Antitrust Law And The Internet

Internet Antitrust Law “Plain English” Explanation

Antitrust law is rooted in the belief that a properly competitive market is necessary for innovation. Thusly, in an effort to keep the market competitive and expanding, Internet Antitrust law — a.k.a. online competition law — imposes limits on digital competition tactics.

The typical Internet antitrust defendants are mega-don-like corporations (i.e., Google) who’ve ostensibly taken control of a market niche (i.e., online search). That said, smaller corporations do become embroiled in Internet antitrust actions.

The Development of Antitrust Law

The post-Civil War manufacturing boom birthed U.S. antitrust laws. As manufacturing techniques grew increasingly efficient, the supply of goods outstripped the population growth. The market became saturated, and prices fell.

In an effort to protect profit margins, businesses banded together into organizations known as trusts. The trusts established industry-wide pricing schemes; any company wishing to sell a particular product would charge the predetermined price.

These trusts allowed powerful business tycoons to control the vast majority of the nation’s production. Because they controlled such a large share of the market, they could protect themselves from new competitors. If an entrepreneur concluded that a trust was overcharging for their products and began selling for a lower price, all the businesses in the trust would lower their prices in response. Their size allowed them to sacrifice short-term profits for long-term market share; by selling their products for a loss, they could force new businesses into bankruptcy, leaving the trust free to resume selling at the higher price.

The Sherman Antitrust Act, The Clayton Act & The Robinson-Patman Act

By 1890, public disgust with the high prices and perceived inefficiencies associated with the trusts forced Congress to take action, and legislators passed the Sherman Act by a near-unanimous majority. The act was written with broad, non-specific terms in the hope that government agencies and the courts could allow the law to evolve in response to changing circumstances. As a result, the Sherman Act remains the core of anti-trust law more than 120 years after it was drafted.

Since the Sherman Act, there have been a few important developments in antitrust law. In several important decisions shortly after the turn of the century, the Supreme Court limited the reach of the Sherman Act, concluding that it unacceptably limited the right to freely form contracts.

In 1914, Congress enacted the Clayton Act, which closed some of these loopholes. Unlike the Sherman Act, violating the Clayton Act carries only civil penalties.

In 1936, Congress passed the Robinson-Patman Act, which prohibited the increasingly common practice of offering different prices to different corporate customers, a practice many businesses used to earn the loyalty of large conglomerates by charging the larger company’s smaller competitors more for the same products.

Basic Principles Of Antitrust Law

There are two crucial distinctions in antitrust practice:

  • per se violations and violations of the rule of reason
  • independent and joint action

Modern antitrust law treats independent action and joint action very differently. If one company adopts a set of tactics to increase its profit share and weaken its competitors, the government is unlikely to pursue the matter unless the company actively attempted to create a monopoly. However, allegations of cooperation between businesses are viewed with great suspicion.

Antitrust Law: The Rule Of Reason

The Sherman Act prohibits “every contract, combination, or conspiracy in restraint of trade.” If applied literally, this would prohibit virtually every aggressive marketing strategy. Accordingly, courts have limited this language so that it only outlaws conduct that unreasonably limits competition. This is known as the rule of reason.

When applying the rule of reason, courts must weigh the business justification of a particular practice against its tendency to limit competition and any beneficial impact it would have on the marketplace. For example, imagine that two local grocery chains agree to negotiate jointly with a company selling apples. This has an anti-competitive effect because once the two stores settle on a supplier, no other apple companies can approach them. Imagine, however, that the stores chose to cooperate in order to receive a lower price, making them more competitive with a national chain that recently opened a store in the area. Their desire to receive a lower price is a legitimate business justification, and their goal of competing with the national chain by efficiently providing apples to the public will have a beneficial effect on the market.

Despite its common-sense appeal, the rule of reason can be difficult to apply. In the absence of a concrete standard, judges, most of whom are not business experts, often struggle to determine when a particular practice is reasonable. Making their job even more difficult, clever corporate lawyers have become very skilled at concocting seemingly plausible explanations for anti-competitive behavior. This difficulty increases ten fold when deciding on new Internet-related and tech-related artitrust lawsuits — as most judges do not fully understand the nature of 21st century corporations (another reason why it’s a good idea to hire an Internet Law attorney who knows how to successfully argue a tech-related case in front of a potentially non-tech-savvy judge.

Antitrust Law: Per Se Allegations

To address these difficulties, courts have declared certain types of conduct to be per se unreasonable. If a business is charged with a per se violation, the court will not consider whether the business harmed the market or discouraged competition. Proof that the business engaged in the prohibited activity is sufficient. This allows judges to avoid the murky waters of market analysis and focus on what they do best: deciding whether defendants did the specific acts they are accused of doing.

Most per se violations involve horizontal restraints, which are agreements between direct competitors that are independently owned. For instance, an agreement between two national chains is a horizontal restraint, but an agreement between a national chain and a local subsidiary would be a permissible vertical restraint.

The classic per se violation is price-fixing. This occurs when competing businesses agree not to lower their prices beyond a certain point. Because of the harm it does to consumers, price-fixing carries severe penalties. Business owners who knowingly engage in such schemes often receive lengthy prison sentences.

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