What is the Clayton Act of 1914?

The Clayton Act is an antitrust law passed to protect consumers by providing a means of preventing early-stage anticompetitive practices. It has a specific focus on the sale of commodities. The Clayton Act is more specific in identifying anticompetitive conduct than is the Sherman Act. It also creates exemptions for certain industries or businesses and establishes an enforcement mechanism to remedy violations of the Act. A notable aspect of the Clayton Act is that it prohibits conduct that does not presently amount to an injury to consumers but has the tendency to lead to consumer injury. In this way, the Act focused on regulating conduct to prevent harm from occurring.

Note: The specific types of conduct prohibited under The Clayton Act is discussed below.

Discussion: How do you feel about the purpose of the Clayton Act? Should the Federal Government be able to prohibit certain business practices that are not presently anticompetitive based upon their tendency to by anticompetitive?

Practice Question: What is the regulatory function of the Clayton Act and how is it distinct from the Sherman Act?

What is Price Discrimination?

Price discrimination under the Clayton Act means charging a different price for a commodity based upon something other than quality, quantity, or cost of selling. The Robinson-Patman Act, an amendment to the Clayton Act 2, addressed the issue of a seller charging purchasers of commodities different prices. This practice can be anticompetitive when the price is below costs and gives one customer a competitive edge in the market that is not related to operational superiority. A claim under the Robinson-Patman Act must meet the following requirements:

Commodities - It involves the purchase of commodities.

Like Kind & Quality - The commodities must be effectively the same.

Injury to Competition - There must be some effect on the market (interstate commerce), in either:

Primary line - The reduction of prices for a buyer in a specific region causes an injury to competitors in that market.

Secondary Line - Buyers who are customers of a sellers supplier receive a particular discount.

This rule protects smaller buyers who cannot secure the advantages of larger buyers. Ensuring equal prices for resellers of commodities promotes competition. Specifically prohibited conduct includes:

Section 2(c) - limits brokerage commissions related to the sale of goods.

Section 2(d) - outlaws granting promotional allowances or payments on good bought for resale, unless such allowances are available to all competing customers.

Section 2(e) - prohibits giving promotional facilities or services on goods bought for resale, unless they are made available to all competing customers.

The statute also makes predatory pricing illegal outside of the context of Sherman Act 2, which primarily covers pricing below marginal cost for a prolonged period to drive out competition. The Clayton Act does allow for defenses to or justifications for price discrimination, including:

Cost Justification - Price differentials based on differences in the cost of manufacture, sale, or delivery of commodities are permitted.

Good-faith Defense - A seller in good faith may meet the equally low price of a competitor.

Either of these defenses are a pro-competitive justification that might outweigh the restraints placed on competition.

Discussion: Why do you think the Clayton Act focuses on vertical price discrimination by sellers of commodities? Do you think the limitations expressed above achieve these objectives? Can you think of other methods of regulating price discrepancies between purchasers?

Practice Question: ABC Corp is a seller of industrial cement. ABC prefers to sell in large quantities because of the lower warehousing and shipping costs. ABC particularly likes to deal with 123 Corp, which has its own warehousing and logistics system that ABC Corp may employ when selling 123 cement. As such, ABC provides special deals and incentives to 123 Corp, which has helped 123 Corp dominate the commercial construction market. If ABCs practices are challenged by the FTC, what would a court examine to determine legality?

What are special arrangements prohibited by the Clayton Act?

Section 3 of the Clayton Act limits the use of certain types of contracts involving goods when the impact of these contracts may substantially lessen competition or tend to create a monopoly. These contracts may be per se illegal if monopolistic behavior is present. Examples of contractual arrangements that may tend to lessen competition or create a monopoly include:

Exclusivity Contracts - Many supply contracts, requirements contracts, and exclusive dealing agreements are per se illegal. The primary concern is that manufacturers are foreclosed from entering the market due to these exclusive dealing relationships with established suppliers (and vice versa). The Clayton Act 3 only applies to situation when a seller requires a buyer to only purchase from it or another seller. It generally does not apply to situation when a buyer requires that a seller refrain from selling to other buyers. This situation may, however, violate Sherman Act 1. Legality turns on the question of whether the activity substantially lessens competition. To make this determination, the court will look at:

Line of Commerce - Does this activity prevent competitors for achieving a sustainable size? If economies of scale do not require competitors to be a certain size in order to compete in the market, the exclusivity contract is less likely to be illegal.

Area of Effective Competition - How large is the geographic limitation on competition? The court will examine the extent to which sales boundaries are confined and potential effect in that region.

Barriers to Entry - How difficult is it for new competitors to enter the market?

To be illegal, the agreement must have a tendency to foreclose competition in a substantial share of the relevant geographic area and line of commerce. A defendant may be able to rebut a Clayton Act 3 allegation by demonstrating that:

There is no foreclosure of competition;

The contract is short-term in nature;

There are other available modes of distribution; or

The pro-competitive aspects of the agreement may outweigh the anticompetitive effects under the rule of reason.

One exception is a franchise agreements that requires that all goods purchased come from the franchisor. These are legal, so long as the product is linked to quality of goods. Sourcing things not related to quality of goods cannot be prohibited through a exclusive source of supply provision. A challenge to a franchise agreement is subject to the rule of reason.

Discussion: How do you feel about making exclusive purchase agreements illegal? Do you believe the above-listed factors demonstrate anticompetitive effects in the market? Does the ability to rebut these concerns affect your opinion? Why or why not?

Practice Question: ABC Corp is the seller of hydraulic fluid. ABC requires that many of its customers only purchase ABCs products. What will the court examine to determine whether these requirements are legal?

Clayton Act - Tying Contract

A tying contract is one in which a product is sold or leased only on the condition that the buyer purchase a different product or service from the seller or lessor. A common type of tying, known as full-line forcing, is where a seller compels the buyer to take a complete product line from the seller. That is, the buyer cannot purchase just one product in the line. Another situation involves tying unpatented products to a patented product. Such a practice is per se illegal if the following elements are present:

Separate Products - The tying and tied product are two separate products;

Market Power - The defendant has substantial market power in tying the product market;

Forecloses Trade - The tying agreement prevents a substantial amount of trade in the relevant market;

Forced Sale - The defendant effectively forces a substantial number of customers to purchase the tied product under conditions where they may otherwise look to other sellers in the market;

Harm to Competition - There must be an identifiable lessening of competition in the market, and

No Competitive Justification - No legitimate pro-competitive justification exists.

The general defenses of maintaining company goodwill, pro-competitive or strategic objectives, and generating market efficiencies are available to combat a finding of anticompetitive effect.

Example: A common example of an illegal tying arrangement involves tying a patented drug to an unpatented medicine dispenser. This seeks to extend the monopolistic rights allowed to patent holders to non-patented items.

Discussion: How do you feel about prohibiting tying goods from a single provider? Do you believe the above-listed elements are sufficient to identify anticompetitive practices? Why or why not? Should general, pro-competitive defenses be sufficient to justify tying contracts? Why or why not?

Practice Question: ABC Corp carries a line of products. One of its products is subject to a utility patent and is the only product of its type currently on the market. Lots of market competitors make accessories for this product. ABC, however, requires that any purchaser of this product also purchase several of ABCs accessory products? If the FTC challenges these sales agreements, what elements would a court use to determine whether the practice is anticompetitive?

Clayton Act - Reciprocal Dealing Contracts

This is an agreement where a buyer offers to buy a sellers goods under the condition that the seller buy other goods from the original buyer. These agreement are only illegal if there is a distinct anticompetitive objective with a substantial effect on the product market. Any pro-competitive justification may serve as a defense to a challenge to these practices.

Example: ABC Corp agrees to purchase machinery that distributes chemicals from a 123 Corp if the 123 agrees to purchase all of the chemicals from the ABC. This conduct will be illegal if a challenger can demonstrate that ABC and 123 have an anticompetitive objective that substantially affects the market for farmers purchasing these machines and chemicals.

Discussion: How do you feel about banning reciprocal dealing agreements that deemed anticompetitive? Can you think of situations where such an agreement would have an anticompetitive effect in the market? Can you think of any pro-competitive justification for these arrangements?

Practice Question: ABC Corp and 123 Corp are manufacturers of material used in radios. ABC Corp supplies rubber materials to 123 Corp. 123 Corp supplies glass materials to ABC Corp. They have an exclusive, reciprocal dealing agreement. Under what conditions might this relationship be subject to challenge?

How does the Clayton Act regulate mergers and acquisitions?

The Clayton Act 7 makes certain mergers and acquisitions illegal. Basically, one company cannot acquire another companys stock or assets (or otherwise combine with another entity) if the combination is reasonably likely to substantially lessen competition or tend to create a monopoly. Such activity may also be illegal under Sherman Act 2 if such activity results in a company acquiring monopoly power following the transaction. Mergers are generally classified as horizontal, market extension, vertical, or conglomerate.

Note: Originally the Clayton Act only prohibited horizontal mergers. The Celler-Kefauver Amendment to the Clayton Act covers vertical mergers that lessen competition.

Horizontal Merger - A horizontal merger combines competitors or two businesses in the same industry. To determine whether such a merger is anticompetitive, begin by defining the product and geographic market. These two factors define the market share of each entity. If the merger will result in less competition, it may be illegal. The court may examine any justifications for the anticompetitive activity, such as:

procompetitive results of the merger, or the offsetting pro-competitive market responses, such as new competitors entering the market; and

gains in the market efficiency.

Vertical Merger - A vertical merger brings together companies that are in the same chain of commerce. That is, it brings together buyers and suppliers. Such a merger may be illegal where it will:

erect barriers to entry for competitors,

promotes collusion, or

allows the companies to evade regulations.

In reviewing a vertical merger, a court may consider the pro-competitive attributes of the merger.

Conglomerate Merger - This type of merger is between non-related businesses. These businesses do not compete or operate in the same chain of commerce. This type of merger is illegal when it effectively makes it difficult for new competitors to enter the market.

Discussion: How do you feel about the regulation of mergers as potentially anticompetitive activity? Do you think the factors listed above are adequate to demonstrate an anticompetitive effect on the market? What pro-competitive justifications might justify some of these mergers?

Practice Question: ABC Corp is a manufacturer of televisions. 123 Corp is a primary supplier of glass used in HD televisions across the market. ABC Corp buys all of its glass from 123 Corp. 123 Corp also sells to XYZ Corp, the largest competitor to ABC Corp in the television manufacturing space. ABC Corp needs to spend any excess corporate cash and is considering a buyout of 123 Corp or XYZ Corp. If the FTC decides to challenge either of these mergers, what factors would the court apply in making a determination of legality?