Antitrust Law and Regulations

In the United States, antitrust law bars unfair business practices and anticompetitive behavior. This in turn should encourage competition and development in the marketplace. Competition is deemed a necessary ingredient of a healthy economy, since it benefits both the markets and the consumers. U.S. antitrust law renders illegal certain business practices that may hurt free markets or consumers or both. Various antitrust laws and regulations were adopted on both federal and state levels. While federal laws primarily govern interstate commerce, state laws regulate the conduct of market participants within their state borders. In addition to the enacted laws the Federal Trade Commission (FTC), state antitrust agencies have administrative authority to implement additional regulations, expanding upon existing antitrust laws, to ban new anticompetitive practices that were not in existence at the time when original legal acts were introduced. Anticompetitive laws are also enforced by private litigants who sustain damages as a result of someone practicing prohibited behavior.

 

The consequences of antitrust law violations can be severe. The company, individual officers, directors, and other businesspeople responsible for such conduct can be subject to both civil and criminal penalties. If intentional and clear violations are proven, criminal penalties may be up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Additionally, customers, competitors, and others harmed by the conduct may recover damages against the offending party in triplicate of their actual damages, plus attorney fees.

 

Federal laws and regulations that govern antitrust matters can be quite complex in certain situations since they aim not only to remedy the actual violation, but also to prevent the future ones.  Below is an overview of the three core federal antitrust laws:

 

1. Contracts, Combinations, or Conspiracies in Restraint of Trade

 

The Sherman Act broadly prohibits “[e]very contract, combination, in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.” Generally speaking, a restraint of trade is an agreement among two or more persons or entities that affects the competitive process. However, the Sherman Act does not prohibit every restraint of trade, only unreasonable ones. For instance, an agreement between two individuals to form a partnership restrains competition in some way, but it may not do so unreasonably, and thus may be lawful under the antitrust laws. On the other hand, certain acts are considered so inherently harmful to competition that they are almost always illegal. These acts are called per se violations. Once such actions are detected, the blamed party is not allowed to introduce any defense or justification. Accordingly, when examining the complained conduct, the courts now apply either (1) a per se analysis when the rules are clear, or (2) a broader rule of reason analysis when the rules are not as clear as in cases of per se violations. When applying the rule of reason analysis, in order to evaluate whether conduct was reasonable under circumstances or its sole purpose was to restrain the competition, a fact-intensive inquiry into the motive, purpose, conduct itself, and its effects, including any business justifications, is required.

 

An illegal antitrust agreement includes implied understandings between the parties, even though they are not written or expressly agreed to. Such agreement may be evident when, after several meetings, companies begin to conduct commercial activities in a certain uniform way that may harm the markets or consumers but benefit those companies. Anticompetitive agreements may exist between different market participants, between those who occupy similar positions in the market as well as those who are on different levels in the market chain. 

 

Agreements Among Competitors: Not all agreements among competitors violate antitrust laws. In the multi-firm sphere, an agreement to cooperate with the purpose of producing better goods and services is not unreasonable, although it technically restrains competition. However, the following types of agreements are determined to be per se violations, which means they automatically violate the antitrust laws and cannot have any justification:

 

·    Agreements to alter, fix, or maintain the prices at which their products and/or services are sold.

·    Agreements to allocate customers or divide markets. Geographic market division does not account for all of these violations; rather, competing firms may not agree not to compete for specific customers or types of customers, products, or territories among themselves.

·    Agreements about predatory pricing and bidding. Predatory pricing occurs when companies price their products or services below actual cost, with the purpose of removing competitors from the market (e.g., a product sale price is lower than the actual cost of its production). A company that bids up the price of raw materials or other items to prevent competing companies from acquiring needed materials is engaged in predatory bidding. Large companies with big budgets may afford to sustain temporary losses in return of taking bigger gains later if they put their smaller competitors out of business; the law prohibits such unethical behavior. 

·    Agreements about collusive bidding, meaning that two or more competitors agree to alter their bids for the purchase or provision of a particular product or service.

·    Agreements among competitors that all of them will refuse to do business with a targeted individual or business or to do business only on certain agreed-upon terms (known as a group boycott agreement).

 

Agreements with Suppliers and Distributors: The antitrust laws also affect the relationships between the firms at various levels of the supply chain, such as manufacturer/dealer or supplier/manufacturer. Restraints in the supply chain are tested for their reasonableness by analyzing the market in detail and balancing any harmful competitive effects against offsetting benefits. The arrangements in such chains may violate the antitrust laws if they reduce competition among firms at the same level (e.g., if a supplier does not treat all his customers equally, the competition may be reduced among its retailers or wholesalers) or prevent new firms from entering the market (high entrance barrier). Different arrangements between parties are reasonable when, for example, the discount in price is given to one retailer but not to another, based on the buying volume, delivery and production costs, and for other industry-accepted reasons.

 

A wide variety of agreements may exist between businesses, and these may be anticompetitive, pro-competitive, or competitively neutral. In such case, the conduct at issue must be evaluated under the rule of reason analysis, considering and balancing possible harms and benefits. In a case where the court concludes that the competitive harms of the agreement outweigh its benefits, it is classified as an illegal restraint of trade. As a sample, some types of the illegal agreements that may exist between the various participants in the supply chain are provided below:

 

·                    Price discrimination, when a supplier charges competing purchasers different prices for the same goods (this does not apply to services) or discriminates in the provision of allowances, compensation for advertising, provision of additional free goods for samples and other services. Price discrimination may give favored customers an edge in the market that has nothing to do with their superior efficiency. In general, the law requires that a seller treat all competing customers in a proportionately fair and equitable manner. If the seller offers additional services or goods, such as the use of its facilities, advertisement, and promotional materials, it must inform all of its competing customers about the availability of such services or allowances. Price discrimination is lawful if it reflects the different costs of dealing with different buyers or is the result of the seller’s attempts to meet a competitor’s offering. Discrimination in allowances is generally forbidden. Again, when evaluating a particular situation, the rule of reason is applied.

·                    Exclusive dealings involve an agreement between the parties to purchase the goods/services exclusively from each other. In practice, such contracts are common and permissible, but they should be reasonable. For example, the manufacturer may give lower price to its exclusive dealers.

·                    Territorial and customer restrictions are also not allowed. A manufacturer or supplier may assign a specific territory to a distributor, but it may not prohibit a distributor from selling its products outside the assigned territory without justification.

·                    Pricing impositions are forbidden. A manufacturer or supplier may not establish prices at which its distributors resell its products. However, manufacturers are free to suggest resale prices and even unilaterally refuse to do business with a distributor who fails to comply with these suggested prices.

·                    Tying arrangements are agreements in which one party agrees to do business with another party only on condition that the other party does something else in addition to the primary agreement. For example, a seller will only agree to sell widgets to a buyer on the condition that the buyer will also either (1) purchase knickknacks from the seller or (2) guarantee that it will not buy knickknacks from another seller. Tying arrangement is a per se violation.

 

2. Single-Firm Conduct

 

In an effort to gain market share, companies sometimes employ forms of conduct or tactics that go beyond competition on the merits and that may harm or distort normal competition. Competitive conduct may be justifiable if it is innovative and actually benefits consumers. However, if there is no valid reason for that conduct other than to reduce or eliminate competition and charge higher prices, it will be precisely prohibited by antitrust laws. 

 

The Sherman Act addresses single-firm conduct by providing a remedy against “[e]very person who shall monopolize or attempt to monopolize…any part of the trade or commerce.” Monopoly, per se, is not illegal, but only monopoly acquired or maintained through prohibited conduct is forbidden. The company has total rights to try to achieve a monopoly position, even utilizing some aggressive methods. Also, some companies may succeed in the marketplace to the point where they move far beyond their competitors. To quote from the decision in one court case: “[t]he successful competitor, having been urged to compete, must not be turned on when he wins.” Thus, U.S. antitrust law does not attack monopoly power obtained through superior skill, foresight, and industry. The law is violated only if the company tries to maintain or acquire a monopoly through unreasonable and unethical methods. A key factor used by the courts to determine whether or not conduct is unreasonable is whether the practice has a legitimate business justification.

 

As opposed to the illegal agreements among various market participants, offensive monopoly and attempted monopolization may be committed by an individual firm without the involvement of others. Unreasonable exclusionary practices, predatory pricing, and other methods used by the firm to entrench or create monopoly power can be unlawful.

 

3. Anticompetitive Mergers and Acquisitions

 

Many mergers benefit competition and consumers by allowing companies to operate more efficiently, but some change market dynamics in ways that can lead to higher prices, fewer or lower-quality goods or services, and less innovation. To avoid such consequences, the merger review process was established. Federal law prohibits mergers and acquisitions that bear the effect of substantially lessening competition or tend to create a monopoly. 

 

The Hart-Scott-Rodino Act, a federal statute, requires companies intending to merge to file certain information with the Federal Trade Commission (the FTC). This Act allows the FTC to examine the likely effects of the proposed mergers before they take place. This process of advanced review is necessary in order to prevent the undesired mergers from happening rather than dealing with the consequences later. The agency may also investigate the completed mergers if they harm the customers as a result.

 

In contrast to federal law, there are no filing requirements or specific timing provisions under most state laws. As a result, state antitrust agencies may investigate any merger at any time and may challenge a merger transaction even after it has been consummated without creating any evident harm.

 

Statistics show that 95 percent of proposed mergers presented to the FTC for review do not have any competitive issues. If a deal presents some problems, it is often possible to resolve those concerns by consent agreement between the parties, which allows the beneficial aspects of the deal to go forward while eliminating the competitive threat. If the agency and the parties cannot agree on a solution, the Commission may seek a court order preventing businesses from merging.

 

The announcement of a merger can be a headline-grabbing event, especially in cases of large public companies or when the transaction has been valued at a substantial amount. By law, all information provided to or obtained by the governmental agencies in a merger review or investigation process is confidential. Agencies cannot disclose any information regarding the proposed deal, including the existence of a review or investigation. However there are some circumstances in which the parties themselves may announce their merger plans, and the FTC may confirm the ongoing review.

 

Exemptions to Antitrust Laws

 

There are several exemptions to the enforcement of antitrust law, as follows: 

 

Patent Owners: Because public policy favors innovation, patent owners are exempt. However, the use of a fraudulently obtained patent to create or maintain a monopoly subjects the individuals and companies to criminal and civil prosecution.

 

Labor Unions and Agricultural Organizations: The Clayton Act provides an exemption for labor unions and agricultural organizations.

 

Banks: The Securities and Exchange Act of 1934 regulates banking entities. The U.S. Supreme Court decided that in cases where securities laws and antitrust laws conflict, securities laws prevail.

 

Nonprofits: The Nonprofit Institutions Act permits nonprofits to purchase and vendors to supply the products and services for use by such organizations at a reduced price without violating the antitrust laws.

 

Sports Leagues: Generally, mergers and joint agreements of professional football, baseball, basketball, or hockey leagues are exempt from antitrust law under 15 U.S.C. § 1291 et seq.

 

Newspapers Under Joint Operating Agreements: These allowed limited antitrust immunity under the Newspaper Preservation Act of 1970.

 

Insurance Companies: Limited antitrust exemptions are provided by the McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq.

 

Monopolies in certain industries such as utilities and infrastructure, where multiple players are considered unfeasible or impractical, may be allowed by the government.

 

Antitrust laws also do not prevent companies from using the legal system or political process to attempt to reduce competition. Most of these activities are considered legal.

 

A healthy economy is based on free and open markets. Aggressive competition among sellers in an open marketplace benefits consumers by rendering lower prices, higher quality products and services, and more choices. The goal of antitrust laws is to enforce the rules of the competitive marketplace and maintain healthy national economy.

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