Tuesday, July 10, 2012

Antitrust and Unfair Competition, part 1.

Antitrust and Unfair Competition Law is one of the most complex legal fields. Unlike many other areas of law that simply apply legal doctrine to a given set of facts (one level of abstraction), Antitrust and Unfair Competition Law applies legal doctrine to economic doctrine, and then to a given set of facts (two levels of abstraction). The frames of reference that affect which economic doctrine to apply are fuzzy with Antitrust Law, because the definition of the relevant market can differ greatly. The definition of the relevant market is of paramount importance when determining whether an entity has "Monopoly Power," under Section 2 of the Sherman Act. Monopoly Power is how much market share a given business entity has. If you define the relevant market improperly, a monopolist might appear to have much less of a market share than they actually do.

Section 2 of the Sherman Act ("Section 2") deals with monopolies. Section 1 of the Sherman Act ("Section 1") deals with concerted action restraining trade. Both are nebulously written. Section 2 merely states that persons who monopolize or attempt to monopolize, or combine or conspire with anyone to monopolize any part of trade or commerce, shall be deemed guilty of a felony. Section 1 states that every contract, combination, trust or otherwise, or conspiracy in restraint of trade is illegal. As with Section 2, Section 1 violators are also guilty of a felony. The Clayton Act allows parties injured through Antitrust Law to bring civil actions. Successful civil actions can receive what is called "treble damages," or three times the amount of actual damages.

Neither Section 1, Section 2, nor the Clayton Act can be read literally, because to do so would prohibit much conduct that is not practically anticompetitive and unethical. For instance, noncompete agreements are legal restraints of trade, and quite reasonable when a former employer has imparted an employee with specialized skills and knowledge at great expense. Scholarship limits in the NCAA are also a legal restraint of trade. It is literally a restraint of trade for Division I Football Bowl Subdivision schools to agree to limit their rosters to 85 scholarship players at a given time. But the Court affords governing bodies like the NCAA deference because of the rules needed for effective competition. [1]

That deference comes in the form of the "Rule of Reason." Some conduct is so blatantly anticompetitive that it is per se illegal, or illegal "on its face." Some conduct is so anticompetitive that it only deserves a "Quick Look." Some conduct is anticompetitive, but must be judged carefully. Such conduct is examined using the Rule of Reason, which is a full balancing test of the anticompetitive behavior, its procompetitive effects, and a determination of which outweighs the other.

Section 2 tends to be less relevant to small businesspersons. Attempted monopolization is a crime, but it requires a "dangerous probability" of achieving monopoly power. Usually a small business would not have a dangerous probability of achieving monopoly power, but it all depends on how the relevant market is defined. In a small enough geographic area, some relatively small businesses might indeed be a monopolist. For instance, a company offering a product that has no suitable comparison within the region may very well have monopoly power, with the biggest indicator being that they can have large profit margins because of a lack of competition. In fact, such a scenario is not all that uncommon. But simply having monopoly power is not the issue. Engaging in monopolizing conduct is when the conduct becomes illegal. Monopolizing conduct is conduct that attempts to maintain or achieve monopoly power through anticompetitive behavior.

The take away from Section 2 is that almost all small businesses would not have monopoly power, unless the geographic definition of the market is small enough. However, monopolizing conduct that attempts to foreclose competition is not nearly as uncommon. Even then, without monopoly power, monopolizing conduct does not lead to attempted monopolization unless there is a dangerous probability of monopolization and the intent to do so.

Section 1 will be discussed in greater depth in my next post.

[1] NCAA v. Board of Regents of Univ. of Oklahoma, 468 U.S. 85 (1984).

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