FALL 2007

Computer Law

Course No. 9200 711 001	Th 6:30 - 9:30 p.m.	Room W-214
Professor Jay Dratler, Jr.	Room 231D (IP Alcove)	(330) 972-7972	dratler@uakron.edu, dratler@neo.rr.com

A "Drinking from a Fire Hose" Introduction to Antitrust

Antitrust law is one of the most conceptually difficult and challenging fields in all of Anglo-American law. The reason is easy to state but difficult to appreciate fully, especially for students new to the field. More than almost every other field of law, antitrust is interdisciplinary at its very core. Its understanding requires habits of thought and "mindsets" characteristic not only of lawyers, but of economists and business people as well.

In order to understand antitrust decisions, let alone predict future trends in the field, you must be able to assilimate and apply basic economic principles. In addition, appreciating particular decisions may require understanding the business dynamics and/or technology of particular industries, which are often only dimly and incompletely described in the text of judicial opinions themsleves. Therefore, to a significant degree, antitrust law is not just another field of law, but an entirely distinct discipline.

That is the major reason for taking a course in antitrust law while in law school. Usually, busy practicing lawyers can "pick up" new fields of law by attending CLE courses or through self study. Doing so with antitrust, although possible in theory, is in practice incomparably more difficult. The best way to assimilate antitrust law is to devote a significant and concentrated amount of time to its study, either in a law-school course or in a postgraduate course of similar length and depth. Truly a ssimilating antitrust requires developing new mindsets, which, for most lawyers, are just as new and challenging as learning to "think like a lawyer" was to most first-year law students. In order to know and apply antitrust, your must learn not only to think like a lawyer, but to think like an economist and a business person as well.

That said, this unit of this course is going to attempt the challenging task of introducing antitrust law in a single week. The attempt is confessedly a pegagogical experiment. Its success or failure will depend upon how deeply you understand the peculiar blend of law, economics and business that is "antitrust analysis." As the Supreme Court stated in what is undoubtedly its most important antitrust decision in the last quarter of the twentieth century: antitrust analysis "must be based upon demonstrable economic effect rather than . . . formalistic line drawing." Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58-59, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977).

1. The first thing to understand about antitrust law is that it has a generally recognized primary economic purpose: to protect free markets and free competition from interference by private forces acting in their own self-interest. If you had to describe the purpose of antitrust law in one word, that word would be "competition." See, e.g.: National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 104, 104 S.Ct. 2948, 82 L.Ed.2d 70 (1984) ("whether the ultimate finding is the product of a presumption or actual market analysis, the essential inquiry remains the same—whether or not the challenged restraint enhances competition") (Footnote omitted); National Society of Professional Engineers v. United States, 435 U.S. 679, 696, 98 S.Ct. 1355, 55 L.Ed.2d 637 (1978) ("the Rule of Reason does not support a defense based on the assumption that competition itself is unreasonable"); United States v. Philadelphia National Bank, 374 U.S. 321, 372, 83 S.Ct. 1715, 10 L.Ed.2d 915 (1963) ("competition is our fundamental national economic policy"); Standard Oil Co. v. FTC, 340 U.S. 231, 248, 71 S.Ct. 240, 95 L.Ed. 239 (1951), quoted in National Society of Professional Engineers, supra, 435 U.S. at 695 ("The heart of our national economic policy long has been faith in the value of competition"); Fashion Originators' Guild of America, Inc. v. FTC, 312 U.S. 457, 465, 61 S.Ct. 703, 85 L.Ed. 949 (1941) ("Under the Sherman Act 'competition not combination, should be the law of trade'").

2. Although other statutes comprise part of antitrust law, by far the most important statute is the Sherman Act of 1890. Its penal, remedial, and procedural provisions have undegone amendment over the years, but its basic substantive provisions are virtually unchanged since its enactment over a century ago.

One reason for this constancy is the statute's generality. "As a charter of [economic] freedom, the [Sherman] Act has a generality and adaptability comparable to that found to be desirable in constitutional provisions." Appalachian Coals, Inc. v. United States, 288 U.S. 344, 359-360, 53 S.Ct. 471, 77 L.Ed. 825 (1933). The substantive portions of the Sherman Act's two basic provisions, which are set forth below, comfortably fit on half a page, yet the judicial decisions and commentary that give them shape fill volumes. The principal consequence of this generality is that real antitrust law, i.e., law with sufficient specificity and generality to apply with confidence and precision, is almost entirely judge-made. Hundreds of judicial decisions—principally those of the United States Supreme Court—constitute the sum and substance of antitrust law.

3. If antitrust law resembles constitutional law in this respect, the likeness is no accident. Thomas Jefferson originally wanted to include a prohibition against monopolies, like that in the old English Statute of Monopolies, in our Bill of Rights. See Graham v. John Deere Co., 383 U.S. 1, 7-9, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966). Eventually, he accepted the argument that "ingenuity should receive a liberal encouragement[.]" Id., 383 U.S. at 8, quoting Letter to Oliver Evans (May 1807), V Writings of Thomas Jefferson, at 75-76 (Washington ed.). He therefore endorsed our Constitution's Patent and Copyright Clause. With its limitations of time and purpose, that Clause strongly suggests that free competition is the rule of our national economy and state-granted monopolies like patents and copyrights the exception. The fact that the general rule appears only by negative implication in our Constitution is largely an accident of history. See Jay Dratler, Jr., "Does Lord Darcy Yet Live? The Case against Software and Business-Method Patents," 43 Santa Clara L. Rev. 823, 823-830 (2003).

In any event, the pregnant negative in the Patent and Copyright Clause gave birth to the Sherman Act a century later. Today there is little doubt that the Sherman Act is as fundamental to our nation's economic constitution as the Bill of Rights is to our political constitution. As Justice Thurgood Marshall so eloquently put it:

"Antitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free-enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms. And the freedom guaranteed each and every business, no matter how small, is the freedom to compete--to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle it can muster."

United States v. Topco Associates, Inc., 405 U.S. 596, 610, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972).

Thus, antitrust law resembles the Constitution in three respects. First, it is vital to the very structure of our society, in particular, to the operation of our national economy. Second, its basic provisions are general and require interpretation by the courts. Third, because the courts (absent action by Congress) give antitrust law its form and detail, the nine philosopher kings and queens who sit on the Supreme Court largely control its substance. Although this state of affairs may seem strange in a democracy, it does have its advantages. The courts are often less susceptible to lobbying and political pressure, and more amenable to impartial reason (including new economic learning), than the Congress might be.

4. The Sherman Act has two basic provisions. Section 1 outlaws contracts, combinations, and conspiracies in restraint of trade. As its subject suggests, it focuses on concerted or collective action by which private parties attempt to suppress competition through private agreement. Classic examples of illegal agreements under Section 1 are agreements by which competing producers fix the prices at which they will sell their products ("price fixing"), or by which competing construction firms agree which among themselves which will submit the low bid for a public works projects ("bid rigging").

In contrast to Section 1, Section 2 deals primarily with unilateral action by a single firm in unlawfully obtaining, extending, maintaing, or attempting to obtain a monopoly of a defined market. Section 2 does not outlaw having a monopoly, if it was achieved by lawful means, such as winning in hard competition. Section 2 does, however, outlaw gaining, maintaining or extending a monopoly (even one property achieved) by improper means, i.e., conduct designed to crush, rather than promote, competition. The European phrase for the same offense—"abuse of dominant position"—much better describes the essence of the offense than any term common in American practice.

One fact about Section 2 is important to understand at the outset. Conduct constituting a Section 2 offense need not be unlawful in itself, whether under the antitrust laws or otherwise. Conduct that is perfectly lawful for a smaller firm may be unlawful for a monopolist or near-monopolist if it is directed toward suppressing competition rather than competing. One of the conceptual difficulties of Section 2 cases is that anticompetitive conduct may come in a bewildering profusion of varieties, limited only by the fertile imaginations of business people wishing to escape the rigors or competition.

5. The basic substantive text of the two key Sherman-Act provisions is rather simple. It reads as follows:

Section 1:

Section 2:

As the quoted portion of Section 2 suggests, the basic prohibitions are criminal in nature. Section 4 of the Clayton Act, 15 U.S.C. §15, provides corresponding civil causes of action, with the well-known mandatory remedies of treble damages and attorneys' fees for successful plaintiffs. Thus, violations of either Section 1 or Section 2 are both civil offenses and (if the requisite state of mind exists) felonies. Even in times of relatively lax antitrust enforcement, defendants caught in flagrant antitrust violations such as price fixing and bid rigging often serve jail time.

6. Two basic modes of analysis apply in antitrust law. Certain types of conduct are deemed "illegal per se," i.e., illegal in themsevles. In order to concemn these types of conduct, one need, in theory, only identify them, that is, verify that they fall within a defined category of prohibited conduct. The rationale for categorical prohibition is that certain types of conduct are so invariably anticompetitive that the cost of identifying the rare cases in which they might have a neutral or positive effect on competition is not worth the effort. As the Supreme Court put it:

"[T]here are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. This principle of per se unreasonableness not only makes the type of restraints which are proscribed by the Sherman Act more certain to the benefit of everyone concerned, but it also avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, in an effort to determine at large whether a particular restraint has been unreasonable—an inquiry so often wholly fruitless when undertaken." Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958).

Today per-se analysis is not applied as strictly or as widely as it once was. Certain so-called "per-se" rules, like the rule against tying, now require more than simple categorization of behavior; they also require limited inquiry into market structure an performance, such as market power. See Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 16-19, 26, 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984) (per-se rule for tying depends, inter alia, on whether defendant has sufficient market power in tying product to coerce purchase of tied product). Today only a few types of conduct are generally recognized as illegal per se: (1) horizontal division of markets or customers among competitors; (2) price fixing; (3) tying with market power; and (4) boycotts by groups with market power. See Jay Dratler, Jr., Licensing of Intellectual Property §5.02[2][a][iii] (Law Journal Press 1994 & Supps.), available on LEXIS: Secondary Legal: Law Journal Press.

7. The second type of analysis used in antitrust law is called the "rule of reason." The focus of this mode of analysis is determining whether the challenged behavior unreasonably restrains competition.

Unlike analysis under the per-se rule, analysis under the rule of reason is usually plenary. Normally it requires a complex examination of the relevant industries, their performance and structure, relevant geographic, product and service markets, relevant market conditions, the positions of the litigants and others in those markets, and the effect of the challenged behavior on competition. See id., § 5.02[2][a][ii]. The classic judicial description of the rule of reason is as follows:

"[T]he legality of an agreement or regulation cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences." Board of Trade of Chicago v. United States, 246 U.S. 231, 238, 38 S.Ct. 242, 62 L.Ed. 683 (1918).

8. Three practical facts about the rule of reason are worth mentioning. First, the rule of reason is the exclusive mode of analysis for claims under Sherman Act § 2. There is no such thing as a "per-se illegal" act of monopolization or attempt to monopolize, by a single actor. Per-se analysis developed under Section 1, for concerted action among two or more parties, because concerted action was thought to create a more potent threat to competition than unilateral action by a single party, no matter how powerful. See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768, 768-769, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984) ("single-firm activity is unlike concerted activity covered by § 1, which 'inherently is fraught with anticompetitive risk'") (citation and internal quotation marks omitted.).

The second important fact about the rule of reason is that its application is difficult, time-consuming, and expensive. In essence, the rule requires a real-world investigation of all economic, technological, industrial and busines circumstances that are relevant to assessing the effect on competition of the challenged behavior in the relevant geographic, product and service markets. In other words, the rule requires proof in a courtroom (albeit with the help of expert testimony!), of all the facts and circumstances that an economist might use to prove or disprove an anticompetitive effect. Appying the rule of reason therefore makes antitrust litigation complex, expensive, and time-consuming.

Finally, in Section 1 cases in which per-se analysis might apply, the battle over whether to apply per-se or rule-of-reason analysis is often the entire war. If the plaintiff succeeds in convincing the court that a per-se rule should apply, the plaintiff nearly always wins. In contrast, if a defendant in a Section 1 case convinces the court to apply the rule of reason, the defendant usually wins or can force a favorable settlement.

This second conclusion is not invariable, however. Sometimes courts apply an abbreviated analysis under the rule of reason, taking only a "quick look" to be sure that the effect of the challenged behavior is as anticompetitive as it first appears. See Dratler, supra, §5.02[2][a][ii]. In general, however, in a Section 1 case determining which mode of analysis to apply is a key part of the litigation. (These observations do not apply, of course, to Section 2 cases because those cases use only one mode of analysis: the rule of reason.)

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