This lesson begins with an examination of one type of liability which can potentially affect your business: liability for trade practices, otherwise known as antitrust. In trying to gain a competitive advantage, our capitalist system is based on the idea that the market will determine the winner. However, in gaining that competitive advantage, goods or services must not unfairly compete with other like goods or services, or a business will run afoul of the antitrust laws. Failure to comply with these antitrust laws and regulations can result in liability for the business and decreased competition for consumers, leading to higher prices and less quality.
The heart of the American system of economics is its capitalist approach to business. Under this theory, those who deliver shoddy goods or services will fall by the wayside, and the market will thus regulate itself. To that end, our system regulates the production and marketing of goods so that those markets stay open and free to whoever wishes to compete.
Antitrust is the area of law which keeps the market open by regulating business activities. Marketing involves many factors such as the pricing, packaging, promotion, and placement (distribution) of goods and services. The thrust of the laws is to make sure businesses do not act in ways which will suppress competition, inhibit free trade, and ultimately harm the consumer. Knowledge of the antitrust laws ensures that your business stays within the law as you market your product and that the consumer benefits by you doing so.
Federal Regulation of Antitrust
Just as the economy is not static, neither is business. New forms of business may emerge, and new relationships may offer different ways of doing business. Whether these new ideas are threatening to the market, and how threatening they are, are often not agreed upon by the economists, the government, or the courts. This tension should be kept in mind when judging the effects of competitive behavior in the U.S. marketplace. Section 1 of the Act prohibits contracts, combinations or conspiracies in restraint of trade or commerce and focuses on agreements made to restrain trade. Section 2 of the Act prohibits monopolizing or the attempt to monopolize.
As the federal statute is written, every “restraint of trade” is illegal. In the early court interpretation of §1 courts used a literal interpretation of this section. In the landmark case involving the Standard Oil Company13, the U.S. Supreme Court announced that §1 of the Sherman Act did not prohibit all trade restraints, but only outlawed unreasonable” restraints of trade. The rule of reason requires a two-step analysis: proof of a contract, combination, or conspiracy, and the combination must be found to be unreasonable under the circumstances, and therefore illegal.
In contrast to the rule of reason approach, courts use a per se approach to antitrust analysis.
The Sherman Act provides powerful remedies. The Act makes equity’s broad powers available to enjoin specific behavior, to dismantle monopoly positions acquired or sustained lawfully and otherwise to service antitrust policy. Private parties who are successful are entitled to treble damages,
The Clayton Act
Congress enacted the Clayton Act in 191414 to address the problems left open by the Sherman Act. The Clayton Act declared four practices unlawful but not criminal: (1) price discrimination – selling a product at different prices to similarly situated buyers; (2) exclusive dealing contracts including tie-ins – sales on condition that the buyer stop dealing with the seller’s competitors; (3) corporate mergers – acquisitions of competing companies; and (4) interlocking directorates – common board members among competing companies. The courts interpretation of the reach of the Clayton Act limited the Congressional intent of the act.
The Robinson-Patman Act
The Robinson-Patman Act applies only to sales of commodities of like grade and quality in commerce. The act barred price discrimination unless it was supported by cost savings or was proven necessary to meet a competitor’s price offer.
The Federal Trade Commission Act
Section 5 of the Federal Trade Commission Act (FTC) of 1914 (amended in 1938 and 1975) provides that “unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce are hereby declared unlawful.”15 Section 5 is a catch-all provision which has been construed to include all the prohibitions of the other antitrust laws and is used to fill loopholes in the more explicit statutes. Congress also created the Federal Trade Commission to enforce antitrust violations and to improve and develop antitrust policy.
State Antitrust Efforts
Although the laws that were enacted were inconsistent with each other they all served the same purpose, and that was to preserve the balance of power between the citizens of the state.
States continue to permit indirect suits on behalf of aggrieved citizens who are impacted by antitrust violations. These actions are generally orchestrated by the National Association of Attorneys General (NAAG), an organization formed in 1907. State attorneys general are also free to litigate on behalf of their state citizens individually.
Antitrust Violations: Per Se or Rule of Reason Approach?
When conduct is alleged to be anticompetitive, a court has two ways in which it can measure the anticompetitive effects of that conduct – the per se approach and the rule of reason approach.
The rule of reason approach requires courts to look at the specific activity that is alleged to be anticompetitive and determine whether the agreement unreasonably restrains trade, or whether the behavior is monopolistic. Conduct that the court has not previously categorized as per se illegal, or conduct that the court has not had much experience in evaluating, is generally treated on a case-by-case basis. The court will scrutinize the conduct, its purpose, and its effect on the market before determining whether it is unreasonable.
There are a few activities that, however, if proven, are held by courts to be inherently unreasonable; these are known as per se violations. There is nothing that is beneficial to the market that this conduct has to offer. The per se analysis is a conclusive presumption of illegality.
Courts determine whether an antitrust violation has occurred by looking at whether it involves a per se offense or one which requires the court to evaluate the offense under the rule of reason. Further, the courts look at whether the companies involved are horizontal to each other, meaning in competition with each other, or vertical to each other, meaning in a relationship of a supplier and its customer.
Horizontal per se violations generally are looked at more stringently than vertical ones, and include price fixing, allocation of territory or customers, cartels and group boycotts. Vertical per se violations include price fixing, tie-ins, and boycotts.
Antitrust violations are not limited to any particular industry, nor are they limited to a particular behavior. Antitrust violations are measured by looking at the power a company has in a particular market. Markets are measured by two concepts – product market and geographic market. A product market is determined by looking at like products in a particular. Another market is the geographic market.
Horizontal Price Fixing
The most serious horizontal per se violation is price fixing. Price fixing is an agreement between two or more competitors to set prices. It is simply illegal. One way to attain price fixing is to form a cartel. The purpose of a cartel is to try to control prices through control of the output. Price fixing covers agreements that affect prices, even if it is not an agreement to set the price. The agreement need not be in writing and signed by the parties. What is required to be proved is that the agreement was made, directly or indirectly, to set prices or affect them. Conscious parallelism is not sufficient to infer an agreement between competitors.16
Vertical Price Fixing
Vertical price fixing agreements are those between a supplier and customer with respect to the price at which the customer will resell the products. To fall within the per se rule, there must be an agreement between the buyer (customer) and seller (supplier) that the buyer will resell at a specified price or price level.
Horizontal Market Restraints
An agreement among competitors to divide markets by territory is analyzed under the per se approach. This type of agreement may be to divide an area geographically or to divide among customers or products. Proof of the agreement is required here also. However, indirect proof is permitted.
Vertical Market Restraints
Marketing plans have often had arrangements whereby dealers agree to resell the product only within specified territories and to solicit business only from specified classes of customers. Such restraints are subject to the rule of reason; as long as the agreements are purely vertical and economically justified, they will not be found to be anticompetitive. While most vertical customer and territorial restrictions have been sustained, if the seller has a significant market share, the practice can still be risky, and less restrictive methods of marketing should be considered.
A boycott, or concerted refusal to deal, is an agreement between two or more competitors not to sell or buy from an individual or company or group. The boycott restrains trade and impedes competition and is per se illegal
Vertical boycott agreements occur when a seller agrees with some of its customers that it will not sell to another. If such an agreement is shown, the refusal to deal is per se illegal. A seller has always been afforded the right to choose as long as the decision is independently made.
Sellers with more than one product may seek to tie the sales of one (which the consumer desires) with that of another (which the consumer does not want.) Such tying arrangements are per se illegal if the seller coerces the buyer into taking the tied product as a condition to obtaining the desired product. One of the problems with tying arrangements is in defining when the products are tied. In order to establish a per se violation alleging tying there must be two products; there must be power in the tying product market; there must be a “not insubstantial” amount of commerce affected in the tied product market; the power in the tying product must be used to prevent competition between products in the tied market; and the tying firm must have an economic interest in the sales of the tied firm.
Exclusive Selling Agreements
Sellers may grant an exclusive selling agreement to a particular dealer in a specified territory by agreeing to sell only to that dealer within its area of responsibility. Such restraints, are, in most instances, valid.
Exclusive Dealing Agreements
Exclusive dealing agreements are when the buyer undertakes to purchase all its requirements for the product from the seller. The principal vice of exclusives is that, if they tie up a significant portion of the market, the seller’s competitors will be foreclosed from market access and competitively disadvantaged. The application of the rule of reason to exclusive dealings does not mean that all such arrangements are lawful.
Price discrimination is charging different prices to buyers of the same product in essentially the same time period. The Act allows two defenses to price discrimination. Under the “cost justification” defense, there shall be no liability where the discount to the buyer reflects the lower cost to the seller of selling to the favored customer. Under the “meeting competition” defense, there shall be no liability where the seller granted the discount in order to meet a competing seller’s price. In addition to the statutory defenses, the FTC recognizes the “practical availability” defense. The FTC will find an absence of competitive injury where discounts are generally and practically available to competitors of the favored customer. For purposes of the Robinson-Patman Act, the price includes all promotional materials, discounts or gifts given in connection with the sale of a product. Price discrimination is charging different prices to different buyers. Predatory pricing is selling below cost for the purpose of eliminating competition. These aspects of the Robinson-Patman Act remain controversial.
Trade associations require agreements to deal with each other, and for that reason may violate antitrust laws. Behavior such as closed business meetings, closed membership, and decisions to exclude buyers or sellers that do not support the trade association may be viewed as anticompetitive, thus, their behavior may violate the antitrust law. One act that trade associations often engage in is price sharing, which can be a lawful activity and beneficial to the industry. Courts apply a rule of reason approach to this activity. In order to prevent an appearance of antitrust activity, trade associations should be open to all qualified firms.
Antitrust law is also concerned with the overall market structure and how competition operates within it. Market structure looks at certain things that might lessen competition. When there are only a few sellers in a market, they are said to have a large market share. Large market shares lead to market power. Market power leads to monopolies. The Supreme Court has defined monopoly power as the power to control prices or exclude competition.
The offense of monopolization has two elements: (1) possession of monopoly power in the relevant market, and (2) willful acquisition or maintenance of power. A report from the DOJ suggests that for firms with less than 50% market share there be a rebuttable presumption that market power is lacking, and when a firm has maintained a market share exceeding 2/3rds for a significant period of time with no likelihood of erosion, that market power be presumed.17
Once a monopoly is found to exist, the question is how was it obtained or maintained? However, monopolies that are created through the use of monopolistic behavior are unlawful. Another indication of market power is the product market. The product market is all of those products that are available to a buyer of the business’s product. This includes all products that are similar in price, use, and quality.
In some instances, the power is on the buying side, called monopsony power. A buyer having price and quantity power is said to have a monopsony on the buying or demand side of the market.
There is a gap in coverage between §1 and §2 in industries where there are a few competitors who own the entire market. This type of market is called an oligopoly, or, more recently, a shared monopoly. To be an oligopolistic market, the market has to have a limited number of competitors who are interdependent on each other. This parallel behavior is not monopolistic, so it does not fit within § 2 of the Sherman Act, nor is it the result of collusive agreement, thereby escaping §1 liability as well.
Mergers and Acquisitions
A merger is the joining together of two companies that were previously separate.
Mergers are covered by the Sherman Act § 1 if they anticompetitively restrain trade because every merger involves an agreement. Mergers may present threats to competition, depending on the type of merger and the size and strength of the companies involved. The merger regulations attempt to prohibit the merging of firms that will create a monopoly under the theory that it is better to prevent than to untangle a merger. The Hart-Scott-Rodino Act of 1976 was enacted to allow the DOJ to review these mergers before they were completed. There are three types of mergers that can threaten competition: horizontal, vertical, and conglomerate mergers.
Next, this lesson examines intellectual property issues. Intellectual property consists of concepts, information, symbols, or creative expression and therefore has no physical boundaries. Such activity becomes property once it is protected by patents, copyright, or trademark.
The Copyright-Patent Clause of the U.S. Constitution, Article I, section 8, gives Congress the power “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Copyright protects authors, illustrators, photographers, musical composers, and lyricists, among others. Patents protect inventors and their inventions. Trademarks protect goods and services. Other types of business information such as trade secrets are protected by state statutes or unfair competition laws. The Copyright Office lies within the Library of Congress and is an arm of the legislative branch.
The Copyright Reform Act of 1976
The basic copyright law that now governs is the Copyright Reform Act of 1976. The Copyright Reform Act of 1976 (the Act) grants to copyright holders the exclusive right to use and authorize use of their work with certain exceptions. A copyright does not protect an idea itself, but protects the manifestation of the idea. That is the protectable product. Copyright protection lasts for the life of the creator plus 90 years.18 Thus, all of an author’s works enter the public domain at the same time. Works that are in the public domain, i.e., works whose copyright has expired or was never requested, are not eligible for copyright protection.
Section 1101 of the Copyright Act
In 1994 Congress enacted section 1101 of the Copyright Act. This section was enacted to implement the treaty known as the Agreement on Trade Related Aspects of Intellectual Property (TRIPs). The purpose of section 1101 is to prevent unauthorized fixing or broadcasting of live musical performances, also known as bootleg copying.
The No Electronic Theft Act
The No Electronic Theft Act (NET Act) was passed in 1997 largely in response to the U.S. v. LaMacchia 19case. In that case the district court dismissed the case against LaMacchia, a college student at Massachusetts Institute of Technology (MIT) who infringed as a hobby, because there was no commercial intent in the infringement. Maximum penalties are 5 years in prison and a $250,000 fine.
The Digital Millennium Copyright Act
The Digital Millennium Copyright Act (DMCA)20 was enacted in 1998. If there is an encryption device placed on copyrighted material, Title I makes it a federal violation to decode that device. Title II of the DMCA limits the liability of online service providers for copyright infringement by their users, providing a safe harbor for those providers who adhere to the safe harbor guidelines.
The Meaning of “Fixed” Image
The Copyright Act protects a work fixed in either a copy or phonorecord as defined in section 101 of the Act. New technology has challenged the definition of “fixed.”
Ideas Versus Expressions
Section 102(b) of the Act specifically states that copyright does not “extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.” The line between idea and expression is not always clear, especially in certain areas.
Ownership of Copyright
The Copyright Act is straightforward on ownership; ownership is in the author. If the work is a joint work, the authors are co-owners.
Notice and Registration
Registration of the copyrighted work with the Copyright Office is not a prerequisite for a valid copyright. Because the term publication was not defined in the previous act, courts were left to define the term. The courts generally agreed that only a general publication would divest a work of copyright protection, while a limited publication would not. Although registration with the Copyright Office is not necessary (copyright attaches at the moment of creation), it is required before seeking certain legal remedies, and it is best for legal protection.
Fair Use Doctrine
An exception to the unauthorized use of copyrighted material is the fair-use doctrine. Public policy dictates that use of the material is fair and that its use would not conflict with the constitutional mandate to protect such work for the purposes of promoting intellectual growth and development.
The Act lists four criteria to be used in a determination of whether use of material is fair: the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the portion used in relation to the copyrighted work as a whole, and the effect of the use upon the potential market. The Act gives six examples of purposes to which the fair-use doctrine normally applies. Those examples are criticism, comment, news reporting, teaching, scholarship, and research. Parody and satire are not listed but are protected as well.
Fair Use and Photocopying
To the specific issue of photocopying (including by audiovisual or computer), three tests apply: brevity, spontaneity, and cumulative effect. The fair use doctrine was rejected in two important cases with similar facts where teaching materials that comprised substantial portions of copyrighted books were copied without seeking permission of the copyright owners21, and where a single copy was made to assist researchers.
Work for Hire
The work-for-hire doctrine states that an employer automatically owns copyright in employees’ works that are prepared within the scope of employment. The critical inquiry to be made is whether a person has created the material while within the scope of employment. A second inquiry revolves around the definition of who is an employee. The better practice is to have employees enter into contracts that give an employer the ownership of property created by an individual that is generally enforceable.
Transfer of Copyright Ownership
Ownership of copyrights is freely transferable. The Copyright Office registers initial ownership and records transfers of ownership and acts much like the recording of real property.
Remedies for Copyright Infringement
Once the plaintiff has proven infringement, injury is presumed and either an injunction will be issued or damages assessed. Section 504 of the act provides for the award of statutory damages consisting of actual damages and additional profits.
The Constitution of the U.S., Article I, Section 8, gives Congress the power to enact laws relating to patents. The Patent Act establishes the U.S. Patent and Trademark Office (USPTO) as the agency to administer the laws relating to the granting of patents. A patent for an invention is the grant of a property right to the inventor to preclude others from using the patent without the patent holder’s permission. A patent does not give the inventor the right to make, use, or sell the invention; rather, it gives the inventor the right to exclude others from making, using, offering for sale, or selling, the invention or design for a 20-year-period from the date of the application, which cannot be renewed. Beginning in 1995, the USPTO provided for the provisional application for a patent. Once a provisional application is filed, the term “Patent Pending” is permitted to be used with the invention.
A trademark is “any word, name, symbol, or device, or any combination thereof…used by a person…to identify and distinguish his or her goods…from those manufactured or sold by others….”
Trademarks are protected under a federal statute known as the Trademark Act of 1946, commonly referred to as the Lanham Act. Section 43(a) sets the “likelihood of confusion” standard for infringement of an unregistered trademark or trade dress. In 1999, Congress enacted the Trademark Cyberpiracy Prevention Act.
This act was intended to create liability for any person who tries to make a bad faith attempt to profit by registering or using a domain name that belongs to a trademark. Although words are probably the principal form of trademarks, names (once they become known), symbols, and devices can also serve as trademarks. Unlike the other intellectual properties we have discussed, trademark protection has no limited term, but rather is protected for as long as it is used in commerce.
Section 3 of the Lanham Act provides for registration of service marks. It defines the term service mark as a mark used in the sale or advertising of services that identifies and distinguishes the services of one person, including a unique service, from the services of others. Service marks identify services rather than goods.
Title and Character Names
Creative property, such as the titles of and the characters in creative works are commercially important, and trademark principles also protect them.
A trade name is the name of a firm or business and differs from a trademark in that it identifies the producer, rather than the products or services produced. Because trade names are not trademarks, they cannot be registered under the Lanham Act, but they are instead protected under nearly identical principles housed in the common law.
The term trade dress refers to the total image of a product, including the size, shape, color, texture, graphics, or particular sales technique employed. Almost any feature may be protected under this term if it is distinctive and performs an identifying function.
A certification mark is used to indicate that certain goods or services originated in a particular region, or that they are of a particular nature, quality, or characteristic, or that they were produced by a member of a particular organization. Use of a certification mark cannot be denied to anyone who maintains the characteristics that the mark certifies.
A trade secret may be any formula, pattern, device, or compilation of information that is used in one’s business and that gives one an opportunity to obtain an advantage over competitors who do not know or have it. In 1979 the Uniform Trade Secrets Act (USTA), a set of uniform rules much like the Restatements, was adopted Trade secret protection in the U.S. is a matter of state law and contains three requirements: (1) limited availability of the secret to those outside the circle of those who need to know, (2) economic value, and (3) reasonable effort to keep the secret. Trade secrets do not require novelty or nonobviousness to be protected.
Intellectual Property in Cyberspace
Analysis of legal issues relating to the World Wide Web and the Internet require more than just how to use these new technologies. Issues as simple as where to bring a case are perplexing when you think of the fact that both the web and the Internet are global in scope and illusive in capture.
The Internet can be described as a global network of networks that facilitates communication and information transfer between the millions of computers connected to it.22 Domain names are how we communicate and are similar to addresses we go to find people to talk to, things to purchase, and to pursue every other kind of information interaction imaginable. Domain names are regulated by the Internet Corporation for Assigned Names and Numbers (ICANN), a non-profit organization that has an exclusive contract with the U.S. government to maintain the domain names. The second level of domain names (SLDs), are represented by the name of the registrant. ICANN is currently is focusing on adding international domain names.
Lesson Learning Objectives
By the conclusion of this Lesson you should be able to:
- Explain the federal regulation of antitrust law.
- Appraise the importance of the Sherman Antitrust Act.
- Contrast the different antitrust violations.
- Explain monopolistic behavior.
- Distinguish the different types of intellectual property.
- Demonstrate how the copyright protects works of original artistic creativity.
- Explain the patent law process and the types of patents available.
- Appraise trademark protection law.
Study Chapters 14 and 15 of the text.
The following Assignments should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Submit your responses to these questions in one WORD document. List the question first, and then your response.
Be sure to properly site your sources, both in-text and with a reference list at the conclusion. If you use an online source to support your answers, you must provide a properly formatted link to the source. You should use APA citation format and make sure your sources are credible. In most cases, your responses should be no more than 100 words.
Short Answer Questions
- Compare the Sherman Act, the Clayton Act, and the Robinson-Patman Act.
- What is a per se violation? Give two examples.
- What is meant by horizontal price fixing?
- Distinguish between a monopoly and a monopsony
- What is predatory pricing?
- Compare price discrimination and price fixing.
- What are the three types of federally protected intellectual property?
- What does a copyright protect? When is a work protected by copyright?
- What does a patent give the inventor? How long does a patent last? What does a patent not protect and why?
- Compare a trademark and a service mark.
Professional Development Questions
- Barnaby’s and Books for Less were the two big retail chains for books in the U.S. When Barnaby’s would have a sale on its books, Books for Less would offer the same sale for the same length of time. When the book prices were raised, they were raised by both sellers. What is this called, and is this behavior a violation of the antitrust laws?
- Several pizza parlors are located near a university. Since there are so many of the parlors, owned by different people, none of them is particularly successful. In an effort to become more so, one of the parlors begins to lower prices. The other parlors, seeing the increase in business, do the same. The first parlor continues to lower prices to meet competition. Eventually, though volume has increased, prices are so low for the parlors, that none of the owners is really making any money. The owners get together after a local chamber of commerce meeting and decide that they will divide up the area around the school and only service customers within their area. In this way, they can go back to charging higher prices and not all lose out because of undercutting each other to meet competition. They don=t feel customers would be harmed because they will be able to still come to the parlor closest to their area, and will only have to pay the prices they paid before for pizza. Can they take care of the problem this way?
- You are employed by a company that has asked you to take pictures at the company party. You are a photographer by trade; it is your second job when you are not at work. You agree to take the photos at the party. Who owns the rights to the photographs you take?
Lesson 7 Quiz
Use the quiz to test your knowledge of the concepts covered in this lesson. You may take the quiz as many times as you wish. The results are not calculated into your grade.