The antitrust laws of the United States are intended to protect competition—that is, their purpose is to insure a competitive economy and to prevent the exercise of excessive control of a market by any particular business entity. The principal antitrust laws include the Sherman Antitrust Act, Clayton Act, Robinson-Patman Act, Federal Trade Commission Act and Hart-Scott-Rodino Antitrust Improvements Act, all of which share this purpose as their guide. Interpretation by the courts of these federal statutes and other state unfair competition laws also plays an important role in the development of antitrust and unfair competition law in the U.S. Antitrust enforcement can have serious consequences for the parties concerned. (See Section 5 of this chapter.)
I. The Sherman Act
The Sherman Act was the first of two broadly worded laws enacted by Congress that were designed to promote opportunities for market access and to foster market rivalry. Section 1 of the Sherman Act prohibits any contract, combination, or conspiracy that creates an unreasonable "restraint of trade." Section 2 prohibits monopolization or attempts to monopolize. These prohibitions apply to "trade or commerce among the several States, or with foreign nations."
1.1 Restraints of Trade
An agreement "restrains trade" when its performance would injure competition in any business or would restrict the party making the agreement in the exercise of a gainful employment. In contrast, the courts will allow as merely "ancillary" a restraint that is incidental to a lawful transaction when the restriction is no broader than necessary to protect the person for whose benefit it is imposed, and it does not tend to create a monopoly. The three typical instances of restraints upheld as ancillary, and thus reasonable, are promises not to compete in the sale of a business with its related goodwill, agreements by employees not to compete after the termination of their employment by using confidential information acquired during the course of that employment, and agreements by purchasers or lessees of property not to use the property in competition with or to the injury of the seller or lessor.
Even though not "ancillary," an agreement that restrains trade may be upheld if the restraint is "reasonable," that is, if it is not anticompetitive in purpose or effect under the principle known in antitrust law as the "rule of reason." The specific analysis undertaken pursuant to this principle to determine whether an agreement should be abrogated is commonly referred to as the "rule of reason inquiry."
Some agreements are considered to be so inherently anticompetitive and without any redeeming virtue that they are treated as automatically (or "per se) illegal. For example, antitrust law almost invariably treats horizontal conspiracies between competitors to fix prices, to divide territories or to assign customers as per se unlawful.
"Vertical" agreements, that is, agreements between sellers and buyers of goods, are rarely per se illegal. Classic vertical restrictions include: resale price maintenance, or the control by a producer of the price at which its products are resold by dealers; restrictions on the area within which a dealer may distribute such products; and agreements between a manufacturer and a dealer that the manufacturer will not sell to other dealers or that the dealer will not buy from other manufacturers. With the exception of resale price maintenance, vertical restraints are generally governed by the rule of reason, which requires an extensive inquiry into the facts and circumstances to determine whether the overall impact may be to promote and enhance, rather than eliminate or injure, competition.
In 1985, the U.S. Department of Justice (DOJ) issued a set of guidelines for its enforcement policy regarding vertical restrictions, but those guidelines were withdrawn by the DOJ in 1993. In 1995, the National Association of Attorneys General issued its own set of revised Vertical Restraints Guidelines, which outline the enforcement policy of the attorneys general of the fifty states, Puerto Rico, Guam, American Samoa, the Northern Mariana Islands and the Virgin Islands regarding resale price maintenance agreements, tying arrangements and non-price related vertical restraints of trade.
1.2 Monopoly
The second fundamental antitrust concept—"monopoly"— may be defined as the power to set the market price of a product or to exclude competition. Determining whether such power exists in a particular case is a factual rather than a legal question, and a critical factor that must be examined in answering that question is the "market share" of the alleged monopolist. It is sometimes said, for example, that a 90% market share is almost always enough to show monopoly power; that a 60% market share may be enough to constitute monopoly power; and that a 30% market share is almost certainly not enough. To measure market share, it is obviously necessary to define the market. Thus, the initial inquiry in any monopolization case is to determine the "relevant market," which is the area of effective competition in terms of both product and geographic region. In such an inquiry, there can be a broad market that includes all products that effectively compete with one another, and there can be narrower markets where the competition relates to a specific product or to a specific region of the country.
It should be kept in mind that monopoly itself is not forbidden. There are many forms of lawful monopolies as, for example, those granted by patents or government franchises. A violation of law results only where the monopoly is unlawfully acquired or unlawfully maintained. A classic example of the unlawful acquisition of a monopoly is the original American Tobacco Company, which in the early 1900’s acquired or controlled almost all its competitors until it was virtually the sole source of tobacco products in the United States. An example of the unlawful maintenance of monopoly power is the use of a monopoly position to exclude new entrants from the market through various predatory acts.
II. The Clayton Act and Robinson-Patman Act
2.1 The Clayton Act
The Clayton Act prohibits, among other things, mergers or acquisitions that may result in a lessening of competition or in a monopoly, certain exclusive dealing contracts and certain tie-in arrangements that occur when a seller requires a buyer or lessee to take a product it does not want as a condition to obtaining a product it does want. While commerce is defined in the Clayton Act to include trade or commerce "with foreign nations...or between...any Territory of the United States and any...foreign nation," exclusive dealing and tie-in provisions apply only to "commodities...sold for use, consumption or resale within the United States" or its territories and possessions.
2.1.1 Mergers and Acquisitions.
Section 7 of the Clayton Act is of particular importance to a foreign investor who is considering entering the U.S. market through acquisition, merger or joint venture. Section 7 provides that an acquisition of all or any part of the stock or assets of another entity is illegal "where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." This provision applies to joint ventures as well as to acquisitions. Section 7 may be applicable before any anticompetitive act has taken place if there is a reasonable possibility that the acquisition, merger or joint venture will produce an anticompetitive effect.2.1.2 Merger Guidelines.
In 1992, the DOJ and the U.S. Federal Trade Commission (FTC) issued a major revision to their joint merger guidelines (further minor revision 1997; the "Guidelines). The Guidelines emphasize the central role of economic analysis in evaluating acquisitions under the antitrust laws.The Guidelines focus on whether the likely consequence of a proposed combination would be to permit the combined entity to increase its prices above the prevailing level for a significant period of time. In order to identify such situations, the Guidelines provide for a systematic evaluation of the competitive forces that may restrict the combined entity from exercising "power" over price. This evaluation entails: (1) defining the relevant economic market; (2) computing market share and concentration statistics; and (3) evaluating additional relevant factors.
Markets are defined in accordance with the economic principles of substitution and therefore are not restricted to include only the merging firms’ closest competitors. Such principles require the inclusion in the relevant market of all entities that compete with the merging firms as well as those entities that would compete in the event of a relatively small price increase by those entities already participating in the market.
After the relevant market is defined, the Guidelines set up a methodology for measuring the level of concentration, utilizing as a measurement tool the Herfindahl-Hirschman Index (HHI). The HHI is computed by summing the squared market shares of each entity in the market. The increase in concentration resulting from the acquisition is measured as the difference between the postmerger HHI and the premerger HHI.
On the basis of its assessment of the HHI, the DOJ makes a preliminary judgment as to whether it will challenge the proposed acquisition. The DOJ is not likely to challenge proposed acquisitions in markets that it determines to be unconcentrated, or in markets where the difference between the postmerger HHI and the premerger HHI is small. The probability of such a challenge increases if the DOJ determines that a particular market is moderately or highly concentrated, or if the difference between the postmerger HHI and the premerger HHI is significant. Under such circumstances, the likelihood of a challenge by the DOJ may be influenced by considering "additional factors." These additional factors form a basis for the economic arguments that are relevant in assessing the likely effect of the proposed acquisition on competition and the ability of the merged entity to exercise market power. Included among these additional factors are the potential adverse effects on competition (including foreign competition); the economic efficiencies of the transaction; the existence of technological changes in the industry; the ease of entry for other competitors into the affected market; the financial conditions of firms; and the capacity of fringe firms to increase output.
2.2 The Robinson-Patman Act
The Robinson-Patman Act was enacted as an addition to the Clayton Act and generally prohibits certain forms of price discrimination. It applies only to "commodities...sold for use, consumption or resale within the United States" or its territories and possessions.
III. The Federal Trade Commission Act
Section 5 of the Federal Trade Commission Act proscribes unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The FTC is empowered to take action when the law is being or has been violated, but only if it is in the public interest that it do so.
The phrases "unfair method of competition" and "unfair or deceptive acts or practices" have never been satisfactorily defined by the courts. Unfair competition, however, is generally considered to refer to practices aimed directly at a competitor. Such practices are regarded as being either (1) characterized by bad faith, fraud or oppression, or (2) against public policy because they run counter to the Sherman or Clayton Act. Most FTC matters involving unfair competition fall into the second category; however, the Federal Trade Commission Act was designed to halt at their incipience practices that, if allowed to flourish, would constitute violations of the antitrust laws. Other practices that may constitute "unfair competition" include false advertising, trademark violations or infringements, "passing off" a competitor’s products as one’s own, and interfering with a competitor’s business or contractual relations.
IV. The Hart-Scott Rodino Antitrust Improvements Act
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and regulations thereunder (HSR Act) require parties intending to merge or to make acquisitions of voting securities or assets to provide the FTC and the DOJ with certain information with respect to the parties and the proposed transaction.
The HSR Act requires parties to a covered merger or acquisition to wait to consummate a transaction for 30 days, and cash tender offers for 15 days, after filing the required premerger notification and report form (HSR Form). The FTC and DOJ have the ability to extend the 30-day period by another 30 days and the 15-day period by 10 days by requesting additional information regarding the proposed transaction. The additional time period does not begin to run until the party supplying the additional information is in "substantial compliance" with the request.
The purpose of the HSR Act is to ensure that such transactions receive meaningful scrutiny under the antitrust laws, with the possibility of an effective remedy for violations, prior to consummation.
4.1 Covered Transactions
If a proposed transaction meets each of the following three tests, the jurisdictional prerequisites are satisfied and a filing is required unless an exemption applies. These tests are the (a) commerce requirement; (b) "size-of-the-parties" requirement; and (c) "size-of-the-transaction" requirement.
The HSR rules require the "ultimate parent" of each of the corporations involved in a transaction to file an HSR Form. An "ultimate parent" is an entity that is not controlled by any other entity. "Control" is defined under the HSR Rules as (1) holding 50% or more of the outstanding voting securities of an issuer; or (2) having the contractual power to designate 50% or more of the company directors or individuals exercising similar functions; or (3) having a right to 50% of the profits; or (4) having the right to 50% of the assets upon dissolution. The HSR Act provides that the HSR Form may be filed on behalf of the ultimate parent entity by an authorized U.S. subsidiary.
4.1.1 Commerce requirement.
If either the acquiring person or the acquired person is engaged in the interstate or foreign commerce of the United States or in any activity affecting such commerce, the transaction is covered. This requirement is construed quite broadly and virtually extends to the limit of Congressional power to legislate under the Commerce Clause of the U.S. Constitution. Given the broad scope of coverage, virtually every U.S.-related substantial transaction will meet this test.4.1.2 Size-of-the-parties requirement.
The second jurisdictional prerequisite is the "size-of-the-person" test. To be covered, one of the parties to the transaction must have annual net sales or total assets of at least $100 million, and the other must have annual net sales (if engaged in manufacturing) or total assets of at least $10 million. However, if the "size of the transaction" in "c" below exceeds $200 million, the transaction is reportable regardless of the "size of the parties."4.1.3 Size-of-the-transaction requirement.
To meet the "size-of-the-transaction" test, the acquiring person must be acquiring an aggregate total amount of voting securities and assets of the acquired person in excess of $50 million.The rules provide that the filing requirements apply to the formation of corporate joint ventures. The joint venture parents are defined as "acquiring persons" and the venture offspring is deemed to be the "acquired person."
Special rules exist regarding limited liability companies (LLCs), by virtue of FTC Formal Interpretation Number 15 adopted 29 June 1999 and revised 23 March 2001. Under these rules, the FTC treats as reportable the formation of an LLC if (1) two or more preexisting, separately controlled businesses will be contributed to the LLC, and (2) at least one of the members will control the LLC (i.e. have an interest entitling it to 50% or more of the profits of the LLC or 50% or more of the assets upon dissolution). The acquisition of a membership interest in an existing LLC is reportable if (1) it results in the acquiring person holding 100% of the membership interests in that LLC, and (2) that person had not previously filed for and consummated the acquisition of control of that LLC. The formation of an LLC or the acquisition of all of the membership interests of the LLC must also meet the three thresholds detailed above for the HSR Act to apply.
Partnerships are treated differently than other entities under the HSR Act. If an acquiring person will hold less than 100% of a partnership as a result of a transaction, the HSR Act does not apply. The HSR rules are concerned only with acquisitions of assets or voting securities. Anything less than 100% of a partnership is considered as neither an asset nor a voting security. However, if the acquiring person will hold 100% of a partnership as a result of a transaction, that transaction is potentially reportable.
4.1.4 Exemptions.
If the three jurisdictional tests are met, then the parties must file the HSR Form, pay the fee and observe the waiting period—unless an exemption applies. The statute designates 10 types of acquisitions and persons that are exempt from the HSR Act’s coverage. It also authorizes the FTC to promulgate further exemptions of persons and exemptions that are not likely to result in violation of the antitrust laws. The most important exemptions to non-U.S. companies are the two "foreign acquisition" exemptions contained in federal regulations at 16 Code of Federal Regulations Regulations §§802.50 and 802.51. Currently, under §802.50, an acquisition of foreign [non-U.S.] assets by a U.S person is exempt if (1) the assets are located outside the U.S., and (2) the acquiring person, as a result of the acquisition, will hold assets of the acquired person to which sales aggregating less than $25 million during the acquired person’s most recent fiscal year were attributable. An acquisition of voting securities of a foreign issuer by a U.S. person is exempt if the issuer (a) holds assets located in the U.S. having an aggregate book value of less than $15 million, or (b) made aggregate sales in or into the U.S. of less than $25 million in its most recent fiscal year.Under §802.51, acquisitions of assets by foreign persons are exempt from the HSR Act if the assets are located outside the U.S. or if the assets are valued less than $15 million. Acquisitions by a foreign person of voting securities of a foreign issuer are exempt if it will not confer control (i.e. if the acquiring person will not hold 50% or more of the voting securities as a result of the acquisition) of (1) an issuer that holds assets located in the U.S. having an aggregate book value of $15 million or more, or (2) a U.S. issuer with annual net sales or total assets of $25 million or more. If both the acquiring and acquired persons are foreign persons, the acquisition is exempt if the aggregate annual sales in or into the U.S. of both of them combined are less than $110 million, and the aggregate total assets located in the U.S. of both of them combined (with certain exceptions) are also less than $100 million. These regulations are being rewritten, and proposed regulations are in the "notice and comment" stage. The proposed regulations are subject to revision and should be finalized sometime in mid-2001. HSR counsel should be consulted before relying on these exemptions, as the threshold and measure of values will be changed.
Other exemptions include: (1) an acquisition of voting securities by an acquiring person that already owns 50% or more of the issuer’s voting securities; (2) an acquisition of 10% or less of an issuer’s voting securities made solely for purposes of investment, regardless of the dollar value of the transaction; and (3) an acquisition of voting securities made by one of certain specified institutional investors solely for purposes of investment and in the ordinary course of business, so long as the voting securities held by the acquiring person do not exceed both 15% and $25 million of the issuer’s outstanding voting securities, and do not constitute control.
4.2 Filing Requirements and Fees
Reportable transactions require that the acquiring person pay a fee with the HSR form, although the parties may negotiate the payment of the fee between or among themselves. The amount of the fee is unusually high. For transactions valued at less than $100 million, the filing fee is $45,000. For transactions valued in excess of $100 million up to $500 million, the fee is $125,000. For transactions valued in excess of $500 million, the filing fee is $280,000.
The HSR Form is broad in scope and is divided into 10 separate "items." Generally, it requires information regarding (among other things) the identities of the persons involved in the transaction; a description of the acquisition, including the type of transaction being proposed and the manner in which it is to be carried out; the percentage and dollar amount of assets or voting securities to be acquired; dollar revenues for specific years, listed separately by industry and product classification; geographic market data; the existence of a supplier-customer relationship between the acquiring and acquired entities; and a description of prior acquisitions by the acquiring entity.
The preacquisition notification is not intended to change the standards by which the legality of mergers and acquisitions is judged under the antitrust laws. Rather, it is designed to provide an effective means of monitoring significant merger and acquisition activity by giving the FTC and DOJ comprehensive data that they can quickly evaluate, enabling them to prevent consummation of the proposed merger or acquisition if it would violate the antitrust laws.
V. Enforcement and Jurisdiction
The antitrust laws are enforced both by the government and by private parties. At the federal government level, the DOJ is the sole enforcer of the Sherman Act, but it shares Clayton Act and Robinson-Patman Act enforcement responsibility with the FTC. The DOJ can seek an injunction or damages under any Act, and criminal penalties for Sherman Act violations. The FTC usually acts administratively, through judicially enforceable "cease and desist" and similar orders. A private party may seek an injunction when threatened by an antitrust violation and, if injured in its business or property by such violation, may sue for treble damages as well as the cost of the lawsuit, including reasonable attorneys’ fees.
In 1995, the DOJ and the FTC jointly issued new Antitrust Enforcement Guidelines for International Operations (International Guidelines). The stated purpose of the International Guidelines is to provide antitrust guidance to businesses in international operations regarding questions of the DOJ’s and the FTC’s international enforcement policies. The International Guidelines acknowledge that international transactions can involve any area of the U.S. antitrust laws. The International Guidelines discuss various international agreements, both formal and informal, used by the DOJ and the FTC to promote enforcement cooperation between the U.S. and foreign governments, and to reduce tensions that may arise in particular proceedings. They also address certain threshold concerns on the enforcement of the antitrust laws, relating to matters of jurisdiction, comity, foreign government involvement and trade regulation.
Both subject matter jurisdiction and personal jurisdiction must be present to sustain any suit under the antitrust laws. Subject matter jurisdiction exists over transactions (a) within the intended scope of the relevant provision that (b) generally affect interstate or foreign commerce and satisfy any additional commerce requirement specified in the provision. The particularized commerce requisites contained in the various statutes are generally satisfied if the violative conduct either occurs "in the flow of" (that is, transit of the subject matter from origin to destination) or otherwise appreciably "affects" the interstate or foreign commerce of the United States. Personal jurisdiction requires that a defendant (a) have "minimum contacts" with the forum sufficient to make it "fair" to proceed there, and (b) be served with process in a way "reasonably calculated" to give notice regarding the suit and a fair opportunity to defend.
Personal jurisdiction is often obtained in cases involving non-American corporations by lifting the veil of separate incorporation between the foreign parent and its American subsidiary corporation. The DOJ has consistently taken the position that when a subsidiary acts on behalf of a foreign parent, and there is such an identity of interest between the two or such control by one over the other that the one is in reality the alter ego of the other, or its mere agent, instrumentality or adjunct, then the parent comes within the jurisdiction of the United States.
The DOJ and FTC give due deference to matters of comity in determining whether to assert jurisdiction to investigate or bring an action, or to seek particular remedies in a given case. In analyzing whether significant interests of a foreign sovereign would be involved, the DOJ and FTC consider a number of relevant factors, including the relative significance to the alleged violation of conduct occurring within the U.S., as opposed to conduct occurring abroad; the nationality of the persons involved in or affected by the conduct; the relative significance and foreseeability of the effects of the conduct on the U.S. as opposed to the effects abroad; the degree of conflict with foreign law or articulated foreign economic policies; the effect on foreign enforcement; and the effectiveness of foreign enforcement. Each factor may be afforded more or less weight as required by the circumstances of a particular case. The DOJ and FTC also will consider whether a foreign country either encourages a certain course of conduct or leaves parties free to choose among several different strategies, or whether the foreign country itself prohibits certain conduct.
The DOJ and FTC will also consider the implications of foreign government involvement in conduct that may have anticompetitive results. As a practical matter, most anticompetitive activities of foreign-government-owned corporations operating in the commercial marketplace will be subject to the U.S. antitrust laws. If the anticompetitive conduct is compelled by the law of the foreign country where that conduct occurs, it will not be subject to the U.S. antitrust laws provided that the "compulsion" is of a nature so that a refusal to comply with the foreign government’s directive would result in the imposition of penal or other severe sanctions, and the compelled conduct is accomplished entirely within the territorial jurisdiction of the foreign sovereign. Nor will the anticompetitive conduct be subject to the U.S. antitrust laws if the conduct is a public, governmental act of the sovereign that was committed within the territorial jurisdiction of that sovereign. Lastly, a genuine effort to obtain or influence action by governmental entities is immune from the antitrust laws, even if the petitioner’s intent is to restrain trade.
Trade laws may set restrictive tariffs or quotas on the free flow of goods into and out of the U.S., and thus may operate as "restraints of trade." Where the trade regulations concerning price and quantity of goods of foreign companies are strictly followed, an implied antitrust immunity results. However, agreements with foreign competitors that go beyond the requirements of U.S. trade regulations (or that do not comply with those regulations) will be subject to U.S. antitrust laws.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
