The United States competition law has as its genesis the Sherman Act of 1890 fol- lowed by the Clayton Act of 1914 (which was later amended in 1936). Such estab- lished legislation has been interpreted judicially to require two criteria: pricing must be below average variable costs and there has to be proof of recoupment of losses incurred during the alleged period of predatory pricing. In the 2001 case of US v.
AMR Corp13 the court held that an air carrier, which matches prices and increases output when faced with competition from low cost carriers, is not guilty of monopo- lization of the market.
Price fixing is a form of collusion between parties that sometimes gives the illu- sion of a monopoly. The Sherman Antitrust Act of 1890 in Section 2 provides that Every person who is guilty of monopolizing, or attempting to monopolize, or com- bining or conspiring with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, is guilty of a felony, and, on conviction, is liable to be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding
11 Id. Article 12.
12 84/380/EEC [1984] OJ L 207/17.
13 U.S. District Court, District of Kansas, 27 April 2001, 28 Avi 15, 204.
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3 years, or by both at the discretion of the court to which matter will be remanded.
Section 1 set the stage by providing that every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the sev- eral States, or with foreign nations, is declared to be illegal. In United States v.
Trans-Missouri Freight Association14 the court held that the provisions respecting contracts, combinations, and conspiracies in restraint of trade or commerce among the several States or with foreign countries, contained in the Sherman Antitrust Act
“to protect trade and commerce against unlawful restraints and monopolies,” apply to common railroad carriers, and “a contract between them in restraint of such trade or commerce is prohibited even though the contract is entered into between compet- ing railroads only for the purpose of thereby affecting traffic rates for the transporta- tion of persons and property”.15 In this case the defendants had formed themselves into a company called “Trans-Missouri Freight Association” and by agreement decided to raise railroad transportation prices. Peckham J. held that:“[T]he claim that the company has the right to charge reasonable rates, and that, therefore, it has the right to enter into a combination with competing roads to maintain such rates, cannot be admitted. The conclusion does not follow from an admission of the prem- ise. What one company may do in the way of charging reasonable rates is radically different from entering into an agreement with other and competing roads to keep up the rates to that point. If there be any competition, the extent of the charge for the service will be seriously affected by that fact. Competition will itself bring charges down to what may be reasonable, while, in the case of an agreement to keep prices up, competition is allowed no play. It is shut out, and the rate is practically fixed by the companies themselves by virtue of the agreement, so long as they abide by it”.16 However, the court was of the view that price fixing arrangements were not unlaw- ful generally under common law and would be unlawful only they were to act in restraint of trade and fair competition. In the 1911 Standard Oil Case,17 the Court held that The Sherman Act should be construed in the light of reason; in that it pro- hibits all contracts and combination which amount to an unreasonable or undue restraint of trade in interstate commerce. The court inquired into the common law concept of “restraint of trade” (action that interferes with free competition in a mar- ket) and Harland J affirmed that the formation of the Standard Oil Company of New Jersey and its subsidiary companies constitute a combination in restraint of inter- state commerce.18 Interpreting the judgment in the Trans-Missouri case Justice Harland said: “the Trans-Missouri Freight Case, show so clearly and affirmatively as to admit of no doubt that this court, many years ago, upon the fullest consider- ation, interpreted the Anti-Trust Act as prohibiting and making illegal not only every contract or combination, in whatever form, which was in restraint of interstate com- merce, without regard to its reasonableness or unreasonableness, but all monopolies
14 166 U.S. 290 (1897).
15 Id. 291.
16 Id. 339.
17 221 U.S. 1 (1911).
18 Id. 83.
162
or attempts to monopolize “any part” of such trade or commerce19… The Anti-Trust Act makes it a criminal offense to violate the law, and provides a punishment both by fine and imprisonment. To inject into the act the question of whether an agree- ment or combination is reasonable or unreasonable would render the act as a crimi- nal or penal statute indefinite and uncertain, and hence, to that extent, utterly nugatory and void, and would practically amount to a repeal of that part of the act…
[A]nd while the same technical objection does not apply to civil prosecutions, the injection of the rule of reasonableness or unreasonableness would lead to the great- est variableness and uncertainty in the enforcement of the law. The defense of rea- sonable restraint would be made in every case, and there would be as many different rules of reasonableness as cases, courts and juries. What one court or jury might deem unreasonable, another court or jury might deem reasonable.”20
Judicially, there could be no room for doubt that The Sherman Act equivocates in the context of rule of reason as stated by the court in 1913. The Court’s reasoning was the Act was grounded on common law precedents which ascribe to the Act a well define, clear and objective standard.21 In United States v. Trenton Potteries Co.,22 the Court held that under the Sherman Act, the offensive agreement or con- spiracy is criminal whether or not followed by efforts to carry it into effect. In this case it was argued that on behalf of the respondents, in support of their price-fixing agreement not to sell second grade or class B pottery in the domestic market, and evidence was submitted including the testimony of the secretary of the respondents’
association, that brought to bear the fact that that a distinct association of jobbers of pottery was cooperating in this effort, and that its secretary had tendered his active assistance to confine the sale of this class of pottery to the export trade. In the con- text of reasonableness of the restraint of trade, Stone J held with the original court’s decision that the intent of the Sherman Act was give effect to the legality of the preposition that criminality was determinant on the agreement and not the imple- mentation of the agreement itself. In The 1939 case of United States v. Socony Vacuum Oil Co.,23 involved the indictment of numerous oil companies and individu- als who were charged under Article 1 of the Sherman Act—that they conspired to raise and maintain spot market prices of gasoline, and prices to jobbers and consum- ers in the “Midwestern Area,” embracing many States, by buying up “distress” gas- oline on the spot markets and eliminating it as a market factor. The allegations were supported by evidence that went on to prove that the defendants devised and carried out an organized program of regularly ascertaining the amounts of surplus spot market gasoline with intent to raise and maintain prices, and by assigning its sellers to buyers who were in the combination, and purchasing the oil at fair going market prices, and that this process, by removing part of the spot market supply, was at least
19 Id. 94.
20 Id. 97.
21 See Nash v. United States, (1913) 229 U.S. 373.
22 273 U.S. 392 (1927). See also, Connally v. General Construction Co. (1926) 269 U.S. 385 at 391.
23 310 U.S. 150 (1940).
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a contributing factor in stabilizing the spot market and thereby caused an increase of prices, so that jobbers and consumers in the midwestern area paid more for their gasoline than they would have paid but for the conspiracy, their prices being geared to spot market prices. The Court again held that under the Sherman Act the basic principle remained that it was prima facie prohibited from fixing prices.24
The Court instructed the Jury in the Socony Vacuum Oil Co case. The court charged the jury that “it was a violation of the Sherman Act for a group of individu- als or corporations to act together to raise the prices to be charged for the commod- ity which they manufactured where they controlled a substantial part of the interstate trade and commerce in that commodity”. The court stated that, where the members of a combination had the power to raise prices and acted together for that purpose, the combination was illegal, and that it was immaterial how reasonable or unreason- able those prices were or to what extent they had been affected by the combination.
It further charged that, if such illegal combination existed.25 One of the basic prin- ciples established in this case was the distinction between “raising prices” and
“price fixing” where the former could be justified if accomplished for reasons ben- eficial to free and fair trade where the latter would be prima facie unacceptable at law unless some compelling reason was adduced as to their necessity. Douglas J.
delivering the judgment held: “The reasonableness of prices has no constancy due to the dynamic quality of the business facts underlying price structures. Those who fixed reasonable prices today would perpetuate unreasonable prices tomorrow, since those prices would not be subject to continuous administrative supervision and readjustment in light of changed conditions. Those who controlled the prices would control or effectively dominate the market. And those who were in that strategic position would have it in their power to destroy or drastically impair the competitive system. But the thrust of the rule is deeper and reaches more than monopoly power.
Any combination which tampers with price structures is engaged in an unlawful activity. Even though the members of the price-fixing group were in no position to control the market, to the extent that they raised, lowered, or stabilized prices, they would be directly interfering with the free play of market forces. The Act places all such schemes beyond the pale and protects that vital part of our economy against any degree of interference. Congress has not left with us the determination of whether or not particular price-fixing schemes are wise or unwise, healthy or destructive. It has not permitted the age-old cry of ruinous competition and competi- tive evils to be a defense to price-fixing conspiracies. It has no more allowed genu- ine or fancied.”26
Horizontal price fixing, or parallel price fixing is ipso facto a violation of Article 1 of the Sherman Act which provides that every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. However, the plain- tiff must prove the existence of an agreement, combination or conspiracy among
24 See also, United States v. Addyston Pipe and Steel Co. 85 Fed. 271 at 291.
25 Id. 211.
26 Id. 220.
164
actual competitors where such conduct had the purpose of adversely affecting pric- ing that would create a distortion of the market for competitors. In a case27 decided on 2009 involving allegations that the defendants conspired to fix, raise, maintain, and stabilize the price of ethylene propylene diene monomer (“EPDM”) synthetic rubber at artificially high, non-competitive levels in violation of federal antitrust law, the plaintiffs filed suit under section 1 of the Sherman Act, alleging, inter alia, that the defendants conspired “to fix, raise, maintain and/or stabilize the price of EPDM sold in the United States, including limiting supply and/or allocating mar- kets and customers for the sale of EPDM in the United States”. The court endorsed the principle enunciated in an earlier case: “to prevail in their motion for class cer- tification, the plaintiffs must demonstrate that common questions of law or fact predominate over individual ones on the issues relevant to the three elements of an antitrust claim”. “The predominance requirement is met if the plaintiff can establish that the issues in the class action that are subject to generalized proof, and thus applicable to the class as a whole, … predominate over those issues that are subject only to individualized proof.”28
The Sherman Act is driven and determined in terms of a violation of its Section 1 more by conspiracy and collusion rather than the identification of a specific overt act. In Summit Health Limited v. Pinhas29 where an ophthalmologist on the staff of the petitioner Medical Center, filed a suit, asserting a violation, inter alia, of Article 1 of the Sherman Act by the Center and other petitioners, including several doctors, the complainant alleged further that the petitioners had conspired to exclude the complainant Pinhas from the Los Angeles ophthalmological services market when he refused to follow an unnecessarily costly surgical procedure used at the Medical Center. Court held: “to be successful, Pinhas need not allege an actual effect on interstate commerce. Because the essence of any one violation is the illegal agree- ment itself, the proper analysis focuses upon the potential harm that would ensue if the conspiracy were successful, not upon actual consequences. And if the conspir- acy alleged in the complaint is successful, as a matter of practical economics there will be a reduction in the provision of ophthalmological services in the Los Angeles market. Thus, petitioners erroneously contend that a boycott of a single surgeon, unlike a conspiracy to destroy a hospital department or a hospital, has no effect on interstate commerce because there remains an adequate supply of others to perform services for his patients.”30
On the subject of conspiracy and parallel pricing, the case of Bell Atlantique Corporation v. Twombly31 gives an interesting perspective. The complaint in the case was from two respondents—Twombly and Marcus—telephone subscribers who alleged that the providers of telecommunication services conspired to restrain
27 Ethylene Propylene Diene Monomer (EPDM) Antitrust Litigation, 681 F Supp (2d) 141.
28 In re Visa Check, 280 F.3d at 136.
29 500 US 322 (1991).
30 Cornell University Law School, Legal Information Institute, at https://www.law.cornell.edu/
supct/html/89-1679.ZS.html.
31 550 US 544 (2007).
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trade in two ways, by inflating charges for local telephone and high-speed Internet services. They claimed that the providers had “engaged in parallel conduct”32 in their respective service areas to inhibit the growth of upstart companies. Justice Souter, in his judgment stated: “Liability under §1 of the Sherman Act … requires a
“contract, combination …, or conspiracy, in restraint of trade or commerce.” The question in this putative class action is whether a §1 complaint can survive a motion to dismiss when it alleges that major telecommunications providers engaged in cer- tain parallel conduct unfavorable to competition, absent some factual context sug- gesting agreement, as distinct from identical, independent action. We hold that such a complaint should be dismissed”. In this case it was held that there was nothing to uphold plausibility by real evidence of conspiracy by the providers. Justice Souter concluded: “In a traditionally unregulated industry with low barriers to entry, sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement, but here we have an obvious alter- native explanation”.
The award for injury or damage caused by collusion is based on a just and rea- sonable inference of the damage arrived at after a rigorous analysis.33 It is important to note that there are more chances of succeeding in a case involving collusion if the case is instituted as a class action where it is likely that it is the only way compensa- tion for anti trust violations could be dispensed. Second, if the plaintiff could prove that the antitrust resulted in anti competitive conduct the case becomes more com- pelling in his favour. It would also help if the damages sought is not excessive.