An Introduction to Anti-Trust

One of the first legitimately important things that law students learn during their time in law school is that almost everything laypersons think they know about the law is wrong.  Sometimes the wrongness is simply the result of a catchy urban legend, like the famous (and false) story of a Winnebago driver who went back to make a sandwich after setting the cruise control and then supposedly sued Winnebago for the resulting accident.  Sometimes it’s a combination of superficial reporting and a lack of time or desire to look into the suit closely enough to see that there is legitimate substance to it, as was the case with the undeservedly infamous McDonald’s hot coffee case.  And sometimes it’s simply the result of people not understanding that their middle school and high school history classes gave only a rather superficial outline of events because it’s not really possible to do more than that within the constraints of the class.

It is this last issue to which the lay understanding of anti-trust law falls victim most often.  Sometime during middle school or high school students get told about Teddy Roosevelt the “trust buster” and the evil of monopolies, but even the less-subtle nuances get left out.  And so, when news that nearly 1/3 of the US population has only one choice for high-speed internet comes out the internet explodes with people frothing at the mouth about how such a thing is clear evidence that the government is in bed with industry since, “monopolies are illegal.”

See, here’s the thing, monopolies aren’t illegal.  Not even a little bit.  There is no law prohibiting a company from being the only supplier of a good or service within a given market.  “If that’s the case,” the layperson may ask, “why was there all that talk about monopolies when we learned about trusts back in school?”  Good question.  You see, the law just loves technicalities.  And while being a monopoly isn’t illegal, forming a monopoly may well be.

Speaking generally, anti-trust law in the United States doesn’t particularly care whether a company is a monopoly or not.  What it cares very much about, however, is how the company became a monopoly and how the company is attempting to maintain its monopoly.

Inventing a new product and being the only supplier or manufacturer of that product is legal.  Moving into an area and supplying a service that no-one else in the area supplies is legal.  Both of these situations result in monopolies, but US anti-trust law doesn’t concern itself with these monopolies (absent certain specific anti-competitive acts being associated with them).  However, if two companies are providing a service within an area, antitrust law may prevent those two companies from merging to form a single company.

This is why, for example, Apple’s monopoly on portable MP3 players (though they are not the only player in the market, they control a large enough share that they may be considered a monopoly for anti-trust purposes) is legal while the railroads in the famous Northern Securities Co. case were not permitted to be owned by a single holding company.  Apple’s monopoly on portable MP3 players is simply the result of the market preferring its product whereas the monopoly the railroads were attempting to form in Northern Securities would have been the result of the corporations working against the market.  In simple terms, two or more competitors cannot merge to create a single-player monopoly (in most cases, the law always has exceptions), but if one company is the only option in an area because they are the only company to offer services in that area, it’s perfectly acceptable as long as that company doesn’t abuse its monopoly power.

Which brings us to what constitutes the abuse of monopoly power in cases where the monopoly itself is legal.  There are, of course, many different specific acts which are prohibited under US anti-trust law, but all share the common theme of causing, or having a substantial likelihood of causing, an unreasonable restraint on trade.  For example, a legal monopoly cannot use its market power to discourage new companies from entering the market (by pricing its products below cost in an effort to make the new company go broke, among other actions), nor can it use its market power in one market to help products it may create in other markets (by requiring that anyone purchasing the monopoly product also buy the new non-monopoly product, a process known as “tying,” among other actions).

Similarly, companies that are in competition with each other cannot all agree to operate in such a way that makes them behave like a monopoly.  For example, companies cannot meet and formally divide the market amongst themselves, nor can they mutually agree to prices.  However, this does not stop companies from unilaterally deciding not to enter the market in certain areas where a competitor is already established, nor does it stop companies from unilaterally deciding to match the prices of their competitors.  This may seem like a small difference, but it can be crucial in an anti-trust case.

Finally, there’s my favorite anti-trust prohibition, the group boycott.  This often-overlooked prohibited action came back to my attention recently when I was reading about a company called SawStop, which created a safety mechanism for table saws that will stop and retract the blade if it senses that the blade has come into contact with skin.  You’ve probably seen their quasi-famous hot dog demonstration.  SawStop is alleging that several makers of power tools collectively agreed not to license SawStop’s system in order to preserve overall parity amongst the major players in the market.

While companies are permitted to spurn new technology on their own, US anti-trust law prohibits coordinated boycotts where there is evidence that, absent a group agreement, the individual players would have acted differently.  Here, SawStop is claiming (among other things) that without the alleged industry-wide agreement individual manufacturers would have chosen to license its system in order to avoid appearing more liable for injuries if other manufacturers licensed the safety system and they did not.  Whether SawStop’s allegations are true or not is yet to be determined; the case is so new that the defendants have not even responded yet.  Regardless of the outcome though, the complaint provides some insight into an area of anti-trust law seldom considered by most non-attorneys.

Obviously, I’ve only just skimmed the surface of US anti-trust law, but I hope that this gives non-lawyers some insight into the more obvious nuances and encourages people to go beyond the broad-brush of “monopolies are illegal.”  As always, this is merely generalized information and is not intended to address any specific situations.  If you have general questions, leave a comment.  If you have specific questions asking for legal advice, find an attorney licensed to practice in your jurisdiction and contact them.

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