The US Antitrust Law - Demarcation of Territories - Essay Example

Demarcation of territories Section 1 of the Sherman Act prohibits conspiracies and combinations while restraining foreign trade’s interstate. Companies that directly compete with each other on agreements come under this provision, Such a thing is called horizontal agreements. Vertical agreements are agreements between businesses operating at different levels of the same product’s distribution or production chain. In addition although restrains on trade remain illegal per se such as certain agreements to fix prices most asserted antitrust violations now require the finder of the fact [to] decide whether the questioned practice imposes an unreasonable restraint on competition taking into account a variety of factors including specific information about the relevant business, its condition before and after the restraint was imposed and the restraint’s history, nature and effect. Under section 1 of the Sherman Act, it is a per se violation if competitors agree to formally or informally allocate customer whether by name of class. Similarly it is not legal for competitors to allocate among themselves territories in which each will compete or not compete. The idea in essence as ensconced in Section 1 of the Sherman Act is aimed at the prohibition of contracts that are aimed ensuring lessening of competition through conspiracies and combinations resulting ultimately in trade restraint. The first thing to be remembered in this context is that there is a requirement of proof of joint action and/or agreement. This means in essence that if the case in question relates to a single entity there can be no injunction under Section1 (Rolnicki, 1998). There is also the requirement of circumstantial evidence which is considered admissible aimed toward the establishment of a violation of the Act. The judiciary has established two categories of illegal restraints of trade. This brings one to the per se rule of violation wherein some agreements are considered substantially and also blatantly anticompetitive vis-a-vis Section1 which they violate. The idea therefore is that if an agreement is anticompetitive, that is, it is aimed at controlling, restricting or killing competition, and then it is considered to be something that is illegal. Using the rule or reason the courts analyze anticompetitive agreements that allegedly stand in violation of section 1 o the Sherman Act aiming at a determination of whether they may in fact constitute reasonable restraint of trade. It is rule of reason on account of which businesses are done in accordance with the Sherman Act. This sentiment was phrased aptly in Chicago Board of Trade v United States: “Every agreement concerning trade, every regulation of trade, restrains. To bind is one their very essence. The true test of legality is whether the restraint imposed is such as mere regulative and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition”. A term that becomes pertinent in the context of this case is that of horizontal restraint. A horizontal restraint prevents competing companies from locking horns with each other on the same product in the same market. The idea therefore is that whenever firms at the same level of operations and on direct competition with one another agree to operate in a way that restricts their market activities are said to have imposed a horizontal restraint of trade. In this context one could utilize the judgment delivered by the courts in the case of the big seven who were accused of market allocation and held for a violation of section 1 of the Sherman Act and indicted on charges of horizontal restraint of trade. “While the court has utilized the rule of reason in evaluating the legality of most restraints alleged to be violative of the Sherman Act, it has also developed the doctrine that certain business relationships are per se violations of the act without regard to a consideration of its reasonableness.” The judgment cited the court’s decision in Northern Pacific Co v United States [356 US 1. 5. 78 S.Ct. 514] where Justice black said: One of the classic examples, according to case law, of per se violation of s1 is the agreement between competitors at the same level of the market structure to allocate territories in order to minimize competition. In such concerted the aim usually is the creation of individual dealers by killing competition altogether (Congress, 2002). The courts have reiterated repeatedly horizontal territorial limitations account for naked flouting of s1 of the Sherman act with no purpose but to stifle competition [White Motor Co v United States]. These account for per se violation of the Sherman Act [Addyston Pipes & Steel Co v United States]. The idea put forward in the context of this case was that in cases the primary purpose of an agreement is the restriction of trade leading to invalidity of agreement and guilty of Sherman Act violation. On the context of this case therefore it becomes clear that the North American Truck Leasing Association stands in clear violation of s1, given the fact that the very purpose of the association was to restrict competition with the said geographical boundary. Given the fact that the members of NATLA did not supply to geographic areas outside of their purported areas of operation meant that the agreement also was hindering the growth of business. The fact that MTL should be allowed to trade anywhere is clear and there can be no ban on it trying to set up operations outside its stated areas of operartion. The fact that NATLA tried doing this also again makes it guilty of a per se violation of s1 of the Sherman Act under charges of horizontal fixing. Definition of relevant market: All products come under the purview of the relevant product market if the commodities have identical attributes, which also means products that are interchangeable if consumers treat them as so or even as substitutes to the relevant product [HDC Medical v Minnetech Corp 474 F3d]. The constituents of the relevant market form the basis of most cases mired in monopoly disputes. The idea therefore is that the market itself could be defined in terms of substitutability or interchangeability. It has thus adopted a definition of the relevant market which described the market as consisting of products that are interchangeable with each other but not (or only for a limited extent) interchangeable with those outside it. This may be with other products or with the same products. The relevant market would thus have a geographical and the interchangeability factors. In case of Dyco, the functional interchangeability yardstick helps determine the intended use of the product and qualitative criteria of characteristics price in the relevant market.   The Sherman Act does not go into the definitions of the word monopoly. In economic parlance monopoly stands in reference to a single-entity control of a specific market. Antitrust law establishes it very well, and also to an extent of a situation where the monopolist is not the sole seller in the market. Additionally, size alone does not determine whether a firm is a monopoly. Size in relation to relevant market is what matters in the context of this case given the fact that monopoly is the power to affect prices and output. Monopoly power can be proved by direct evidence that the firm used its power to restrict output and control prices. Usually, however there is not enough evidence to show that the form was intentionally controlling prices, so the plaintiff has to offer indirect or circumstantial evidence or monopoly power. To prove monopoly power the plaintiff must be able to prove that the firm holds dominant market share in the product category involving monopoly.   In most cases in coming up with definitions of the relevant market, courts have, in the early years made use of a complicated outlines in coming up with relevant market definition. Defining the relevant market is a must given that in cases where the rule of reason is applicable; there must be an instance for the plaintiff to prove conspiracy which causes harm. In many early cases, the courts have ruled in favor of the plaintiff given that they were able to prove market dominance through the application of a tailor made definition of the relevant market. In the case of U.S. v. Grinnell, 384 U.S. 563 (1966), the trial judge, Charles Wyzanski, composed the market only of alarm companies with interstate services, with sort-of tailoring out competitors who were local; with defendant all alone in this market. Subsequently the entire national market was added up by the court, due to which it would have had a much smaller share of the national market for alarm services that the court purportedly used. This finding was affirmed by the appellate courts; even though, and strangely so, today an appellate court would likely find this definition to be flawed since modern courts have a more sophisticated market definition in place that does not permit as manipulative a definition. Section 2 of the Sherman Act deals with the issue of monopolization of a relevant market. It states in essence that any person or persons attempting to conspire to monopolize an industry is in violation of the act. For any persons or more than one person the Section makes it unlawful to monopolize, conspire or combine with any other person or persons to any part of “trade or commerce” in the United States. It also states that such persons if found to be indulging in conduct abetting monopoly would be felt guilty of “a felony, and, or conviction thereof, shall be punished by fine not exceeding $10, 00, 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 courts”.  In the context of this case, there are three basic questions that need to be answered: 1. The relevant market could be defined in this case consisting of Orange100 along with product x, y, and z with Orange 100 holding the dominating, if not the monopoly position in the market. The reason why the market is explained in these terms is because of the fact that while the other products are susceptible to the change in the Orange100’s pricing, they are legitimate substitutes and provide the customer with an option. 2. If the cost of production for Orange100 was substantially low, then the relevant market would be defined as headed by Orange100 with fringe products to be used as substitutes. This would happen given that with a decline in cost of production there would be an automatic increase in the kind of market share enjoyed by Orange100. 3. A monopoly situation would be created if Dyco’s cost of production was lower than those of its competitors given that it would then dictate market dynamics in an absolute manner. Price fixing At the heart of the above mentioned dispute is the case of price ficing., given the fact that Sweet co has been indicted of price fixing under the Sherman Act, would signify that the company was guilty and therefore owes its consumers some return. There are nevertheless some methods by which damages done can be minimized in a significant manner. According to section 7 of the Clayton Act, “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, is declared to be illegal”. In the context of this case, the first indictment is being brought in under Section 4 of the Clayton Act, where it is stated, that, "any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefore in any district court of the United States ... and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee." The idea therefore is that the plaintiffs are correct in seeking damages and injunctive relief. The private right of action for damages under Section 7 stems from Section 4(a) of the Act, which provides for treble damages. Similarly the private right to injunctive relief under Section 7 as well as other antitrust violations is governed by section 16 of the Act. 1. In the context of this case, the first defense would be that it is only the products that were bought within four years of filing the injunction that would be held illegible for action, given the provisions of the Clayton Act. Here as well the burden of proof would fall on the shoulders of the plaintiffs given the fact that they would need to prove first and foremost that even during the time that the product was bought by them that there was the price fixing already taking place at the other end. Also the amount o damages would need to be verified for them to be legitimate for damages. 2. The first thing that could be remembered here is that the damages done need to be fixed in an exact manner. This would mean in the first case therefore there could be no action, unless every single defendant who has over the years purchased a sweetener be bale to produce a receipt for the purchase, because in the absence of this receipt, there can be no sure shot way of deciding upon the amount of damage that was suffered by the plaintiff. Proof of damages incolves two steps. Establishment of the fact of damage and the amount of the damage itself. 3. The important thing to remember in this case is that it would only be the ones who were direct purchasers of the price-fixed goods that would be liable to sue for damages. In the context of this case therefore the ones that had purchased the sweetener directly would be liable to bring in a suit of class action for price fixing but those that bought the products in the indirect manner through purchase of the goods that were ultimately created by the manufacturers of sweets and syrups would not be liable to bring in an injunction against SweetCo in this context.   Mergers The Court’s intense focus on market share in horizontal merger decisions has made the definition of relevant markets especially critical in most Section 7 cases. As a result, the Federal Trade Commission and the Department of Justice have established guidelines indicating which mergers will be challenged, under the guidelines the first factors to be considered in determined whether a merger will be challenged is the degree of concentration, the FTC and the DOJ employ what is known s the Herfindahl-Hirshcman Index. The HHI is computed by summing the squares of the percentage market shares of the firms in the relevant market. If the premerger HHI is less than 1,000, then the market is concentrated of the merger is unlikely to be challenged. If the premerger HHI is between 1,000 and 1,800 the industry is moderately concentrated, and the merger will be challenged only if it increases the HHI by 100 points of more. If the HHI is greater than 1800 the market is highly concentrated. In this kind of a market, a merger that produces an increase in the HHI of between 50 and 100 points raises significant competitive concerns. Mergers that produce an increase in the HHI of more than 100 points in a highly concentrated market are deemed likely to enhance market power. In the case of Chicago Bride V US, Chicago Bridge and its US subsidiary of the same name were a company that designed engineered and constructed industrial storage tanks for liquefied natural gas, liquefied petroleum gas (LPG) and liquid atmosphere gases, such as nitrogen, oxygen and argon (UN/LOX) as well as thermal vacuum chambers for testing aerospace satellites. In all these markets Chicago Bridge and the other firm held dominant positions the FTC charged that the company’s acquisition resulted in an undue increase in the company’s market power that would not be constrained by timely entry of new competitors. Keeping this basic index in mind, it would be possible for one to classify the merger in the above mentioned context as a vertical merger. A vertical acquisition is the acquisition of company that either uses a product or service that the acquiring company sells or supplies a product or service that the acquiring company used, an acquisition by a supplier of a customer or potential customer such as the acquisition by a producer or copper of a fabricator of copper wire is a forward vertical integration. The acquisition by a customer of a supplier or potential supplier is a backward vertical integration. Vertical transactions create a potential for market foreclosures to the extent that the producing partner can sell or transfer goods or services to the consuming partner. The supreme Court has identified market foreclosure as the primary vice of a vertical merger, stating more particularly that: [B]y foreclosing the competitors of either party from a segment of the market otherwise open to them, the arrangement may act as a “clog on competition”…which deprive[s] rivals of a fair opportunity to compete”. Since merging companies will not necessarily deal with one another, courts will consider proof that foreclosure will not result from a vertical transaction. Nevertheless, since amended Section 7 is an incipiency statute, other courts find that reasonable probability of foreclosure exists absence clear proof to the contrary. As one court chose to put it: “[I]t would seem patently beyond reason for wholly-owned subsidiary…to go with any regulatory to an outside firm to purchase goods available as well from the parent company]…of nothing else, the requirements of a regular reports from each division to the central office of major purchases surely would act as a rein to keep such purchases y and large within the family”. The share of the market that could be foreclosed as result of any acquisition to competitors of the supplier is viewed as one significant factor in predicting the probably effect of a vertical transaction. But courts have not always measured foreclosure solely in terms of market share percentages; absolute volume in terms of dollars of units also has significance. The second consideration given the fact that the merger in this case is not just vertical but a horizontal merger as well, would be to consider whether the merger would substantially lessen competition or just aid monopoly in the market. The test the court sets forth in such scenarios is to view the merger in the context of its functional purpose. This is to signify whether or not the merger would take place in an industry that was concentrated or fragmented. According to the courts, while “statistics reflecting the shares of the market controlled by the industry are the primary index of market power, further examination of the market could provide the appropriate setting for judging the probable anticompetitive effects of a merger.” In Philadelphia National Bank, the Court announced a simplified test of prima facie illegality in respect of horizontal mergers: “Specifically, we think that a merger which produces a firm controlling an undue percentage share of the relevant market and that results in a significant increase in the concentration of firms on that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects”. In Alcoa the court condemned a horizontal acquisition under amended section 7 where Alcoa had 28 per cent of the market in question and Rome Cable has just 1.3 per cent. The idea is tat that of concentration is already great the importance of preventing even slight increases in concentration and so preserving the possibility of eventual de-concentration is correspondingly great. In the context of the above mentioned case therefore there are high chances that the market would become highly concentrated once the merger took place, amounting to a total market share of over 50 per cent for one player which would make entry of new players relatively difficult. Also, the defense in this case would be that for both firms, the merger more than allowing them to take a dominant share in the market, the idea would be to bring about a substantial reduction in the cost of production, which would in the long run allow a much greater flexibility to the consumer by way of prices. Price fixing agreements: The case in question would be a violation of s1 of the Sherman Act and the constituents if found guilty would be charged for horizontal price fixing. Courts have frequently held that antitrust, price fixing conspiracies by their mature deal with common legal and factual questions about the existence, scope and the effect of the alleged conspiracy. As a result class action petitions concerning price fixing claims are often granted when the plaintiffs are able to demonstrate that the alleged conspiracy had a uniform impact on the plaintiff class [In re Sugar Antitrust Litig., 73 F.R.D. 322, 335 (E.D. Pa. 1976)]. Price fixing is an agreement that is entered into by defendants which tend to hamper competition in the market place by ensuring an increase, reduction, fixing, or stabilization of prices. This is also one of the most serious per se violations of the Sherman Act. The idea in essence is that whether or not the priuces were fixed at a maximum, minimum, the real cost or or the fair market price. It also does not matter under the aegis of the law if fixed price is in itself reasonable. The idea here is simple. If it could be proven that there was in fact an attempt to fix prices between competition aimed at leaving out other members, elimination of competition then this is a violation of s1. All vertical and horizontal price-fixing agreements are per se illegal. These include agreements among sellers in order to establish fix prices on certain services or goods. These agreements also entitle competitors to change their prices in some predefined circumstances. What is noteworthy is that these agreements may be indirect or direct but still remain legal. Thus, a promotion or discount that is tied closely to price cannot be depressed, raised, stabilized, or fixed without a Sherman Act violation. In the context of this case the idea was that prices were fixed at the maximum level and like those that seek to set prices at a minimum level these are held to be illegal as well. In Kiefer-Stewart Co v Joseph E Seagram and Sons the Supreme court said that agreements among competitors to fix maximum resale reprocess of their products no less than those to fix minimum prices cripple the freedom of traders and thus limiting their own judgment according to which they would have liked to sell. The Supreme Court reaffirmed the per se ban on maximum price fixing agreements among competitors in the case of Arizona v Maricopa County Medical Society. The Court rejected arguments that the rule of reason analysis was appropriate because the agreements involving professionals that the judiciary had little experience because the agreements involved professionals that the judiciary had little experience with the healthcare industry and that fixing maximum reimbursements was precompetitive. In the case of Broadcast Music Inc, v. Columbia Broadcasting Systems, Inc the courts again came up with a well articulated economically based standard for deciding whether restrains should be proscribed under per se rules. The test is to determine if restraint in a free market economy actually threatens the proper operation that would otherwise take place. This is to signify whether the practice facially appears to be one that would almost or always tend to decrease output and restrict competition in a specific portion of the market or instead one designed to increase economic efficiency and render markets more rather than less competitive. Interestingly enough in this case, is also applicable the proof of information exchange as a proof of price fixing activities. The party to the act of price fixing used the media as the medium of information exchange. Section 1 has by law been applied to exchanges of price information among competitors, particularly through information exchanges or agreements or trade association activities, to share information are not in themselves illegal per se, but fall under the rule of reason. It is the rule of reason which when applied to information exchanges actually prohibits it from being exercised since it believes that it could have anticompetitive effects in markets or industries where structural characteristics are identical and/ or complex. While an agreement to exchange price information is not itself illegal per se proof that competitors have shared information sometime has served as evidence of a per se illegal conspiracy to fix prices. In United States v Container Corp of America the Court stated that there was an exchange of price with no agreement to a pricing schedule. It held however that the exchanges of information concerning the most recent price charged or quoted among players destabilized prices. In the United States v United States Gypsum Co the court considered whether an exchange of information about the prices currently being offered o specific customers could satisfy the controlling circumstance test and held that good faith belief rather than an absolute certainty was all that was required to satisfy section 2(b) o the Robinson-Patman Act and that interstellar verification was not sufficient to invoke defense. In the context of this case therefore the idea is that a there was an obvious exchange of information through the media which ultimately translated into actual price demarcations with the aim to block the exit of new players in the relevant market. This was a clear per se violation of the s1 of the Sherman act and should be sufficient in booking the guilty parties for at least a trial. Reference: Rolnicki, K., (1998). Managing channels of distribution. AMACOM Div American Mgmt Assn. p218 Congress, (2002). Congressional Record, V. 148, Pt. 9, June 27, 2002 to July 15, 2002. Government Printing Office. p18851 Hartley, J. E., (1999). The rule of reason. American Bar Association.p69 Price fixing. Retrieved January 11, 2011, < http://legal-dictionary.thefreedictionary.com/Price+Fixing> Jacobson, J. M., (2007). Antitrust law developments (sixth). American Bar Association. Pp966-970 Davis, R. G., and Carr, R. W., (1989. Private litigation under section 7 of the Clayton Act: law and policy. American Bar Association. Pp9-11 Cseres, K. J., (2005). Competition law and consumer protection. Kluwer Law International. pp291–293. Pitofsky, Goldschmid and Wood, Trade Regulation, 6th edition, 2010 (University Casebook Series, Foundation Press) Read More