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Originally Published in Cyberspace Law School 2000 Course Materials
By: Glasser Legal Works

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I. Introduction

II. General Antitrust Concepts

III. Enforcement

IV. Specific Antitrust Laws

V. Intellectual Property Licensing Transactions

VI. Specific Issues for Concern

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I. Introduction

There are no special antitrust rules dealing with the Internet. The internet is simply another distribution channel and will be treated as such.

The nature of the internet, however, is that market power will rarely be present as entry is easy and the ability to charge supracompetitive prices will be extremely rare. Obviously, there are potential bottlenecks where market power can be exercised, (e.g., Microsoft) but they will be rare and not everyday issues.

Nevertheless in pursuing e-commerce, there are some antitrust issues that are more likely than not to come up, and since antitrust violations can result in significant liability, expense of litigation and disruption, and in certain limited circumstances, criminal liability, antitrust compliance is not a trivial subject.

The following, therefore, should be considered only a partial outline of issues that should be considered:

II. General Antitrust Concepts

1. Overview

   The overall purpose of the antitrust laws is to protect and promote competition. The theory is that the more competition that exists (i.e., the more players that participate in a given market), the higher the quality of the goods and services that are provided and the lower the prices.

2. The rule of reason. Section 1 of the Sherman Act makes unlawful all contracts, combinations or conspiracies that restrain trade. This has been interpreted by the Supreme Court to mean that contracts, etc. that unreasonably restrain trade are unlawful. Most of antitrust jurisprudence for the last 110 years has been a search for the dividing line between "reasonable" and "unreasonable."

3. The per se rule. Some restraints are deemed always to be unreasonable, making it unnecessary to inquire into their actual effects in the circumstances and without requiring proof of adverse effects on competition. Such restraints include price fixing or customer or territorial divisions among competitors, and vertical minimum price setting.

4. The Clayton Act standard - incipiency. Some restraints are directly covered by the Clayton Act whose standard is looser than that of the Sherman Act. The Clayton Act standard of illegality is where the restraint (or merger or acquisition) "may tend substantially to lessen competition or create a monopoly in any line of commerce".

5. Relevant Markets. The impact of a restraint is assessed in the context of a relevant product market and relevant geographic market. The internet does not necessarily create relevant product markets, and for most purposes a geographic market would be irrelevant to the internet. The fundamental elements of determining a product market are (i) functional substitutability; and (ii) cross elasticity of price and demand. In other words, will an increase in the price of one product cause customers to substitute another product. This is a way of determining whether there are constraints on the ability of a hypothetical monopolist to raise prices.

6. Monopolization. Section 2 of the Sherman Act makes unlawful the monopolization of a relevant market. Simply having a monopoly is not unlawful as a monopoly may be achieved by invention (whether or not patented), having a superior product, superior marketing, or by being in the right place at the right time (sometimes also called "historic accident" or "dumb luck").

7. Horizontal vs. Vertical Relationships, Conduct and Effects. Entities that are competitors are said to be in a "horizontal" relationship. A relationship between a supplier and its customer, in contrast, is referred to as "vertical." It is possible that conduct among parties in a horizontal relationship may have an effect on vertically- related parties (e.g., an agreement among competitors to fix prices may affect the price charged to customers). Similarly, conduct among vertical entities may effect a business that is related to one of the entities on a horizontal level (e.g., an arrangement among a manufacturer and a customer to deal only with one another may have an effect on a competing manufacturer or on a competing customer).

III. Enforcement

1. Enforcement of the federal antitrust laws is carried out by government agencies (the Department of Justice Antitrust Division ("DOJ") and the Federal Trade Commission ("FTC")) and by the private sector. Specifically, private parties (or classes of private parties) who have been injured by reason of an antitrust violation may recover three times their damages from the antitrust offender and may also obtain an injunction against the offending behavior.

2. There are state antitrust statutes that may apply.

3. There are EC antitrust rules — Articles 85 and 86 — that may apply.

4. There are other country antitrust laws that may apply, including Mexico, Brazil and others.

IV. Specific Antitrust Laws

1. Sherman Act Section 1

2. Section 1 proscribes concerted action in restraint of trade, which requires an agreement or understanding between two or more persons to restrain competition. The meaning of this provision is as follows:

   1. The Concept of "Agreement"

   2. The antitrust laws generally require business people to conduct their business affairs and make their commercial decisions unilaterally and independently and not in collaboration with their competitors.

      An unlawful agreement may be between two or more competitors (e.g., two or more manufacturers or two or more customers) or between a manufacturer and its customer(s). The agreement need not be overt and need not be reduced to writing. An unlawful agreement may be (and very often is) inferred from any written or oral communication that appears to have motivated parties to engage in agreed-upon conduct. Even casual conversations or confidential discussions may provide a basis for a Section 1 claim.

   3. The Concept of "Restraining Trade"

   Generally, the issue of whether an agreement is in "restraint of trade" is analyzed under the rule of reason. Some types of agreements are unlawful "per se," such as those among competitors relating to price, customer or territorial restrictions, or bid rigging. Such restraints are considered classic cartel conduct and may also be prosecuted criminally.

3. Sherman Act Section 2

4. Section 2 proscribes "monopolization" and "attempted monopolization." The offense of monopolization obtains when an entity with "monopoly power" (basically an extremely high degree of market power) engages in anticompetitive or "predatory" conduct to maintain or further that power. An "attempt to monopolize" requires a specific intent to monopolize along with a "dangerous probability" that the entities' efforts will be successful in achieving a monopoly. Thus, while Section 1 targets actions between two or more entities, Section 2 of the Sherman Act is directed to unilateral conduct by a single firm. Predatory behavior by a monopolist may include:

   1. Pricing below cost in order to drive out competition (often referred to as "predatory pricing")(the generally applied standard is average variable costs);
   2. Actions designed to drive competitors out of the market or exclude others from the market and which would not be profitable without their exclusionary effects;
   3. Acquiring competitors with the purpose and effect of obtaining or maintaining market dominance.

   It is not unlawful, however, to achieve and maintain monopoly power solely by way of innovation, superior skill or the development of superior products.

5. Clayton Act Section 3

6. This provision targets certain types of vertical arrangements that preclude one party from dealing with the competitors of the other and which may substantially lessen competition, including:

   1. Exclusive dealing arrangements in which a supplier conditions the sale of a product on the customer's agreement not to obtain the product (or a substitute) from any other source.
   2. Requirements contracts in which a customer agrees to buy all of its requirements from a single supplier; or
   3. "Tying arrangements" in which a seller conditions the availability of one product on the purchaser's agreement to purchase a separate, unwanted product as well Tying arrangements are generally unlawful only when it is found that the seller has market power in the first (or "tying") product and is using that power as a means of unreasonably extending its power into the market for the second (or "tied") product.

   The legality of exclusive dealing, requirements contracts and tying arrangements will depend heavily on the degree to which competitors are foreclosed from the market, and the duration of the foreclosure. For example, an exclusive dealing arrangement with a customer will preclude competitors from selling to that customer, but if there are many other customers available, competitors will not be unreasonably foreclosed; similarly exclusive dealing arrangements that have a duration of one year or less are generally considered presumptively lawful

7. Clayton Act Section 7

8. This provision proscribes mergers and asset acquisitions that may have the effect of substantially lessening competition in a certain relevant market. The Antitrust Division of the Department of Justice and the Federal Trade Commission have issued Guidelines for Merger Enforcement that set out modes of analysis as well a "safe harbors" for certain acquisitions. The Guidelines may be found at Appendix A and at http://www.ftc.gov/bc/docs/horizmer.htm.

9. Robinson-Patman Act

10. This law prohibits "discrimination" in price, promotional allowances, services and facilities, the effect of which may be to injure competition.

    1. Price Discrimination

    2. Section 2(a) of the Robinson-Patman Act prohibits a supplier (subject to the justifications outlined below) from charging different prices to competing purchasers of products of "like grade and quality," where the effect of such price discrimination may be to injure competition. "Discriminations" in price may take many forms, including: cash discounts; volume discounts or rebates; credits; free delivery or freight allowances; favorable credit terms; or free merchandise.

       However, price discrimination is not unlawful if it does not adversely affect competition among purchasers. For example:

       1. Non-Competing End Uses: Different prices may be charged to different purchasers who will use the product for different purposes and thus do not compete with one another.
       2. Different Geographical Market: Different prices may be charged to purchasers who sell the product in different geographic markets and thus do not compete with one another.
       3. Justifications/Defenses for Price Discrimination

       4. There are a number of justifications for price discrimination, including:

          1. Meeting competition. The Act permits a seller to offer a lower price to a customer in order to meet an equally low price of a competitor. The lower price must be based on a good faith belief that it is required in order to meet the competitor's price. management in accordance with procedures that have been established with legal counsel before a competitive offer is made;
          2. Cost Justification. Different prices may be charged to competing purchasers if the seller can prove that the lower price charged merely reflects savings in the cost of manufacture, sale or delivery of the product(s) involved.
          3. Changed Conditions. Price variations in response to a change in market conditions or marketability of the goods (e.g., obsolescence of seasonal goods or sales in good faith upon discontinuation of a business) may be lawful.

    3. Discrimination in Promotional Allowances and Services.

    Section 2(d) of the Robinson-Patman Act prohibits the offering of promotional allowances (e.g., cooperative advertising and promotional monies) to a customer unless such allowances are offered on proportionally equal terms to all other competing customers. Section 2(e) of the Act prohibits furnishing promotional services or facilities (e.g., advertising materials, shopping bags, fixtures, or demonstrators) to a customer unless such services or facilities (or suitable alternatives) are offered to all competing customers.

11. Section 5 of the FTC Act

The FTC has the authority under this provision to obtain relief against "unfair methods of competition and unfair or deceptive acts or practices," which has been interpreted to cover conduct that amounts to an antitrust violation, as well as false or misleading advertising practices.

V. Intellectual Property Licensing Transactions

Many internet commerce related transactions will entail the licensing of some form of intellectual property. Most such transactions will be examined under the rule of reason. The Department of Justice and Federal Trade Commission have issued Guidelines for the Licensing of Intellectual Property that in most areas reflect the current state of the law. The Guidelines may be found at Appendix B and at http://www.usdoj.gov/atr/public/guidelines/ipguide.htm. There have been few nonmerger situations in which the Guidelines have been applied.

VI. Specific Issues for Concern

Recognizing that the internet and commerce over the internet will be examine under conventional antitrust principles, there are some areas in particular that would appear to be more likely than not to arise: vertical price fixing issues; customer selection and nonprice vertical restraints, price discrimination issues, and collective anti-internet efforts of "brick and mortar" dealers.

1. Vertical Price Fixing

2. 1. It is illegal per se for a manufacturer or other seller to determine the prices at which its customers may resell products. This includes products resold through internet sites. This means that a manufacturer may not require that an internet seller resell at either a set price or a minimum price. However, the seller may determine unilaterally not to deal with any customer, regardless of reason. "Unilateral" in the context means not in concert with other dealers or any other person.
   2. While conspiracy may be inferred from the circumstances, it is not proper to infer conspiracy from a manufacturer's determination to terminate sales to a particular reseller after complaints from other resellers about the pricing or other competitive practices of the "offending" reseller. See Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984); Business Electronics Corp. v. Sharp Electronics Corp, 485 U.S. 717 (1988).
   3. Suggesting resale prices without requiring resellers to adhere to them is lawful. See Monsanto, supra.
      
      

3. Customer Selection and Nonprice Vertical Restraints

4. 1. It is permissible to select customers based on a supplier's determination that a certain "image" is desirable.
   2. Nonprice vertical restraints, such as location clauses, customer and territorial restraints, are tested under the rule of reason. Continental T.V., Inc. v. Sylvania, Inc., 433 U.S. 36 (1977). Any restraint on interbrand competition resulting from such an arrangement would have to be balanced against offsetting procompetitive effects in interbrand competition.
   3. In the absence of effects on interbrand competition, it is permissible for a seller to prohibit conventional dealers from selling at sites other than the site contracted for; a prohibition on sales via the internet would likely be sustainable.
      
      

5. Price discrimination issues

6. 1. The fact that sales are made through different channels of distribution or industry recognized "classes of trade" does not immunize sales from antitrust scrutiny. To the extent resellers compete for the same customers, pricing and promotional allowances must comply with the Robinson-Patman Act.
   2. The defenses available under the Robinson-Patman Act will also apply, including meeting competition, availability and cost justification, and meeting competition. It should be remembered, however, that the cost justification defense does not relate to different costs of business at the reseller level but applies only to costs saved by the seller in manufacture, delivery or sale. Thus, the fact that an internet seller may incur lower costs of doing business will not justify a price discrimination.
      
      

   Internet sales have attracted attention from small traditional retailers just as have sales to "category killers" and other large customers. Booksellers have sued Barnes & Noble and booksellers, video stores have sued Blockbuster and movie studios, and pharmacists have sued pharmaceutical manufacturers and wholesalers. Thus, the risk of attack on discriminations in price cannot be considered trivial.

7. Anti - Internet Efforts by Dealers

   Collective efforts by dealers to threaten a manufacturer with collective action (i.e. boycott) have been attacked by government enforcers as antitrust violations. In an FTC enforcement action, a Consent Order was entered regarding collective efforts of Chrysler dealers in the Northwest to attempt to have Chrysler Corp. reduce its allocation of new automobiles to a dealer that was selling at low prices via an internet site. In the Matter of Fair Allocation System, Inc., FTC Docket 9288, June 8, 1998.

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