Issue: Coed Theatre (Coed) and Superior Theatre Services (Superior) supposedly agreed to abstain from the solicitation of each other’s clientele. Both companies were prosecuted for alleged violation of the anti-competitive conduct section of the Sherman Act (Section 1). Evidence provided during the trial demonstrated that both Superior and Coed agreed to stop discussing business opportunities with each other’s clients. The Justice Department found the argument that the court should have applied the rule of reason to be unfounded and subsequently found both firms guilty of the violation.
Rule: In 1890, the United States (U.S.) Congress enacted the Sherman Antitrust Act (the Act) to protect free competition for those participating in commerce in the U.S. The Act prohibits those who conduct interstate commerce from participating in monopolization-related activities or activities that prevent others from engaging in similar business operations in a given timeframe or location. Section 1 of the Act outlines the regulations for restraints of trade. Restraints of trade are agreements between two or more individuals or entities that restrict competition. The court has developed two methods of analyzing violations regarding restraints of trade. The first, per se analysis, is a black and white approach that views any violation of the regulation as illegal, regardless of the conditions. The second method, rule of reason analysis, involves the evaluation of the conditions of the behavior. Rule of reason analysis takes the intent of the regulation and the impact of the behavior to determine liability. In contrast, per se analysis does not consider anything but the letter of the law (Langvardt et al., 2019).
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Section 1 of the Act prohibits the agreements between competitors to divide up markets by territories or customers. These non-compete agreements are called horizontal divisions of markets. In United States v. Topco Associates, Inc. (Topco), the Supreme court utilized the per se approach and granted the government an injunction against Topco. This controversial decision has received a significant amount of criticism, causing lower courts to differentiate between “naked” and “ancillary” horizontal restraints. The only impact naked restraints have is restraining competition, whereas ancillary restraints involve horizontal division of markets to promote competition on a larger scale (Langvardt et al., 2019).
Application: The government successfully provided evidence that both firms participated in horizontal divisions of their market. However, the firms argued that the court should allow the firms to present evidence that their actions did not have a substantial anticompetitive effect on the market. The firms argued that the court should forgo the naked per se analysis approach instead of utilizing the rule of reason and considering ancillary restraints. Critics of the per se approach argue that the rule of reason should be used when the prohibited actions prove to support the intention of the Act. For example, if two or more firms agree to not compete with each other, with the end goal being to make them more competitive with a more prominent firm, the rule of reason would be applied. Coed and Superior were arguing to use the rule of reason on the grounds that their actions only had a small anticompetitive effect. The court was correct in its assertion that the rule of reason should not have been applied in this case because the prohibited actions taken by the firms created the precise effect the Act was created to curtail. The firms did not provide any suggestion that the actions were conducted from some more significant cause.
Conclusion: The rule of reason intends to provide the context of intent and impact to actions prohibited by the Act. The purpose of the approach is to consider motives that allow businesses that would otherwise have very little ability to be competitive (Gavil & Salop, 2020). Although the U.S. Supreme Court has yet to uphold the rule of reason in an antitrust case, many lower courts are utilizing this approach. In this particular case, there was no mention of evidence that supports its use, and the court’s decision is appropriate.
Issue: Two Ohio-based firms, namely Coed and Superior, allegedly agreed not to solicit each other’s customers. Both of the mentioned companies got prosecuted based on anti-competitive agreements, which violates the Sherman Act. Superior’s VP claimed that Coed threatened them for soliciting their accounts. He also testified that both firms’ presidents said it would be in the interests of their firms to stop taking each other’s accounts. Also, some Coed customers testified that Superior refused to accept their business because of an agreement with Coed. The court found both companies guilty Per Se in violation of the Sherman Act. Should the court took a Rule of Reason approach and gave the defendants a chance to provide justification in an attempt to avoid liability?
Rule: The Sherman Antitrust Act of 1890 was made mainly to promote free competition among those engaged in commerce. The law basically prohibits (1) anti-competitive agreements and (2) conduct that monopolizes (or attempts to monopolize) the market to dictate pricing. § 1 of the Sherman Act states, “every 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 is declared to be illegal” (Langvardt et al., 2019). Sherman Act applies only to behavior that unreasonably restrains competition. To analyze whether a restraint is unreasonable, a court will use one of the following two approaches:
1) The Per Se Rule. The per se rule simplifies antitrust litigation. When the per se rule approach is used, it is considered that the action always negatively affects competition; hence the defendant is not allowed to assert any supposed justifications to avoid liability. A plaintiff is only required to prove that the specific anticompetitive conduct took place.
2) The Rule of Reason. Actions that are not classified as per se unlawful are judged under the rule of reason. This approach requires a detailed inquiry into the actual competitive effects of the defendant’s actions. According to BonaLaw PC Antitrust & Competition, (n.d.), the rule of reason approach requires “a full-blown analysis of (1) definition of the relevant product and geographic market, (2) market power of the defendant(s) in the relevant market, (3) and the existence of anticompetitive effects.” The court will shift the burden to the defendant(s) to show an objective procompetitive justification. If the court concludes that the justifications by the defendant outweigh the harm to competition, there is no § 1 violation. A hybrid of the rule of reason is the so-called quick-look analysis. Here, instead of a full-fledged rule of reason analysis, the plaintiff need only show that the arrangement in question would have an anticompetitive effect on customers and the market.
Application: Acts are made illegal per se by statute, constitution, or case law (In Wikipedia, n.d.). The U.S. Supreme Court has, in the past, determined activities such as price-fixing, geographic market division, and group boycott to be illegal per se regardless of the reasonableness of such actions. The actions by Coed and Supreme can be classified in our textbook as “Group Boycotts and Concerted Refusals to Deal.” Agreements by two or more business entities to deal with others only on certain terms and conditions are illegal. Based on the testimony from several Coed customers, it can be proven that both companies arranged to refuse to deal with each other’s customers. In other words, the arrangement implies that Coed is not allowed to deal with Superior’s customers and vice versa. Coed and Superior had an agreement to enable dealing with customers only on the condition that the customer is not a client of the rival company. Such agreements are joint restraints on trade and, historically, have been per se unlawful under § 1.
The agreement between Coed and Superior could also have been a horizontal division of markets agreement wherein Coed (based in Cleveland) is assigned to Northern Ohio, and Superior (based in Cincinnati) is assigned to Southern Ohio. Such agreements among competing firms to divide up the market by assigning certain exclusive territories or specific customers to each other —are illegal per se (Langvardt et al., 2019). Using either “concerted refusal to deal” or “horizontal division of markets,” the plaintiff is only required to prove that the specific anticompetitive conduct actually took place, which can be proven by the testimonies provided by Coed’s customers.
Conclusion: The court’s judgment to take the per se approach seems to be the more appropriate route. Certain acts are automatically considered illegal per se. They should not allow any justification in an attempt to avoid liability because the action always harms competition.
An organization breaches their contracts with approximately 200,000 customers by imposing higher-than-agreed-upon annual renewal fees. This results in the company benefiting $7 million in additional revenues from customers who renewed at these higher fees while obtaining the same services. These services were not reflective or had no justification for the price hike.
Section 5 of the Federal Trade Commission (FTC) Act allows the Commission to prevent “unfair methods of competition” by regulating anticompetitive practices made unlawful by the Sherman Act (Langvardt, 2019). It also reaches anticompetitive behavior not covered by other antitrust statutes and enables the FTC to proceed against potential or incipient antitrust violations.
The unfairness doctrine in section 5 of the FTC prevents unfair acts/practices by attacking behavior that is objectionable for other reasons then being deceptive, such as consumer harm. To adhere to requirement of section 5 the following must be true:
1) Harm must be substantial, in this case, monetary loss adheres to the criteria listed in FTCA (2016) in that the act or practice that causes a small amount of harm to a large number of people is deemed to cause substantial injury.
2) The injury is not outweighed by countervailing benefits to consumers or to competition. I.E. since the services remained the same but the subscription fee increased, therefore there were not any benefits such as lower prices or wider availability of products/services to the consumer.
3) Consumers cannot reasonably be able to avoid the injury. In this example, Orkin, withhold material price information, or changed the initial agreed-upon price when the consumers were already committed or “locked-in” to their renewed contract. The consumers had no way of getting out of it.
Orkin’s behavior did in fact violate FTC Act § 5’s prohibition against unfair acts or practices by adhering to the three criteria listed in the unfairness doctrine. Harm was substantial, the injury was not outweighed by countervailing benefits to the consumer and finally the consumer could not reasonably avoid the injury.
Issue: Orkin Exterminating Company offered a lifetime service guarantee that could be renewed each year at a specified amount. The original contract provided no indication that the fees were subject to change or be raised unless for reasons specified. Almost fifteen years later, Orkin raised the renewal fees which did not add anything additional to the originally agreed upon service for the customers. This breach of contract affected 200,000 customers and allowed Orkin to realize $7 million in additional revenues from the increase in fees.
Rule: The mission of the Federal Trade Commission is to keep the U.S. economy free and fair (Langvardt et al., 2019, p 1350). Section 5 of the FTC Act empowers the commission to prevent unfair methods of competition as well as unfair or deceptive practices with the intent to protect consumers. Section 5 also empowers the FTC to target objectionable behavior that could cause consumer harm. There are three elements that comprise violations of unfairness in Section 5, the first of which is that the act must be substantial. Substantial harm includes monetary loss as well as health and safety risks. Secondly, the act must not be outweighed by any offsetting consumer or competitive benefits that are produced by this practice and finally, it must be one that consumers could have easily avoided (Langvardt et al., 2019, p 1363).
Analysis: To determine if the Orkin Exterminating Company case violated Section 5, we first must assess if the act was substantial. Due to the contract increase and the amount of money Orkin realized and the increase that customers had to pay just to maintain the same service, calls for a violation of this element. The second element poses a question of whether the harm caused by the act contained any benefit to consumers or competition or if it was injurious in its net effect. In the Orkin case, there was no additional benefit to the consumer since they were not gaining any new services or change in quality of service. With regards to the competition, there was no benefit because Orkin’s competitors were willing to offer the same service at Orkin’s original price. Therefore, the second element is a confirmed violation. The final test of a violation of Section 5 is to understand if the consumer could have easily avoided it. Orkin’s consumers were given little choice but to sign up for the same service at a price increase, or risk no longer having the service. A consumer could not have avoided signing up at the higher price if they wished to retain the service, therefore Orkin violated the final element of Section 5.
Conclusion: Orkin Exterminating Company clearly violated Section 5 of the FTC Act by 1) creating substantial harm, 2) creating harm that was not beneficial to consumers or competition and was in fact, was injurious in net effect, and 3) creating a situation in which a consumer could not have easily avoided.