Articles Posted in Types of Antitrust Claims

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Author: Molly Donovan

Antitrust for Kids is a new blog series designed to explain complex principles of U.S. competition law to practitioners and business people in plain English. Meant to be fun, and tongue-in-cheek, the series will serve as a useful primer to help the audience issue spot and better understand antitrust concepts like price discrimination, vertical restraints, tying, tacit agreements, and more.

Max and Margie are next-door neighbors on Lemon Lane. They both operate competing lemonade stands in their front yards all summer. And, both shop at the same grocery stores to purchase the same three ingredients necessary for making their finished drinks:  fresh lemons, sugar, ice.

While they’ve been frenemies for years, casually exchanging pleasantries at times, this summer the weather is very hot, and so is competition in the local lemonade market. In fact, Max and Margie barely acknowledge each another, unless it’s to bad mouth the other—each complaining that the other makes inferior lemonade.

One day, Margie announces a breakthrough that she’s made in the lemonade space:  STRAWBERRY LEMONADE. It’s a hit. Margie begins charging 2 times over cost for her strawberry drink, and the demand for plain old lemonade (sans strawberries) stops cold.

Max is incensed, naturally, and hatches a scheme to bring Margie down.

Max heads to the largest grocery store in town. There, he tells George (the grocer) that unless George stops selling lemons, sugar and ice to Margie, Max—and more importantly, Max’s dad—will pull all their business from George immediately.  EEEK!  That would be a real problem for George because Max’s dad buys nearly all his ingredients to operate the town’s most popular restaurant from George, which is a serious portion of George’s business.

George feels he has no choice.  He agrees with Max to stop selling lemons, sugar and ice to Margie.

[“Oh no,” thinks the antitrust lawyer, “that’s a vertical agreement, i.e., an agreement between a purchaser and a supplier, to restrain competition for the purchase of lemonade ingredients.”]

“But,” says George, “I don’t want to see all of my business with Margie go to the other grocers in town.  Hear what I’m saying?”  “Good idea,” thinks Max.

Max promptly visits the two other grocers in town, telling them that they’d better not sell lemonade ingredients to Margie, or else Max will boycott and so will his dad, both of whom provide a steady stream of business to these grocers as well (whenever George faces supply issues). Max takes care to add: George already agreed, so all of you grocers need to get on the same page.”

Not sure what else to do, these two additional grocers respectively agree to Max’s proposal. While the idea seems contrary to their individual interests, they can see Max means business and independently decide it’s easiest to comply.

Max circles back with George, telling him that all the grocers in town are on board. George nods.

[“Oh no,” thinks the antitrust lawyer, “now there’s a potential horizontal agreement, i.e., an agreement among competitors in the same level on the supply chain—in this case, the 3 grocers. Such an agreement could be implied even though the grocers never actually spoke to one another.”]

As a result of Max’s scheming, Margie can’t buy the ingredients she needs, and goes out of business. Max never can figure out how to add strawberries to his classic recipe for straight lemonade, so the town is left without strawberry lemonade indefinitely.

Margie’s very upset until she meets an antitrust lawyer to whom she tells her story. The antitrust lawyer explains to Margie that she’s the victim of a hub-and-spoke conspiracy—with Max at the hub, 3 separate vertical agreements between Max and each of the grocers (the spokes), and the 3 grocers all implicitly agreeing with one another, forming a horizontal agreement to boycott Margie on the “rim.” While courts may analyze the arrangement differently depending on the jurisdiction, it’s certainly an antitrust concern anywhere.

With her lawyer’s help, Margie files an antitrust claim, wins trebled damages, and lives happily ever after selling her strawberry lemonade, now world famous.

Max becomes a white-collar lawyer specializing in the defense of executives who allegedly violate the criminal antitrust laws. He’s still single.

THE MORALS OF THE STORY:

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Distribution-Antitrust-Developments-300x188

Author:  Steven J. Cernak

Recently, I was researching 2021 antitrust developments to update my Antitrust in Distribution and Franchising book and draft a long article for another publication. That research confirmed that new government antitrust enforcers and their actions gathered the most attention last year — but this blog covered those issues already, such as here and here and here. This post discusses the private antitrust litigation developments affecting distribution that I uncovered but that might have flown under your radar.

Refusal to Deal and Predatory Pricing

Despite the impression left by the mainstream media, not all antitrust cases involving claims of monopolization involved Amazon or Facebook.  Other defendants faced claims of gaining or maintaining a monopoly through refusals to deal or predatory pricing schemes.

Careful readers will recall the anticipation last year that Viamedia Inc. v. Comcast Corp. might generate a Supreme Court opinion on refusal to deal issues.  Here, the defendant monopolist had stopped dealing with the plaintiff after years of doing so and, allegedly, caused competitive harm.  The district court had dismissed the refusal to deal claim by explicitly following the Tenth Circuit’s opinion in Novell, Inc. v. Microsoft Corp., authored by then-Judge Gorsuch, because it found that the defendant’s conduct was not “irrational but for its anticompetitive effect.”  The Seventh Circuit reversed, finding the court’s application of the Novell standard inappropriate at the motion to dismiss stage when a plaintiff need only plausibly allege anticompetitive conduct even if the defendant might later try to prove a procompetitive rationale.

The defendant sought Supreme Court review and the Justices asked for the views of the Solicitor General. The Solicitor General did not recommend that the Court hear the appeal. In June, the Court denied the writ of certiorari. After remand, the plaintiff chose to drop its refusal to deal theory of the case and proceed only on a claim of illegal tying. Therefore, the opinion will stand and future monopolist defendants, at least in the Seventh Circuit, will have more difficulty dismissing refusal-to-deal claims. Instead of simply asserting that some rational potential procompetitive purpose or effect is self-evident from the complaint, the defendant will have to show that the allegations do not raise any plausible anticompetitive purpose or effect, a much more difficult burden.

In another refusal to deal case, OJ Commerce LLC v. KidKraft, LP, the defendant won summary judgment on plaintiff’s refusal-to-deal claim. Plaintiff was a discounting online retailer that had sold defendant’s products, including children’s wooden play kitchens, for years. An affiliate of plaintiff then began making wooden play kitchens that plaintiff also sold on its website.  Defendant objected, claiming that the affiliates’ kitchens were knock-offs of defendant’s products and that plaintiff’s sales of defendant’s products were plummeting. Eventually, defendant terminated its relationship with plaintiff, who then sued alleging illegal monopolization through a refusal to deal.

The court began with the proposition that even a monopolist is not required to do business with a rival. The court recognized that the Supreme Court had found an exception to that proposition in Aspen Skiing Co. but only if defendant’s termination of prior conduct was irrational but for its anticompetitive effect.  The court found “this is hardly the case here” as the defendant had shown several other potential explanations for its termination of plaintiff. As a result, the court granted defendant’s summary judgment motion.

Predatory pricing remains a popular claim by plaintiffs against alleged monopolists, despite the difficult standard for such claims imposed by the Supreme Court. In such claims, the plaintiff alleges that the defendant’s extraordinarily low prices will drive out competitors, which in turn will allow the defendant to later raise prices and harm consumers. In Brooke Group, the Court set a difficult standard to meet because “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.” Also, it can be difficult to distinguish low pro-competitive prices from predatorily low ones. Subsequent plaintiffs have found it difficult to successfully allege, let alone win, such claims.

Last year, we described an exception where a defunct ride-hailing company’s predatory pricing claims against Uber survived a motion to dismiss. In 2021, a taxi company was not as successful and its similar claims were dismissed (although other non-antitrust claims survived). In Desoto Cab Co. v. Uber Technologies, Inc., the court dismissed the claim because the plaintiff did not allege barriers to entry or expansion for new or existing competitors sufficient to allow defendant to recoup its losses. Plaintiff’s mere invocation of network effects without any allegations regarding how they might create entry barriers in this market also was not enough. Finally, unlike the plaintiff in last year’s case, this plaintiff failed to allege why Lyft no longer could prevent defendant’s recoupment through higher prices.

Tying and Agreement

2021 also brought opinions on some of the basic elements of a tying claim and what facts amounted to an agreement.

One element of a successful tying claim is that the defendant is selling two separate products, the tying and the tied product.  To make that determination, courts must find that “there is a sufficient demand for the purchase of [the tied product] separate from [the tying product] to identify a distinct product market in which it is efficient to offer [the former] separately from [the latter].”  In AngioDynamics, Inc. v. C.R. Bard, Inc., the court denied competing summary judgment motions from the parties on this question. The defendant had sought and received regulatory approval to sell the tied product separately; however, it had actually made only a few such sales and then just to a single customer. The only other competitor that sold both products did sell them separately; however, it was not clear that its conditions were identical to defendant’s. The court, therefore, could not determine as a matter of law that the consumer demand was sufficient to make it efficient for defendant to offer the tied product separately.   

For every Sherman Act Section 1 case, a successful plaintiff must show an agreement between defendant and some other entity. To meet that burden at summary judgment or trial, plaintiff must present “evidence that tends to exclude the possibility that the [the defendants] were acting independently.” In a typical distribution case, a terminated distributor claims an anticompetitive agreement between its supplier and some other distributor, usually based on some complaints about the terminated distributor to the supplier from the other distributor.

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Resale Price Maintenance

Author: Jarod Bona

Some antitrust questions are easy: Is naked price-fixing among competitors a Sherman Act violation? Yes, of course it is. Indeed, it is a per se antitrust violation.

But there is one issue that is not only a common occurrence but also a source of great controversy among antitrust attorneys and commentators: Is price-fixing between manufacturers and distributors (or retailers) an antitrust violation? This is usually called a resale-price-maintenance agreement and it really isn’t clear if it violates the antitrust laws.

For many years, resale-price maintenance—called RPM by those in the know—was on the list of the most forbidden of antitrust conduct, a per se antitrust violation. It was up there with horizontal price fixing, market allocation, bid rigging, and certain group boycotts and tying arrangements.

There was a way around a violation, known as the Colgate exception, whereby a supplier would unilaterally develop a policy that its product must be sold at a certain price or it would terminate dealers. This well-known exception was based on the idea that, in most situations, companies had no obligation to deal with any particular company and could refuse to deal with distributors if they wanted. Of course, if the supplier entered a contract with the distributor to sell the supplier’s products at certain prices, that was an entirely different story. The antitrust law brought in the cavalry in those cases.

You can read our article about the Colgate exception here: The Colgate Doctrine and Other Alternatives to Resale-Price-Maintenance Agreements.

In 2007, the Supreme Court dramatically changed the landscape when it decided Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet). The question presented to the Supreme Court in Leegin was whether to overrule an almost 100-year old precedent (Dr. Miles Medical Co.) that established the rule that resale-price maintenance was per se illegal under the Sherman Act.

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Author: Jarod Bona

Do you or your competitor have a monopoly in a particular market? If so, your conduct or their conduct might enter Sherman Act, Section 2 territory, which we call monopolization.

If you are in Europe or other jurisdictions outside of the United States, instead of monopoly, people will refer to the company with extreme market power as “dominant.”

Of course, it isn’t illegal itself to be a monopolist or dominant (and monopoly is profitable). But if you utilize your monopoly power or obtain or enhance your market power improperly, you might run afoul of US, EU, or other antitrust and competition laws.

In the United States, Section 2 of the Sherman Act makes it illegal for anyone (person or entity) to “monopolize any part of the trade or commerce among the several states, or with foreign nations.” But monopoly, by itself, is not illegal. Nor is it illegal for a monopolist to engage in competition on the merits.

As an aside, I have heard, informally, from companies that are considered “dominant” in Europe that the label of “dominant” effectively diminishes their ability to engage in typical competitive behavior because they are under such heavy scrutiny by EU Competition authorities.

If you are interested in learning more about abuse of dominance in the EU, read this article.

In the United States, monopolists have more flexibility, but they are still under significant pressure and could face lawsuits or government investigations at any time, even when they don’t intend to violate the antitrust laws. There is often a fine line between strong competition on the merits and exclusionary conduct by a monopolist.

Here are the elements of a claim for monopolization under Section 2 of the Sherman Act:

  • The possession of monopoly power in the relevant market.
  • The willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

This looks simple, only two basic elements, but it isn’t.

The Possession of Monopoly Power in the Relevant Market

To determine whether an entity has monopoly power, courts and agencies usually first define the relevant market, then analyze whether the firm has “monopoly” power within that market.

But because the purpose of that analysis is to figure out whether certain conduct or an arrangement harms competition or has the potential to do so, evidence of the actual detrimental effects on competition might obviate the need for a full market analysis. If you want to learn more about this point, read FTC v. Indiana Federation of Dentists (and subsequent case law and commentary).

Sometimes this element leads to difficult questions about the line between monopoly power in a relevant market and something slightly less than that. Other times, the monopoly-power element comes down to how the court will define the relevant market. A broader market definition may create a finding of no monopoly power, while a more narrow definition means the powerful company has monopoly power.

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Author: Jarod Bona

Have you ever considered the idea that your business would be much more profitable if you didn’t have to compete so hard with that pesky competitor or group of competitors?

Unless you have no competition—which is great for profits, read Peter Thiel’s book—this notion has probably crossed your mind. And that’s okay—the government doesn’t indict and prosecute the antitrust laws for what is solely in your mind, at least not yet.

But, except in limited instances, you should definitely not divide markets or customers with your competitors. Indeed, you shouldn’t even discuss the idea with your competitors, or, really, anyone (many antitrust cases are made on inconveniently worded internal emails).

The reason that you shouldn’t discuss it is that market-allocation agreements are one of the few types of conduct that the antitrust laws consider so bad they attach the label “per se antitrust violation.” The other per se antitrust offenses are price-fixing, bid-rigging, maybe tying, and sometimes group boycotts.

What is a Market-Allocation Agreement?

When competitors divide a market in which they can compete into sections in which one or more competitors decline to compete in favor of others, they have entered into a market-allocation agreement.

The antitrust problem with a market-allocation agreement is that a group of customers experience a reduction in the number of suppliers that serve them. The companies dividing the markets benefit, of course, because they have less competition for at least some of the market, which means that it is easier to raise prices or reduce quality.

It doesn’t matter, from an antitrust perspective, how the competitors divide the markets or even whether they both end up competing for that product or service after the agreement.

For an obvious example, ponder a small town with two large real-estate brokerage businesses—Northern Real Estate Brokers and Southern Real Estate Brokers. A river flows through the town, roughly dividing it into northern and southern regions. The Northern Real Estate Brokers mostly attract clients north of the river and the Southern Real Estate Brokers usually service clients south of the river. But the river is passable; there is a bridge and it isn’t that big of a river anyway. So sometimes agents of each brokerage will participate in transactions on the other side river from their normal client base.

Late one evening, in the middle of the bridge, the leaders of the two companies meet and agree that from that point on, each company would only represent sellers for properties on their side of the river.

This is a market-allocation agreement and the leaders could find themselves in antitrust litigation, or even jail (the Department of Justice will often prosecute per se antitrust violations).

While the geographic boundary created an obvious method for the two companies to divide markets, they also could have agreed not to steal each other’s existing customers (market allocation based upon incumbency, which is common). So if a real estate agent from the northern brokerage firm won a customer, no agent from the southern brokerage firm would compete for that customer’s business in the future.

This customer allocation agreement is also a per se antitrust violation. To see how this type of antitrust offense can develop in a seemingly innocent way, read our article on the anatomy of a per se antitrust violation.

In this way, the antitrust laws actually encourage stealing customers.

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Author:  Steven J. Cernak

Recently, I was researching antitrust developments in 2020 to update my Antitrust in Distribution and Franchising book.  While there were several developments last year, what struck me was the large number of potentially drastic changes to antitrust distribution law that started to play out in 2020 but are continuing into 2021.  Whether you think of them as shoes to drop or dogs yet to bark, these three potential changes are the key ones to watch in 2021.

Legislative Changes to the Antitrust Laws?

In the Fall of 2020, the U.S. House Judiciary Committee issued its Majority Report on its lengthy Investigation into Digital Markets. While the bulk of the Report focused on a few big tech companies like Google, Facebook, and Amazon, the Report also recommended that Congress override several “classic antitrust cases” that allegedly misinterpreted antitrust law applicable to all companies.  Because we have covered several of those recommendations in detail already (see below), I will just focus on potential applications to distribution here.

  1. Classic Antitrust Case: Will Congress Override Brooke Group, Matsushita, and Weyerhaeuser—and Resurrect Utah Pie?
  2. Classic Antitrust Cases: Trinko, linkLine and the House Report on Big Tech.
  3. What Happens if Congress Overrides the Classic Antitrust Platform Market Case of American Express?

First, the Report recommended overriding Trinko, a case that has made refusal to deal claims against monopolists very difficult to bring, as we detail in the next section. In Trinko, the Court practically limited such claims to those that are nearly identical to the claims in Aspen Skiing, namely that the monopolist ended a prior voluntary course of dealing with the plaintiff for no good reason. Might an override of Trinko make it easier for a plaintiff-retailer to object if a monopolist defendant-retailer kicks the plaintiff off the defendant’s platform?

Second, overriding Trinko might also alter one of its more famous holdings, that the mere possession of monopoly power and the ability to impose “high” prices does not violate Sherman Act Section 2. While most states have price gouging laws, Trinko found that charging a “high” price was not “monopolization.”  If Congress overrides Trinko—and adopts the broader “abuse of dominance” standard for Section 2 cases, as the Report also recommends — might we end up with a federal price gouging law?

Third, the Report also is concerned about monopolists charging too low a price and recommends overriding Brooke Group and its “recoupment” requirement for successful predatory pricing claims.  As we covered previously, the Supreme Court was worried about discouraging low prices for consumers by companies with large market shares and so adopted a two-part test in Brooke Group that is difficult for plaintiffs to meet.  Plaintiffs must show very low prices, usually below average variable costs, plus the probability that the defendant later will be able to raise prices to recoup its losses.  If Congress overrides the recoupment prong of Brooke Group, might we see less aggressive pricing from companies with high market shares?

Fourth, overriding the recoupment prong also might revive long-dormant primary line price discrimination claims under Robinson-Patman.  While there are few Robinson-Patman claims in total today, all of them are secondary line claims:  Manufacturer 1 sells the same commodity to Retailer A at a lower price than to Retailer B, who claims an injury to itself and competition. In Brooke Group, the Court looked at primary line discrimination claims and applied the same two-part test for predatory pricing to primary line claims:  Manufacturer 1’s lower prices to Retailer A must be below its average variable costs and Manufacturer 1 must be able to later recoup its losses before a court can find harm to competition and Manufacturer 2. Before Brooke Group, the Supreme Court’s test had been the one from the oft-criticized Utah Pie opinion that focused on the defendant’s intent to lower prices for the entire market.  If Congress overrides the recoupment prong of Brooke Group, might we see price discrimination claims from manufacturers who cannot, or do not want to, match the lower prices of their competitors?

As of this writing, Sen. Amy Klobuchar has introduced legislation that would drastically change the antitrust laws.  While most of the proposed changes relate to merger review, the proposed legislation would expand the definition of “exclusionary conduct” subject to the antitrust laws and create a presumption that such conduct by “dominant firms” is anticompetitive.  Might we see changes to the antitrust laws that drastically change how manufacturers, distributors, and retailers deal with one another?

Supreme Court Weighs in on Refusal to Deal Law?

As we have discussed several times (see here, here, and here), the courts are skeptical of claims that a monopolist’s refusal to deal with some other company, usually a competitor, is monopolization. Generally, even a monopolist has no duty to deal with its competitors. One of the few exceptions is when the facts are very close to Aspen Skiing where the Court did find such a violation of a duty to deal.

In Aspen Skiing, the Court found a refusal to deal violation because of what it saw as the defendant’s decision to terminate a “voluntary (and thus presumably profitable) course of dealing” and its “willingness to forego short-term profits to achieve an anti-competitive end.”  Many refusal to deal claims flounder because the defendant and plaintiff had never entered any sort of “course of dealing.”  But even if that prong is met, many lower court judges, such as then-Judge Gorsuch in the 10th Circuit’s Novell case, emphasize that a monopolist might “forego short-term profits” but for pro-competitive ends. Those cases, therefore, require a plaintiff to show that defendant’s conduct is “irrational but for its anticompetitive effect.”

The District Court in Viamedia, Inc. v. Comcast Corp. granted defendant’s motion to dismiss the refusal to deal claim, despite termination of a prior voluntary course of dealing, because the “potentially improved efficiency” resulting from the termination showed that the move was not “irrational but for its anticompetitive effect.”

The Seventh Circuit reversed, finding that a plaintiff only must allege that defendant’s termination was “predatory.”  As the concurring judge described it, a plaintiff need only allege some anticompetitive goal for the termination. A defendant’s assertion of other, procompetitive, rationales for the conduct was a question for summary judgment, not a motion to dismiss. If allowed to stand, the court’s ruling would make it much easier for refusal to deal plaintiffs to survive to discovery, thereby encouraging more such claims.

Comcast petitioned the Supreme Court for certiorari and in December 2020, the Court sought the views of the Solicitor General. Any response from the Solicitor General could indicate whether the Biden Administration supports any change, large or small, as to how the Court has interpreted the Sherman Act in refusal to deal cases. Might the Court weigh in on refusal to deal monopolization cases and, if so, how would such an opinion affect the chances of new antitrust legislation?

Changes Driven by Amazon? 

Of course, we could not post about distribution and antitrust and not mention Amazon.  As we discussed earlier, Amazon’s Jeff Bezos was one of several big tech executives who testified at a Fall 2020 Congressional hearing. At the time, we described some potential antitrust claims raised by that testimony and concluded that ones alleging illegal tying or monopolization had the best chance of succeeding—and that even those faced some real questions.

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By:  Steven J. Cernak

As we described in a prior post, the U.S. House Judiciary Committee Majority Report of its Investigation into Digital Markets included a number of recommendations that went beyond digital markets, including overriding several classic antitrust cases.  One of the Report’s recommendations is to make it easier for plaintiffs to bring predatory pricing and buying monopolization cases by overriding the “recoupment prong” in Brooke Group, Matsushita, and Weyerhaeuser.  While such action would drastically alter monopolization law, it also might inadvertently (?) revive another classic antitrust case, Utah Pie, and certain Robinson-Patman price discrimination claims long considered dead.

Predatory Pricing Under Brooke Group and Matsushita

We covered Brooke Group and predatory pricing in a prior post and so just summarize it here.  Sherman Act Section 2 claims for monopolization can be lodged only against “monopolists” that are “monopolizing,” that is, acting in a way to maintain that monopoly.  There is no general test to judge a monopolist’s actions; instead, courts have developed different tests for different actions, including predatory pricing.

Predatory pricing is pricing below some level of cost so as to eliminate competitors in the short run and reduce competition in the long run.  The Brooke Group Court established a two-part test for such claims:  ”the prices complained of are below an appropriate measure of its rival’s costs … [and the defendant] had a … dangerous probability of recouping its investment in below-cost prices.”

While the Report did not express any concerns about the “below an appropriate measure of costs” prong, its one example (Amazon’s pricing of diapers) just described the pricing as “below cost.”  Lower courts have developed a standard that finds prices “below an appropriate measure of costs” only if they are below some measure of the monopolist’s incremental costs, like average variable costs. It is not clear if the Report’s authors want to modify this prong as well.

Under the recoupment prong, a plaintiff must show that the monopolist has the capability to drive out the plaintiff and other competitors plus keep them (and other potential competitors) out so it can later raise prices and “recoup” its losses.  Such a showing requires an analysis of the relative strengths of the competitors and the attributes of the market, such as high entry barriers.

The Brooke Group test has been difficult for predatory pricing plaintiffs to meet — as the Supreme Court intended, for two reasons.  First, the Court thought it would be difficult for courts to distinguish between competitive low prices and predatorily low ones.  Because “cutting prices in order to increase business is often the very essence of competition,” the Court was concerned that an easier test would deter low prices that benefit consumers.

Second, the Court had earlier in Matsushita expressed skepticism that such competitively harmful predatory pricing schemes occurred often:  “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”  As we covered in different prior posts, while Matsushita does concern predatory pricing, its holding is more concerned with the appropriate standard for summary judgment in any antitrust case; because the “consensus” quote has been repeated in nearly every predatory pricing case since Matsushita, however, the Report’s recommendation to override it makes sense.

Weyerhaeuser Extends Recoupment to Predatory Buying and Monopsony

More than a decade after Brooke Group, the Supreme Court in Weyerhaeuser extended its two-part test for predatory pricing by a sell-side monopolist to predatory buying (or overbidding) by a buy-side monopsonist.  There, the defendant allegedly purchased 65% of the logs in the region that were a necessary input for lumber.  Such alleged overbuying drove up the cost of the input while the price of lumber was going down.  These trends led plaintiff, a competing lumber mill, to shut down operations and sue.

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Bundling-antitrust-300x200

Author: Jarod Bona

Let’s pretend that you sell three different types of protein powder: Whey Protein, Casein Protein, and Pea Protein. You sell them each for $10 per container. But for someone—like myself—that likes to include several types of protein in their morning smoothie, you offer a special deal of $25 total for purchasing all three types of protein at once (compared to $30 at the regular price).

Congratulations, you just offered a bundled discount, the subject of this article.

Should you worry that your bundled discount breached the antitrust laws?

Let’s dig in.

You probably recognized the maneuver above because bundled discounts are pervasive in a market system. Companies like it when customers purchase several products and may thus offer a discount—a reduction in margin—when customers do so. At the same time, customers like discounts, so they may purchase a second, third, or fourth product from the same company to obtain the discount.

So what is the problem?

Well, like many pricing policies, there exist a set of conditions such that certain bundled discounts create anticompetitive harm that exceeds their procompetitive benefits.

That sounds too formal, so let’s try this: Sometimes a big company that sells lots of different products can eliminate its competitors that sell fewer types of products by manipulating the prices of their bundles.

How does that work?

If your company has market or monopoly power, your profits are at least a little extra. This is sometimes called supra-competitive pricing or monopoly profits (or monopoly rents if you prefer economist-speak). If that is your world, you worry about not just competing, but also about maintaining your extra level of profits that only exist with market or monopoly power.

Because these extra profits can be so significant, those that have market or monopoly power will burn extraordinary resources to hold onto that power. This, of course, is one of the wasteful aspects of monopoly—the resources that go into maintaining it.

You must keep feeding the monopoly beast or it may grow weak and competition will kill it.

Anyway, monopolists are brilliant at manipulating pricing to exclude their competitors. And even though bundled discounts are usually pro-competitive, a monopolist in certain situations can employ them to exclude competition and protect their market power and, thus, their outsized profits.

In what situation can a monopolist manipulate bundled discounting to maintain or extend their monopoly?

Let’s turn to an actual case that made it to the Third Circuit a couple years after I graduated from law school: LePage’s, Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003).

You’ve probably heard of 3M—Minnesota Mining and Manufacturing Company. They are based in Saint Paul, Minnesota and they are important to the community. I am from Minnesota, originally, and as a local, you hear a lot of good about this innovative company. (Bona Law also has a Minnesota office).

3M makes many products, but relevant to this Third Circuit case, they manufacturer transparent tape (under the Scotch brand)—just like their upstart competitor, LePage’s. I am speaking, of course, from the time perspective of the lawsuit. I am certain that 3M still makes transparent tape, but I haven’t kept up with LePage’s.

Anyway, unlike LePage’s, 3M also made many other products that they sold to major customers that purchased their Scotch tape. Importantly, 3M had monopoly power in the market for transparent tape.

So, according to the lawsuit, here is what 3M did: They offered discounts to major customers (retailers, etc.) conditioned on those customers purchasing products from each of six of 3M’s product lines. 3M linked the size of the rebate to the number of product lines in which the customer met purchasing targets. And the number of targets (i.e. minimum purchases in separate product lines) would determine the rebate that the customer would receive on all of its purchases. So each customer had a substantial incentive to meet targets across all product lines, to maximize the discounts/rebates.

LePage’s sold transparent tape, but not all of the other products. So they didn’t stand a chance to compete because the customers for transparent tape would purchase from 3M because by doing so, they receive substantial discounts on a bunch of other products too.

The Third Circuit explained that “[t]he principal anticompetitive effect of bundled rebates as offered by 3M is that when offered by a monopolist, they may foreclose portions of the market to a potential competitor who does not manufacture an equally diverse group of products and who therefore cannot make a comparable offer.” (155).

Of course, if there were a competitor of 3M, even separate from LePage’s, that could offer these product lines, the Court may have held that there wasn’t anticompetitive harm or antitrust injury.

If you are inclined toward numbers, you might spit out your drink and say—“Gosh darn it! Hold on a Second! How do we know whether the discount forecloses the market or is even anticompetitive without getting into the actual prices and discounts? If LePage’s is super inefficient or insists on crazy-high prices, should they really be able to utilize the machinery of the federal government to stop a benevolent monopolist from reducing their prices?”

Good instincts!

LePage’s was a controversial decision for that reason. While 3M’s bundling could have been anticompetitive, the Court didn’t go deep enough into the analysis to really understand if they were.

For some number crunching, let’s travel west to the Ninth Circuit and see what they did a few years later in Cascade Health Solutions v. PeaceHealth, 515 F.3d 973 (updated Feb. 1, 2008).

The Discount-Attribution Test for Bundled Discounts

In PeaceHealth, the Ninth Circuit overturned a jury verdict against defendant for violating Section 2 of the Sherman Act by bundling (among other conduct). The trial court erred in providing the jury with a LePage’s instruction on bundling that didn’t include specific price-cost requirements.

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Author: Jarod Bona

The short answer to the statute-of-limitations question is that an antitrust action must be commenced “within four years after the cause of action accrued.” (15 U.S.C. § 15b). And the antitrust cause of action accrues when the defendant acts in violation of the antitrust laws and injures plaintiff.

But it isn’t always this simple. Sometimes the statute of limitations doesn’t start running right away, even when the antitrust defendant actually injures the plaintiff. Unlike the victim of a battery—maybe a punch to the face—an antitrust-law victim doesn’t always know right away that he or she or it (i.e. a corporation) suffered injury from an anticompetitive act.

This is called the discovery rule and it isn’t unique to antitrust. There are other types of claims in which the victim doesn’t even know about the injury. Fraud is a good example. The victim may not know that he or she has been swindled. When they find out about the fraud, the statute of limitations may have passed. But if the cause of action doesn’t accrue until discovery, the victim will still have the standard time period to file a lawsuit.

The discovery rule could also apply to a medical malpractice case—the sort of case Bona Law doesn’t handle. Like a fraud injury, the victim may be walking around totally oblivious to an injury. Maybe during a surgery the doctor’s Fitbit fell off and landed in the patient? The doctor, none the wiser because he or she was concentrating so hard, simply didn’t notice. Presumably a Fitbit left in the body causes some sort of medical injury, so when the patient/victim finds out about it, the cause of action begins to accrue. Of course, I don’t know if Fitbits are often left in bodies because we don’t do medical malpractice work.

Not all courts apply the discovery rule in antitrust cases: Check out this article by Michael Christian and Eric Buetzow if you have a Law360 subscription. Of course, even if a Court applies the injury rule to the exclusion of the discovery rule (and they sometimes do), a plaintiff could still invoke fraudulent concealment to postpone accrual of many antitrust claims.

You will likely see a fraudulent concealment count in any case involving a long-lasting conspiracy. That is because the nature of a conspiracy—in most cases—is to hide the anticompetitive conduct. Most antitrust claims where a discovery rule would be useful are ones in which a plaintiff could likely invoke fraudulent concealment.

Fraudulent concealment means that the defendants are purposely trying to hide their bad conduct, with an intent to deceive the victims.

So, for example, if there are a group of competitors that are engaged in a market-allocation or bid-rigging conspiracy and they also cover up the conspiracy, it is likely that a Court will find that the conspirators committed a fraudulent concealment such that the antitrust cause of action doesn’t begin to accrue until the victim discovers the conspiracy.

You will see claims of fraudulent concealment in many antitrust complaints. Of course, if you are an antitrust plaintiff, you may have to show that you exercised diligence during the concealment period.

You can read our article about fraudulent concealment in the antitrust context here.

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Author:  Steven J. Cernak

On October 6, 2020, the Antitrust Subcommittee of the U.S. House Judiciary Committee issued its long-anticipated Majority Report of its Investigation of Competition in Digital Markets.  As expected, the Report detailed its findings from its investigation of Google, Apple, Facebook, and Amazon along with recommendations for actions for Congress to consider regarding those firms.

In addition, the Report included recommendations for some general legislative changes to the antitrust laws.  Included in those recommendations were proposals for Congress to overrule several classic antitrust opinions.  Because this blog has summarized several classic antitrust cases over the years (see here and here, for example), we thought we would summarize some of the opinions that now might be on the chopping block.  This post concerns two classic Supreme Court opinions on refusal to deal or essential facility monopolization claims, Trinko and linkLine.

House Report on Refusal to Deal and Essential Facilities

The Report’s recommendations for general changes in the antitrust laws included several aimed at increasing enforcement of Sherman Act Section 2’s prohibition of monopolization.  In particular, the Report recommended that:

Congress consider revitalizing the “essential facilities” doctrine, or the legal requirement that dominant firms provide access to their infrastructural services or facilities on a nondiscriminatory basis.  To clarify the law, Congress should consider overriding judicial decisions that have treated unfavorably essential facilities- and refusal to deal-based theories of harm.  (Report, pp. 396-7)

The two judicial opinions listed were Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) and Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555 U.S. 438 (2009).

Trinko

Justice Scalia wrote the Court’s opinion dismissing the plaintiff’s refusal to deal claim.  There were no dissents although Justice Stevens, joined by Justices Souter and Thomas, wrote separately to concur in the result but would have dismissed based on lack of standing.

Since the Supreme Court’s 1919 U.S. v. Colgate (250 U.S. 300) decision, courts have found that “in the absence of any purpose to create or maintain a monopoly,” the antitrust laws allow any actor, including a monopolist, “freely to exercise his own independent discretion as to parties with whom he will deal.”  Trinko narrowly interpreted the Court’s earlier exceptions to the rule that even a monopolist can choose its own trading partners.

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