Origin and Purpose of the Antitrust Laws - Assignment Example

U.S.A. Antitrust Law I am required to assess whether NATLA has reached any per se illegal agreement under section 1 of the Sherman Act, and discuss if on the contrary, NATLA has reached any unreasonable agreements under the rule of reason. To do this, we need to understand the background and content of the Sherman Act, both per se illegal rule and the rule of reason provisions. In doing so, we will also review the origin and purpose of the antitrust laws. The American history before enactment of antitrust legislation saw an increased formation of large trade firms and corporations that covered their trade identities regarding their suspicious activities through formation of trusts. Since these activities were majorly anticompetitive, there was good reason to come up with laws to check them to secure free market operations. This led to development of the Sherman Act. The antitrust laws were formulated with the main reason to put anticompetitive practices by business owners or sellers in check. This was to allow the markets operate free from unfair monopoly influence by few individuals or groups at the expense of free market competition benefits. Established in 1980, the Sherman Act required total commitment from business people at all levels including the private and public sector stakeholders. Enforcement of the antitrust laws was a responsibility of the Federal government. Thus failure by the sellers to observe the antitrust legislation would attract due punishment in line with the provisions of the law. The enacting of antitrust legislation served to prevent rise of new business cartels and anticompetitive practices in the market. The major aim was to lay and preserve a level competing ground in the market and not to care for direct business competitors, 'Spectrum Sports, Inc. v. McQuillan', 506 U.S. 447, 458 (Supreme Court 1993). In order to apply the Sherman Act in responding to the question, a logical starting point is to understand what the provisions of the act contain and how they are supposed to be legally enforced inline with the reasons for which the laws were put up. For the purpose of this paper, we concentrate on sections 1 & 2 provisions. Section 1 provide; “whenever trade rivals agree to team up, scheme or connive to stand in the way of normal market functioning between states or with foreign nations, they shall be guilty and liable to punishment by fine and/or imprisonment”, (15 U.S.C. ch.1). This was to put a check on every activity or resources deployed with motive to restrict competitive market operation. Section 2 provide; “Engaging in any anticompetitive practice, or trying to take part in it with another person(s) with intention to limit free business relations between states, or with other nations amounts to a felony and thus subjects the law breaker to punishment by fine and/or imprisonment”, (15.USC. ch.2). Section 2 helps put a stop to any anticompetitive practice based outputs. Clayton and Robinson developed other sets of legislations to complement the initial provisions of the Sherman Act. Clayton felt that there was need to include laws to govern and guide mergers and acquisitions. This was aimed to mitigate restraint effects and price discrimination with reference to buyers. On the other hand, Robinson provided for inclusion of legislation to check attempts by manufacturers to undermine those who they considered to be possible distributors. In the next section, we look at elements of violation associated with each of the sections above. Section 1 is considered to be violated where there is an agreement that causes unreasonable trading restraints, and therefore interfering with the flow of business between states. Richter Concrete Corp, vs. Hilltop Basic Resources Inc.547 F. Supp. 893, 917 (S.D. Ohio 1981). Section 2 is considered to be violated whenever it is established that a seller has knowingly, unfairly acquired and maintains absolute market power, thus restricting free competition. If however, such market power has resulted from regular business growth following natural competitive advantage enjoyed by the seller, section 2 shall not have been contravened. United States v. Grinnell Corp., 384 U.S. 563, 570-71, 16 L. Ed. 2d 778, 86 S. Ct. 1698 (1966). In the next section, we discuss what constitutes per se illegal (a per se violation) and the rule of reason. As stated in the Sherman Act above, the illegal restraints comprise only those specified to be unreasonable. Therefore, per se illegal acts must be precisely ‘unreasonable’ beyond doubt such that there can be no need to further inquire into them. For instance, there can be no defenses for acts that are expressly illegal as a mater of law. There is no need to consider the original intentions and motives of an action. It is necessary to note that per se violations are associated with actions whose consequences do not have a reverse mechanism. Hence it is vital to consider if for example a particular act will cause irreversible price increase, and/or if the action is likely to lock up competition. Per se violations are common and almost always occur where there is practice of fixing prices, market or customers allocation, and where there is resolute refusal to pact. Unlike per se rule, the rule of reason puts into consideration the underlying motives and likely results of individual cases. It examines carefully all circumstances and details of facts and how such can affect market activity. For the rule of reason to apply, it is necessary to assess if the agreement has the effect to suppress prices, if there can be observed or perceived a justified reason for the restraint and more important, evaluate the possible impact of the restraint on market competition. The foregoing theoretical background review brings us back to analysis of the dispute between Midwest Truck Leasing (MTL) and the North American Truck Leasing Association (NATLA). Under the circumstances as described for this case, NATLA should be sued and rule of reason applied to conduct a balancing test. This is because I don’t find NATLA’s behavior to strictly meet the elements of per se violation. I can’t state for a fact that there was an agreement. More so, NATLA has not even attempted to practice price fixing. Even if the members of NATLA are required to service and repair trucks of other members, we have been told that NATLA does not regulate the price for these services. However, NATLA must still be sued and rule of reason used to weigh the situation because of imposing location and non affiliation restrictions to member companies with aim to completely and unreasonably restrict over- the-road competition between them. The original necessity to form NATLA was to establish a mechanism which would enable its members to let out trucks over-the-road and on full-service and compete with other National truck leasing companies who owned service depots all over the U.S. When NATLA therefore allows her members to start up outlets in different names in unauthorized locations, and on the other hand refuse to provide reciprocal service to the trucks that would be rented under such names indicates that NATLA is aiming to restrict competition. NATLA’s intention was to make it difficult if not impossible, opening of such new companies. From the description, we know that whichever way, if a NATLA member opens a new outlet under a different name, licensed by another truck-leasing enterprise that operates on full-service mode like NATLA, there will be a violation of the NATLA rules and a possible risk of expulsion even if the member would be willing to forfeit the reciprocal service advantage. The next question requires that I discuss what the relevant market analysis would be Under Sherman 2 in the case described with relation to Dyco with the assumption that Dyco’s production and distribution costs are not significantly different from those of X, Y, and Z. I will therefore discuss if Dyco is likely to have market power and monopoly in the circumstances. Sherman 2 was enacted to curb upcoming of business cartels that would have the effect of monopolizing the market. Such is monopoly that results from collusion activity (conspiracy) to restrain free market competition. Sometimes, there are those monopolies that are allowed by government to operate whereas other monopolies arise as a result of fair competition. These two are not illegal and Sherman 2 does not affect them, (Pitofsky, 2010). Where a seller is be able to control its prices, such that he can increase the prices beyond the normal market price at any given time, he would be considered to have market power. On the other hand, if the seller were able to control both completion and market price, He would be said to have monopoly power. These are the major elements to look for under Sherman 2 evaluations and are similar but not the same. Big market share by a company is also a factor that is considered for Sherman 2 analysis. Finally, it has to be assessed if there are barriers to free entry and/or exit in the market. To apply the foregoing discussion to Dyco’s case, we can not establish any anticompetitive behavior by Dyco Company. From the case facts, Dyco is having pricing troubles and is not therefore in position to regulate her product prices independently. Given that X, Y, and Z have the same production and distribution costs and are substitute products to orange 100, Dyco can only make a price decision favoring all the parties. There has to be consultation. It is difficult for Dyco to monopolize the market given the fact that 80% of Dyco’s sales are handled strictly through independent jobbers and distributors of agricultural chemicals. From the case facts, there are no barriers to entry into the market. Next I consider market analysis for Dyco company with assumption that her production cost per unit of coloring potency are substantially lower than those of X,Y and Z. I wish to reiterate that the market analysis will not be the same as above. It will change because the situation too has changed and the competing ground is no longer level. Dyco’s low costs of coloring potency would place her at a better position to influence price decision in the market. Dyco will be able for instance to charge low prices without necessarily incurring losses, and without regard for what the effect will be to X, Y and Z. If they respond by leaving the market due to unsustainable losses, Dyco will be able to raise her prices beyond that which would be charged in the competitive market situation. If entry into the industry is difficult, Dyco will under such circumstances remain dominant and enjoy monopoly power. The third part of this question requires that I consider whether Dyco has monopoly power under either of the two cases above. Under the first case, one in which the production and distribution costs of Dyco are the same with those of X, Y, and Z, Dyco does not possess any monopoly and is not able to create any given the interdependence in decision making regarding price. Though one of Dyco’s products orange 100 is the only product that is preferred for use in manufacturing and producing photographic plates for commercial photographers, this does not give Dyco monopoly power because the price of this product can not be raised above the free market price. However, in the second case in which Dyco’s production and distribution costs for coloring potency are substantially lower than those of X, Y and Z, Dyco is likely to have monopoly power due to reason that it can reduce her prices without making losses and manage to gain market power, eventually sending off her competitors. Dyco can later increase the prices to a level high above those that would be charged in the competitive market. If entry into the industry is not easy, Dyco will have absolute market dominance Being the general counsel for litigation and antitrust at Sweet Co, I am required to prepare a litigation plan detailing the company’s possible actions and defenses to the lawsuits regarding the three lawsuits described against Sweet Co, analyze the details of the case facts and advise what I believe the Court would rule. My approach to this assignment is to first discuss the background information relating to civil law suits and enforcement. The U.S antitrust laws are enforcement takes several forms as follows: Civil law suits can be filed in Court by either the federal trade commission or the Federal government through the antitrust division of the US department of justice. Apart from these, the state Attorneys general have authority to file suits to enforce state and federal antitrust laws. Thirdly, antitrust laws can also be enforced through private civil suits filed by individuals. This will be of our primary interest in responding to this particular question. A private civil suit may be brought either in state or federal Court. The remedy that has been unanimously agreed to in both the state and federal Courts is to impose three times against the law offenders. This means that if a business person(s) violates the antitrust laws, and is found guilty by the jury to have caused a $5000 overcharge to the consumer, the business will be required by the law to compensate treble damages to the injured consumer. The consumer will be awarded triple the amount, i.e. $15000. The underlying reason for this remedy was to promote culture of private civil suits hence the people are encouraged to assume the role of "private attorneys general”. An early example of a case in which the US Supreme Court applied the option of treble damages compensation to private civil suits was that of the Standard Oil Company. It was observed that every time antitrust violation occur, the free market competition mechanism as was envisaged by Congress suffer significantly. It is clear that for free enterprise to exist, there must be in place both competition laws and strong competition. Despite fact that there were other possible remedies in place to apply, Congress was reluctant to do so. Thus individual suits were allowed by Congress and treble damages awarded to litigants so that people would be able to act as private attorneys general, Hawaii v. Standard Oil Co. of Cal., 405 U.S. 251, 262 (1972). Applying the foregoing discussion to the case in question, we need to understand the concept of class representation since it features in the three private civil suits as described. This is describes a situation where a suit is filed by an individual, group of individuals or a company, to represent a larger group of persons injured in the same manner therefore filling same legal claim. It is common where either the cost of filling the suits individually is unaffordable or where it is complex to deal with the suit individually. Hence a class representative is handy in such case to exercise responsibility of informing the Court on matters of the case on behalf of the group. Group lawyer(s) gives legal guidance to the class representative while responding to any Court inquiries. Except where the courts may sometimes enter order incentive awards to the class representative, the class representative understands that he acts to represent group to which he also belong hence his own compensation is same as that of the group. From the case facts, I believe the Court will rule that Sweet co. is guilty for involvement in a worldwide conspiracy to fix prices of artificial sweeteners. As stated in the case, a similar case determined in Court earlier found that Sweet Co. was guilty and was fined $250 million. Sweet Co. will be ordered to award treble damages with respect to all the three cases described against it by the drink manufacturers and the consumers of sweet stuff in both the federal court and state law court. As the Attorney in the Antitrust Bureau of the Tazland Attorney General’s Office, I am required to evaluate the proposed merger under the Horizontal Merger Guidelines as well as under existing United States Supreme Court decisions and Include the best arguments which I believe the State of Tazland could make to support its challenge of the proposed transaction, and the possibility that the challenge will succeed at least in the preliminary injunction stage. Before embarking to this question, let us review the merger guidelines concept. Merger guidelines were established in 1992 to and mitigate merger associated negative effects, but safeguard mergers that would be potentially neutral and competition friendly. Not all mergers are dangerous to competition. It has been argued that some of the mergers have the intent and ability to enhance competition. It would be irrational to challenge such mergers. Antitrust laws in the U.S require partners to a proposed (intended) merger to notify the Federal Trade Commission and the Department of Justice's Antitrust Division for review of the proposed merger. This is done purposely to check if there is any likely anticompetitive behavior, risky to competition in the market. It takes 15-30 days to perform the review. However, at the end of 30days, the regulators may if necessary ask for extra time to do further review of circumstances in the industry. Merger guidelines were created to lay a foundation upon which assessment of acquisitions and mergers would be done to test the mergers’ probability of jeopardizing the market operations. Some of the general factors which the merger guidelines were to consider in assessing any proposed merger include the chances of a merger to generate market concentration, the ability of a merger to affect entry into the industry and cause anticompetitive behavior, the chances of a merger to result benefits which would not be realized without the merger, indication that one of the partners to the merger is bound to fail without the merger and thus stand to lose her assets in the event that the proposed merger is challenged, (Townley, 2009). The Supreme Court agrees with the merger guidelines position that a merger may not produce or enhance market power or aid its application except when it appreciably leads to higher, well defined and calculated concentration causing a concentrated market. ordinarily if a merger does not significantly increase concentration or do not result in a concentrated market, there will be no sufficient reason for more investigation, Brown Shoe Co. v. United States, 370 US 294 (1962). A common consideration to the merger guidelines is fact that they aim to curb the possibility of any merger to martial or acquire or even further the use of market power. We have stated that market power lies in the ability of a given seller to continually sustain profits over a time frame, through hiking prices beyond competitive market rates. This is a characteristic mainly for sole market player handling a commodity that lack substitutes. But it is also possible that a few firms can coordinate their actions and attain substantial market power especially if such firms hold a bigger share of the product’s sales in the market. Further more, one firm may also benefit from and attain market power by virtue of unilateral conduct, a situation where her decisions can not be influenced by the response of the other firms in the industry. Whichever way attained, market power has the overall effect to either cause resource misallocation, or a transfer of wealth from buyers to sellers. One inherent character of market power which analysts may not be keen enough to consider is where a monopsonist (single buyer) makes use of market power which in this case we can call ‘monopsony power’, to lower the buying price of a commodity below the competitive market price. Merger guidelines identify and check monopsony power in the same way it applies to monopoly power.        It is important that evaluation of any proposed merger be done with due regard to the general circumstances associated with the industry as a whole. Particular issues like the industry’s share holding and distribution, past history of domination and entry barriers if any need be analyzed. It is not likely that a merger can wield sufficient market power in circumstances where entry by other firms into industry is very easy. This is due to reason that the merging firms will not have room to maintain higher prices and enjoy high profits alone. Other firms will quickly join the industry and competition will re-emerge and thwart the monopoly motives of the merger. Ease of entry is usually to be assessed with respect to time, possibility and adequacy factors. It means that an opportune, possible and adequate successfully manages deterrence of the competitive effects of concern hence do not warrant antitrust investigation. Market power is unlikely to be achieved, used or promoted in a merger where the perceived failing partner has no capacity to be able to sustain her financial requirements and succeed to revive operations, and the firm has held in vain, expressed willingness to tender other reasonable options to acquire the assets of the bankrupt firm, a process that would mitigate anticompetitive behavior and keep the firm’s assets in the market. Thus the assets of the weaker firm will be forced out of the market if the merger does not happen. In an industry whose products are relatively similar, and competition is mainly determined by the relative capacities of firms, a merger may exercise unilateral advantage and lower output by increasing product price. This is made possible by the resulting wider market demand especially when the other competitors quit business since they are not able to stand losses. In the case in question, considering theoretical review above, the State of Tazland should challenge the proposed merger. As we have seen in the theory discussion, antitrust laws in the U.S require partners to a proposed (intended) merger to notify the Federal Trade Commission and the Department of Justice's Antitrust Division for review of the proposed merger. This is done purposely to check if there is any likely anticompetitive behavior, risky to competition in the market. It takes 15-30 days to perform the review. However, at the end of 30days, the regulators may if necessary ask for extra time to do further review of circumstances in the industry. I will therefore expect that the partners to the proposed merger in this case have undertaken this procedure and successfully notified the Department of Justice's Antitrust Division. At this point, the State has already carefully weighed information provided and intends to challenge the proposed merger. Just how will the state support her decision to challenge the merger is our next business. From the facts of the case, we need to establish if there is possibility that the merger between GBK and Super will create a substantial market power and generate monopoly power as a result. Indeed this is likely to be the case because the merger between Super and GBK has the immediate effect to increase the combined market share to 55% hence the merged firm will enjoy greater market power. Analysts have argued that where the merger creates a market share of at least 35% to the firms, the firms can take advantage of this to increase prices and reduce output, a practice that is purely monopolistic and anticompetitive in nature. Having said that, the State of Tazland still has better reasons to challenge this proposed merger based on the fact that entry into this industry is quite difficult and if the merger is allowed, the merged firm is likely to gain market power and propagate monopoly power since no new firms will be able to enter the industry in good time given the difficulties associated with getting direct pipeline access, local zoning requirements and the bureaucratic nature of regulatory approvals as described in the case. To further support its decision, the state of Tazland will argue that the merger between GBK and Super has the effect to give forth advanced technical and operation efficiency that could not be ordinarily achieved using any other formula without the merger. For instance, apart from being guaranteed a combined market share of 55% of the total sales of propane in Tazland, their combination will lower joint production and operating costs, enhance capacity utilization of GBK’s storage facility, and ease long-overdue reductions in their respective work forces. The merged unit will be in position to jointly bid for long-term contracts in Tazland as well as in several neighboring states. Although super is the weaker partner to the merger, there is no sufficient reason to belief that it is failing and that it risks losing its assets in the market if the proposed merger does not work. Therefore, the State of Tazland should go ahead and challenge the proposed merger between Super and GBK. As a member of the team assigned to evaluate the facts related to the situation in the small battery industry my role is to determine whether further investigation is warranted, set forth the best arguments in favor of pursuing a complete investigation of this conduct as an antitrust violation, and the best arguments against doing so, indicate whether I find any of the facts provided above to be significant, one way or the other, and explain why, then discuss any significant facts about the conduct of the industry that I don’t have, but will need to complete the evaluation. In order for the Sherman Act to be applied, it has to be proved that there existed some form of agreement, or that it was bound to happen so considering the circumstances of that particular time. Horizontal price fixing is a capital offense in the face of antitrust law. Any agreements by trade rivals (buyers or sellers) pertaining prices for products are per se unlawful regardless of the intentions for pursuing such options. In some rare cases where the Supreme Court finds the decision to be beyond the scope of per se rule, exception is usually permitted, putting to use the rule of reason instead, (Harrington, 2008). Richard Postner argued that each time business rivals behave in a similar manner, and thus pursue a similar course of demeanor which would not customarily be taken in the absence of some prior agreement; it can be deduced that there is conspiracy. Further more, if any considerable information exchange or transactions can be traced to have been carried out by the rival firms, there will be a possibility for an inherent agreement. Thus the Supreme Court has stated that if a particular firm holds any discussions relating to prices and intention to raise the prices and it is found that within a few days, competitors in the industry implement price increase in the manner that was discussed by the former, such is clear evidence for agreement. It is therefore necessary to be cautious and reduce or avoid these kinds of practices, (Posner, 1999). In view of the foregoing theoretical assessment, I suggest that complete investigation be done in the case of the small battery industry so that full facts relating to the case can be established and considered. This is because it is likely that there was a prior agreement to raise the prices since Batteron and Allthere announced similar wholesale price increases (10% for most batteries, 12% for size D), only two days after interview of Durab CEO was reported in the January 24 edition of the Consumer Electronics Daily. This was more of a conspiracy to fix prices and need be investigated. Having considered the circumstances of the small battery industry, one would argue against carrying out an investigation in line with antitrust law, since the actions of these competitors might have been driven by desire to maximize consumer welfare. This concept is also known as Resale Price Maintenance and is recognized by the by law. I do not have sufficient information at hand to determine the motive behind the price increase decision in the small battery industry. As discussed above, the actions of these firms might have been premised on Resale Price Maintenance. I would require such information to inform my analysis of this case. References 15 .U.S.C. ch.1, (2005). 15. U.S.C. ch2, (2004). Brown Shoe Co. v. United States 370 U.S 294 (1962), Harrington, Joseph E. 2008."Antitrust enforcement", The New Palgrave Dictionary of Economics, 2nd Edition. Hawaii v. Standard Oil Co. of Cal 405 U.S. 251, 262 (1972), Pitofsky, Goldschmid and Wood 2010. Trade Regulation, 6th edition, (University Casebook Series), Foundation Press; 6 edition (March 26, 2010). Richard A. Posner, 1999.Antitrust law. University of Chicago Press, 2001 Richter Concrete Corp. v. Hilltop Basic Resources, Inc., 547 F. Supp. 893, 917 (S.D. Ohio 1981) Rosenblum Robert H. 2003.Investment company determination under the 1940 act: exemptions .. Page 339 Spectrum Sports, Inc. v. McQuillan 506 U.S. 447, 458 (Supreme Court 1993). Townley, Chris 2009. Article 81 EC and Public Policy, Hart Publishing. United States v. Grinnell Corp. 384 U.S. 563, 570-71, 16 L. Ed. 2d 778, 86 S. Ct. 1698 (1966). Read More