Executive Summary Of The Antitrust Laws
The scope of federal antitrust regulation is all-pervasive, with virtually every business of significance falling within its reach. With the notorious exception of the Robinson-Patman Act, the relevant statutory provisions are deceptively simple. Each can be set forth on one page, and all are expressed in straightforward language which, at face value, is readily comprehensible even to the uninitiated. More than a century of judicial construction and active governmental and private enforcement have put substantial flesh on the bare-boned statutory texts.
Yet the risk of violation, even if unintentional, is so great that some familiarity with the antitrust mysteries is a sine qua non for the conscientious executive. Accordingly, a brief survey such as this can be useful, if only in alerting management to the fact that a problem of antitrust dimension is present which an attorney should review. It should be noted at the outset, however, that this review takes a conservative approach, since antitrust litigation, even if successful, is expensive and should therefore be avoided when possible. In the last analysis, antitrust turns on the peculiar facts of the given case, and the advice of counsel should invariably be sought.
The General Statutory SchemeThe basic antitrust statutes are few in number: The Sherman Act of 1890; the Clayton Act, first enacted in 1914 and significantly amended in 1936 by the Robinson-Patman Act and in 1950 by the Celler-Kefauver Antimerger Act; and the Federal Trade Commission Act of 1914.
The Sherman Act, which prohibits contracts, combinations, and conspiracies in restraint of trade, and monopolization, includes criminal penalties when enforced by the government. Violation can result in substantial fines and, for individual transgressors, prison terms. In addition, court orders restraining future violations are also available. These provisions are enforced primarily by the Antitrust Division of the Justice Department.
The Clayton Act, which deals with specific types of restraints including exclusive dealing arrangements, tie-in sales, price discrimination, mergers and acquisitions, and interlocking directorates, carries only civil penalties and is enforced jointly by both the Antitrust Division and the Federal Trade Commission, but with the FTC in practice assuming almost total responsibility for the Robinson-Patman Act's strictures against anticompetitive price discrimination.
The Federal Trade Commission Act, administered solely by that agency, is a catch-all enactment which has been construed to include all the prohibitions of the other antitrust laws and, in addition, may be utilized to fill what may appear to be loopholes in the more explicit regulatory statutes.
Both the Antitrust Division and the Federal Trade Commission have broad investigatory powers to uncover antitrust violations. Yet, despite the breadth of this authority, they are subject to constitutional and statutory limitations. It is therefore essential, when contacted by an enforcement agency, to consult counsel at once.
Over and above this awesome panoply of governmental enforcement, the Clayton Act arms a person who can establish that he or she has been injured by virtue of any antitrust violation with the substantial weapons of a private suit in the federal courts for treble the damages sustained plus reasonable attorneys' fees and a court order restraining future violations. In many instances, the specter of substantial liability for treble damages, not to mention the cost of defending such suits, is a far more significant deterrent to antitrust infraction than the threat of criminal sanctions.
Rule of Reason and Per Se OffensesSection 1 of the Sherman Act prohibits "every contract, combination . . . or conspiracy in restraint of trade . . . ." Such a sweeping interdiction, if applied literally, would invalidate practically every commercial arrangement. Accordingly, as early as 1911 the Supreme Court ruled that, despite the all-embracing statutory language, the Sherman Act reached only those trade restraints which are unreasonable. This so-called rule of reason has since been the hallmark of judicial construction of the antitrust laws. Under its aegis, the anticompetitive consequences of a challenged practice are weighed against the business justifications upon which it is predicated and its putative procompetitive impact, and a judgment with respect to its reasonableness is made.
Such an approach has obvious shortcomings. For one thing, reasonableness is an ephemeral concept, and whether a particular course of conduct will ultimately be found to be reasonable is not easy to predict when new business arrangements are contemplated. Moreover, the task of enforcing a regulatory scheme based on such a theory can be staggering. The trial of particular cases often entails a microscopic examination of the entire market involved. In light of these difficulties and the blatantly anticompetitive nature of certain types of conduct, the courts have developed a doctrine of "per se" illegality which conclusively presumes such practices to be unreasonable. In other words, when a per se offense (such as price fixing among competitors) is charged, all the government or the private plaintiff must establish to make out a Section 1 violation is that the defendant has, in fact, engaged in the proscribed practice; illegality follows as a matter of law, no matter how slight the anticompetitive effect, how small the market share of the defendants, or how proper their motives.
Horizontal Restraints Among CompetitorsHorizontal restraints of trade -- that is, concerted actions among entities in actual or potential competition with one another -- have traditionally been considered the most serious of antitrust infractions and constitute that category of violations most susceptible to criminal penalties. The reason for such harsh treatment is plain: The antitrust laws postulate a competitive marketplace in which rival firms compete with respect to prices, products, and services. Any arrangement which runs counter to this axiomatic conduct among competitive entities is accordingly suspect.
Price FixingAntitrust's capital crime is horizontal price fixing. Agreements among competitors with respect to prices for products or services are illegal per se. The prohibition is all-embracing, whoever may be involved and whatever the circumstances. Not only sellers but buyers as well are within the statute's scope. Both large and small companies in all industries, whether booming or depressed, are covered. Even price agreements intended to provide their participants with the countervailing power to meet larger, more powerful competitors are not permitted. Moreover, the reasonableness of the agreed-upon prices is beside the point. Agreements setting maximum prices in inflationary times and those setting minimum prices during depressions are equally prohibited. In short, price fixing, in any shape or form, is deemed anticompetitive and thus unlawful.
What is price fixing? To start with the obvious, competitors may not agree on the actual prices they will charge or pay for a product or service. But this self-evident example is only the beginning. As the Supreme Court has made explicit, horizontal agreements that affect prices are as unlawful as those that actually set them. Competitors may not agree on a price range within which they will compete, on a common list or book price from which discounts are free to vary, or on the discounts themselves. Terms and conditions of sale which indirectly affect price cannot lawfully be the subject of agreement. Nor can competitors act in concert to limit supply in order to drive prices up. Even agreements on common standards may, if entered into for the purpose of affecting price, be violative of the law.
To be sure, a number of Supreme Court decisions have treated certain novel price-affecting arrangements as beyond the scope of the per se rule and, thus, subject to the rule of reason. But those exceptions -- involving, for example, blanket copyright licenses and athletic league agreements -- should not be construed as significantly weakening the fundamental rule prohibiting agreements among competitors which affect price. No agreement with a competitor which affects price is completely free from antitrust risk. And the risk is great: criminal proceedings resulting in fines and possibly imprisonment, followed by claims for treble the damages provable by aggrieved customers.
The element of agreement . Given the broad sweep of the Sherman Act's prohibition of price fixing, the statutory requirement of "contract, combination or conspiracy" becomes crucial. These words mean that there must be an agreement for the statute to apply. But the concept of agreement in the antitrust lexicon is a far cry from the notion as found, for example, in the law of contracts. And, practically speaking, it is as important to avoid conduct which might be construed to evidence agreement as to avoid agreement itself.
To run afoul of Section 1 of the Sherman Act, an agreement need not be in writing and be signed by each of the parties. In fact, it need not be formally entered into at all. It would indeed be rare in this day and age for competitors to draft such an agreement. Rather, the element of agreement is an ultimate fact to be proved, sometimes by direct evidence that the parties agreed, but most often circumstantially -- by inferences logically drawn from all the relevant circumstances.
Thus, whenever competitors follow a similar course of conduct which would not ordinarily be taken in the absence of prior agreement, the possibility is present that an inference of conspiracy will be drawn. To the extent that any substantial contacts among the competing firms have taken place, there is a risk that an agreement will later be found. In fact, the Supreme Court has stated that a discussion of prices and the need for an increase among competitors followed within a few days by a uniform price rise is little less than proof positive of agreement. Accordingly, such contacts should be kept to a bare minimum, if not avoided altogether.
One large manufacturer, having been severely burned by the antitrust laws, instructed its sales personnel to have no contacts -- even personal ones -- with competitors. While this mandate may be somewhat extreme, the conservative course would be to avoid the exchange of any price information with the competition. Competitive price lists should be secured only from customers and should be clearly marked as to their source. If it is necessary to get in touch with a competitor, the purpose and substance of the contact should be recorded. The basic rule is to err on the side of fewer contacts.
Even if overt contacts with competitors are avoided, the risk that an agreement may be found is not totally eliminated. If competitors take uniform action which might not otherwise be expected in the circumstances, the inference of agreement can be drawn. Much has been written of the doctrine of "conscious parallelism," inferring conspiracy from parallel action among competitors. The Supreme Court has decided that, although such a state of facts is relevant to the question of agreement, it is not the substantive equivalent of conspiracy; in other words, parallel action alone will not prove a violation.
The problem arises most often in the context of the widespread industry practice of price leadership -- one market leader announces a price change, and all other companies follow with identical moves shortly thereafter. If the leader's move is downward, there can be no legitimate inference of agreement if everyone follows, since it is to be expected that competition will be met. On the other hand, following the leader upward can present problems. If there is no evidence of discussions or other price-related contacts among the various concerns, the inference of agreement is proper only if the circumstances in the market dictate a result other than the one that has been uniformly reached. For example, if a standardized product with roughly uniform production costs is involved, one would expect uniform pricing and the standard price leadership pattern would not raise any eyebrows. On the other hand, if the price leader announced a substantial increase in the face of sharply falling demand and a condition of chronic overcapacity, and then every other firm announced an identical increase, one might be hard put to convince a court or jury that each company's decision was made individually.
In the last analysis, if a price-fixing agreement is charged, the defendant should be prepared to show facts supporting the exercise of an individual business judgment in making its pricing decision.
Allocation of Markets or CustomersAgreements among competitors dividing markets by territory or by customers are patently anticompetitive and hence illegal per se. If anything, such arrangements are even more restrictive than the most formal price-fixing agreement, since they leave no room for competition of any kind.
Thus, competing firms may not divide among themselves the geographical areas in which they sell, nor may they distribute customers or allocate the available market. All such understandings, whether direct or indirect, are unlawful.
Again, since agreement is a matter of inference and proof, one must be careful to avoid suspicious conduct. It can be dangerous to refer customers to a competitor, since an agreement not to sell to them might be inferred. It is risky to use competitors as exclusive distributors, lest the conclusion be reached that an agreement not to compete underlay the arrangement. As with all questions of horizontal conspiracy, the conservative course is to avoid even the suspicion of a prohibited agreement.
Concerted Refusal to DealThe horizontal boycott used to be a classic per se offense. It was a settled principle that the Sherman Act prohibited agreements by two or more persons not to sell to or not to buy from an individual, a firm, or a group. Today, the courts are more selective in applying the per se rule of illegality to concerted refusals to deal. As the Supreme Court has put it, the per se rule applies to prohibit agreements to deny supplier or customer relationships that competitors need in the competitive struggle. This formulation, while somewhat less restrictive then the prior rule, is still broad enough to reach many, if not most, boycott agreements. Sellers should not agree not to deal with a known price cutter. Nor should buyers join in boycotting sellers whose prices are too high or whose goods are defective.
Trade AssociationsTrade associations, by their very nature, bristle with antitrust problems. Practically by definition the requisite agreement is present, and the inquiry focuses on the nature of the members' concerted activity. In view of this constant antitrust concern, every trade association activity, even if it may appear wholly innocuous, should be closely supervised by an attorney. Agendas should be prepared in advance and reviewed with counsel -- who should, if possible, be present at every meeting. Informal business meetings outside the presence of counsel should be avoided. In addition, membership in a trade association should be open to all qualified firms, since arbitrary exclusion might be construed to be an unlawful group boycott, especially where membership confers a significant competitive advantage over nonmembers.
Per se offenses such as price fixing and market division are obviously improper for an association. Of course, trade associations may properly act, under supervision, in many areas. Among these, statistical reporting of various types -- past costs, production, sales, and the like -- is the most usual. But the identification of the individual firm's data should be buried in the association's reports, and forecasts of any kind should be avoided. Past prices can probably be reported; but, in light of the use of past price discussions to help prove price-fixing conspiracies, such statistics are dangerous and ought to be closely supervised. So also, standardization may be a proper association activity as long as standards which serve to lessen competition are avoided and all members are free to disregard them.
Vertical RestraintsAntitrust analysis distinguishes between economic relationships among entities on the same level of distribution which compete with one another (horizontal relationships) and relationships among suppliers and customers on different distributional levels (vertical relationships). Vertical arrangements, not being among direct competitors, are, generally speaking, treated less severely than horizontal restraints although, to be sure, certain vertical restraints have been uniformly condemned.
Vertical Price FixingLike horizontal price-fixing agreements among competitors, vertical price-fixing agreements, whereby a seller and a buyer agree with respect to the price at which the buyer will resell, have long been illegal per se. As is true with horizontal agreements, it does not matter how reasonable the agreed-upon price may be or how many good and sound reasons there are for the agreement. Nor does it matter whether the fixed price is a maximum rather than a minimum (although the per se rule against fixing maximum resale prices has encountered substantial criticism recently).
To fall within the per se rule, there must be an agreement between the buyer and the seller that the buyer will resell at a specified price or price level. Unlike horizontal agreements, the per se rule does not apply to vertical agreements which merely affect prices. The crucial question again is whether an agreement exists. It has been made clear by the courts that a seller may properly suggest a resale price to its vendee; the fact that the suggested price is followed is not enough to show the presence of conspiracy. It is thus advisable for a manufacturer or other supplier, in mentioning resale prices, to use the word "suggested" in order to make its intention clear.
Consignment sales. For many years it was accepted antitrust doctrine that, in consignments to a true agent (as opposed to a merely formal arrangement), a seller was free to set the price at which "its" products were sold, even though the agent was otherwise an independent business. The Supreme Court has raised serious questions with respect to the continuing validity of this rule. Vertical price fixing under the guise of a consignment appears to be dangerous whenever the seller is in a position, by using economic leverage, to "coerce" the consignees into compliance. The prudent course is to utilize consignment selling only if there is a good nonprice reason for doing so and, whenever such a method is followed, to treat the consignee as a true agent -- the seller should pay taxes and insurance, maintain inventory control, and give approval on significant decisions.
Non-Price Vertical RestraintsIn organizing the distribution of their products, sellers often resort to a variety of restrictions aimed at the orderly marketing of their goods. These restraints often limit intrabrand competition in the seller's goods among the various dealers in order to enhance the goods' position in the interbrand competitive struggle with the goods of other sellers. So long as they do not involve per se unlawful vertical price fixing, orderly marketing arrangements are governed by the rule of reason and condemned only when unreasonable in the totality of the economic circumstances of the market.
Exclusive selling agreements . Sellers may grant an exclusive franchise to a particular dealer in a specified territory by agreeing to sell only to that dealer within its area of responsibility. Such restraints, which are limitations upon the seller's freedom, are governed by the rule of reason and are, in most circumstances, valid. Even if the seller is induced to grant such an "exclusive" by the dealer, the courts have not found an illegal concert of action.
Territorial and customer restrictions. Orderly marketing plans have often utilized arrangements whereby dealers agree to resell the product only within specified territories and to solicit business only from specified classes of customers. Thus these restrictions are upon the buyer. Such restraints are subject to the rule of reason with validity depending on economic justification, so long as the agreements are purely vertical and do not involve horizontal conspiracy among the dealers. The issue is whether the anticompetitive effect of the restraint on intrabrand competition (among dealers selling the same brand) is outweighed by the procompetitive effect on interbrand competition (among different brands) generated by strengthening the seller's ability to compete.
While most vertical customer and territorial restrictions have been sustained, if the seller has a significant market share, the practice can still be risky, and less restrictive methods of orderly marketing should be considered. These include assigning to a dealer an area of primary responsibility in which it must exercise its best efforts to promote sales. A quota system can be used to implement such a device. With certain products for which service or installation is important, dealers can be required either to install and service all machines they sell or, if they prefer, to pay a fee to a local dealer for assuming that obligation. The amount of the fee should be reasonably related to the cost of the service.
Exclusive dealing agreements . Exclusive dealing agreements, pursuant to which the buyer undertakes to purchase all its requirements for the product from the seller, are governed by Section 3 of the Clayton Act; this prohibits such contracts if they are likely to substantially lessen competition. The principal vice of exclusives is that, if they tie up a significant portion of the market, the seller's competitors will be foreclosed from market access and competitively disadvantaged.
The development of the law in this area has been muddled, to say the least. In an important decision in 1949 the Supreme Court ruled that, if a substantial share of total sales in the market (measured by percentage) is foreclosed, illegality follows; a finding of 6.7 percent foreclosure was deemed sufficient. Twelve years later, however, reliance on numbers alone was abandoned, and a test requiring a case-by-case evaluation of the exclusive's probable effect on competition was announced. More recent decisions have followed that lead and, in effect, have applied the rule of reason.
As with territorial and customer restrictions, the application of the rule of reason to exclusive dealing agreements does not mean that all such arrangements are lawful. Particularly for a seller with a significant market share, the prudent course is to avoid any widespread use of exclusive dealing arrangements or any single agreement or group of agreements which would tie up a large number of outlets. Antitrust risk can be minimized by requiring dealers to purchase absolute minimum quantities instead, or by utilizing similar undertakings to assure adequate inventories.
Tying arrangements . Sellers with more than one product may seek to tie the sale of one (which the customer presumably desires) with that of another (which it presumably does not want). Such tie-ins are governed not only by the general language of the Sherman Act, but the more particular provisions of Section 3 of the Clayton Act, which prohibits such arrangements if the likely result is substantially to lessen competition. Tie-ins are per se unlawful if the seller possesses sufficient market power in the tying product, and coerces the buyer to take the tied product as a condition to obtaining the desired product.
The central problem with respect to tie-ins is often one of definition. Certainly, a shoe producer may require that a left shoe be purchased with a right. The question boils down to whether the two products have separate demand functions, so that customers ordinarily will buy them separately.
The antitrust problem with tie-ins is that the leverage generated by economic power in one market is used to accomplish sales in another. Once it is established that a tie-in is present; that the seller has sufficient economic power in the desired product to force the tie-in; and that a "not insubstantial" amount of sales is involved (amounts as small as $60,800 have been found to meet this standard), they are generally deemed unlawful.
In some instances, tie-ins justified by exceptional competitive circumstances have been upheld -- for example, in new industries and as part of a franchise operation involving the licensing of the seller's trademark to franchisees.
Refusals to DealVertical boycott agreements have been harshly treated, although the courts in recent years have grown more lenient. As a general rule, a seller should not agree with some of its customers that it will not sell to another (for example, a price cutter). If such an agreement can be shown, the refusal to deal is likely to be the subject of litigation and, if there is evidence of an agreement with the compliant customers as to the prices or price levels they charge, a rule of per se illegality can be applied.
On the other hand, a seller has traditionally been afforded the right, acting independently, to select those with whom it will do business. For example, a seller may announce its unwillingness to deal with anyone who does not comply with certain suggestions (such as resale prices) and may cut off those who do not act accordingly. But if such a seller agrees with others to carry out its policy, independent action is not present and an unlawful combination may be found. Therefore, it is essential, when deciding to cut off a customer, to avoid any inference of concerted action with others. If complaints are received from dealers about another dealer, it is dangerous to inform the complaining parties of the eventual outcome.
Structural Offenses: Monopolization and MergerThe problems that have been dealt with thus far concern what may be deemed behavioral offenses -- certain types of anticompetitive conduct which the antitrust laws forbid. Antitrust is also concerned with market structure, and it prohibits structural phenomena likely to substantially lessen competition or to amount to monopolization. Whether or not the assumption is sound as a matter of law or economics (and lawyers as well as economists have widely divergent views on the question), antitrust is premised on the belief that a competitive economy can best be achieved by maintaining markets with a significant number of sellers. Hence, to a considerable extent, the structural aspect of the law focuses on avoiding or remedying the concentration of market power in a few firms with large market shares.
Market DefinitionAnalysis of market structure requires, in the first instance, a definition of the relevant market to be examined. As a theoretical matter the question is: What is the area of effective competition?
Product market . The fundamental issue in delineating a product market is to determine what products or groups of products are sufficiently related to confront each other in the marketplace. In 1982, the Department of Justice issued Merger Guidelines (revised in 1984 and again in 1992) which set forth an approach toward product market definition that has had a marked impact on the law. Simply stated, the Guidelines define product markets by asking which products would be substituted by buyers in response to a small but significant and nontransitory price increase in a series of possible markets. When a conclusion is reached that such an increase would not add significant substitutes, the market is defined.
Geographic market . The construction of geographic markets is of a piece with that concerning products. The issue is whether a small but significant price increase in an area would lead producers to go beyond it in buying the products in question.
MonopolizationSection 2 of the Sherman Act makes it unlawful to monopolize, attempt to monopolize, or conspire to monopolize a line of commerce. It is significant that the statute does not speak in terms of the existence of a monopoly; rather, its focus is on the act of monopolization, which requires something more. The offense of monopolization , which is not purely structural, has two elements: (1) possession of monopoly power in the relevant market, and (2) willful acquisition or maintenance of that power.
Monopoly power . The Supreme Court has defined monopoly power as the power to control prices or exclude competition. As a practical matter, such power is measured by the alleged monopolist's share of the relevant market. Absolute monopoly in the economic sense -- 100 percent of the market -- is a rare phenomenon, raising the question of how large a share a firm must possess to come within the statutory concept. Although there is no hard and fast rule, any market share of 50 percent or higher is sufficient to be of concern.
Willful acquisition or maintenance. Once monopoly power is found the question remains: Was it willfully acquired or maintained? This is ephemeral and difficult to determine. What is clear is that the statute does not require that monopoly power be abused or intentionally exercised to drive out competition, although such conduct, if present, is sufficient to make out a violation. Nor does the element of willfulness entail an evil intent to eliminate competitors. Conscious acts designed to further or maintain a monopoly market position will suffice -- for example, acquisitions of competitors, exclusive dealing arrangements, or unreasonably low (i.e ., below cost usually measured on an incremental basis) pricing tactics with a reasonable prospect of recoupment by monopolistic pricing once competition is eliminated. On the other hand, monopoly power achieved through growth or development as a consequence of a superior product, business acumen, or historic accident is permissible.
Attempt to Monopolize . Section 2 of the Sherman Act also prohibits attempts to monopolize by companies that do not possess monopoly power but engage in anticompetitive conduct designed to achieve it. To prove an attempt to monopolize, one must establish that the defendant had a specific intent to achieve monopoly; that it acted in an anticompetitive manner designed to injure its actual or potential competition; and that there was a dangerous probability that monopoly power would in fact be achieved. Since companies that actually possess monopoly power are an industrial rarity, most Section 2 litigation involves allegations of attempts to monopolize; and it is the "dangerous probability of success" element on which the resolution of most cases turns.
MergersSection 7 of the Clayton Act prohibits acquisitions, whether of stock or assets, where the likely result is a substantial lessening of competition or a tendency toward monopoly in any relevant market. The statute is not criminal, the principal sanctions being a preliminary injunction prohibiting the transaction's closing or a post-closing order of divestiture. In the 1960's, a series of Supreme Court decisions had construed the statute so broadly as to lead one dissenting justice to remark that, in litigation under Section 7, the government always wins. In recent years, both the courts and the enforcement agencies have retreated significantly from that position and have taken a more economically sophisticated approach, as exemplified in the Merger Guidelines.
Horizontal mergers . Mergers of firms competing in the same market are most likely to have anticompetitive repercussions. It is thus not surprising that they are most harshly treated.
The first step in analyzing the effects of a proposed merger is to define the relevant market to see whether the two companies compete.
Assuming a given merger is between competitors, the touchstones of illegality are the market shares of the merged companies and the concentration in the market. The Guidelines measure a market's concentration by the Herfindahl-Hirschman Index ("HHI"), which is calculated by summing the squares of the market share percentages of each firm in the market. Depending on the HHI after the acquisition, markets are categorized as unconcentrated, moderately concentrated and highly concentrated. In the latter two categories, specified increases in the HHI as a result of the acquisition are said to raise a presumption of anticompetitive effect which can nonetheless be rebutted by evidence showing that the merger is not likely to create opportunities for competition to raise prices.
The Guidelines merely set forth the enforcement attitudes of the Department of Justice and the Federal Trade Commission. They are not binding on the courts but have nevertheless been influential in judicial decision-making.
Vertical mergers . Vertical mergers are those between suppliers and customers. Here the number of decided cases is much smaller, and the attitude of the enforcement agencies significantly less stringent.
Theoretically, the anticompetitive effect of a vertical acquisition is measured by the foreclosure of competing sellers from outlets for their goods and of competing buyers from supplies. If the percentage of the market foreclosed is not substantial, one would be hard put to divine the substantial lessening of competition of which the statute speaks.
Patents and the Antitrust LawsIn order to encourage technological innovation, the patent system, established by Congress under specific authority granted by the Constitution, provides to inventors of new and useful products and processes a seventeen-year right to exclude others from making, using and selling the patented invention. The grant of this limited "monopoly" can run counter to the antitrust principle encouraging free and open markets; and the courts have, not surprisingly, struck an appropriate balance between the two.
Simply stated, if a patent is lawfully acquired and lawfully enforced, any economic monopoly that stems from the power it confers is immune from the strictures of the antitrust laws. Thus, it is not an act of monopolization or an attempt to monopolize to apply for and receive a patent which confers the power to exclude all competition from a relevant market, even though, as a literal matter, monopoly power will have been wilfully acquired. But if the owner of a patent acquired it improperly (such as, for example, by committing fraud on the Patent and Trademark Office) or attempts to utilize its power beyond the limitations of the grant, that exemption is forfeited; and if the other elements of an antitrust violation are present, the Sherman or Clayton Act can be violated.
The interface between the patent system and the antitrust laws is a complicated one; and the attitude of the courts has varied over the years, sometimes favoring the one and then the other. As a general rule, counsel should be consulted before significant patents or license rights thereunder are acquired from third parties; and it is important to have counsel review all patent licenses to be certain that any restrictions they contain do not raise unintended antitrust difficulties.
The Robinson-Patman Act, which governs price discrimination in interstate commerce, operates in a world of its own. Its intricacies are legendary, as are its absence of logic and its total divorce from the realities of the marketplace. Substantial treatises have been written to guide even the specialist through its labyrinth. This cursory review can only highlight the bare-boned requirements of the statute. Any significant pricing problem requires the advice of counsel.
Robinson-Patman analysis is much like constructing a jigsaw puzzle of an abstractionist picture. The important thing is to put each piece in its proper place; concern for the ultimate picture will only lead to wrong results. With this warning in mind, the basic elements of the statutory scheme can be reviewed.
The Fundamental Elements of ViolationThe Robinson-Patman Act prohibits discriminations in price between purchasers of commodities of like grade and quality which are likely to result in substantial injury to competition. Each of the elements is separate and must be found before the statute is violated.
Discrimination . For purposes of the Robinson-Patman Act, price discrimination means a difference in the price actually charged a purchaser. The term imports no element of bad intent. If there are at least two sales at different prices, this element of the statute is met.
As a general rule, price means actual price paid by the purchaser. If the seller wishes to utilize a delivered price system which absorbs varying amounts of freight costs in sales to different customers, there is no discrimination so long as every buyer pays the same delivered price. Conversely, it is permissible to sell f.o.b. seller's plant at the same price to all regardless of freight. Only the invoiced price paid by the purchaser matters.
The price difference must be between different purchasers. This means that a refusal to sell except at a higher price which does not culminate in a sale or a mere offer to sell on discriminatory terms cannot be deemed a price discrimination. As a general rule, only prices to purchasers directly from the seller are relevant. But if the seller exercises a degree of control over the resale terms, even though sales are made through an intermediary such as a wholesaler, the wholesaler's customers may be deemed "indirect purchasers" from the seller.
Like grade and quality . Price differences are not within the Act unless the goods sold to the different purchasers are of "like grade and quality." This requirement relates solely to the physical characteristics of the goods. Are they sufficiently alike for the law to require that their pricing be identical? Stated conversely, is there a significant commercial difference in the physical characteristics of the goods to justify a price differential? The fact that identical goods may be sold under differing brands and may have varying degrees of customer acceptance is beside the point at this stage of the inquiry. If the goods are fundamentally alike in physical and chemical composition, they are of like grade and quality.
Injury to competition . Discrimination in sales of goods of like grade and quality are unlawful only if they are likely to result in substantial injury to competition. Essentially, such injury can be of two types: (1) to buyers' competition (injury in the secondary line); and (2) to sellers' competition (injury in the primary line).
When secondary-line injury is charged, the inquiry focuses on the competitive harm suffered by the disfavored purchaser who pays the higher price in relation to the favored competitor. Thus, for secondary-line injury to be present, the discrimination must be between competing purchasers. If both purchasers are ultimate consumers and do not compete in resale of the product, no violation can be found. Not only must the purchasers compete geographically, they must, as a general rule, be on the same functional level. A wholesaler who buys at a lower price does not compete with a retail customer of the same seller, even though a price discrimination is present. On the other hand, if a direct-buying retailer is charged less than a wholesaler whose retailer customers compete with the favored retailer, injury might be found.
Given a discrimination between competing buyers, the case law is quite harsh. Injury is virtually presumed if the amount of the discrimination is substantial or, even when small and continuous, if the industry is characterized by small profit margins or fierce resale price competition. If, on the other hand, the lower price is reasonably available to all purchasers -- for example, if the smallest can buy enough to gain the highest quantity discount -- the discrimination would result from the disfavored buyer's own choice, and injury to competition could not be established.
Primary-line injury focuses on damage to competition between the seller and its competitors who may lose business because of the low discriminatory price. Here the discrimination need not be between competing purchasers; in fact, the usual primary-line case involves area discrimination where the seller lowers its price in one area in order to attract more business. Here, Robinson-Patman is in direct conflict with the basic antitrust premise of open price competition, and accordingly primary-line injury requires a stronger showing of likely impairment of competition than in a secondary-line case. Mere diversion of some business from one competitor to another is insufficient. But, if the lower prices are predatory -- at or below cost -- primary-line injury may be established.
The Statutory DefensesIn the event that each of the elements of a Robinson-Patman violation is proved, there are two important defenses which, if established, permit the defendant to prevail despite the injury to competition which may result: cost justification and meeting competition.
Cost justification. The statute expressly permits discriminations which "make only due allowance for differences in the cost of manufacture, sale or delivery resulting from the differing methods or quantities" sold or delivered to the purchasers. Cost justification is extraordinarily complex. Suffice it to say that a successful defense involves intricate accounting techniques hobbled by stringent rules.
Meeting competition . If the lower price was made in good faith to meet the equally low price of a competitor, the seller has an absolute defense to a Robinson-Patman charge even if every other element of a violation is proved.
The key to the defense is the seller's good faith. The seller must obtain sufficient facts to justify a reasonable belief that the lower price is equal to -- not lower than -- that of the competitor. In other words, it is permissible to meet, but not to beat, the competitor's price. It is thus advisable to make a record of every available fact demonstrating the identity of the competitor and its price. To avoid Sherman Act problems, these facts should be sought from the customer, not the competitor.
Promotional AllowancesThe statute also prohibits the granting of promotional materials and allowances (such as for cooperative advertisements) to competing customers except upon proportionally equal terms. In this area the law is quite strict, decreeing per se illegality once nonproportional payments are found. Injury to competition need not be shown, although the good-faith meeting of competition is a defense.
If it is decided to grant such allowances at all, they should be affirmatively offered to all competing customers, not just to those who ask for them. Prudence dictates that the offer be pursuant to a written plan which, as a routine matter, is provided to every customer. Moreover, the payments must be "functionally available" to all. This means it is not permissible to offer only payments for television advertising to all customers if only a few large ones can afford it. A substitute must be provided for the smaller purchaser, such as newspaper space in local papers, leaflets, or the like. Even the smallest purchaser must be included, or the plan may be deemed illegal. The statute's requirement of proportional availability must also be met. The safe way to do so is to key payments to periodic sales volume either in dollars or in units. Thus, for example, the seller may offer to pay for half the cost of cooperative advertisements up to a ceiling of three percent of annual volume. So long as every customer is in the same boat, almost any variation will be permitted.
These guidelines apply equally to the furnishing of promotional facilities such as racks or demonstrators. If such facilities are to be furnished at all, they must be made available to every purchaser on proportionally equal terms.