Although you may not realize it, as a consumer, antitrust laws affect your daily life in a variety of ways. Whether you’re shopping for food at the grocery store, buying a car, or downloading new software from the Internet, antitrust laws play an important role in ensuring that you have the benefit of competitive prices and high quality goods and services. The antitrust laws accomplish these goals by promoting and fostering competition in the marketplace and preventing anticompetitive mergers and business practices.
In many respects, antitrust is a complex and intricate area of law that most consumers may only know about through what they have read in the newspapers or seen on the news. Even then, antitrust laws can appear somewhat distant and esoteric. This short guide discusses antitrust laws and provides answers to some of the basic questions consumers often send to us. While this summary is not meant to be a comprehensive statement of the law, we hope that it will assist you in learning more about antitrust laws to better understand how both federal and state antitrust enforcers work to ensure a free and competitive marketplace.
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I. Background and History of the Antitrust Laws
A. Federal Antitrust Laws
The first antitrust law enacted in the United States was the Sherman Antitrust Act, in 1890. Perhaps the most significant of the federal antitrust laws, the Sherman Act was intended to combat the “business trusts” of the American economy during the late nineteenth century, and to this day it remains the bedrock of antitrust enforcement in the U.S. The Sherman Act prohibits two broad categories of conduct. First, it declares to be illegal “[e]very contract, combination, in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” Second, it prohibits efforts to “monopolize, . . . attempt[s] to monopolize, or . . . conspir[acies] … to monopolize any part of the trade or commerce among the several States, or with foreign nations.” While the Sherman Act is broadly worded to apply to all restraints of trade, the United States Supreme Court has interpreted the Sherman Act as applying only to unreasonable restraints of trade. Penalties for violating the Sherman Act include can be either civil or criminal in nature. Only the United States Department of Justice has the authority to criminally prosecute individuals for violating the Sherman Act. Additionally, some states have criminal authority under their own state antitrust laws.
In 1914, Congress enacted two new antitrust laws. First, Congress enacted the Federal Trade Commission Act, which created the Federal Trade Commission and gave it the authority to enforce U.S. antitrust laws. Second, Congress enacted the Clayton Antitrust Act, which was intended to supplement and strengthen enforcement of antitrust laws. It added new forms of prohibited conduct, such as “mergers and acquisitions where the effect may substantially lessen competition”, and also gave state attorneys general the ability to enforce the federal antitrust laws. The Clayton Act has been amended several times over the years, first by the Robinson-Pitman Act of 1936, to ban certain forums of discriminatory business conduct, and then again by the Hart-Scott-Rodin Act in 1976, to require companies intending to merge to notify the federal government before consummating the transaction in order to enable enforcement agencies to review the competitive effects of the merger.
B. State Antitrust Laws
Most states, including Washington state, have enacted their own antitrust laws to prohibit anticompetitive conduct affecting commerce within their states and to supplement enforcement of federal antitrust laws. While state and federal antitrust laws are conceptually similar, the codification of state antitrust laws varies widely from state to state. For example, some state antitrust laws, such as those in Washington, substantially track the language of their federal counterparts, whereas other states only incorporate select sections of federal antitrust laws, recite specific types of prohibited acts, or include new areas of substance entirely. In many cases, state antitrust laws are more expansive than the federal antitrust laws in terms of the amount and quality of prohibited conducted. The interpretation of state antitrust laws may, but will not always, substantially mirror the federal antitrust laws.
Unless otherwise noted, throughout this guide, references to “state antitrust law” refer to Washington state’s antitrust laws.
II. Who Enforces the Antitrust Laws?
The antitrust laws are enforced by both public and private parties.
A. Government Enforcement
The United States Department of Justice Antitrust Division (“DOJ”) and the Federal Trade Commission (“FTC”) share responsibility for investigating and litigating cases under the Sherman Act and they both also review potentially anticompetitive mergers under the Clayton Act. While there is not a formal system by which the DOJ and the FTC divide their enforcement responsibilities, the agencies typically devote resources to particular industries where they have investigated or litigated in the past. For example, typically the DOJ will review mergers in transportation industries, such as airlines or railroads, as well as the telecommunications industry. The FTC generally focuses its enforcement responsibility in the oil and gas, pharmaceutical, and health care industries.
State attorneys general also have authority to enforce federal and state antitrust laws. Typically, states investigating a matter arising under the federal antitrust laws will jointly investigate with either the DOJ or the FTC, or may conduct a separate investigation. Individuals or businesses that violate Washington state’s antitrust laws are subject to civil penalties of up to $100,000 per violation for individuals, and up to $500,000 per violation for corporations. In addition, state attorneys general have the authority to seek restitution on behalf of the citizens of their states that have been harmed as a result of violations of either the federal or state antitrust laws. Our state antitrust law was recently amended to enable the Attorney General to recover restitution on behalf of citizens that have been indirectly harmed by a violation of the state antitrust laws.
The Attorney General of Washington, through its Antitrust Division, is the primary enforcer of our state antitrust laws. As part of that responsibility, the Attorney General’s Office regularly conducts outreach to consumers, businesses, and trade groups to explain how antitrust laws are enforced and to underscore their importance.
B. Private Enforcement
The antitrust laws are also enforced by private parties. Under both federal and state antitrust law, any person who is “injured in his business or property” by a violation of antitrust laws is entitled to bring an action in court. A prevailing plaintiff is eligible to recover treble damages, costs of suit, as well as attorneys’ fees. Additionally, private parties are also authorized to obtain injunctive relief to prevent threatened losses or damages. The majority of antitrust suits are in fact brought by private litigants seeking damages for violation of federal and state antitrust laws. Because these antitrust actions are often aimed at business practices that affect interstate commerce, private antitrust actions often take the form of a class action seeking damages and restitution for consumers across the country.
III. What Do the Antitrust Laws Prohibit?
If you were to read through the Sherman Act, you would see that the Act is not at all explicit about what conduct is prohibited. The Clayton Act is a little more specific about conduct that may be illegal, but only when such conduct substantially lessens competition, or tends to create a monopoly in any line of commerce, neither of which is defined in the statute. Because our state antitrust law substantially tracks the federal antitrust laws, the same interpretive issues arise under those statutes as well.
It turns out that when Congress enacted the Sherman Act, it intentionally left it to the courts to develop the substance of the Sherman Act, and to ultimately determine what should or should not be deemed illegal. Therefore, the Sherman Act is sparse, but in fact carries with it over 100 years’ worth of interpretation from the courts, antitrust enforcers, economists, and policy makers, making it a highly rich area of the law. What follows will be a basic summary of the types of conduct for which it is now well established may raise concerns under antitrust laws.
As you read through these pages, it’s important to remember that one of the central tenants of antitrust law is the protection of competition, not competitors. In market economies, competition between firms necessarily produces winners and losers. The fact that a company has competed aggressively on the merits and caused another firm to go out of business is not itself a violation of antitrust laws; this may simply be the competitive process playing out precisely as it should.
A. Section 1 of the Sherman Act – 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 among the several States, or with foreign nations.” Generally speaking, a restraint of trade is an agreement among two or more persons or entities that affects the competitive process. However, under this approach, even contracts for the purchase and sale of a single good would seem to be a prohibited by antitrust laws. Therefore, courts have limited the Section 1 of the Sherman Act (and accordingly, the corresponding section of our state antitrust law) as applying only to “unreasonable” restraints of trade. Over the years, two different methods have evolved to analyzing conduct under Section 1. Courts now apply either (1) a per se analysis, or (2) a broader rule of reason analysis to evaluate whether conduct violates Section 1 of the Sherman Act.
1. Per Se Offenses
It has become well settled over the years that certain forms of agreement among competitors are so harmful to competition and consumers that such conduct should be prohibited outright. The antitrust laws deem these types of offenses as per se illegal, because they will always or almost always result in consumer harm. Examples of per se offenses include price fixing, bid rigging, market and/or customer allocations and group boycotts.
As you read through the following discussion on per se offenses, it’s important to note that all of them require an agreement to be illegal under antitrust laws. An agreement, by definition, requires more than one person acting together; unilateral, independent business decisions will not meet the agreement requirement. An agreement does not have to be in a particular form; it can be proven by a written document, verbal exchanges, or even inferred from conduct (e.g., regular meetings between competitors followed by joint conduct immediately afterwards).
A. Price fixing. Price fixing is an agreement among competitors to raise, lower, or otherwise stabilize the price range, or any other competitive term that will be offered for their products or services. Competitive terms that competitors may not agree to include anything from financing terms and warranties to discounts and shipping fees. What matters is whether there is an agreement, the effect of which is to directly or indirectly affect prices. Price fixing has long been recognized as per se illegal under the Sherman Act due its harmful effect on competition and consumers.
Firm A competes with Firm B. For the past several weeks, they have been engaged in a price war, with each firm attempting to undercut the other’s prices. Upset with the current market prices, Firm A’s CEO calls Firm B’s CEO and tells him that the low prices are endangering his business and that he can no longer cover his costs at the current price level. To save his company from going under, he offers not to undercut Firm B’s prices anymore if Firm B can agree to the same. Firm B’s CEO accepts and the price war ends. A’s and B’s agreement not to undercut the other’s prices constitutes a price fixing agreement under the Sherman Act. Because price fixing is per se illegal, it does not matter that Firm A made the agreement to save his company from going out of business; it is still illegal under the Sherman Act. It would also be illegal if non-CEO employees reached the same agreement.
It is not the case that all instances of seemingly similar pricing decisions are necessarily the result of price fixing; in many cases, businesses may simply be making unilateral business decisions due to external market factors. Therefore, in order to show the existence of an illegal agreement, antitrust laws require more than the mere parallel or similar conduct among competing firms.
Q: I noticed that several gas stations in my area all raised their prices at the same time to within several cents of one another. In other cases, I’ve seen them lower their prices to roughly the same amount. Isn’t this price fixing?
A: On these facts alone, there is no evidence of price fixing. Price fixing requires evidence of an agreement, and here, there is nothing to suggest that each gas station isn’t independently setting its own price in response to external market forces, such as an increase in the cost of crude oil or cost of delivered fuel. High prices do not necessarily equate to price fixing.
B. Bid Rigging. Bid rigging refers to coordinated conduct among competing bidders that undermines the bidding process. One common form of bid rigging is an agreement among bidders as to who will win the bid.
For the past several years, Firm A and Firm B have submitted competing bids for a government contract. This year, they decide together that Firm B will submit a bid superior to Firm A’s and that if Firm B is awarded the contract, it will subcontract part of the work to Firm A. This conduct is illegal under antitrust laws because A and B have agreed not to compete for the contract.
C. Market or Customer Allocations. A market or customer allocation is an agreement among businesses not to compete for customers. For example, an agreement to allocate or divide sale territories, assign certain customers to particular sellers, or reduce output would be per se illegal under the Sherman Act.
In some instances, limited non-compete agreements may be permissible when the agreement is ancillary to a larger transaction. For example, limited non-compete agreements are commonly entered into as part of a sale of a business, where the non-compete may be necessary to protect the value of the business. Notwithstanding these limited permissible uses of non-compete agreements, the non-compete agreement but must still be reasonably limited in time and scope.
Firms A and B are competing car dealerships. In order to boost their sales, they jointly decide that customers willing to spend above a certain dollar amount will be referred to Firm A, and customers wishing to spend below a certain dollar amount will be referred to Firm B. This agreement would be an illegal customer allocation.
D. Group boycotts. A group boycott is an agreement among competitors to engage in some form of concerted conduct, such as agreeing not to do business with a targeted individual or business, or only on certain agreed-upon terms.
A and B are small widget manufacturers that sell their products through a large retailer C, and smaller retailer D. In order to increase its market share, D decides to offer a discount on A’s and B’s products. In response to D’s discount, C calls A and B and threatens to no longer carry A’s and B’s products if they permit D to discount. In response, A and B threaten to terminate D as a retailer unless D observes a specific price policy. A and B have engaged in an illegal boycott.
E. Tying Arrangements. A tying arrangement conditions the availability of one item (the “tying” item) upon the purchase of another item (the “tied” item). A tying arrangement is presumed to be illegal where (1) the tying and tied products are separate goods (rather than components of a single product), (2) the availability of the tying item is conditioned on the purchase (or rental or license of the tied item, as the case may be), and (3) the business imposing the tie is in a position to use its strength in the market for the tying item to harm competition in the market for the tied product.
Firm A is a monopolist in the hammer industry. Firm A is evaluating its strategic position and decides to begin producing its own nails. In order to promote its own line of nails, it requires consumers who purchase its hammer to also purchase its nails. After Firm A begins selling its hammer and nails together, other firms in the nail industry experience a significant decline in demand due to purchases of Firm A’s nails. Firm A has likely engaged in an illegal product tie because it has used its strength in the hammer industry to promote sales of its nails in a competitively unreasonable manner.
2. The Rule of Reason
For other types of agreements among businesses, the effect on competition and consumers is not as clear as in the case of a per se offense – the agreement may be anticompetitive, procompetitive, or competitively neutral. Under this scenario, evaluating whether the conduct is illegal or not requires a broader assessment than the per se rule; instead, the conduct must be evaluated under an approach known as the rule of reason, so named because it requires a full consideration and balancing of the harms and benefits of the conduct at issue. If a court determines that the competitive harms of the agreement outweigh its benefits, it is deemed an illegal restraint of trade.
There is a wide array of business arrangements that can be reviewed under the rule of reason, and it would not be practical to list them all here. Therefore, provided is a sample of some of the types of agreements that are reviewed under the rule of reason.
A. Restraints in the supply chain. A restraint in the supply chain refers to any agreement involving parties along the supply chain (e.g., supplier and wholesaler or supplier and retailer) who are in a so-called vertical relationship. Vertical restraints generally range from agreements on price or sales territory to how a retailer must display or market a supplier’s product.
One form of a vertical agreement is resale price maintenance, which is an agreement between vertical firms on either a price floor (setting a minimum price that a retailer must charge for the supplier’s product) or a price ceiling (setting a maximum price that a retailer cannot charge above). Historically, both forms were considered per se illegal under the federal antitrust laws, but recently the courts have reversed course. In 1997, the Supreme Court held that there were sufficient procompetitive justifications for maximum resale price maintenance that it was no longer appropriate to view this conduct as always illegal. Similarly, in 2007, the Supreme Court held that there were sufficient procompetitive justifications for minimum resale price maintenance that no longer justified treating these agreements as per se illegal. However, either practice could still ultimately be found illegal under the rule of reason if there are sufficient anticompetitive effects associated with the agreement that outweigh any procompetitive benefits.
B. Exclusive Dealing. A common form of exclusive dealing is a contract between a supplier and retailer under which the retailer agrees to exclusively carry the supplier’s product. In general, the federal antitrust laws view these types of agreements as competitively neutral or even procompetitive, although it will vary from case to case. Exclusive dealing is most likely to be found illegal under federal and state antitrust laws where the one imposing the agreement has market power and uses the exclusive dealing contracts in a manner to distort competition or by making it more difficult for competitors to gain a foothold.
Q: I have a product that I want to sell at a local retailer. When I contacted the retailer, the manager told me that she is contractually obligated to carry only my competitor’s product. Isn’t this illegal?
A: Generally speaking, these types of exclusive distribution agreements would not be prohibited by antitrust laws. In general, antitrust laws accept the view that this type of exclusive dealing can be procompetitive if the product requires retailers to invest a certain amount of time and cost into learning, promoting, and/or servicing the product and otherwise making it attractive to and benefitting consumers, for which it is probably appropriate to compensate the retailer. In addition, exclusive dealing may not be problematic if a supplier has other outlets to sell its product.
B. Section 2 of the Sherman Act - Monopolization
In an effort to gain market share, businesses sometimes may employ forms of conduct or tactics that go beyond competition on the merits, and which may harm or distort normal competition. Sometimes such conduct may be justifiable if it is innovative and actually benefits consumers. However, if there is no valid justification for that conduct other than a business’s desire to reduce competition and charge higher prices, antitrust laws operate to prohibit precisely this type of conduct.
Section 2 of the Sherman Act prohibits businesses from monopolizing, attempting to monopolize, or conspiring to monopolize trade or commerce. Practically speaking, this means that businesses are prohibited from engaging in competitively unreasonable conduct that would result in giving that business control over prices, restrict output, or engage in other anticompetitive conduct in a particular market. Note that, in contrast to Section 1 of the Sherman Act, Section 2 does not require that there be two entities acting together in a joint fashion, although Section 2 can apply to firms acting jointly. Thus, even a single firm acting alone can be found to violate Section 2 of the Sherman Act.
1. Defining the market and monopoly power
The first step in a Section 2 analysis is to determine what market the firm or firms are competing in. There are two dimensions to a relevant market: (1) a product market (what are the competing goods or services at issue?) and (2) a geographic market (where do those goods or services compete?). Determining what the markets are can be one of the most complex stages of an antitrust case and involves an in-depth study of the products and potential alternatives to those products, as well as whether there are geographic limitations to competition. For a more in-depth discussion of how antitrust enforcers define markets, see the discussion “Why and How are Mergers Reviewed under Section C, Mergers and Acquisitions.
Once a market has been defined, the next step in the analysis is to determine whether a business possesses monopoly power within that market. Practically speaking, literal monopoly power is not required; what is required is that the firm be in a position to control prices or exclude competition within the market, which is simply referred to as “market power.” Antitrust enforcers use a number of means to show that a business has market power. A firm may have market power if it has a high market share and if it exhibits price leadership without corresponding changes in its market share, or if it has actually excluded other competitors from the market. In addition, a key component to determining whether a firm has market power is whether the industry is such that new firms can enter the market relatively easily and compete with existing firms; if there are no such “barriers to entry,” it is unlikely the case that a firm can really exercise market power.
A common misconception is that antitrust laws prohibit monopolies. It is true that antitrust laws prohibit firms from acquiring or maintaining monopoly power, but only when that power is obtained through competitively unreasonable conduct. It is not illegal to be a monopoly under antitrust laws, provided that monopoly status was obtained through legal, competitively reasonable conduct. It’s easy to imagine a scenario where this may be the case. Imagine a setting where there are two competing firms in a market. One firm invests a portion of its profits into research and development which it uses to innovate and eventually offer a superior product, while the other firm does not. Consumers find the new product far superior, and begin to purchase it exclusively. If the firm with the inferior product is forced to go out of business, that is the result of its own failure to compete vigorously, and not the result of illegal conduct (it is certainly not illegal to invest in one’s products with the hopes of offering a better one down the road). Although the remaining business effectively has a monopoly, it has achieved it through good business decisions and by offering a superior product.
2. Exclusionary Conduct
The next step in a Section 2 inquiry asks whether the firm has engaged in competitively reasonable or unreasonable conduct. In some cases, this can be a relatively straight forward determination. If the firm has engaged in a form of conduct that is already recognized as illegal under antitrust laws (such as price fixing) the conduct can be easily deemed exclusionary. Less clear are examples where the conduct is not independently illegal, but may nevertheless be competitively unreasonable. In these cases, a court will apply the same rule of reason analysis discussed earlier when analyzing restraints of trade that are not per se illegal. This analysis will consider such things as whether the conduct has impaired competition in an unnecessarily restrictive way, and whether there are any valid business justifications for the conduct. It bears repeating that a rule of reason analysis involves a complicated and highly fact-intensive balancing process that will depend on many factors, including the goods or services at issue, particular qualities of the market, and past conduct in the market.
C. Anticompetitive Mergers and Acquisitions
One of the most visible areas where antitrust law seeks to ensure competitive markets is through the merger review process. The Clayton Antitrust Act prohibits mergers and acquisitions whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” This provision gives antitrust enforcers the ability to seek a court order preventing businesses from merging in cases where the merger would substantially lessen competition by creating, enhancing, or facilitating the exercise of market power.
The announcement of a merger can be a headline grabbing event, particularly in cases of large public companies or where the transaction has been valued at a substantial amount. Generally speaking, there are three kinds of mergers: (1) a merger between direct competitors (referred to as a horizontal merger), (2) a merger of firms that operate at different levels in the supply chain (referred to as a vertical merger); and (3) a merger of firms that operate in different industries entirely (referred to as conglomerate mergers). Because horizontal mergers generally raise the most significant competitive concerns, it is with these types of mergers with which antitrust laws are most concerned.
1. The merger review process
The Hart-Scott-Rodino Act requires companies intending to merge to file certain information with the federal government and establishes a series of timetables for federal antitrust enforcers in which to complete the merger review. In contrast, there is no filing requirement or specific timing provision under state law, and states are not bound by the timing provisions in the Hart-Scott-Rodino Act. As a result, a state may investigate any merger at any time and may challenge a merger transaction even after it has been consummated.
For a detailed explanation of the merger review process under federal law, visit the FTC’s website at http://www.ftc.gov/bc/antitrust/mergers.shtm.
2. Why and how are mergers reviewed?
Many mergers are procompetitive. For example, a vertical merger involving a supplier that seeks to purchase a large distributor is likely not anticompetitive because it would allow the supplier to sell its goods to consumers directly at a lower cost. On the other hand, there are a number of scenarios where a horizontal merger may have the potential to harm competition. If a horizontal merger would eliminate a competitor in an industry where there is already only a few firms competing, the merger may enhance the ability of the remaining firms to engage in some level of anticompetitive coordination, to the detriment of consumers. A horizontal merger may also be harmful if it would effectively result in one firm in a particular industry having market power (a so-called “merger to monopoly”).
To determine whether a merger may harm competition, the basic question antitrust enforcers must answer is whether the companies proposing to merge have products or services that compete with one another (the “product market”), and, if so, where they geographically compete (the “geographic market”). For example, if two companies both produce a special type of running shoe designed for long distance marathons and offer it for sale in stores across the country, and there is evidence that consumers see only those products as each other’s alternatives (meaning if the price of one were to increase consumers would likely respond by purchasing more of the other) a merger of those two firms may harm competition for consumers. On the other hand, if one company only produced a special running shoe for long distance marathons and the other only produced women’s dress shoes, it would likely not be the case that consumers view these products as substitutes, and a merger between the two companies likely would not harm competition. The examples presented here are straightforward and easy to understand; in a real case, ascertaining the product and geographic markets normally requires extensive review of the companies’ documents describing their products and market conditions, and interviews (formal or informal) with participants in the industry, as well as understanding any barriers to entry or long term benefits to the merger. It may also be necessary to consult with an economist to determine whether there is empirical evidence of consumers’ switching or other harms to competition.
Note: This document is not intended to be a comprehensive summary or statement of federal or state antitrust laws, and it should not be construed as a legal conclusion, legal advice or as an official statement of opinion of the Office of the Attorney General of Washington.