What Companies Don't Know Can Hurt Them: An Introduction To The Basics Of U.S. Antitrust And Competition Laws

Originally published in the State Bar of Texas Corporate Counsel Section Newsletter, Winter 2013

What Companies Don't Know Can Hurt Them: An Introduction To The Basics Of U.S. Antitrust And Competition Laws1

1. Purpose of U.S. Antitrust Laws

   A fundamental precept to American economic philosophy is free-market competition. With that in mind, the United States antitrust laws prohibit anti-competitive behavior and unfair business practices. The laws are intended to protect economic freedom and opportunity by promoting competition in the marketplace. They are based on the principle that competition fosters the most efficient allocation of resources, the lowest prices, and the highest quality goods and services. The Antitrust Division of the United States Department of Justice ("DOJ") and the Federal Trade Commission ("the Commission" or "FTC") (when referred to collectively, "the Agencies") are the federal agencies charged with the responsibility of enforcing the U.S. antitrust laws.

2. U.S. Antitrust Laws Focus on Certain Types of Anticompetitive Conduct

   The U.S. antitrust laws make unlawful every contract, combination or conspiracy in restraint of trade.2 They apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. The three basic U.S. federal antitrust laws - the Sherman Act, the Clayton Act, as amended, and the Federal Trade Commission Act (the "FTC Act") - each attempt to prohibit anticompetitive practices and prevent unreasonable concentrations of economic power that stifle or weaken competition.

   1. The Sherman Act3

      The Sherman Act was enacted in 1890 and was the first major legislation passed to address oppressive business practices associated with cartels and oppressive monopolies. Section 1 of the Sherman Act prohibits every contract, combination or conspiracy between two or more companies which exerts an unreasonable restraint on trade or commerce.4 This section prohibits horizontal agreements to restrain trade (i.e., agreements among competitors) as well as vertical agreements (i.e., agreements between buyers and sellers).

      Section 2 of the Sherman Act makes it unlawful for any person to "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations. . ."5 Section 2 establishes three offenses, commonly termed "monopolization," "attempted monopolization," and "conspiracy to monopolize."6 Unlike Section 1, Section 2 of the Sherman Act does not require proof of an agreement. Instead, Section 2 requires proof that the violator: (1) possesses monopoly power,7 and (2) acquired, enhanced or maintained that power by use of exclusionary conduct.8

      If applied literally, Section 1 of the Sherman Act would invalidate practically every commercial arrangement. Accordingly, in 1911 the United States Supreme Court ruled that, despite the all embracing statutory language, the Sherman Act reached only those trade restraints which are unreasonable.9 This analysis, referred to as the rule of reason, has since been the hallmark of judicial construction of the antitrust laws. Under its aegis, to determine the reasonableness of challenged conduct, courts weigh the anticompetitive consequences of the conduct against the business justifications upon which the conduct is predicated and the putative procompetitive impact.10

      In contrast to the rule of reason, the "per se" rule makes certain practices conclusively unreasonable, and thus illegal. Among these practices are agreements to fix certain prices, to divide markets among competitors, to rig bids, or to impose certain group boycotts. Other practices, such as exclusive dealing arrangements or restraints in a supply chain that restrain commerce, may be unlawful if they are judged unreasonable.

      Restraints of trade can be categorized as horizontal or vertical. A horizontal agreement is an agreement for cooperation between two or more direct competitors operating at the same level in a particular industry, while a vertical agreement involves participants who are not direct competitors because they are at different levels in the distribution chain. Thus, a horizontal agreement can be among manufacturers or retailers or wholesalers, but it does not involve participants from across the different groups. A vertical agreement involves participants from one or more of...