Antitrust and Trade Regulation Law and Practice - Managing Legal Risk to Facilitate Legitimate Competitive Business Activity

Robert T. Joseph
Partner
Sonnenschein Nath & Rosenthal LLP

The Fundamentals of Antitrust: What Are The Basic Features of the Antitrust Laws?

An appreciation for and understanding of the fundamentals of antitrust legal practice are, not surprisingly, facilitated by at least a basic grasp of what the antitrust laws are intended to prevent. While a thorough review of antitrust law and principles is not feasible here, an overview should be instructive and helpful.

Generally

The antitrust laws generally prohibit conduct -- either joint conduct pursuant to an agreement that unreasonably restrains trade, or anticompetitive exclusionary conduct by a firm that acquires or maintains monopoly power. An important body of antitrust law is aimed at collusive conduct (i.e., contracts, combinations or conspiracies) that have a substantial adverse effect on competition, because it raises prices or restricts output (e.g., an agreement among competitors to fix prices or allocate customers or geographic markets).

Other antitrust rules deal with exclusionary conduct that, by eliminating competitors from the market (or substantially impairing their ability to compete on the merits), allows or facilitates one or more remaining firms to exercise market power and thereby raise prices, restrict output or offer less variety to consumers.

The federal merger statute prohibits mergers or acquisitions that may tend to substantially lessen competition or create a monopoly in any line of commerce.

Brief Description of Key Antitrust Statutes

The four principal federal antitrust laws are the Sherman, Clayton, Robinson-Patman and Federal Trade Commission Acts. (Additionally, states have enacted antitrust laws patterned to varying degrees on these federal statutes, most often the Sherman Act.)

The Sherman Act.

Contracts, combinations or conspiracies, i.e., agreements which unreasonably restrain trade or commerce are illegal under Section 1 of the Sherman Act. The courts have decided, for example, that agreements between competitors that fix prices; lead to production capacity curtailments; allocate territories or production; or constitute certain types of boycotts of third parties represent per se unreasonable restraint of trade and violate this section. Minimum resale price maintenance, i.e., an agreement between a supplier and a distributor as to the minimum resale price the distributor will resell the supplier's product, is also per se illegal.

Agreements are the basis of Section 1 antitrust violations. Unlike legitimate agreements or contracts, which in most instances must meet definite criteria before they are legally binding, illegal agreements can be found to exist under antitrust law without being formalized or explicit. And while commercial agreements must have clarity, no such clarity is required for an agreement in violation of the antitrust laws. An illegal agreement may be inferred from circumstantial evidence in the form of conduct.

It is important to recognize that certain activities are so injurious to competition, while at the same time are so unlikely to have any procompetitive benefits, that they are not only termed anticompetitive per se , but also may well be punished by criminal sanctions. These activities include bid-rigging, price-fixing and market allocation. There is no defense to such violations of antitrust law; no explanations or justifications are entertained by the courts.

Under Section 2 of the Sherman Act, it is illegal for any person to monopolize, attempt to monopolize, or to join or conspire with others to monopolize, any part of trade or commerce. In general, this section prohibits the possession of power to control prices or access to the market if such power was obtained or used with intent to monopolize. It is not illegal to acquire monopoly power through superior products or skills or even through luck. What is prohibited is acquiring, or attempting to acquire, or maintaining monopoly power through unfair and unreasonably exclusive tactics. An example of an attempt to monopolize would be price- cutting below costs with intent to drive competitors out of business and secure a monopoly position, when it is likely that the price-cutting firm can "recoup" its losses from the price-cutting by making greater than normal profits after its competitors have left the market.

The Sherman Act is applicable to all transactions, regardless of where they occurred, that have any substantial effect on the domestic trade and imports into the United States. The Sherman Act also applies to U.S. export trade if the activity has a direct, substantial, and reasonably foreseeable effect on such export trade.

Serious violations of Section 1 of the Sherman Act (such as price-fixing or market allocation among competitors or bid-rigging) may be the subject of criminal actions brought by the Department of Justice. Prison sentences of up to three years can be imposed on individual employees convicted of criminal offenses. These offenses are categorized as felonies. A fine of up to $10,000,000 against a corporation and up to $350,000 against an individual may be levied for each criminal offense, and defendants may be subject to greater fines equal to twice the gain to them from their illegal conduct or twice the loss to the victims of the offense.

There has been a dramatic surge of cartel enforcement activity in the last decade . A very important factor contributing to this growth has been the adoption by the United States of its amnesty program and by similar programs in other key jurisdictions active in anti-cartel efforts. The U.S. Department of Justice's Corporate Leniency Policy, initiated in 1978, was changed to provide additional incentives for companies to come forward and cooperate. Major features of the revised program included automatic amnesty, post-investigation amnesty and complete protection for cooperating individuals. The revised policy had an enormous impact on criminal antitrust enforcement in the United States, generating a significant number of new and frequently large cases, especially in the international cartel area, in turn resulting in huge increases in the size of financial penalties imposed on companies and individuals and in the number and length of prison sentences for individuals convicted of antitrust offenses.

Non-criminal actions can be brought by the Department of Justice to seek injunctive relief to stop and prevent conduct illegal under the antitrust laws.

The Clayton Act.

Section 3 of this Act concerns the sale or lease of commodities where competition is substantially lessened through abusive exclusive dealing, tying and full-line forcing, arrangements and certain requirements contracts.

Section 7 of the Clayton Act is the federal merger statute that, as noted above, prohibits mergers and acquisitions that may substantially lessen competition or tend to create a monopoly in a line of commerce. The unifying theme of merger law is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. In analyzing whether to challenge a horizontal merger between competitors, the federal agency analyzing the merger (the Department of Justice or the Federal Trade Commission) will first assess whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured. Second, the agency assesses whether the merger, in light of market concentration and other factors that characterize the market, raises concern about potential adverse competitive effects. Third, the agency assesses whether entry would be timely , likely and sufficient either to deter or counteract the competitive effects of concern. Fourth, the agency assesses any efficiency gains that reasonably cannot be achieved by the parties through other means. Finally, the agency assesses whether, but for the merger, either party to the transaction would be likely to fail, causing its assets to exit the market. The process of assessing market concentration, potential adverse competitive effects, entry, efficiency and failure is a tool that allows the agency to answer the ultimate inquiry in merger analysis: whether the merger is likely to create or enhance market power or to facilitate its exercise.

The Robinson-Patman Act.

Among other things, this technical, complex and often confusing Act prohibits charging different prices for the same product to customers who are in competition with each other, where the price differential may cause an adverse effect on competition among the customers or with competing suppliers, unless the difference in price is cost-justified, was offered in good faith to meet lower prices, or meets other defenses. As a customer, a buyer cannot knowingly induce or receive an illegal price differential. This Act also prohibits offering promotional payments, services or assistance on a disproportionate basis to competing purchasers of the same product unless the offer is made to meet competitive offers.

The Federal Trade Commission Act.

Section 5 of this Act, which is enforced by an administrative agency, the Federal Trade Commission, bars unfair methods of competition and unfair or deceptive acts or practices, including false or misleading advertising, false disparagement of competitors or their products, use of lottery devices, and commercial bribery. Violations of the antitrust laws (such as Sections 1 and 2 of the Sherman Act) are also "unfair methods of competition" that violate the Federal Trade Commission Act and may be the subject of an action by the Commission.

Various Remedies.

In addition to the criminal penalties and governmental actions described above, persons or firms whose businesses are damaged may recover in civil suits three times the amount of their damages plus attorneys ' fees, and all other costs of litigation. Class actions have been brought on behalf of purchasers of products or services claimed to have been injured by price-fixing and on behalf of persons otherwise believed to have been injured by antitrust violations. Federal courts may issue injunctions aimed at preventing illegal conduct and restoring competition, and the Federal Trade Commission may cease and desist orders of the same nature, which may contain prohibitions going beyond the scope of the violation originally involved.

Non-U.S. Antitrust Laws.

Antitrust laws that prohibit many of the same activities prohibited in the United States are in effect in numerous countries, including virtually all major commercial countries , and careful consideration must be given to the applicable laws of all jurisdictions in which a transaction possibly involving a competitive restraint is to take place.

The chief antitrust regime outside the United States is found in the Rome Treaty of 1957, which established the European Common Market ("Common Market"). Article 85(1) of the Treaty specifically prohibits all agreements and concerted practices that are likely to affect trade between the member states and that have as their object or result the prevention, restriction, or distortion of competition within the European Union. Examples deemed to fall within Article 85(1) include such restraints as price-fixing, production limitation, unjustified price discrimination, and tie-in arrangements. Article 85(3) allows the Commission of the European Communities to exempt from the prohibition of Article 85(1) agreements which may be shown to contribute toward improving production or distribution of goods or promoting technical or economic progress within the Common Market while reserving to users a fair share in the profit without (a) imposing upon the enterprises concerned any restriction that is not essential to attaining such objectives, or (b) giving such firms the power to eliminate competition in a substantial part of the Common Market. Article 86 prohibits the misuse of dominant market positions .

One of the actions that may be taken by the Commission of the European Communities, in the event of violation, is the imposition of a fine. The Commission regularly imposes substantial fines in cases involving agreements between competitors adopting concerted practices, including price-fixing and in cases involving misuse of dominant market positions. The fines have been levied against parties headquartered both inside and outside the Common Market.