Dimensions: 5.5'' x 8.5'' 202 pages AEI Press  (Washington) Publication Date: December 2001 Hardcover ISBN: 0-8447-4154-X Price: $ 25.00 Add to Cart   Examination Copies

December 2001
The Antitrust Laws: A Primer
By John H. Shenefield and Irwin M. Stelzer

This book explains antitrust policy and the way antitrust laws treat a variety of business practices. It will enable business executives and students to understand the interaction of law and economics in antitrust enforcement and to assess more knowledgeably day-to-day business situations. The new edition features expanded discussions of how the antitrust laws apply to intellectual property and international antitrust enforcement.

Mr. Shenefield, a partner in the Washington, D.C., firm of Morgan, Lewis, and Bockius, is former head of the Antitrust Division of the U.S. Department of Justice. Mr. Stelzer is the director of regulatory policy studies at the Hudson Institute.

The antitrust laws of the United States, sometimes referred to as the "Magna Carta of free enterprise," enable markets to direct resources to the uses that will best satisfy consumers with minimum intervention by the government. When competition, the engine of free enterprise, has been throttled by public or private action, the long arm of government antitrust enforcement must replace the invisible hand of the market as the regulator of dealings among businesses and between businesses and consumers. The several laws and court decisions the authors describe contain the rules of the competitive game in which commercial enterprises are the players, courts are the referees, and consumers are the beneficiaries--if the rules are observed and the contest hard-fought.

The Origins and Objectives of Antitrust

When competition works, the market economy functions well. Numerous sellers, vying for customers, must produce goods and services of sufficient quality and at acceptable prices or be driven from the field. But critics of the market economy focus not on its accomplishments but on situations where competition extinguishes itself or where private participants prevent market forces from operating freely.

When competition fails, the government can either protect the consumer from market abuse by directly regulating the firm exercising monopoly power, or it can restore the vigor of competition through antitrust enforcement that prevents competitors from conspiring to fix prices or individual firms from dominating markets.

Stating the objectives of the antitrust laws is, surprisingly, no simple matter. The language of the statutes, the history of their enactment, and their subsequent interpretation by courts and commentators provide several major themes but no unanimity.

Both the Sherman and the Clayton Acts reflect the objective of enhancing consumer welfare as the primary goal of antitrust. Chicago school commentators make that primary goal exclusive. Yet other commentators emphasize producer welfare, economic fairness, or even society's concern for the diffusion of private power as objectives of the antitrust laws.

The authors' presume that, where social and economic goals conflict, the economic goal has primacy. But establishing the primacy of economic efficiency as the goal of antitrust policy is often the beginning, not the end, of the analysis. The problem of selecting the path to an efficient outcome remains.

The Antitrust Statutes

The oldest of the antitrust laws, the Sherman Act, dates from 1890. It remains the core of the statutory regime. Section I of the act provides that "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." The trigger is a "contract," "combination," or "conspiracy." In the absence of some cooperative conduct or joint action involving at least two separate companies, that provision of the Sherman Act does not apply. It is also clear that the trade restrained must either be in, or at least have an effect on, interstate or foreign commerce.

Section II provides that "every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of felony."

In neither section did Congress provide a list of objectionable acts or conduct and thus left it to lawyers and judges to elaborate the general principles in specific cases.

Because antitrust enforcement seemed to have gotten off to a slow start in the early days of the twentieth century, U.S. political leaders decided that the nation needed further statutory enactments. One result was the Clayton Act of 1914, which prohibited certain conduct whose effect “may be to substantially lessen competition or tend to create a monopoly in any line of commerce.” In 1914 Congress also enacted the Federal Trade Commission Act, which established the FTC as an independent regulatory agency with the power to prohibit unfair competitive practices even though they do not infringe either the letter or the spirit of the antitrust laws.

Today, the federal agencies enforcing the antitrust laws are the Antitrust Division of the Department of Justice, which may bring civil or criminal cases, and the Federal Trade Commission, which may bring civil cases only. State attorneys general, in addition to enforcing state antitrust laws, can in certain circumstances also bring civil lawsuits under the federal antitrust laws. Even private parties can sue in federal court for an injunction to prohibit violations of the antitrust laws and, more important, for triple the damages they claim to have suffered.

How Antitrust Law Analyzes Conduct

Analyzing a firm's conduct under the antitrust laws to determine whether it will produce injury to competition involves defining the relevant market. That includes specifying the product, locating appropriate geographic boundaries in which the competitive battle occurs, and identifying other firms that supply the same product or that could do so with relative ease. The next step is to determine how much of all the business done by firms in the market is controlled by those said to be involved in the restraint of trade. Only then can the government assess the competitive significance of the challenged conduct. Market share, however, is only the beginning of analysis.

Consider the prohibition of monopolization of a relevant market in Section II of the Sherman Act. Monopoly is only a threshold requirement for Section II application, and despite the fact that economists view monopoly power as an economic evil, it is not itself illegal. The practical point even for very successful businessmen is that the antitrust laws do not prohibit tough, honest competition. But if a firm uses restraints of trade or unfair business tactics in an effort to attain monopoly status, for instance, that conduct is attempted monopolization and is illegal under Section II.

For plaintiffs to prove an attempt to monopolize, the courts require evidence of specific intent to destroy competition or to build a monopoly. "Intent" in that context is determined by appraising the firm's competitive tactics within the context of its general behavior. Individual acts and practices, when viewed in isolation, may not appear indicative of anything, harmful or otherwise. But a pattern of actions, each one unexceptionable, may reflect an intent to monopolize.

Section I of the Sherman Act requires a different approach. Because relationships among competitors can so easily evolve into conspiracy that threatens the competitive integrity of the marketplace, they are subject to close scrutiny under the antitrust laws. Of course, a large range of permissible contact between competitors elicits little antitrust concern. Purely social contacts, trade association memberships, and even industrywide lobbying for favorable legislation or regulation are permissible. But any agreements among competitors to control prices or to divide territory, customers, or product markets are illegal per se.

Section I's prohibition of contracts, combinations, and conspiracies in restraint of trade also applies to agreements between suppliers and customers. Of course, on numerous occasions the interests of manufacturers, distributors, and retailers diverge. Manufacturers, for example, may wish to set minimum prices to preserve a product’s upscale appeal, while retailers might wish to use the high-prestige item as a traffic-generating loss leader. As a practical matter, manufacturers can certainly provide price lists or promotional materials that specify a desired price, as long as the dealer remains free to set its own price. But setting minimum or maximum resale prices may well trigger enforcement under Section I of the Sherman Act.

Common-Sense Guidelines for the Executive

The old maxim that an ounce of prevention is worth a pound of cure carries extra authority in antitrust. Where jail terms, hundred-million-dollar damage recoveries, and enormous litigation expenses can follow hard upon a corporate misstep, businesses prefer the monotony of never being a defendant in antitrust litigation.

So how should one organize a compliance program? The first step is for top management to endorse full compliance with the antitrust laws and to impose responsibility--and accountability--firmly on the shoulders of individual supervisors for ensuring that their employees not only participate in the program but take the lessons to heart.

An efficient and effective compliance program must involve an antitrust lawyer. He should be asked to develop a program that includes the issuance of written guidelines, an antitrust presentation to important officials, a review of document retention procedures, and periodic antitrust audits. A written policy statement, accompanied by a primer (such as this book) that can be kept at the employee's desk, gives the compliance program a permanence that one-time oral exposition cannot claim.

It is difficult--not to mention risky in this era of easily provoked malpractice actions--to offer businessmen the assurance of a list of dos and don’ts. Nevertheless, counting on the intelligence of their readers and the availability to them of counsel, the authors offer a few guidelines.

• Do not discuss prices with your competitors. That is a black-and-white area. The enforcement authorities can be counted on to bring a criminal prosecution if they learn that you have met with your competitors to fix prices or any other terms of sale.
• Do not agree with your competitor to stay out of each other’s markets. It may be tempting, but the consequences of the discovery of such behavior are likely to be the same as those for the unearthing of a price-fixing conspiracy.
• Feel free to join trade associations and to participate in activities that do not affect the vigor of your competition with your fellow members. But beware of meetings with competitors that result in discussions of business, customers, costs, and ultimately prices.
• Do not join forces with some of your competitors to the disadvantage of a few others. Some forms of cooperation, such as joint research and development activities, are permissible if their main purpose is to improve efficiency; others, especially those that deny the excluded competitor access to an essential facility, are more questionable.
• Compete vigorously for all the business you can get. Nothing in the antitrust laws penalizes success achieved by lawful methods.
• Do not price below some meaningful measure of cost with the intention of using deep pockets to drive out a competitor or discourage a new entrant. Particularly if you have significant market power, consider the effect on competitors of any planned action. If it is likely to hurt your competitors badly, be sure that such harm is a byproduct of moves that have a sound business justification.
• Feel free to suggest retail prices to dealers but not to coerce them to accept those prices. Guidance and persuasion, yes; agreements or coercion, no.
• Impose such restrictions on distributors and dealers as contribute to your ability to compete with rival brands. You can cancel nonperforming dealers, but keep good records to document their poor performance in case a dispute arises about the circumstances.
• Do not tie the sale of one product to another. Such arrangements might be allowed in a few rare instances but generally fall afoul of the law.
• Use exclusive dealing arrangements if business necessity justifies them. The higher your market share and the longer the term of the agreement, the more important the business justification.
• Charge all customers the same price, unless the cost of serving them varies. But feel free to cut prices to any customer to meet the lower price of a competitor.
• Institute and support a vigorous, custom-designed antitrust compliance program.
• Consult with counsel when specific problems or questionable activities occur. While this book gives you a general overview of the law and the issues, antitrust law is highly fact-specific. There is no substitute for competent advice based on the detailed facts unique to your situation.

Fourth Edition

The fourth edition contains updated material throughout and new material on international antitrust enforcement and on the economic and legal issues associated with intellectual property. The new sections on international antitrust enforcement address the antitrust regimes of member states of the European Union and international merger notification.

We live in a world in which intellectual capital is rapidly replacing physical capital as the cornerstone of the wealth of nations. How the antitrust laws treat intellectual capital, and the right of its owner to use such capital, will increasingly affect the pace of innovation and the increase in productivity that is the source of national wealth. The authors conclude that laws governing intellectual property operate in "uneasy complementarity" with the antitrust laws.