California Law
California Antitrust Law
- Antitrust Law
Antitrust Law
Antitrust law is a complex area of federal and state statutory law, the primary purpose of which is to prevent businesses from creating unjust monopolies or competing unfairly in the marketplace. Antitrust law seeks to maximize market efficiency and to protect consumers. Many specific actions are covered by these laws, including pricing policy, terms of trade, customer and territory selection, bundling of services, advertising and sales technology, and mergers and acquisitions. An experienced antitrust attorney who stays abreast of current developments in this area should be able to advise businesses on how to avoid antitrust problems.
Actions Prohibited Under Antitrust Laws
Businesses are prohibited by antitrust laws from forming or trying to form a monopoly. The law also restricts the way businesses interact with their competitors and customers.
Monopolies
A business has a monopoly in the market if it has such an advantage over all other businesses in that field that it is said to have economic control. The company with the monopoly may be the only manufacturer of a particular commodity, or it may provide a service in the community to virtually all consumers desiring the service. A natural monopoly is one over which the business has no control--it forms in the natural course of a growing economy. The market may be so specialized, for example, that no other businesses have found it feasible to establish themselves in that area. Power companies often have natural monopolies. Natural monopolies are not illegal. It is illegal, though, for a business to conspire with others to drive its competitors out of business in order to create a monopoly.
Unlawful Relationships with Competitors
Arrangements between competitors are called horizontal arrangements under antitrust law. Some of these arrangements run afoul of antitrust laws. Generally, the agreements businesses enter into are unlawful only if they are for the intentional purpose of restraining trade or gaining a monopoly in the market. Some agreements are per se illegal, however. A per se illegal relationship with a competitor is one in which no anti-competitive intention must be proved. The arrangement itself, no matter what the purpose, is against the law.
Collective Refusal to Deal
A collective refusal to deal, also called a group boycott, is a concerted decision by competitors not to do business with another business. Unlike a single company's boycott, or a boycott by consumers of a particular business, a group boycott is unlawful because it has the effect of restraining freedom of trade. Collective refusals to deal are per se violations of the antitrust laws; that is, even if the businesses do not intend to restrain competition, their group boycott is illegal.
Joint Ventures
Obviously, a joint venture is not in and of itself an unlawful business action. However, depending on the parties involved, joint ventures sometimes violate antitrust laws. If a joint venture between several competitors in a market excludes others--especially if there are more businesses included in the joint venture than those excluded--there may be an antitrust violation. For example, if all photography equipment and processing companies in San Francisco form a joint venture, excluding two independent film processing stores, the participants in the joint venture probably are engaging in unlawful business actions.
Market Division
When competing businesses agree to divide up the market among themselves, they have engaged in market division. They may divide the market geographically, agreeing they will not enter into the geographic area assigned to their competitors for the purpose of selling their products or services. They may divide the market by product, agreeing not to manufacture certain products so as to allow competitors to do so. They may even allocate particular customers among themselves. If the purpose and effect of dividing the market is to limit competition among them, the businesses have engaged in an unlawful antitrust activity.
Price Fixing
Horizontal price fixing is the agreement between competitors to set their prices at the same amount or within the same range. For example, if the major airlines meet and agree to offer a particular price on round-trip tickets to Hawaii, they have fixed prices in contravention of the antitrust laws. Depending on the circumstances, price fixing may be per se illegal.
Tying
Tying occurs generally when a company requires buyers to purchase one product or service (called the "tied" product or service) in order to obtain another product or service (the "tying" product or service), and the arrangement restrains trade. Illegal tying is a per se violation of the antitrust laws. Three elements must be present to constitute an illegal tie-in per se:
- A tying scheme must exist, in which buyers are required to buy one commodity or service in order to obtain another commodity or service
- The seller must have enough economic power in the tying product to allow it to significantly restrict the market for the tied product
- A fairly substantial amount of interstate commerce in the tied product must be affected
Tying is an antitrust concern not because it restrains competition in the tying product, but because it restrains trade in the market for the tied product. Thus, for example, a computer system manufacturer that licensed a very popular computer operating system software only to buyers of its not-so-popular computer system was held to have violated antitrust laws by unlawful tying. The manufacturer had the leverage in the market to require some purchasers to buy something they did not really want. There was a demand in the market for purchase of the products separately.
Unlawful Relationships Between Businesses and Customers
Antitrust law prohibits some actions between businesses at different levels of the market. Agreements or actions between businesses and customers, between manufacturers and distributors, or between distributors and retailers are called vertical arrangements. As a general rule, vertical arrangements are less likely than horizontal arrangements to violate antitrust laws.
Exclusive Dealing
Although generally companies are free to do business with whomever they choose, some antitrust laws put a limitation on this freedom. Exclusive dealing arrangements, like market divisions, are illegal if they have the effect of lessening competition. A company that manufactures beach wear, for example, may not enter into a contract to sell its products to a retailer on the condition that the retailer refuse to carry any other lines of beach wear. The retailer should be able to carry the products of competing businesses.
Price Discrimination
If it is intended to injure competition, or if it has that effect, discriminating in price is prohibited by antitrust law. Sellers are not allowed to charge two purchasers different prices for the same product, unless it is for a lawful purpose. For instance, a sale to dispose of damaged or perishable goods is not price discrimination in contravention of antitrust law. On the other hand, it is unlawful for a petroleum distributor to offer petroleum at a discount to one gas station but not others.
Price Fixing
Under some antitrust laws, a manufacturer requiring a distributor or retailer to sell its product at a set price is unlawful price fixing. Usually there must be a showing that the fixed resale price was required or compelled, such as through a distributor agreement. Merely suggesting a resale price is not unlawful.
Basic Federal Antitrust Scheme
Several federal laws govern most of the field of antitrust law in the United States.
The Sherman Anti-Trust Act
The Sherman Anti-Trust Act is the basic federal antitrust statute. It prohibits businesses in interstate commerce from contracting, combining, or conspiring to restrain trade, or attempting to monopolize the market in a particular area of business. Violations of this Act include making contracts that unreasonably restrain trade, price fixing, group boycotts, allocating markets, and attempting to form and maintain a monopoly in an industry to injure competition. Persons found in violation of certain aspects of the Sherman Anti-Trust Act may be fined or jailed. In practice, however, these violations generally are handled by civil, rather than criminal, lawsuits. The Antitrust Division of the Department of Justice (DOJ) enforces the Sherman Act.
The Clayton Act
The other major federal antitrust law is the Clayton Act. This law specifically prohibits leases, sales, contracts for sale, or other conditions, agreements, or understandings that have the effect of substantially lessening competition or creating a monopoly in a line of commerce. Price fixing, price discrimination, tying, and exclusive dealing are covered by this law.
Congress amended the Clayton Act in 1936 to strengthen prohibitions on price discrimination, which theretofore were seen as ineffective. This amendment, known as the Robinson-Patman Act, makes discrimination in price, services, or facilities unlawful for both sellers and buyers when it has a tendency to create a monopoly, to restrain competition, or to violate trade regulations. The Act seeks to assure that suppliers of products treat buyers even-handedly. It requires that buyers be given an equal opportunity to participate in certain types of seller programs relating to resale of a product, such as advertising and promotional programs, and that such benefits be disbursed to buyers on equal terms in proportion to their participation.
The Clayton Act also is enforced by the DOJ. The Federal Trade Commission (FTC) has co-jurisdiction with the DOJ to enforce this Act, although the DOJ has exclusive jurisdiction to enforce its criminal aspects. Also, each individual state is considered a "person" under the Act. A state may file an antitrust action, seeking injunctive relief or damages.
The Federal Trade Commission Act
Deceptive statements or acts violate the Federal Trade Commission Act if they constitute unfair competition affecting commerce. A business violates this Act if it is responsible for a material practice, representation, or omission likely to mislead reasonable consumers. People and businesses are proscribed from making false statements about their own products or the products of competitors, if the advertisements or statements have the effect of deceiving or tending to deceive consumers regarding a purchasing decision. The primary goal of this statute is to protect the public from anti-competitive acts. There is no private right of action; the FTC represents the public in lawsuits to enforce this Act.
California Antitrust Law
In addition to the federal laws that govern antitrust, California statutory law prohibits many of the actions described above.
Antitrust Law
California's Cartwright Act is the state's general antitrust law. The Cartwright Act generally prohibits combinations of two or more persons' capital, skill, or acts to restrict trade or commerce, reduce the production of merchandise, increase the price of a commodity, prevent competition, or control or fix at a standard or figure any commodity. The Act also specifically prohibits certain actions, such as fixing prices by contract, agreeing not to sell certain commodities, and agreeing not to deal in the goods or services of a competitor. As with the Sherman Act, unreasonable restraints are per se violations of the antitrust law.
The Cartwright Act also prohibits illegal "tying." In California, an illegal tying arrangement exists if two separate products are tied together, and the seller of the products has enough economic power over the tying product to restrain free trade in the tied product. The prohibition against tying in the Cartwright Act applies to services as well as products.
Generally, exclusive dealing arrangements that are intended to, or actually do, restrain trade are prohibited by the Cartwright Act. The Act also prohibits price discrimination in California as a restraint of trade. California's Unfair Practices Act, too, makes price discrimination illegal. The Unfair Practices Act generally parallels the federal Robinson-Patman Act, prohibiting price discrimination that destroys competition, with two important distinctions. Payment or allowance of commissions, rebates, refunds, or unearned discounts in the form of money or in another form, or special services or privileges extended to some purchasers and not to others, is unlawful when it tends to destroy competition and the payment or extension of special privileges is secret. True price discrimination is unlawful only when the discrimination is between different California cities, communities, or sections or portions thereof. The Unfair Practices Act applies to services, as well as products.
Unfair Trade Practices
California's Unfair Competition Act considers unlawful, unfair, or fraudulent business actions or practices, and unfair or misleading advertising, to be unfair competition. Another statute makes false or misleading statements in advertising unlawful, and requires disclosure in advertisements of any requirement that products or services be purchased together, along with their prices. The California Attorney General prosecutes antitrust and unfair trade law violations in California.
How to Avoid Antitrust Violations
More than almost any other area of the law, antitrust is a broad and complex set of federal and state laws. Antitrust laws proscribe many specific business actions that, under slightly different circumstances, are within the realm of legal behavior. Nevertheless, a smart businessperson will create guidelines for the conduct of his or her business, so as to avert the possibility of any antitrust violations. An antitrust attorney can assist a business in instituting these guidelines, tailoring a policy specific to the particular area of commerce, and advising on how to prevent antitrust liability in specific situations.
Create a Written Policy
Antitrust liability is a serious concern for any business, large or small. As the old maxim goes, an ounce of prevention is worth a pound of cure. A business' top management should be familiar with basic antitrust policies and laws, and should articulate a commitment to avoid behavior that unreasonably restrains trade. This business goal should be stated in a written program in which antitrust laws are described for employees, and managers are educated about how the business should operate to avoid antitrust liability.
Avoid Conspiring with Competitors
As a general rule, avoiding all contracts, conspiracies, and concerted action with competitors will ensure that a business stays clear of horizontal arrangements that violate antitrust laws. This means never discussing certain subjects with competitors, much less contracting with them regarding issues that could be construed as trade restraint or monopoly creation. Businesses should not agree with competitors over what prices to charge, for example, nor should they divide up a product or geographic market with competitors. Keeping in mind the goal of antitrust law--to encourage competition--is helpful. A businessperson should adopt a business goal of competing vigorously with his or her competitors in the market.
Avoid Vertical Restraints
Businesses should deal equally with their distributors, franchisees, and customers, avoiding contracts or agreements that favor some members of a group over another or restrain their market behavior. Tying, for example, is almost never a good idea; a business should make its products available separately. Similarly, exclusive dealing is allowed under some circumstances, but conspiring with others to exclude a competitor or competitor's distributor from the market is unlawful. Again, a businessperson who remembers that healthy competition is the best way to avoid antitrust liability, and who refrains from putting unnatural restraints on trade, will most successfully stay within the bounds of antitrust law.
Resources
A number of publications exist to aid the businessperson dealing with antitrust issues, including:
David S. Copeland, Basic Antitrust Law (Practicing Law Institute, New York, NY 1994).
Eliot G. Disner, Antitrust for Business: Questions & Answers (Federal Legal Publications, Inc., New York, NY 1989).
John H. Shenefield & Irwin M. Stelzer, The Antitrust Laws: A Primer (The American Enterprise Institute Press, Washington, DC 1993).
The Competition Bureau of the Federal Trade Commission, 6th Street & Pennsylvania Avenue N.W., Washington, DC 20580, (202) 326-2565, answers general inquiries about unfair and deceptive trade practices.
The United States Department of Justice, Antitrust Division, Main Building Room 3208, 10th & Constitution Avenues N.W., Washington, DC 20530, (202) 514-2410, is responsible for enforcing federal antitrust laws.
Other governmental offices that can offer antitrust information and assistance include:
California Attorney General, Public Rights Division, Antitrust Law Assistant Attorney General, 1300 I Street, Sacramento, CA 95814, (916) 324-7874.
California Department of Consumer Affairs, Consumer Services Division, 400 R Street #3000, Sacramento, CA 95814, (916) 323-2191.