 150 members, one of which is MTL. NATLA works on a franchise model. In this regard, considering the three elements5 of section 1 of Sherman Act as below:- 1. An agreement – NATLA as an association has laid down a in its agreement, series of terms and conditions. 2. Unreasonable restraint of competition – The agreement specifically forbids each of its member from operating as a National franchise at any other location apart from the one designated by NATLA . Also, it forbids each member or franchise to get associated with any other full service truck leasing organisation. 3. Affects interstate commerce - Markets for full service mercantile truck leasing are local in nature. Therefore, in order to assist regular frequent maintenance on their vehicle, lessees typically lease trucks from a firm having an workshop within a few miles (no more than 25) of the lessee’s place of operation or business. The overall effect of NATLA’s rules is towards acutely limiting over-the-road leasing competition between its members. The above act of NATLA strictly meets the characterisation of Section 1 (agreements, conspiracies or trusts in restraint of trade) and therefore deems the agreement reached by NATLA as illegal per se under section 1 of Sherman Act. The agreement of NATLA has a pernicious effect on competition, however, it has certain positive effects too6. It aids its member towards benefiting from collective or joint fuel purchase program. Also, it does not regulate the price of the services provided by its franchisees. Thus, we may contrast the above act of NATLA with rule of reason analysis also. In this, complete circumstances test inquiring whether the practice in question promotes or suppresses market competition is made. Also here, the intent and motive behind such practices are of relevance wherein, analysis of facts specific to the case, history of restriction and reasons of why these were imposed are analysed7. In this case, the association of NATLA although favourable to it s members in various terms, unreasonable restrains trade opportunities of its franchisees, apart from hindering competition in the relevant product market and therefore would be deemed unreasonable under rule of reason assessment. Part II. Dyco Background All such trusts, organisations and companies who are suspected of having violated The Sherman Antitrust Act, is under the investigative purview of the United States Federal government.8. It was the first Federal statute to prohibit cartels and monopolies, and till date forms the basis of most antitrust litigations by the United States federal government. Therefore, the Act made it a crime to monopolize or make an effort to monopolize any part of trade or commerce . Definitions of market is also of importance in cases where monopolies are discussed especially in rule of reason cases, since it is necessary to establish the market relationship between the conspirators so as to prove their conduct. This case of Dyco discusses the potential scenario of a product of the company which in a manner is the only product in one industry (photographic industry) and a competitive product in another industry (agricultural colouring industry). Related Laws Every entity which shall monopolize, or attempt to monopolize, or combine or plan with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a offense, and, on sentence thereof, shall be punished by way of a penalty not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, as per the discretion of the court. Section 2 of the Sherman Act prohibits monopoly. A distinction between coercive and innocent monopoly has been drawn by the court in Section 2 cases. The act is not directed towards penalising businesses which have come to dominate their market inertly or on their own merit, only those that deliberately dominate the market through misconduct, which usually comprise of the kinds of conspiratorial conduct prohibited by Section 1 of the Sherman Act, or Section 3 of the Association. A dominant market share is usually a pre-condition for the possibility of monopoly control, however, this is only an initial point in consideration while establishing whether a rival possesses monopoly power. Competitive conditions must be such that the competitor can continually charge prices well beyond competitive reasonable levels without considerable erosion of its dominant position through the expansion of incumbent competitors or the admission of new rivals. Where courts have established monopoly power, as against market power, the defendant’s market share has been at least 50 % and in most cases, considerably higher. Therefore, maintaining a market share in excess of two-thirds9 for a significant period by a firm and the court accomplishes that market conditions most likely would prevent the erosion of its market position in the near future, the court will deduce that the firm possesses monopoly power in absence of satisfactory evidence to the contrary 10 Case Analysis Dyco is a company whose product ‘Orange 100’ caters to two different markets. One is the photographic industry for manufacturing and production of photographic plate; and other is agricultural colouring industry for colouring skins of oranges. (a) Pertaining to a market analysis of the case as per Sherman 2 Act, assuming that the production and distribution costs of Dyco are not significantly different from those of XYZ, very similar to The Williamson trade-off analysis11, we can analyse the situation of the market comprising of Dyco, X, Y, Z also. Let us assume that competitive cost and price for all is C, then as per the fig. 1, area ABC determines the aggregate social surplus of the industry. (b) However, if we say that prices stays at C, but the cost of Dyco is substantially lower at C1, then area ABEC1 will provide the aggregate social surplus. Figure 1: Market Analysis (c) Consideraing first the photographic industry, since Dyco’s Orange 100 is the only dominant product in competition to another product A which exists in the market, Dyco may be treated as having dominant market share in that. However, the same will not be considered a monopoly since Dyco has achieved the same on merit. Product A is considered to be of inferior quality and therefore not competitive enough, making Orange 100 the market leader. Considering the agricultural industry, all products including Dyco, X, Y, Z have an equal impact on the market since the product is sensitive to the price changes. No evidence in the case states that Dyco owns more market share or sales (atleast 50 % or more) as compared to others. Therefore, Dyco does not have monopoly in this market. Part III. Sweet Co. Background Price fixing is an arrangement between members on the same side in a market to buy or sell a product, service, or commodity only at a particular fixed price, or preserve the market conditions such that the price is retained at a specific level by manipulating supply and demand. Suck a group of market participants involved in price fixing is also referred to as a cartel. There can be various intents behind price fixing such as to escalate prices of products or services as high as possible which is profitable to all sellers, also the intent may be to stabilise or discount the prices. The most essential feature of price fixing is an agreement on price, which may be expressed or implied. Such an agreement so as to restrain price competition by raising, fixing, stabilising or depressing prices is the most serious instance of Sherman Act per se violation, under which, the fixing of the prices at maximum price, minimum price, actual cost, fair market price or even at a reasonable price is of no consequence.12 Horizontal as well as vertical price fixing are both illegal per se. Here, Horizontal price fixing arrangement consists of agreements among sellers to maintain a maximum or minimum price on particular goods or services, where, simultaneous price changes by competitors’ under some circumstances are also included. Also, it is worth noting that horizontal price fixing arrangement is illegal irrespective of it being direct or indirect. Therefore, it is impossible to raise, depress, fix or stabilise a promotion or discount that is tied closely to price without violating Sherman Act. Situations where a wholesaler establishes control over the minimum or maximum price at which their retailers may sell certain products is categorised as vertical price-fixing arrangement. Therefore, it is understood that in order to have a mutual benefit among traders, a conspiracy is made between sellers or buyers, the purpose is to coordinate pricing, and is referred to as price fixing. Sellers might agree to sell at a mutual target price; , maintain a common minimum price; buy the product from a supplier at a particular maximum price; stick to a price book or list price; get involved in collaborated price advertising; regulate financial credit terms offered to purchasers; employ harmonised trade-in allowances; cap discounts; do away with a free service or manipulate the price of one element of an overall service; stick uniformly to pre announced prices and terms of sale; maintain uniform costs and markups; induce binding surcharges; reduce output or sales, on purpose, in order to charge higher prices; or share or assemble markets, territories, or customers intentionally. In neo classical economics, price fixing is considered inefficient. Some of the consumer surplus is transferred to those producers who fix prices above market price through an anti competitive arrangement, which also results in a deadweight loss13 The case of Sweet Co. is also one where the company has been accused of fixing the prices of artificial sweeteners in conspiracy with its two largest rivals. Related Laws Under section 1 of the Sherman Antitrust Act, price fixing can be prosecuted as a criminal federal offense in the United States.14 Triple damages for antitrust violations and also to recover attorneys fees, their own lawsuits can be brought about by private individuals or organizations15 Collaborating on price amongst competitors, which is also known as horizontal price fixing, is seen as a per se violation of the Sherman Act irrespective of the market impact or assumed efficiency of the action. In 2007, the U.S. Supreme Court established that vertical price fixing by a producer and its retailers, also known as retail price preservation, is not a per se violation. Under American law, exchange of prices among competitors can also lead to the violation of the antitrust laws. This includes exchange of prices with an intention of either to fix prices or if the exchange affects the prices, then individual competitors set. Proof that competitors have shared prices can be used as part of the evidence to substantiate the existence of an illegal price fixing arrangement16 As per the section 4 of Clayton Antitrust Act of 191417Except as provided in subsection (b) of this section, any entity which shall be injured in his business or property due to a reason of anything prohibited under the antitrust laws may sue therefore in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee. Under this section, the court may award, pursuant to a motion by such person promptly made, simple interest on actual damages for the period beginning on the date of service of such person's pleading setting forth a claim under the antitrust laws and ending on the date of judgment, or for any shorter period therein, if the court finds that the award of such interest for such period is just in the circumstances. As per Section 4c of Clayton Act: (i) Any attorney general of a State may bring a civil action in the name of such State, as parens patriae on behalf of natural persons residing in such State, in any district court of the United States having jurisdiction of the defendant, to secure monetary relief as provided in this section for injury sustained by such natural persons to their property by reason of any violation of sections 1 to 7 of this title. ... (ii) The court shall award the State as monetary relief threefold the total damage sustained as described, and the cost of suit, including a reasonable attorney's fee. Case Analysis In the case of Sweet Co., the discussed three lawsuits have been filed in United States district courts and state court respectively. As per Section 4a of Clayton Act, whenever an entity in the United States is hereafter injured in its business or property due to anything prohibited in the antitrust laws, it may sue therefore in the United States district court for the district in which the defendant resides or is found or has an agent, irrespective of the amount in controversy, and can claim threefold the damages sustained by it along with the cost of suit. In case of the lawsuits filed by Drink manufacturers and consumers, both have although appealed to United States District Court, the appeal has been made in different districts. Since the suit should be filed in district court, that too for the district in which the defendant resides, the claim may not be held good. Also on same lines of a suit which should be filed in United Sates district court for the district in which defendant resides, or is found, the lawsuit filed by consumers in state court does not hold valid. Part IV. Horizontal Merger Case Background A merger takes place when two or more businesses coalesce to form one enterprise. Since 1890, Congress has attempted to regulate mergers and acquisitions through antitrust laws so as to protect the rights of American citizens. The assumption of antitrust laws is basically that when one company obtains a monopoly over an industry, the lack of competition within the market reduces innovation and forces consumers to become susceptible to increased prices and substandard goods and services. In 1972, U.S. Supreme Court Justice Thurgood Marshall wrote, “Antitrust laws…are the Magna Carta of free enterprise. They are as important to the perseveration of economic freedom and our free‐enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms.”18 This concept has been the framework of government’s views on mergers and acquisitions for more than a century. The horizontal merger case between Super Propane and GBK Propane is also to be discussed along same lines. Horizontal mergers basically focus on methods by which a leading firm may attempt to decrease competition by eliminating its competitors from the marketplace, either completely, or by more partially limiting their competitiveness. It emphasises practices such as predatory pricing, absolute dealing, and tying. Related Laws Sherman Act had originally aimed at protection of consumers against threat of monopolisation namely Section 1 which prohibited every collusion in restraint of trade , and also Section 2 which prohibited monopoly combinations.19 However, the language of Sherman Act was quite broad which made the implementation difficult. Therefore Clayton Antitrust Act clarifies the details of ‘unreasonable’ trade agreement. Under Section 7 f Clayton Act addressing merger and acquisition issue, it was clarified that no combination between two commercial organisations can validly take place if the end effect of the same lessens competition amongst themselves or if this tends to create monopoly of the related line of commerce.20 A proposed updated version of the Horizontal Merger Guidelines ("Guidelines"), on April 20, 2010, was released for public comment by the Federal Trade Commission (FTC), which explain how the FTC and the Antitrust Division of the U.S. Department of Justice (collectively, the “Agencies”) evaluate the impact on competition of a proposed merger when determining whether to challenge the merger under U.S. antitrust law. The Guidelines "are aimed at assisting the business community and antitrust practitioners by increasing the transparency of the investigative process underlying the Agencies' enforcement decisions" and "may also assist the courts in developing a suitable framework interpretation and application of the antitrust laws in the horizontal merger context."21 The Agencies principally review mergers for violations of section 7 of the Clayton Act, which prohibits acquisitions of assets or voting securities that are likely to substantially lessen competition or tend to create a monopoly in any line of commerce in any section of the country. The proposed revisions to the Guidelines would deemphasize the focus on step-by-step analysis that requires definition of relevant product and geographic markets, in favour of a more flexible analysis, while retaining and modifying most of the basic analytical tools referenced in the current Guidelines. Case Analysis This industry of Propane marketing consists of 5 major players like Super Propane and GBK Propane to name a few. These are local or regional marketers which are engaged in retailing and wholesaling of Propane. Super also sells propane related goods apart from the above. Both of them at present comprise of 35% and 20% of the total Tazland propane sales respectively. The analysis of the merger between Super and GBK will under following steps as per FTC guidelines22: Market Definition: The market here which is relevant in terms of a potential anti competitive effect of a merger is propane retailing. Since both Super and GBK are commonly involved in selling of propane, therefore both the companies’ products being in the same market, qualify for horizontal merger. Since this is a retail merger, retail price increase would be the focus rather than net increase in price of retail services. Market concentration and concentration changes calculation: As already stated, a merger between Super and GBK will lead to their total market concentration increase from 35% and 20% of total propane sales to 55%. The other major players remaining in the industry will remaining 25% , 10% and 10% respectively. This clearly indicates a vast dominance of one entity in propane retailing market. Other market factors’ evaluation: Several other market factors will determine the competitive impact of mergers such as structural facts affecting the ease of the association, market performance, substitution patterns in market, capacity limitations of some firms in the market and ease of entry. In this case, a very serious issue of capacity constraint faced by all other players apart from the merged entity is evident due to the location advantage of GBK (GBK is the largest propane storage operating facility and also, it is located at an access point to one of the few supply pipelines, passing through Tazland). These capacity advantages (direct access to pipeline and significant storage capacity of GBK) to merged entities can enable them to ‘stock up’ prices when prices are most favourable from its suppliers and is an unfair disadvantage to the other competitors. Pro-competitive justifications – Pg 28 (holizontalmerger.pdf) Another consideration is in terms of efficiency of the merged entity. It is to be seen that no merger will be challenged till cognizable efficiencies are sufficient to keep consumer surplus from decreasing and therefore the merger should not be likely to be anti competitive in any market. Also, it may be specified that with such standards of consumer surplus such as reduction in merging firms’ costs will not lead to a merger gaining approval; particularly then only reductions in marginal costs matter. In merger between GBK and Super, although joint operating and production costs are lowered, it is to be established whether reduction is in marginal cost of these or not which will be of consequence as described above. More so, it will be analysed whether these efficiencies could have been brought about by less restrictive means such as joint production agreements or mergers including limited divestitures. The reduction in respective work force of both GBK and Super, as mentioned in the case should not affect the quality of the products. Also, a joint bid for contracts which may lead to monopoly can create anti competitive situations in Tazland Part V. Small battery Industry Background Worldwide, all the competition agencies agree that cartel conduct is the most outrageous of competition law offences and the detection, investigation and prosecution of cartel behaviour is a priority in every such agency. Since cartels are usually enveloped in secrecy, their detection and the strategies used by a competition agency within the starting investigatory period are of the paramount importance to effective enforcement. The challenges to enforcement include: Increasing investigative cartel detecting capacity Initiating vigorous investigations, and Prioritising multiple enforcement matters so as to make the best use of available resources. This part of the assignment focuses towards pursuing a complete investigation of the antitrust violation in the small battery industry, considering whether a full-scale investigation of a possible cartel formation is required. Arguments in favour and against both, are to be discussed. The significance of the facts provided, as well as, related significant facts about the industry, which are available or not, but will be required for completion of the assessment. Related Laws Cartel conduct characteristically involves: Raising, fixing or maintaining the price of a product or service. Price fixing can consist of those arrangements which establish a minimum price, to eliminate discounts, or to adopt a standard formula for calculating prices, etc.23 Limiting output or sales, through a production or sales quota arrangement which involve an agreement between competitors to limit the volume of particular goods or services available on the market Sharing markets, which refers to agreements between competitors that divide up the market, on basis of geography, product or customer, so that the participants are saved from competition between each other, or Rigging bids, where two or more competitors agree that they will not compete with each other for particular tenders or will share information on their tenders, and/or allow one of the participants in the agreement to win the tender. A “full scale investigation” is often initiated by an official agency action. Such actions include taking some form of official decision to investigate or exercise formal investigative powers (for example, conducting a search, raid or inspection, issuing an order for production of documents or compelling attendance at a verbal examination). These actions often have the effect of disclosing the existence of the investigation in public. A full scale investigation can also begin with covert steps such as using informant(s) to gather evidence while the cartel is still underway. Such covert action would not disclose the existence of the investigation in public.24 Case Analysis In small scale battery industry as described in the case, clearly, the three main firms: Durab, Allthere and Batteron dominate the market position with approximately 35%, 35% and 20% of U.S. sales of battery respectively. However, in recent times, Caman (a major camera company) and Nisobat (a large Japanese battery company) have entered into this market. The case illustrates that both Caman and Nisobat had their own drawbacks in the form of insufficient retail distribution and high transportation costs due to import. The contentious issue in the case is that subsequent to the announcement of a 10-12 % rise in battery price by Durab, Batteron as well as Allthere increased their battery prices by 10-12%.; whereas Caman and Nisobat did not do so. This instigated the consumer groups to file a complaint against the above price rise. Decision of a full scale investigation can be taken only after ensuring that exisstance of a cartel could be detected (thorugh screening or pre investigatory verifications). Usually, a number of factors will indicate whether a complete investigation is warranted or not25. Factors which favour the same in this case are: a. Smalll number of firms which makes it easier to manage hidden arrangements b. Homogenous and fungible products such as batteries in this case c. Price patterns wherein all three companies, Durab, Allthere and Batteron have initiated a price hike of almost 10-12 % range One of the major factors which indicate against initiation of a full scale investigation are lack of entry barriers, Nisobat and Caman could easily enter the market. However, they have their own individual disadvantages. External factors which influence decision of cartel investigation are; a. Relevant legislation b. Economic, judicial and regulatory environment c. International developments d. Government priorities, and e. Activities undertaken by domestic or international agencies Also, it is worth considering that ‘Monitoring industry activity’ is also one of the best ways of detecting a cartel. Therefore availability of certain significant facts on the conduct of the industry is imperative. A systematic monitoring of industry activity is also undertaken by certain agencies. Public procurement agencies are asked, or to present data (including expected bid value, name of bidders, information about bidders and bid submitted, details of successful and rejected bids) to agencies containing details of procurement activities either carried out over a specified period or on a continual basis. The results are analysed by the agency and investigations initiated where the greatest symptoms of bid rigging are established. Such methods are also highly useful from an educational perspective, since they draw procurers’ attention to the potential for bid rigging. Read More