The Per Se Rule v. the Rule of Reason:
Violations under the Sherman Act take one of two forms -- either as a per se violation or as a violation of the rule of reason. Per se violations of the Sherman Act include price fixing, bid-rigging, horizontal customer allocation, and territorial allocation agreements.
A per se violation requires no further inquiry into the practice's actual effect on the market or the intentions of those individuals who engaged in the practice.
All other violations will be analyzed under the Rule of Reason. Established in Standard Oil v. US, the rule of reason establishes that a business practice is illegal if it unreasonably restricts trade. Courts often find intent and motive relevant in predicting future consequences during a Rule of Reason analysis.
In the event that certain business practices have both pro-competitive and anti-competitive elements, the court applies a "totality of the circumstances test" and asks whether the challenged practice promotes or suppresses market competition in net.
Horizontal Agreements v. Vertical Agreements:
Horizontal agreements refer to agreements between competitors. Vertical agreements refer to agreements between manufacturers and distributors.
Under Sherman Act Section 1, any agreements that unreasonably restrains competition is unlawful. All vertical agreements are analyzed under the Rule of Reason.
Horizontal agreements with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce (price-fixing agreements) unreasonably restrain competition per se. However, the court will analyze the case under Rule of Reason if the agreement is ancillary, or the agreement creates a new product. The agreements where the defendants are the sub-companies of the same parent company, or learned professionals (i.e. dentists and lawyers) and leagues are also analyzed under Rule of Reason. Horizontal agreements between competitors to boycott another competitor are illegal per se as well. The exception applies when the defendant is a joint venture. A joint venture can refuse to admit another member unless it has a substantial market share and no legitimate business reasons for the refusal. Labor unions and agreements that are protected by the First Amendment are immune to the Sherman Act.
Companies engaging in parallel conduct without explicit agreements are not always illegal. If the defendant’s behavior is a radical departure from the previous contract, and the risk of a radical departure is so high without a unanimous agreement, the behavior is illegal under antitrust law. On the other hand, if the defendant’s parallel conduct makes business sense without an agreement, then it is considered legal.
Under Sherman Act Section 2, it is illegal to monopolize or attempt to monopolize. In order to prove a violation of the Sherman Act Section 2, the plaintiff needs to show that the defendant has market power in the relative market and the defendant engages in some competitive behaviors. The competitive behaviors include refusing to deal, predatory pricing, tying arrangement, and exclusive dealing.
A company generally does not have a duty to deal with its competitor unless it is required by law. However, in Aspen Skiing v. Aspen Highlands Skiing, the court ruled that the defendant had to deal with the plaintiff because the defendant had previously dealt with the plaintiff and the defendant did not have a justified business reason for its refusal.
Below-cost pricing intended to eliminate specific competitors and reduce overall competition is known as predatory pricing. In Brooke Group Ltd. v. Brown & Williamson Tobacco, the U.S. Supreme Court devised a two-part test to determine if predatory pricing had occurred. First, the plaintiff must establish that the defendant's production costs surpass some measure of cost (usually average market cost). Second, the plaintiff must establish that a "dangerous probability" exists that the defendant will recover the investment in above-cost inputs.
A tying arrangement is an agreement by a party to sell one product only on the condition that the buyer agrees either to buy different products from the seller or not to buy those different products from another seller. The tying arrangements are usually analyzed under Rule of Reason.
An exclusive dealing agreement requires a retailer or distributor to purchase exclusively from the manufacturer. These arrangements make it difficult for new sellers to enter the market and find prospective buyers, thus depressing competition. However, because companies widely use requirements contracts, which essentially are exclusive dealing agreements, for purposes that promote competition, exclusive dealing arrangements are subject only to the rule of reason.
The Clayton Act bars mergers when the effect “may be substantially to lessen competition or to tend to create a monopoly.” Horizontal mergers (mergers among two competitors); vertical mergers (merger among firms that have a buyer-seller relationship) and potential competition mergers (buyer is likely to enter the market and become a potential competitor of the seller) are subject to review by FTC and DOJ.
DOJ published a horizontal merger guideline in 2010. The guideline instructed DOJ to examine unilateral effects and coordination effects of the merger when determining whether the merger should be allowed. The unilateral effect is the effect where the merged company can raise the price profitably by itself. The coordination effect is the effect where the company can collude with its competitors more easily after the merger. In 2020, FTC and DOJ jointly issued new Proposed Vertical Merger Guidelines that proposed a potential safe harbor and clarified some points in the economic analysis of vertical mergers. Proposed Guidelines have closed for comment in February 2020 and it is yet unclear when they will be issued in their final version.
Corporations looking to merge need to file with both the FTC and the DOJ, one of which will “clear” the other to take over the merger review process. In the review process, the “cleared” agency will gain access to non-public information from the parties and other industry participants to make a preliminary determination. The agency will then often make a request for additional information, which often signals the agency’s intent to challenge the proposed merger. Once the agencies decide to challenge the merger, they will often file an action for a preliminary injunction in the federal district court to stop the entire transactions pending an administrative trial on the merits. The review process includes the agency’s review of the current market conditions of the particular industry and the potential pro-competitive or anti-competitive effect of the proposed merger on the industry.
[Last updated in June of 2022 by the Wex Definitions Team]
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