Antitrust
Analysis
Synthesis
for Sherman Act §1 & §2 theories
Prof.
Eric E. Johnson
ericejohnson.com
This
handout is intended to give you a unified to-do list for approaching antitrust
problems under §1 or §2 of the Sherman Act. It also applies, of course, to
cases brought by the FTC using Sherman Act theories – cases that are
technically brought under §5 of the FTC Act.
Important notes regarding how
this document relates to our course:
First, note that this handout does
not cover all the legal doctrine in the course. For example, it does
not cover the enforceability of non-compete agreements under state law (topic
7) or merger review (topic 33). Second, this document is not meant to be a
source for helping you to understand the law. Rather, it is meant to be a road
map for approaching problems in order to apply what you’ve learned. Third, do
not try to make inferences about what will be on the exam from this handout.
The amount of words devoted to a topic in this handout reflects my judgment in
the amount of detail necessary to give you a comprehensible scheme for applying
what you’ve learned. The amount of words devoted to topics in this document is not
intended to correspond to the amount of time devoted to the topic in class or to
correspond to the amount of emphasis a topic will receive on the exam. Thus, a
topic might receive detailed coverage in this document but little emphasis on
the exam.[1]
The semester’s “Exam Prospectus” document will be your source for exam coverage
information.
General approach
Think about multiple restraints. The to-do lists below tend to speak
in the singular about “a” restraint. But in any given fact pattern, there may
be multiple restraints giving rise to multiple theories of a §1 or §2
violation.
Think about multiple causes of
action. Often
the same restraint can be challenged under §1 and §2.
Avoid copy-and-paste. In an essay context, when
dealing with multiple restraints, monopolization theories, multiple claims,
multiple parties, etc., avoid using the copy-and-paste function to duplicate text.
Where appropriate, reference your prior analysis, and then note any differences.
Think about the cases you’ve
read. Federal
antitrust law under the Sherman Act is essentially a common-law endeavor;
therefore be mindful of the power of reasoning by analogy from the cases. Thus,
while this document sets out an analytical structure for approaching problems,
do not view it as a rigid algorithm. Instead, think of it as a way to organize your
common-law reasoning. Insofar as that goes, keep in mind that knowing the facts
of the cases we read will help you to see which ones might be valuable for
reasoning analogically.
Creating
a structure for common-law-type analysis always involves judgment calls and
subjectivity. The scheme I’ve laid out below is just one way to do it. There
are other good approaches. The structure I suggest below for §1 is based very loosely
on U.S. v. Brown University, 5 F.3d
658 (3d Cir. 1993). Another resource for §1 analysis synthesis is pp. 160-162
of United States Antitrust Law and Economics, 3rd Edition, by Einer
Elhauge. While Elhauge’s analytical steps for §1 are somewhat different from
what I’ve set out below, there is a large amount of overlap, and I think it is
helpful to read Elhauge’s explanation alongside the approach outlined here.
What counts as
“procompetitive” and “anticompetitive”?
Much
of §1 and §2 analysis comes down to considering “procompetitive” justifications
and “anticompetitive” effects. There’s no hard-and-fast rule about what counts
as either. But here is some guidance:
Procompetitive
justifications
are ultimately delineated by the examples provided in the cases, but in general:
Increasing consumer choice is procompetitive.[2]
Allowing market options to better conform to consumer choice is procompetitive.[3]
Increasing consumer information should count as procompetitive where it aids consumer
choice. Importantly, increasing the incentives to develop a business can be
procompetitive—even where that’s accomplished through a non-compete agreement that
makes the business more transferrable.[4]
And while “efficient” is not synonymous with “procompetitive” in an economic
sense, efficiencies are very often counted as procompetitive.[5]
But
“procompetitive” is not synonymous with “good.”[6]
Social welfare justifications are liable to be ignored as not being
procompetitive. Recall that National
Society of Professional Engineers rejected safety as a justification for an
agreement to prohibit competitive bidding. But bona fide pursuit of safety,
where unaffected by financial self-interest, can sometimes be shoe-horned into the
“procompetitive” category.[7]
Anitcompetitive
effects are also
ultimately delineated by the examples provided in the cases. But in general, anticompetitive
effects include harming the competitive process and thus decreasing the
capacity for consumer choice to guide market outcomes. It is blackletter law
that merely harming a competitor is not an anticompetitive effect. But as LePage's Inc. v. 3M said, “When a monopolist's actions are
designed to prevent one or more new or potential competitors from gaining a
foothold in the market by exclusionary, i.e.
predatory, conduct, its success in that goal is not only injurious to the
potential competitor but also to competition in general.”
§1 violation
A
violation of §1 of the Sherman Act requires the plaintiff to prove that (1) The
defendant was part of an agreement or concerted action that (2) has
unreasonably restrained trade (3) with an effect on interstate commerce.
Element (1) is: The defendant was part of an
agreement or concerted action.
Analyze:
Was there an agreement or concerted action?
Often
this is an easy question. Sometimes, however, it is a difficult issue; if so apply
the appropriate analysis.
Are the defendants, purported to have agreed with one another, separate
entities?
·
Consider
whether there is a wholly-owned subsidiary relationship that excludes a §1
agreement.
·
Apply
American Needle’s test as appropriate
concerning whether there are “independent centers of decisionmaking.”
Is there direct evidence of an agreement?
·
Note
that in some cases, such as Fashion
Originators Guild, Northwest Stationers, and NCAA v. OU, there are out-in-the-open associations with bylaws and
so on, making this part easy. In some cases, the parties to the agreement may
try to keep the agreement secret, but wiretaps or subpoenaed documents may
provide direct evidence.
If there is no direct evidence, can an agreement be inferred?
·
Apply
the teachings of Bell Atlantic v.
Twombly.
·
Apply
the economic sense test. Consider plus factors.
Element (2) is: The action constitutes an unreasonable
restraint of trade. For a restraint to be “unreasonable,” it is either per-se
illegal, condemned under “quick look” analysis, or is found unreasonable via
rule-of-reason analysis. There are many structures one could use to facilitate
a complete analysis of this element. But the following structure/order-of-doing-things
should help you to bring all of the relevant law to bear.
Can the challenged restraint be characterized as per-se illegal?
With
per-se treatment, it’s all about categorization. Once the restraint (a/k/a
action or agreement) has been categorized as per-se unlawful, then:
·
there’s
no need to determine whether the defendant has market power
·
there’s
no need for empirical[8]
evidence of anticompetitive effect
To
determine whether the restraint can be characterized as per-se illegal, ask
these questions (in blue) and subquestions (in green):
Is there a restraint that falls under one of these per-se
categories?
Note:
Your analysis may benefit from analogizing to one or more particular cases we
read.
· horizontal price
fixing
o
Recall
that Palmer v. BRG used a
purpose-and-effect test: “a combination formed for the purpose and with the
effect of raising, depressing, fixing, pegging, or stabilizing … price … is
illegal per se.”[9]
· horizontal output
restriction
· horizontal market
division
à if NO, then
go down to the next blue question, about group boycotts.
à if YES, then
that’s not the end of the story, go on to analyze:
Is the restraint reasonably necessary to advance procompetitive
purposes of a productive business collaboration?
Again,
your analysis may benefit from analogizing to one or more particular cases we read.
à if YES, then you are headed to quick-look or rule-of-reason
analysis. But before you go there, it may nonetheless make sense to consider
the next questions …
à if NO, then
go on to ask …
Will the defendants get a break from
per-se treatment because of who they are?
Once
again, analogizing to cases we read is key. We know that professionals can
sometimes get rule-of-reason treatment (e.g., California Dental), but not always (e.g., Maricopa). And we know universities can sometimes be given
rule-of-reason treatment even with what looks like output caps or price fixing
(NCAA v. OU; Brown University).
à if NO, then the restraint is per-se illegal. The
plaintiff has proved Element 2 (unreasonable restraint) and can go on to
Element 3 (effect on commerce).
à if PROBABLY NO, BUT
ARGUABLE, then
you may wish to engage in some quick-look or rule-of-reason-type analysis,
looking at procompetitive and anticompetitive effects as the facts support.
à if YES, then you are headed to quick-look or
rule-of-reason-type analysis, looking at procompetitive and anticompetitive
effects as the facts support.
Is there a
restraint that qualifies as a group boycott (concerted refusal to deal)?
If so,
whether the restraint gets per-se treatment or rule-of-reason treatment varies.
Consider:
Is there a plausible procompetitive justification?
The whole
point of per-se rules is that procompetitive justifications are inadmissible.
Nevertheless, as we’ve seen time and time again, courts look at these. So, you
should too. In Klor’s the defendant
went down in flames seemingly in large measure because it had no procompetitive
justifications to offer. And in Fashion
Originators Guild the defendant offered procompetitive justifications, and
the court took these seriously, even while ultimately rejecting them.
Is the situation similar to cases that have applied per-se
treatment?
Recall that
Klor’s and Fashion Originators Guild applied per-se treatment. Associated Press has language suggesting
per-se treatment but analysis suggesting rule-of-reason treatment.
The court
in Indiana Dentists synthesized
precedent this way: “[For] the category of restraints classed as group boycotts
… the per se approach has generally
been limited to cases in which firms with market power boycott suppliers or
customers in order to discourage them from doing business with a competitor[.]”[10]
à if YES, then you can predict this restraint is per-se
illegal. The plaintiff has proved Element 2 (unreasonable restraint) and can go
on to Element 3 (effect on commerce). BUT NOTE THAT YOU STILL MAY WANT TO DISCUSS proffered
procompetitive justifications and any empirical evidence of anticompetitive
effects if these are offered in the facts. Courts often discuss these even in
the course of disposing of a case on a per-se basis, so you might consider the
usefulness of doing so as well.
à if PROBABLY YES,
BUT ARGUABLE, then
you may wish to engage in some quick-look or rule-of-reason-type analysis,
looking at procompetitive and anticompetitive effects as the facts support.
à if NO, then
go on to ask …
Is the situation similar to cases that have refused to apply per-se
treatment?
Recall
that Northwest Stationers applied
rule-of-reason treatment and Associated
Press used analysis that looked a lot like rule-of-reason treatment.
à if YES, then you can predict this restraint will not
be considered per-se illegal. For this thread of analysis you will be going to
quick-look or rule-of-reason analysis.
Is the restraint tying?
à if YES, then
tying gets its own analysis. Apply the analysis for tying, which was covered
under the vertical-restraints portion of the course and is found later in this
document under §2 monopolization analysis.
Is the restraint plausibly justified as fairly within the reward
provided by an intellectual property entitlement?
à if YES, then
analyze in accordance with General
Electric, New Wrinkle, Actavis, In Re
Humira, and Microsoft.
Note
that General Electric appears to
create a rule of almost per se legality for patent license restrictions — and
this holds at least in facts similar to that case. But New Wrinkle shows there’s a limit — you can’t use weak patents
as an excuse to fix prices. And Actavis
says that buying off patent challengers with reverse-payment settlements is
subject to rule-of-reason scrutiny, and that case signaled that rule-of-reason
scrutiny need not be as full-on as a patent holder might wish. But In Re Humira, albeit currently on
appeal, shows potential limits to the application of Actavis. Recall that Microsoft
rejected copyright as a blanket rationale for avoiding antitrust scrutiny, but
the case did find that the copyright entitlement provided some cover for
allegedly anticompetitive conduct at the extremes.
Might quick-look
rule-of-reason apply?
To vet
this, you might ask:
Does the agreement facially restrain competition such
that the court would be justified in only considering the theoretical
procompetitive justifications and anticompetitive effects without needing to
see empirical evidence?
The idea of
quick-look is that there are some restraints that aren’t among the restricted
set of per-se unlawful restraints but that also aren’t among those restraints
regarded as generally being on the up-and-up, like bona-fide joint ventures.
Think
of it this way:
·
Per-se
treatment is efficient for courts and provides predictability for firms, which
is good. But per-se treatment inhibits courts from considering procompetitive rationales,
which could be bad if taken too far. So we reserve per-se treatment for
categories of restraints so obnoxious we’re sure we’ll have no regrets about
having banned them from our economy.
·
Rule-of-reason
treatment is incredibly laborious for courts, which is bad. And rule-of-reason
litigation is time- and money-intensive for plaintiffs. And that’s not good
either. What’s more, even if a plaintiff goes through all the trouble of
bringing a rule-of-reason case, winning is against long odds. All of this means
it’s really hard for plaintiffs to win rule-of-reason cases. Add this up, and
plaintiffs will often see rule-of-reason litigation as too much work for too
little reward. That means restraints that get rule-of-reason scrutiny under the
law may get no antitrust scrutiny at all in practice.
·
Thus
the courts have made room for an intermediate category — the quick look. These
are restraints that might be
economically beneficial, so the courts don’t want to foreclose their
possibility, yet they are so economically suspect that the courts don’t want
plaintiffs to be discouraged from bringing suit.
·
This
rationale for why we need a quick-look category, when stated this way,
articulates an informal test: Quick-look rule-of-reason treatment is
appropriate for restraints that, while not per-se unlawful, are so
on-their-face troublesome that we want to cut plaintiffs a break.
Is the restraint a group boycott that doesn’t qualify for per-se
treatment?
Group
boycotts that aren’t handled on a per-se-illegal basis tend to be looked at in
a quick-look-type manner (whether the court calls it that or not) — for
instance Associated Press and Northwest Stationers.
Can the restraint at issue be fairly
analogized to a restraint given quick-look treatment in the past?
In National Society of Professional Engineers,
the court didn’t need empirical evidence to decide that a professional
association’s elimination of competitive bidding for engineering work was an
unreasonable restraint of trade. In Indiana
Dentists, the court didn’t need empirical evidence to decide that dentists’
refusal to send x-rays to insurers was an unreasonable restraint of trade. And NCAA v. OU can also be considered to be
a quick-look case.
à IF QUICK-LOOK
APPEARS APPROPRIATE, then …
Engage in quick-look rule-of-reason
analysis.
How do
you do that? Here’s the thing: Quick-look rule-of-reason is not really
different from rule-of-reason. It’s all on a spectrum. The main idea with
quick-look is that it’s truncated. If you think of full-on rule-of-reason
analysis as consisting of five steps (as shown below in the five numbered
questions in blue), then quick-look rule-of-reason can be thought of as just
the first two questions ((1) theoretical anticompetitive effect and (2)
theoretical procompetitive justification).
But
keep in mind that even in quick-look cases, the courts often mention market
power when that evidence is readily available. And they often mention intent
evidence when that evidence presents itself. Remember: “[There’s] always
something of a sliding scale in appraising reasonableness.” (Actavis, quoting others.)
NOTE:
The category of “quick-look” rule of reason is also sometimes called
“abbreviated” rule of reason. And it’s often called nothing at all — various
cases truncate their analysis because restraints are highly suspect, yet the
words “quick look” or “abbreviated” are never incanted.
Engage in rule-of-reason analysis.
The
default is rule-of-reason analysis. Historically, rule-of-reason analysis
preceded the development of the doctrines of per-se illegality and quick-look. Today,
rule-of-reason continues to be the presumed analytical mode for determining
whether a restraint is unreasonable within the meaning of §1.
It is
because rule-of-reason is the default that I recommend you start, above, by eliminating
the applicability of the other modes of analysis. Once you’ve done that, you
know that rule-of-reason analysis is appropriate.
The
basic idea of rule-of-reason analysis is to determine whether the restraint is
anticompetitive. The way to do this is to consider procompetitive
justifications, to consider anticompetitive effects, and to analogize to prior
cases.
To
proceed methodically, the rule-of-reason process can be broken down in a way
that is attentive to orders and burdens of production and proof, as follows:
(1) Can the
plaintiff allege an agreement that has theoretical anticompetitive potential?
This
means some agreement between two entities that has the effect of ordering
economic production and consumption in some way other than would be the outcome
as a matter of a free market driven by the self-interested choices of market
participants.
For
example, suppose dentists ban together and decide not to advertise on the basis
of quality or affordability of dental services, enforcing that decision on each
other (à la California Dental). That
theoretically could lead to different offers of dental services, different
consumption of dental services, and different transactions among dentists and
dental patients than otherwise would have occurred among dentists and dental
patients acting purely according to their own preferences.
(2) Can the defendant articulate a theoretically plausible
procompetitive justification?
Consider
whether the restraint contributes to overall economic efficiency — that
is, in a way that’s more efficient for society, not for the defendant’s
shareholders — through the creation of new choices and transactional
opportunities for consumers. The set of possible theoretical procompetitive
justifications is essentially infinite, but cases we’ve read give you a strong
set of examples to work from.
In
thinking about this question, also consider the existence of less restrictive
alternatives. Even if a defendant can articulate a way in which a restraint
does something procompetitive, if that same something could be achieved with a
less restrictive alternative — providing a smaller or less extensive
restraint on the market — then that suggests the particular restraint at
issue isn’t really procompetitively justified.
(3) Can the plaintiff provide empirical evidence of
anticompetitive effect?
Consider
that:
·
direct
evidence of anticompetitive effect will suffice[11]
·
an
empirical showing of market power can, in the right circumstances, allow an
inference of anticompetitive effect
·
anticompetitive
intent is not necessary, but if shown, anticompetitive intent evidence can
count as evidence of anticompetitive effect
(4) Can the defendant produce empirical evidence of
procompetitive effect?
Confronted
with empirical evidence of anticompetitive effect, the burden is on the
defendant to take its theoretical arguments about procompetitive virtues and
back them up with empirical evidence — showing that the procompetitive
effects are real.
(5) Which outweighs the other — evidence of anticompetitive
effect or evidence of procompetitive effect?
Not many
cases make it this far, but if there are theoretical justifications on both
sides and those are borne out by empirical evidence, then the court has to
weigh the procompetitive against the anticompetitive. On balance, is the
challenged restraint more helpful or harmful for economic efficiency and
consumer protection?
IMPORTANT NOTE ABOUT THE ABOVE STRUCTURE FOR ANALYSIS:
What’s
good about the above structure is that it may help you carefully unpack a §1
case and help you bring to bear on it all you have learned in class and in the
reading, BUT the above structure presents a potential danger of making
§1 analysis seem more regimented and inflexible than it really is.
I urge
you to keep in mind this quote from California
Dental:
“The
truth is that our categories of analysis of anticompetitive effect are less
fixed than terms like ‘per se,’ ‘quick look,’ and ‘rule of reason’ tend to make
them appear. We have recognized, for example, that there is often no bright
line separating per se from Rule of Reason analysis, since considerable inquiry
into market conditions may be required before the application of any so-called
‘per se’ condemnation is justified. Whether the ultimate finding is the product
of a presumption or actual market analysis, the essential inquiry remains the
same – whether or not the challenged restraint enhances competition. There
is always something of a sliding scale in appraising reasonableness[.] … As the
circumstances here demonstrate, there is generally no categorical line to be
drawn between restraints that give rise to an intuitively obvious inference of
anticompetitive effect and those that call for more detailed treatment. What is
required, rather, is an enquiry [appropriate] for the case, looking to the
circumstances, details, and logic of a restraint. [Regarding whether quick-look
is justified,] [t]he object is to see whether the experience of the market has
been so clear, or necessarily will be, that a confident conclusion about the
principal tendency of a restriction will follow from a quick (or at least
quicker) look, in place of a more sedulous one.”
California Dental Assn. v. FTC, 526 U.S. 756, 779-781 (1999)
(internal cites, quotes, ellipses, and brackets omitted).
Element (3) is: There has been an effect on
interstate commerce.
This
often will be so clear it can be easily dispatched with a single sentence.
Sometimes, however, this element can present more of a live issue and will
require some level of nuance to the analysis.
·
Consider whether there is an effect on
“commerce,” as opposed to being purely non-commercial activity.
·
Consider whether the commerce is interstate
(an incredibly low bar).
·
Consider whether commerce in the United
States is affected, as opposed to only outside the country.
Other issues that could affect liability might
include:
·
Jurisdiction issues
·
Remedies
·
Injury,
standing, and limitations on actions
·
Exemptions
and immunities
Consult
your notes as appropriate.
§2 monopolization
A §2 monopolization
claim requires the plaintiff to show “(1) the possession of monopoly power in
[a] relevant market and (2) the willful acquisition or maintenance of that
power as distinguished from growth or development as a consequence of a
superior product, business acumen, or historic accident.” U.S. v. Grinnell Corp (U.S. 1966).
Element (1) is: The defendant has monopoly
power in a relevant market.
Analyze:
MARKET DEFINITION: What is a relevant market?
Note for market
definition:
There could be lots of potential markets, but the plaintiff only has to show
monopoly power in “a” relevant market. That means, for the purpose of analyzing
the defendant’s potential liability, you should be looking for the worst-case
scenario for the defendant: Is there a plausible product market definition and
geographic market definition that portrays the defendant as having monopoly
power?
A market
consists of both a product market and a geographic market. So ask:
What is a relevant product market?
To unpack
the issue of a relevant product market, ask:
What products are reasonably interchangeable by consumers?
If
products are reasonably interchangeable by consumers, then they are part of the
same product market. For example: If consumers would reasonably substitute steel
tent spikes for aluminum tent spikes, then they are part of the same product
market. If consumers would reasonably substitute Maine lowbush blueberries for Michigan
highbush blueberries, then they are part of the same product market. If not,
then not.
Consider cross-price elasticity of demand.
You
may or may not have information from the facts relevant to cross-price elasticity
of demand (a/k/a “cross-elasticity of demand”). But if you do, you should consider
the implications for market definition.
Recall
that cross-price elasticity of demand looks at the effect of a price increase
on one good on the demand for the other good.
Cross-elasticity
of demand can allow various inferences:
·
You
can conclude from low cross-price elasticities of demand that there are
separate markets for the two goods. (This holds whether current prices are at competitive
levels or not.)
·
You
can conclude from a high cross-price elasticity of demand at competitive price
levels that there’s a single market encompassing the two goods. (That is, if
raising prices on one good causes consumers to flee to the other good, then the
two goods appear to be reasonably interchangeable by consumers and thus may be
considered to be part of the same product market.)
o
But
be aware that buyer-substitution rates for a competitive market aren’t
observable in the real world if the real-world market is non-competitive — i.e.,
market power is already being brought to bear.
·
You
cannot conclude from high cross-price elasticity of demand at monopoly
price levels that there’s a single market encompassing two goods.
o
To reason otherwise is to fall into the Cellophane Trap!
If raising
prices by the would-be monopolist causes buyers to flee to substitutes, that
doesn’t mean the would-be monopolist isn’t a monopolist. It might be that we
have a monopolist who is already producing at the profit-maximizing output
level so as to fetch the profit-maximizing supracompetitive price.
Consider the Hypothetical Monopolist Test.
The
Hypothetical Monopolist Test comes from the 2010 Horizontal Merger Guidelines. You
may or may not have information from the facts that allows you to do the Hypothetical
Monopolist Test. But if you do have the information, the Hypothetical
Monopolist Test can help with market definition.
Under the
Hypothetical Monopolist Test, a “relevant product market” is one where, if one
firm were the only seller of a product (that firm being the hypothetical
monopolist), the firm would be able to impose a small but significant and
non-transitory increase in price (SSNIP). For these purposes, “small but
significant” is quantified as at least 5%.
What is a relevant geographic market?
A
geographical market is the geographical area in which customers are willing to travel
outward to find substitutes in response to an increase in price or in which
suppliers are willing to travel inward in response to an increase in price.
The substance
of the analysis for geography is the same as for products, above.
Once
you have a relevant market, then you should proceed to …
MONOPOLY POWER: Given the market as
defined, does the defendant have monopoly power?
Monopoly
power is the power to control prices and exclude competition. Essentially,
monopoly power is more market power than mere “market power.”
Determining
monopoly power is mostly about market share, but also relevant are barriers to
entry, capacity constraints, changing consumer demand, and demand elasticity.
So start
here:
Look at the market share in the relevant market.
Assuming
you have a percentage to work with, compare it to signposts or flags that have
been planted by prior cases:[12]
·
90%
is enough for monopoly power (L. Hand, in Alcoa)
·
87%
“leaves no doubt” that monopoly power exists
·
80-95%
is enough for the plaintiff to survive summary judgment on the monopoly power
issue
·
75%
means monopoly power “may be assumed”
·
min.
70-80% is what lower courts “generally require” (DOJ ’08 report that was
withdrawn in ’09)
·
>66%
might be monopoly power
·
50%
is the bare minimum for monopoly power for many lower courts
·
30%
is insufficient even for §1 market power
Consider barriers to entry.
Barriers
to entry are things that stop market entrants. If there are no barriers to
entry, then it is easy for competitors to spring up. Even if a firm has 100%
market share, there will be no monopoly power if there are no barriers to
entry.
Examples
of barriers to entry include:
·
huge
fixed costs, start-up costs
·
government
regulations
·
patents
or other IP rights
·
lack
of access to needed inputs or essential resources
·
network
effects
Consider whether future capacity
constraints, changing consumer demand, or demand elasticity might indicate a
lack of monopoly power.
Future capacity constraints: If an alleged monopolist won’t
be able to produce in the future, then it may have no monopoly power even
though it has overwhelming market share. An example would be a coal company
that already has sales commitments covering all of its coal reserves.
Changing consumer demand: If consumers no longer want the
alleged monopolist’s product going forward, then past dominant market share may
not be probative.
Demand elasticity: Even with overwhelming market
share, if consumers can very easily do without the product, then an alleged
monopolist may not have monopoly power.
Element (2) is: Anticompetitive conduct.
Note that
monopolization claims proceed under a rule-of-reason sort of analysis, but
courts tend not to use the label “rule of reason” for §2 claims like they do
for §1 claims.
There is
general language about what constitutes anticompetitive conduct, such as Grinnell’s phrasing (“the willful
acquisition or maintenance of [monopoly] power as distinguished from growth or
development as a consequence of a superior product, business acumen, or
historic accident”) or Microsoft’s five
principles. But these standards provide little guidance that is useful in
analyzing particularized sets of facts. Far more important are specific
standards developed in connection with specific patterns of conduct (e.g.,
predatory pricing, refusals to deal, exclusive dealing, tying). Also of great
value is reasoning by analogy from cases we’ve read.
Thus, to approach
the anticompetitive conduct element systematically, consider:
Is there predatory pricing that qualifies as anticompetitive?
Keep in
mind that the bar for a predatory pricing case under §2 is high, and a
plaintiff will have to overcome the stringent standards set out in Brooke Group to succeed. Reason from, as
appropriate, Brooke Group.
Is there a refusal to deal that qualifies as anticompetitive?
Reason
from, as appropriate, Aspen Skiing,
Lorain Journal, and Verizon v. Trinko.
Is there exclusive dealing that qualifies as anticompetitive?
Use the
specific analysis for exclusive dealing. In particular, you should consider:
What are the procompetitive justifications for the arrangement?
For
instance: lowering risk to allow for market entry, making efficient
customer-specific investments, etc.
What are the anticompetitive effects
of the arrangement?
For
instance: eliminating competition either by splitting monopoly profits with
vertical partners or taking advantage of collective action problems.[13]
Consider the substantiality of the market share foreclosure
effected by the exclusive dealing arrangement.
Short
of eliminating competitors, the key anticompetitive effect for exclusive
dealing arrangements is foreclosing market share for rivals (Microsoft).
To
gauge the substantiality of market share foreclosure:
Apply the qualitative analysis of Tampa Electric.
“[W]eigh
the probable effect of the contract on the relevant area of effective
competition, taking into account the relative strength of the parties, the
proportionate volume of commerce involved in relation to the total volume of
commerce in the relevant market area, and the probable immediate and future
effects which pre-emption of that share of the market might have on effective
competition therein.” (Tampa Electric)
Consider the size of the market share foreclosed.
Assuming
you have a percentage to work with, compare it to signposts or flags that have
been planted by prior cases:
·
in
general, a minimum of roughly 30-40% of the market must be foreclosed according
to some lower courts
·
foreclosure
24% was unlawful in one case
·
foreclosure
of 38% was lawful in one case
·
foreclosure
of 40% was lawful in one case
Consider
that courts typically require less foreclosure for §2 than for §1.
·
foreclosure
of roughly 40-50% is usually needed for §1.
·
foreclosure
of less is needed for §2.
Consider the duration of the exclusive dealing arrangement.
Recall
that lower courts have held that exclusive-dealing contracts terminable in less
than a year are presumptively lawful.
Is there tying that qualifies as anticompetitive?
Tying, to
qualify as anticompetitive conduct for monopolization under §2 or as an
unreasonable vertical restraint for §1, has its own analytical structure.
Does the tying arrangement qualify as
per se illegal?[14]
Keep in
mind that “per se illegal” for tying is distinct from the regular per-se
doctrine from §1 for price fixing, output caps, etc.
For
per-se illegal tying, four elements must be met:
There are separate tying and tied products.
This is
determined by consumer demand.
The sale of the tying product is conditioned upon the sale of
the tied product or the buyer is otherwise coerced to purchase the tied product
with the tying product.
Coercion
includes terms that make it economically infeasible not to purchase the tied
product.
There is sufficient economic/market power.
Relevant
is the market power the defendant has in the tying product. Alternatively,
courts may focus on the defendant’s power to force upon the buyer a choice the
buyer wouldn’t make in a competitive market.
A substantial amount of commerce is affected.
This
generally requires only more than a de minimis amount. Just $60,800 was found
not insubstantial in one case.
Even if the tying arrangement qualifies as per se illegal, is
there a business justification that forms a defense?
For
instance, ensuring quality for a new product launch.
Also
consider that Microsoft held that the
per-se rule shouldn’t apply to platform software because of the
novel/innovative nature of the industry.
If the tying arrangement does not qualify as per-se illegal,
does it qualify as unreasonable under rule-of-reason treatment?
There’s
always the ability to challenge a tying arrangement under rule-of-reason analysis
– even if the defendant escapes per-se illegality.
Is there other conduct that plausibly qualifies as willfully
acquiring or maintaining a monopoly?
Keep in
mind there’s no exclusive list of specific kinds of anticompetitive conduct.
That is to say, conduct can still be anticompetitive if it doesn’t fall into
one of the above categories.
Thus,
consider:
·
Grinnell’s phrasing (“the willful
acquisition or maintenance of [monopoly] power as distinguished from growth or
development as a consequence of a superior product, business acumen, or
historic accident”)
·
Microsoft’s five principles
·
Myriad
examples from United Shoe
·
Bundling
discounts and rebates, as in LePage’s v.
3M
·
Reasoning
by analogy from cases we’ve read or went over
§2 attempted monopolization
A claim of
attempted monopolization under §2 requires the plaintiff to show:
(1)
Defendant has engaged in predatory or anticompetitive conduct with
(2) a
specific intent to monopolize and
(3) a dangerous
probability of achieving monopoly power.
Element (1) is: The defendant has engaged in
predatory or anticompetitive conduct.
Here you
can use the same analysis as for anticompetitive conduct under a §2
monopolization claim.
Element (2) is: A specific intent to
monopolize.
With
monopolization, intent requires only a deliberate and purposeful act –
something that’s not an accident. Attempted monopolization requires more,
“specific intent,” but it still can be inferred from conduct.
Element (3) is: A dangerous probability of
achieving monopoly power.
Relevant
to this element is the monopoly power analysis used under a §2 monopolization
claim; that is, there needs to be some analysis of market definition, market
share, barriers to entry, etc., that suggests the defendant could pull off the
attainment of a monopoly if the anticompetitive conduct is successful. You can
analogize to Lorain Journal. Note that
even though “a dangerous probability of success” is required, it is not a
defense that the plan would have been impossible to execute (American Airlines).
[1] In a couple of places I couldn’t
help myself, and I added a footnote to memorialize the fact that in 2021 we did
not spend much time on something. But I have not sought to make such notations systematically
throughout this document.
[2] See U.S. v. Brown Univ., 5 F.3d 658, 675 [Elhauge 3d ed., p. 169] (3d Cir. 1993) (“Enhancement of
consumer choice is a traditional objective of the antitrust laws and has also
been acknowledged as a procompetitive benefit.”).
[3] Elhauge 3d ed., p. 136: “Agreements that improve a market option
can thus be procompetitive even though they reduce the number of market
options, as long as the improved market option itself is itself subject to a
competitive process because it competes with other firms for the business of
buyers in a way that leaves those buyers better off according to their own
market judgments.”
[4] See Nat'l Soc. of Pro. Engineers v. United States, 435 U.S. 679,
688–89 [Elhauge 3d ed., p. 130] (1978) (“Mitchel involved the enforceability of a promise by the seller of a
bakery that he would not compete with the purchaser of his business. The
covenant was for a limited time and applied only to the area in which the
bakery had operated. ... The long-run benefit of enhancing the marketability of
the business itself—and thereby providing incentives to develop such an
enterprise—outweighed the temporary and limited loss of competition.”).
[5] See F.T.C. v. Indiana Fed'n of Dentists, 476 U.S. 447, 459 [Elhauge
3d ed., p. 138] (1986) (listing as an example of a “procompetitive
virtue” the “creation of efficiencies in the operation of a market or the provision
of goods and services”).
[6] See Nat'l Soc. of Pro. Engineers v. United States, 435 U.S. 679,
691 [Elhauge
3d ed., p. 131] (1978) (“[T]he inquiry mandated by the Rule of Reason
is whether the challenged agreement is one that promotes competition or one
that suppresses competition.”).
[7] See Elhauge 3d ed., p. 142 discussing
Allied Tube (U.S. 1988).
[8] When the word “empirical” is
used in this context, it means real-world,
observed, or shown via experience.
Empirical does not necessarily mean sophisticated statistical treatment – such
as academic economists might bring to bear. Empirical evidence of anticompetitive
effects could be the observation that after a competitor was eliminated, prices
went up. In this way, empirical evidence is distinguished from theoretical
reasoning – making judgments about what is likely on the basis of economic
reasoning.
[9] Palmer v. BRG, 498 U.S. 46, 48 [Elhauge
3d ed., p. 102] (1990) (quoting Socony-Vacuum).
[10] FTC v. Indiana Fed'n of Dentists,
476 U.S. 447, 458 [Elhauge 3d ed., p. 137] (1986).
[11] Note that where there’s
anticompetitive effect, this obviates the need to look into market power. See FTC v. Indiana Fed’n of Dentists,
476 U.S. 447, 460-61 [Elhauge 3d ed., pp. 138-139] (1986)
(“Since the purpose of the inquiries into market definition and market power is
to determine whether an arrangement has the potential for genuine adverse
effects on competition, ‘proof of actual detrimental effects, such as a
reduction of output,’ can obviate the need for an inquiry into market power,
which is but a ‘surrogate for detrimental effects.’ P. Areeda, Antitrust Law ¶
1511, p. 429 (1986)”)).
[12] This list comes from Elhague (3d
ed.) at p. 226.
[13] In 2021 we did not spend a lot
of time on this, but we talked about it a little bit in the abstract and in
relation to G Nova.
[14] In 2021 we did not spend much time
on per-se tying analysis—mostly it was in covered cursorily in the slides.