Chapter Seventeen | Employment Law, Regulation and Labor Law

History of Employment Law

For most of recorded history, employment law simply did not exist. There were no laws prohibiting discrimination or sexual harassment, no rules regulating the safety of the workplace, and no concept of unions. Traditionally, workers followed their parents into a profession or job, such as being merchants, tailors, bakers, farmers, and performed that job for their lifetime. Common law viewed the employment relationship as a private agreement between the employer and the employee. During the industrial revolution in the nineteenth and early twentieth centuries, workers left their agrarian lifestyle and migrated to cities to work in factories. Traditional bonds between landowner and worker broke down. Employees worked in grueling conditions in factory jobs for bosses who cared little for their workers well-being or safety. The muckraker Upton Sinclair portrayed these conditions vividly in “The Jungle.” Legislators, at the state and federal levels, responded to workplace abuses with a number of laws protecting workers rights. These acts are the foundation of current employment law, enacted to protect the physical, financial, and legal rights and expectations of workers in the United States.

The Employment Relationship

The employment relationship is a unique relationship that relies upon the skill, talents, and strengths of both the employer and the employee. The employment environment must be dynamic and responsive to changing social and legal developments. Employers and employees both need to be aware of social trends that affect the duties and obligations inherent to the employment relationship. Employees earn the necessities of life — food, clothing, and shelter — by working in productive employment and they rely upon their employers to supply a salary and contribute to work-related benefits, such as healthcare and retirement plans. Employers rely upon employees to achieve their business goals. An employee may believe that working long hours, performing well, behaving ethically, and remaining loyal to an employer will result in job security. In today’s employment environment, job security is often contingent on the type of employment. Employees are either hired by employers for a length of time as “contract employees” or are “at will” employees.

Contract Employment

Employment contracts set forth the start and end dates and the terms and conditions of employment. These agreements are typically drafted by the employer and are usually written in the employer’s favor. Contract employees do not automatically waive their statutory employment rights and protections. However, employees who enter into employment contracts should obtain review and advice before entering into any binding agreement, as many statutory rights can be waived in an agreement.

At Will Employment

The majority of employees in the United States are “at will” employees. The doctrine of employment at will provides that an employer can fire the employee at any time, for any or no reason, with no notice; at the same time, the employee can quit at any time, for any or no reason, with no notice. Workers can be terminated (or fired, discharged, laid off or let go) for economic reasons (including reductions in force), personality conflicts, lack of “fit” in the organization, lack of work, and unsatisfactory job performance. Workers may also be terminated for a myriad of additional reasons including those provided in an employee handbook, an employee code of conduct, and for violations of local, state and federal laws. An employee who has been terminated may seek contractual and statutory damages and equitable remedies if the termination is later found to be illegal. As the following case shows, a review of policies and procedures prior to taking actions affecting the employment relationship can greatly reduce an employer’s risk of liability.

 

Case Study

Metcalf v. Intermountain Gas Co.

778 P.2d 744 (Idaho)

Procedural Posture

Plaintiff, a former employee, filed an action against defendant corporation after the former employee’s hours were significantly reduced following her extensive use of accrued sick leave. The trial court granted summary judgment in favor of the corporation on the claims for breach of employment contract and breach of an implied covenant of good faith and fair dealing. The former employee appealed.

Overview

The former employee made extensive use of her accrued sick leave but never exhausted all of the time available to her. She was forced to quit to find better employment when her hours were reduced to two hours a day. The court found that summary judgment on the issue breach of employment contract was not appropriate because a material issue of fact existed regarding whether, by providing for accumulated sick leave benefits, the corporation impliedly agreed with the former employee that the employment relationship would not be terminated or the former employee penalized for using the sick leave benefits which had accrued. The court also found that summary judgment on the claim for breach an implied covenant of good faith and fair dealing was not appropriate. The court for the first time recognized an implied-in-law covenant of good faith and fair dealing in employment contracts. The covenant that the court adopted was grounded in contract, not tort, thus limiting recovery to contractual damages, and was violated by any action by either party that violated, nullified or significantly impaired any benefit of the employment contract.


Outcome

The court reversed the trial court’s grant of summary judgment in favor of the corporation on the former employee’s claims for breach of employment contract and breach of an implied covenant of good faith and fair dealing and remanded to the trial court for further proceedings.

Exceptions to Discharge At Will

Employees who are not subject to at will termination include the following:

  • Contract employees (as per the employment contract);
  • Implied contract employees (usually a long-term, high level employee, wherein promises were made to the employee, or are found in an employment manual or handbook that prohibit termination without cause);
  • Union employees (the terms of the collective bargaining agreement between the employer and the union will govern discharge); Public employees working for local, state and federal agencies and governments. Typically, public employees must be discharged for cause, which is defined in civil service rules and regulations.

Public policy exceptions to at will termination protect employees when society deems the action so unfair or unreasonable that statutory law or common law specifically prohibits them. Situations where employees are not subject to at will termination due to public policy considerations include:

  • An employer may not terminate an employee for refusing to participate in an illegal activity, e.g., illegal dumping of hazardous material or committing perjury.
  • An employer may not discharge an employee for performing an important public obligation, such as jury duty.
  • An employer may not fire an employee for exercising a legal right (ex: voting) or interest (ex: legally filing a worker’s compensation claim).
  • An employer may not terminate an employee if prohibited by state or federal statute from doing so (ex: discrimination) or for exposing legal wrongdoing in the employee’s company (ex: whistleblowing).
  • Pursuant to an implied covenant of good faith and fair dealing, an employer may not dismiss an employee for performing an act that public policy would encourage or refusing to perform something that public policy would condemn, when the discharge is linked with a showing of bad faith, malice or retaliation.

Employers can avoid potential employee litigation and liability for wrongful termination by being aware of what has been promised to an employee during the hiring process and what may be contained in an employee handbook, or in any oral statements or promises made by an employer; educating supervisors; reviewing performance evaluations of employees; reviewing hiring and firing policies and procedures including those that relate to warnings and suspensions; and having an attorney review any terminations prior to taking effect.

 

Case Study

Cocchiara v. Lithia Motors, Inc.

297 P.3d 1277 (Or. 2013)

Procedural Posture

Petitioner, an employee, challenged a decision from the Court of Appeals (Oregon), which affirmed the trial court’s summary judgment in favor of respondent, the employer, based on the employee’s promissory estoppel and fraudulent misrepresentation claims.


Overview

The employee, who worked as a salesperson for the employer, told his manager that he was leaving to work for another company. He alleged in his complaint that his manager told him a new position was available and, after calling the employer’s corporate offices, the manager told the employee that he definitely had been given the position. In reliance on that information, the employee turned down the job with the other company. The employer did not hire him for the new position. The court held that the at-will nature of the new position did not preclude the employee from pursuing his claims of promissory estoppel and fraudulent misrepresentation. The parties’ lengthy employment relationship might have made it reasonable for the employee to rely on the promise of employment, even though the new position was terminable at will. Moreover, the at-will nature of the new position did not create a conclusive presumption that the employee could not prove damages consisting of future lost wages. He could attempt to show the likely duration of employment. Pleading only damages associated with the loss of the new position, and not damages associated with turning down the other job, did not defeat the fraud claim.
In Oregon, the general rule is that an employer may discharge an employee at any time and for any reason, absent a contractual, statutory, or constitutional requirement to the contrary. The focus of the at-will employment doctrine is on termination: Both the employer and the employee have a right to terminate the employment relationship for any reason or for no reason without liability. As a result, when employment is at will, typically, neither party can expect the employment to continue for any specified period of time. Perhaps because the at-will employment doctrine focuses on termination, courts have disagreed regarding the significance of the at-will nature of employment before employment begins. In particular, courts have disagreed whether it is reasonable to rely on an offer of at-will employment, which in turn affects whether an employer’s termination of an at-will employment agreement before the employee begins working is actionable under a theory of promissory estoppel or fraudulent misrepresentation. **** A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. The requirement that enforcement be necessary to avoid injustice may depend on the reasonableness of the promisee’s reliance, and on its definite and substantial character in relation to the remedy sought, among other things.

The at-will nature of an underlying promise of employment does not bar a claim based on promissory estoppel, even if it might limit the nature of the damages available in some cases. An employer’s legal right to fire an employee at any time and for any reason absent contrary contractual, statutory, or constitutional requirements does not carry with it a conclusive presumption that the employer will exercise that right. Absent that presumption, it may be reasonable for an employee to rely on a promise of employment, because the employee may have reason to believe that the employer’s right to terminate at will not be exercised before the employee begins work. Particularly where the employee has had a lengthy employment relationship with his employer, and the employer asserts the employee’s value to the company, it may be reasonable for the employee to rely on the promise of employment, even though the job is terminable at will. However, reasonableness is an issue for the jury, considering all the relevant circumstances.

Outcome

The court reversed the lower courts’ decisions and remanded to the circuit court for further proceedings.

Employment Regulations and Protections

In addition to common law protections of their rights, employees enjoy certain statutory protections at the federal, state, and local levels regarding what have been termed “financial expectations” and “physical well-being expectations.”

Financial Protections

Social Security Act (SSA) of 1935

The Social Security Act established retirement, disability, and survivor benefits for workers, their spouses, and their dependent children. Employers and independent contractors who do not comply with the requirements of this act face financial penalties in the form of fines and interest on unpaid taxes. The Social Security Administration administers this act.

Federal Unemployment Tax Act (FUTA) of 1935

Unemployment compensation, or unemployment insurance, is a benefit paid to private sector workers terminated without cause or through no fault of their own. Unemployment compensation is state-specific and funded by federal and state employment taxes on employers. During times of economic upheaval, the federal government has authorized extended periods of benefits. Federal, state, and railroad employees are subject to similar statues.

Fair Labor Standards Act (FLSA) of 1938

The FLSA specifies the minimum wages to be paid covered workers, when overtime payments are due, and places restrictions on child labor. Employers engaged in interstate commerce must comply with this act or face fines and penalties. The Wage and Hour division of the Department of Labor administers this act.

Equal Pay Act of 1963

The Equal Pay Act requires that men and women receive equal pay for jobs requiring equal skill, effort, responsibility, and working conditions. Under this act, an employee may not be paid a lesser rate than employees of the opposite sex for the same work. The Equal Employment Opportunity Commission (EEOC) administers the law. Unless the pay difference can be justified by such factors as merit, seniority, productivity, or some other “non-gender” factor, the employer will be held responsible if unequal pay exists between genders under an analysis called the “Kress Test.” Under the act, wages can include more than hourly or annual pay, and may involve payments for insurance, employee benefits, and other perquisites. A violation of the Equal Pay Act may also be a violation of Title VII of the Civil Rights Act of 1964.

Today, women are still not paid equal wages with men for equal work, and many maintain that the Equal Pay Act has not done enough to guard against pay inequities. Some argue that the doctrine of comparable worth should apply – equal pay for work of comparable value. However, this concept can create problems as to what to reference in order to define “worth.” Society? The employer? Some other point of reference? What happens when jobs are not equal, but have “equal” or “comparable worth” to society? Which job adds more value to society? Moreover, if the two jobs add “comparable value” to society, shouldn’t the two occupations be similarly compensated?

In Corning Glass Works v. Brennan, the U.S. Supreme Court addressed the Equal Pay Act in light of pay differentials for men and women on different work shifts.

 

Case Study

Corning Glass Works v. Brennan

417 U.S. 188 (1974)

Procedural Posture

The Secretary of Labor instituted two actions, one in New York and one in Pennsylvania, to enjoin the employer from violating the [Equal Pay] Act by the practices stated above and to collect back wages allegedly due female employees because of past violations. The District Court rendered judgment for the Secretary and the United States Court of Appeals for the Second Circuit, modifying some provisions of the injunction not relevant in the instant review proceedings, affirmed the District Court’s judgment as modified, the District Court rendered judgment for the employer and the Court of Appeals for the Third Circuit affirmed (480 F2d 1254).

Overview

Corning Glass Works, which operates plants both in New York and in Pennsylvania, paid its night inspectors, who were all male, significantly higher wages than its day inspectors, who were all female and performed the same tasks. The employer continued this practice after the effective date (June 11, 1964) of the Equal Pay Act of 1963 (29 USCS 206(d)(1)), which prohibits sex discrimination by an employer in the payment of wages for equal work. Beginning in June 1966, the employer started to open up jobs on the night shift to women. Previously separate male and female seniority lists were consolidated and women became eligible to exercise their seniority, on the same basis as men, to bid for the higher paid night inspection jobs as vacancies occurred.

On January 20, 1969, a new collective bargaining agreement went into effect, establishing a new “job evaluation” system for setting wage rates; the agreement abolished for the future the separate base wages for day and night shift inspectors and imposed a uniform base wage for inspectors exceeding the wage rate for the night shift previously in effect. All inspectors hired after January 20, 1969 were to receive the same base wage, whatever their sex or shift. The collective bargaining agreement further provided for a higher “red circle” rate for employees hired prior to the date of the agreement, when working as inspectors on the night shift; this “red circle” rate served essentially to perpetuate the differential in base wages between day and night inspectors.

The Supreme Court held the Equal Pay Act of 1963, 29 U.S.C.S. § 206 et seq. is “…violated by an employer’s paying a lower base wage to female day inspectors than to night shift inspectors, where the female inspectors performed the same tasks as their male counterparts and the higher wage was paid in addition to a separate night shift differential paid to all employees for night work.” The Court noted, “the purpose of the Equal Pay Act of 1963 (29 USCS 206(d)(1)), requiring that equal work be rewarded by equal wages irrespective of sex, is to remedy what was perceived to be a serious and endemic problem of employment discrimination in private industry, that is, the fact that the wage structure of many segments of American industry was based on an ancient but outmoded belief that a man, because of his role in society, should be paid more than a woman, even though his duties are the same.”

The [Equal Pay] Act establishes four exceptions — three specific and one a general catchall provision — where different payment to employees of opposite sexes is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex. Under the Equal Pay Act, once the Secretary of Labor has carried his burden of showing that the employer pays workers of one sex more than workers of the opposite sex for equal work, the burden shifts to the employer to show that the differential is justified under one of the Equal Pay Act’s four exceptions.

On writs of certiorari, the United States Supreme Court affirmed the judgment of the Second Circuit Court of Appeals and reversed the judgment of the Third Circuit Court of Appeals, remanding the case to that court.

The Court held that (1) the employer violated the Act by paying a lower base wage to female day shift inspectors than to male night shift inspectors; and (2) the employer did not cure its violations of the Act by permitting, in 1966, women to work as night shift inspectors nor by equalizing, in 1969, day and night inspector wage rates but establishing higher “red circle” rates for existing employees working on the night shift.

Outcome

The Court affirmed the Second Circuit ruling and reversed the Third Circuit ruling.

Civil Rights Act of 1964

Civil Rights Acts enacted in 1866 and 1870 prohibited intentional discrimination based upon race, color, national origin, or ethnicity. However, it was not until the enactment of the Civil Rights Act of 1964 that workers received legal protection from workplace discrimination based upon race, sex, color, religion, and national origin. The Civil Rights Act of 1964 represents one of the most important developments in the twentieth century in employment law and is discussed more in-depth in the chapter on employment discrimination. It should be noted that not all forms of employment discrimination, for example, that based on an employee’s sexual orientation is address by the act, and are not illegal unless there is a special state law providing protection for a worker.

Employee Retirement Income Security Act (ERISA) of 1974

ERISA applies to private sector employers who establish a pension benefit or other employee benefit plans (health, disability, death, legal services, etc.) for their employees. The act specifies how persons become vested in pension plans, how employers fund such plans, how pension funds are to be invested, and how employees may file an appeal in a case where retirement benefits are improperly denied them.

The Department of Labor, Employee Benefits Security Administration (EBSA) (formerly the Pension and Welfare Benefits Administration – PWBA) and the Internal Revenue Service administer the act. The Pension Benefit Guaranty Corporation (PBGC), created by ERISA, also serves to protect the retirement income of American workers when companies cease to exist, and is funded by employer insurance payments. The passage of ERISA was greatly influenced by the collapse of the Studebaker Corporation in the 1960s which resulted in the loss of pension and health benefits for its employees.

Worker Adjustment and Retraining Notification (WARN) Act of 1988

The Worker Adjustment and Retraining Notification (WARN) Act requires employers of more than 100 workers to give advance notice – up to 60 calendar days – of plant closings or mass layoffs.

Physical Protections

Occupational Safety and Health Administration Act (OSHA) of 1970

OSHA creates a general duty for employers to provide work environments that do not harm their employees. Employers must comply with minimum safety and health standards in the workplace. Employees, labor representatives, or the government itself has the authority to inspect work sites if there is a reason to believe a violation of OSHA has occurred. OSHA violations leave employers vulnerable to fines, penalties, corrective action, administrative oversight, and potential criminal sanctions. The Occupational Safety and Health Administration agency administers this federal act.

Many states have enacted their own equivalent of OSHA, so employers need to be aware of both federal and state requirements. Some states have also enacted their own “Right- to–Know” laws that guarantee individual workers and local communities the right to know what, if any, hazardous chemicals are present in the workplace. This information is also required under the federal statute.

Workers Compensation Statutes and Disability Statutes

Workers compensation statutes provide for wage replacement, medical treatment, vocational training, compensation for permanent disability from workplace injury or illness, and other benefits for employees who suffer injury or illness either at the workplace, or on a job site. The Department of Labor, Office of Workers Compensation Programs administers benefits to injured federal employees. States have created their own administrative agencies to run state programs and require employers to fund state programs by paying for workers compensation insurance. Laws vary from state to state.

An employee who is injured or suffers illness on the job or at a workplace, is not required to apply for workers compensation; but if he or she does, then the employee must comply with the state workers compensation insurance requirements for treatment. If the employee believes that he or she is receiving unfair treatment, or the employer believes there might be some type of fraud, a claim may be filed with the workers compensation court or board. An administrative law judge oversees these types of cases until the case has been closed. All expenses, including medical expenses, are a lien against any potential judgment an employee may win in a civil suit brought against the employer and/or responsible third parties.

Employee disability that occurs outside the workplace is governed by several federal and state laws, including the Social Security Act, the Americans With Disabilities Act, and state short-term or long-term disability statutes. Both employers and employees pay taxes to fund state disability programs. Statutes govern the definition and determination of various types of disabilities. Employers must be aware of the impact of these laws on employee accommodations and the workplace environment.

Consolidated Omnibus Budget Reconciliation Act (COBRA) 1985

The Consolidated Omnibus Budget Reconciliation Act (COBRA) 1985, amended ERISA to allow qualified employees to maintain group health, dental, and vision benefits upon termination. This act applies to employers with twenty or more employees that offers a group health plan. The terminated employee has sixty (60) days to elect this continuing coverage and must pay the entire premium, plus an administrative fee.

Health Insurance Portability and Accountability Act (HIPPA) of 1996

The Health Insurance Portability and Accountability Act (HIPPA) of 1996 amended ERISA to provide for improved portability and continuity of health insurance coverage for employees belonging to a group health plan at their work place. HIPPA also gives employees additional protections relating to coverage exclusions or denial of coverage due to preexisting conditions, and enrollment rights, and also prohibits discrimination based on a variety of health and non-health status-related factors. HIPPA’s extensive privacy rules protect individual employee’s expectations of privacy regarding their medical records and other information. The U.S. Department of Health and Human Services Office for Civil Rights enforces HIPPA’s privacy rule.

Amendments to ERISA that protect employee health include the Newborns’ and Mothers’ Health Protection Act of 1996, which requires employer group plans that offer maternity coverage to pay for at least a 48 hour hospital stay following childbirth (96 hours if a cesarean section), and by the Women’s Health and Cancer Rights Act of 1998, which extends protection to employee-patients who elect breast reconstruction in connection with a mastectomy. Additional protections for employee medical records is provided in the Americans With Disabilities Act and in various state statutes.

The Family Medical Leave Act (FMLA) of 1993

The Family Medical Leave Act (FMLA) was enacted in response to growing concerns about balancing work and home life in the event of family medical emergencies and conditions. This federal act applies to employers who have 50 or more full-time employees within a 75 mile range and allows eligible employees to take up to 12 work weeks unpaid, job protected leave. Eligible employees must have worked for a covered employer for at least 12 months (can be nonconsecutive months) and have at least 1,250 hours of service for the employer during the 12 month period immediately preceding the leave.

Leave may be taken for the birth, adoption, or foster care of a child; to care for a spouse, child, or parent who has a serious health condition; for an employee’s own serious health condition that makes the employee unable to perform the essential functions of his or her job; or for any qualifying exigency arising out of the fact that a spouse, child, or parent is a military member on covered active duty or called to covered active duty status. Leave may be taken for the full 12 workweeks, or any amount of that time, continuously or on an intermittent basis (up to 26 weeks when caring for a service member that is a parent, spouse, son or daughter, or the employee is the next of kin of the service member). Employers may require the employee to use paid leave time prior to or concurrent with FMLA time. Employers may request proof of the medical reason for the leave request. Employees must comply with the employer’s leave request policies whenever possible.

Protections afforded to employees under the act include restoring an employee to his or her original job, or to an equivalent job with equivalent pay, benefits, and other terms and conditions of employment; FMLA leave cannot be counted against the employee under a “no-fault” attendance policy; and continuation of group health insurance coverage for an employee on FMLA leave under the same terms and conditions as if the employee had not taken leave. Restoration of benefits other than health insurance, are determined based on the employer’s policies. Employees who may be denied restoration are those deemed to be a “key” employee – among the highest-paid 10 percent of all of the employer’s employees within 75 miles – if the employer proves substantial and grievous economic harm, gives notice to the employee, and gives the employee the opportunity to return to work. The Department of Labor, Wage and Hour Division administers this act.

Patient Protection and Affordable Care Act (PPACA) of 2010

The 2010 enactment of the Patient Protection and Affordable Care Act (PPACA), affects employers and employees across the country. Also known as the “Affordable Care Act” (ACA) or “Obamacare,” this act, together with the Health Care and Education Reconciliation Act of 2010, creates a mandate that employers with 50 or more employees who do not offer health insurance to their full-time employees must pay a tax penalty. These acts also extends coverage and privacy protections for patients. The employer mandate went into effect in 2015. The tax penalty may also apply to an individual who does not possess health insurance. This controversial law remains in the forefront of political discourse and debate.

Whistleblowing Protections

Federal and state protections are available to employees, called “whistleblowers,” who report illegal, prohibited, or unethical actions of their employers. Often these employees are subject to retaliation from their employers, including termination, demotions, and withheld bonuses and benefits. Whistleblowing statutes are grounded in public policy initiatives that seek to protect those workers who report actions that might harm society. Deadlines for an employee to file a claim vary from thirty days to one hundred eighty days at the federal level and in some states may be filed up to one year after the retaliatory action. Employees may seek monetary damages and equitable remedies which include reinstatement, back pay, and bonuses, other fringe benefits, seniority status, and costs and attorney fees. An employee may also seek an injunction to prevent future retaliatory actions by the employer.

At the federal level, employee protections from retaliation as a result of reporting illegal or harmful employer actions may be found in several statutes. The False Claims Act (31 U.S.C. §§3729-3733, imposes liability on persons and companies contracted with the federal government who defraud governmental programs. Those who report the illegal action are entitled to a percentage of the fines and penalties. Federal employee whistleblowers are protected by the Civil Service Reform Act and the Whistleblower Protection Act of 1989 (WPA). The Whistleblower Protection Enhancement Act of 2012 protects federal employees who disclose evidence of waste, fraud, or abuse.

OSHA provides whistleblowing protections for private sector employees who report activity that is dangerous to workplace health or safety in ten different statutes related to workplace safety and over eight statutes related to transportation safety.

Employees of private sector organizations that provide consumer goods and services or investment vehicles and services receive whistleblowing protection under federal statues such as the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Affordable Care Act, the Consumer Financial Protection Act (CFPA), the Consumer Product Safety Improvement Act (CPSIA), and the FDA Food Safety Modernization Act (FSMA). Many of these statutes can be found at http://www.whistleblowers.gov/statutes_page.html.

Many states also offer whistleblowing protection to public and private sector employees. For example, New Jersey has the Conscientious Employee Protection Act (CEPA) (N.J.S. Stat. § 34:19-1 (2007). This law prohibits a public or private employer from taking retaliatory action against an employee who discloses or threatens to disclose to a supervisor or public body an activity, policy, or practice that the employee reasonably believes is in violation of a law or rule; or provides information or testimony to a public body investigating a violation; or objects to or refuses to participate in an activity, policy or practice that the employee reasonably believes is a violation of law, is fraudulent or criminal, or is incompatible with a clear mandate of public policy related to health, safety, welfare or protection of the environment. The protection does not apply unless the employee has given written notice of the violation to a supervisor and has given reasonable time for correction, except if the employee is reasonably certain the supervisor already knows about the violation or if the employee reasonably fears physical harm and the situation is an emergency.

Whistleblowing protection at the federal and state level upholds public policy initiatives, protects employees, encourages employers to deal fairly with their employees, and discourages illegal, prohibited and dangerous activities and practices in business.

Employee Privacy And The Workplace

The right to privacy is often thought of as the “right to be left alone” and the right to be free from intrusion from others. A full-time employee spends between thirty to sixty or more hours per week at their place of employment creating many interpersonal relationships. Employers adopt workplace manuals and codes of conduct in order to set standards of behavior, to manage employee expectations, and to protect the employer’s business interests. Even so, employee understanding and expectation of privacy in the workplace can be quite different from employer handbooks or federal and state laws.

A variety of federal and state laws relate to privacy, including federal and state constitutions, statutes, common law, as well as some administrative agency rules and regulations. The common law relating to privacy takes various forms. There are at least four separate torts related to privacy. They are: (i) unreasonable intrusion upon the seclusion of another; (ii) misappropriation of another’s name or likeness; (iii) unreasonable publicity given to another’s private life; and (iv) publicity that unreasonably places another in a false light before the public. These torts identify individual “zones of freedom,” which provide privacy expectations and protection to the individual. How these expectations and protections apply to the workplace is ongoing and evolving in response to social development and technology innovations.

The integration of a variety of new technologies into the workplace, particularly those related to social media and information technology, has created a new view of employee privacy rights wherein the employer owns the means of data collection, communication, observation or other forms of employee monitoring. Issues of employee privacy and the right of an employer to monitor the employees’ actions and use of employer owned systems have increased. The fastest growing and most pervasive of new information technologies in the workplace are “Big Data” analytic tools and social media platforms. In the age of “Big Data,” employers have access to almost unlimited information. Employer use of that data, and employer oversight of employee’s social media use, whether private or at the workplace, has provoked considerable controversy.

While federal statutory protections of employee privacy are limited, federal agencies such as the FTC, EEOC and the NLRB have stepped into the void and enacted several rules and regulations protecting employee privacy rights. States, on the other hand, have passed a variety of laws on diverse aspects of employee privacy in the workplace and have come to the forefront in identifying employer and employee rights. Privacy issues in the workplace require a balancing of employee and employer rights and prerogatives to protect their legitimate interests and to address their legitimate concerns. In order for employers to enforce company policies and avoid liability, clear communication of policies and procedures in either an employee handbook or manual must occur.

Employee Surveillance and Searches

Employers use a variety of methods to monitor employee performance for effectiveness and productivity, including “real time” monitoring; visual and audio recording; counting key strokes on computers; inspecting computer files; listening to telephone conversations and messages — both landline and mobile; monitoring instant messages (IMs), blogs, Twitter and social media platforms, such as Facebook; GPS tracking; identification card tracking; and reading emails. Employers monitor employee performance for many reasons including to show compliance with regulations, promote corporate security, protect business reputation, protect trade secrets/proprietary information, reduce product loss, increase employee productivity, and to limit legal liability for improper or illegal acts by their employees.

Electronic Communications Privacy Act (ECPA) of 1986

The FCPA amended the Federal Wiretapping Act, and permits employers to monitor work email and phone calls if (1) the employee consents in advance, (2) monitoring occurs in the ordinary course of business, or (3) in the case of email, if the employer provides the email system.

USA Patriot Act

In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 amended the ECPA to allow the government to compel disclosure of data and information and to provide for employer voluntary disclosure. Prior to monitoring employee communications, employers should first identify the goals of the organization (quality control, training), clearly communicate any electronic monitoring policies to employees, obtain employee consent prior to instituting any monitoring programs and avoid monitoring private employee communications.

Workplace Searches

In addition to monitoring employee communications, employers may also conduct searches of the workplace. Employees have limited protections from employer searches in the workplace, including searches of offices, lockers, company issued vehicles, computers, mobile devices including tablets and telephones, electronic files and email. In O’Connor v. Ortega, 480 U.S. 709 (1987) the U.S. Supreme Court held that an employee did not have any expectation of privacy to their office where the employer retained a key to the office. The court held that in determining an employee’s privacy expectations in the workplace, the “operational realities” should be considered and courts should examine if the employee was provided an exclusive working space, the nature of the employment and whether the employee was on notice that parts of the workplace were subject to employer intrusions. The balance between the employee’s expectation of privacy and the employer’s notice to the employee of policies, practices and procedures frames the issues in the following case in which an employee claimed that employer access and review of his text messages on an employer issued mobile pager, was a violation of his right to privacy.

 

Case Study

City of Ontario v. Quon

560 U.S. 746 (2010)

Procedural Posture

Respondents, an employee and others, filed an action against petitioners, a city and others, alleging, inter alia [among others], that petitioners violated their Fourth Amendment rights by obtaining and reviewing the transcript of the employee’s pager messages. A district court held that petitioners did not violate the Fourth Amendment. The U.S. Court of Appeals for the Ninth Circuit reversed in part. The U.S. Supreme Court granted a petition for certiorari.

Overview

The petition for certiorari challenged the court of appeals’ holding that petitioners violated the Fourth Amendment. The Supreme Court assumed that the employee had a reasonable expectation of privacy in the text messages sent on the pager provided to him by the city. The search was justified at its inception because there were reasonable grounds for suspecting that the search was necessary for a non-investigatory work-related purpose because the search was done in order to determine whether the character limit on the city’s contract was sufficient to meet the city’s needs. Also, the city and a police department had a legitimate interest in ensuring that employees were not being forced to pay out of their own pockets for work-related expenses, or on the other hand that the city was not paying for extensive personal communications. The search was permissible in its scope because reviewing the transcripts was reasonable because it was an efficient and expedient way to determine whether the employee’s overages were the result of work-related messaging or personal use. The search was reasonable. Petitioners did not violate respondents’ Fourth Amendment rights.

Outcome

The judgment of the court of appeals was reversed. The case was remanded for further proceedings.

Employee Speech

Individual’s protected right to free speech under the First Amendment of the U.S. Constitution protects individuals from governmental action. When applied to the workplace, public sector employees are protected, but not private sector employees. However, the type of employee speech, whether political or connected to workplace terms and conditions, may be protected. In Heffernan v. City of Paterson, 136 S. Ct. 1412 (2016) the U.S. Supreme Court held that “when an employer demotes an employee out of a desire to prevent the employee from engaging in political activity that the First Amendment protects, the employee is entitled to challenge that unlawful action under the First Amendment and 42 U.S.C.S. § 1983, even if the employer makes a factual mistake about the employee’s behavior.” Some states have enacted legislation that extends protection to employee speech in connection with political activity outside of the workplace.

Private sector employees’ speech rights may be protected under state law or administrative agency rules and regulations if made in connection with terms and conditions of employment. In 2012, in Hispanics United of Buffalo, Inc. and Carlos Ortiz (Case 03–CA–027872, 2012), the NLRB held that the termination of five co-workers who posted on commentary on Facebook about the workplace and a co-worker was in violation of the National Labor Relations Act, Section 7 regarding “concerted activities.” Comments by workers discussing workplace issues such as “terms and conditions” of employment, such as workload, job performance, wages, and staffing levels are protected speech. But, no protections are afforded to employee speech that violates employers privacy policies, damages the company’s reputation, disparages the employer or other employees, or the employer’s product/service, is rude or profane, is unrelated to workplace terms and conditions, or may be seen clearly as a “rant.”

Drug and Alcohol Testing

Employee testing for drugs and alcohol began in 1986 when President Reagan approved testing of federal employees and was extended in 1988 to federal contracts requiring drug free work environments. The private sector thereafter embraced employee drug testing as a pre-condition to hiring and as an ongoing condition to maintaining employment. Employers adopt drug and alcohol testing policies to maintain a safe working environment, increase productivity, and to ensure quality control of goods and services. Courts have upheld regular and random employer drug testing as a reasonable exercise of an employer’s rights provided the employer has communicated its policy on drug testing to the employees. State statutes, which vary from state to state, govern private sector employees’ privacy rights in drug testing. Employers who choose to drug and alcohol test employees must be aware of state constraints and of protections afforded to employees from disciple or termination under the Americans with Disabilities Act. Employers must also be aware of state protections afforded to employees who use certain drugs under medical prescription.

Recent state statutes legalizing the sale and recreational use of marijuana have direct impact on the workplace. Employees must recognize that although recreational use of marijuana may be legal in some states, it is not legal in all states, and is classified as a federal Schedule I drug. Use and possession of marijuana may subject an employee to state and federal criminal charges and discipline and/or termination under employment policies adopted by employers.

The Employee Polygraph Protection Act of 1988

The Employee Polygraph Protection Act generally prohibits private sector employers engaged in interstate commerce from using or requiring lie detector tests during pre-employment screening or during employment or from using the results of any lie detector tests to discharge, discipline, discriminate against, or to deny promotion or employment to any employee or prospective employee who refuses, declines, or fails to take a lie detector test.

Exemptions include federal employees and contractors, prospective employees of private sector employers in security service businesses, employees of any employer authorized to manufacture, distribute, or dispense a controlled substance as identified in federal law. Private sector employers requesting employees to submit to a polygraph test the employer must show:

  • The test was administered in connection with an ongoing investigation involving economic loss and/or injury to the employer’s business, e.g., theft, embezzlement, misappropriation, industrial espionage or sabotage;
  • The employee had access to the property that is the subject of the investigation; and
  • The employer has a reasonable suspicion that the employee was involved in the incident or activity under investigation.

Additional exemptions are also provided in various state statutes.

Genetic Testing and Health Screening in the Workplace

In 2008, the Genetic Information and Nondiscrimination Act (GINA) was enacted to protect individuals from discrimination in healthcare insurance and employment. GINA specifically prohibits employers from discriminating against prospective and current employees in the hiring, firing, compensation, benefits or others terms and conditions or opportunities because of an individual’s genetic information or genetic profile. Employers are also prohibited from requesting, requiring, or purchasing genetic information of an employee or his or her family member(s) except in limited circumstances such as consent or where the information is used in connection with services offered by an employer wellness program.

Additionally, many states have passed laws prohibiting discrimination against employees on the basis of their genetic information. Employees may have a right of action against their employer for genetic discrimination under the Fourth Amendment, the Americans With Disabilities Act, common law for invasion of privacy, and Title VII of the Civil Rights Act of 1964 (discussed in the chapter on Employment Discrimination).

Employee Assistance Programs (EAPs)

Employee Assistance Programs are employer funded programs to assist employees with personal problems and issues that might affect their performance at work. These programs seek to help employees address financial, medical, emotional, family, and substance abuse issues to name a few. Inherent in many of these programs are issues relating to privacy. Employers must be aware of federal and state laws that apply to the administration of these programs, retention of information and data, and potential liability for employment actions taken, such as discipline and termination, based upon information obtained from employees participating in EAPs.

Personnel Records

During the course of pre-hiring screening and subsequent employment, employers gather extensive private information on individuals often referred to as personnel records. The maintenance, accuracy and security of these records are privacy concerns for individuals. The federal Privacy Act of 1974 and subsequent amendments applied to personnel records of federal employees. However, there is no federal law that provides private sector employees the right to access, review, contest or correct private information contained in the personnel file maintained by their employer. Private sector employees must rely upon state law and employer policies and procedures governing access to these records. Whether a public or private sector employee, individuals must look to federal, state, and common law for remedies for wrongful disclosure or false or defamatory information.

“Off Duty” Employee Actions and Lifestyle Laws

There is a growing trend for employers to prohibit certain employee activities while not at the workplace, or “off duty,” for reasons such as protecting business reputation or company security, or for economic reasons such as to decrease losses in productivity, or to reduce costs of employer offered healthcare. Employers have attempted to prohibit activities such as certain international travel, high-risk sporting activities (motorcycle riding skydiving, helicopter skiing), gun possession, political activity, health related practices (weight maintenance, smoking, alcohol and dietary consumption), and social media communications. Many states have enacted laws that prohibit employer regulation of employee off-duty acts, while other states permit any lawful activity while off-duty. Some administrative agencies such as the NLRB and the EEOC have begun to address concerns of employees that employer control of actions and activities may violate employee’s federal and state privacy rights.

Today, there is often conflict in the workplace between an employer’s right to monitor employee performance and an employee’s expectation of privacy. Issues related to privacy rights, not just those related to the workplace, are a reflection of how society balances the need for individuals to feel secure in their persons with public access to private information. Clearly, as new methods of communication and of collecting, storing, and disseminating information become available, tensions arising from balancing the privacy expectations of employers and employees will continue to grow. Technological, mechanical, and social changes continue to create legal, social and ethical issues in the employment relationship.

Labor Law and Management Relations

Introduction To Labor Law

In order to study the development of labor unions in the United States, one must also study the development of labor legislation – the two are inextricably entwined. Judicial rulings and subsequent legislation have continually tried to strike a balance between the private property rights of employers and employee freedom to associate in organizations for their own mutual benefit.

Early Legal Developments

Early legal developments came as the result of judicial interpretations of laws (both statutory and common) that were not originally drafted to deal specifically with labor relations but were clearly designed to favor the property class. The Cordwainers Case (1806) established the “criminal conspiracy” doctrine as it applied to labor organizations. Workers seeking to better their working conditions could not do so in a concerted manner. If workers joined in collective activities, they could be considered “criminals” and jailed for such behavior. It may be surprising to note that this was not the unanimous view of the legal system—even at this early stage of the development of our capitalist market. The ruling in Commonwealth of Massachusetts v. Hunt (1842) established that labor organizations in and of themselves were not automatically criminal conspiracies. While the ruling in Commonwealth of Massachusetts was not a ruling of the United States Supreme Court, judicial rulings from Massachusetts were highly regarded in other jurisdictions for their precedential value. Thus, while unions were not automatically considered criminal conspiracies, they could nonetheless be liable for civil damages, under the “civil conspiracy” doctrine. Contract law was relied upon to enforce “yellow dog contracts” in which employers demanded assurances that job applicants were not members of unions, nor would they ever consider joining a union, if employed.

Loewe v. Lawler (Danbury Hatters case) (1908) applied the Sherman Antitrust Act of 1890 to labor organizations. Labor organizations were considered “in restraint of trade” when the Hatters union organized a nationwide boycott in conjunction with the AFL-CIO to protest Loewe’s use of nonunion labor to make hats. Clearly, with the exception of Commonwealth of Massachusetts v. Hunt, the pendulum swung in the direction of protecting managerial rights and prerogatives in the workplace.

Specific Labor Legislation

Following these early legal developments, Congress passed legislation specifically aimed at regulating labor in a more balanced fashion. The Clayton Act of 1914 removed unions from the umbrella of the Sherman Antitrust Act. The Clayton Act was initially hailed by organized labor, while in reality it had made it easier for employers to obtain an injunction against threatened or actual concerted labor activities (such as strikes, boycotts, and picketing). These injunctions were not difficult to obtain and were regularly granted by courts in the decade of the 1920’s.

As the Great Depression riddled America with massive unemployment and sometimes violent labor disputes, the Norris-LaGuardia Act (1932) was one of many pieces of progressive (later “New Deal”) legislation enacted to improve the ability of workers to engage in joint activities in support of their right to join a union. Norris-LaGuardia made the “yellow dog” contract unenforceable in courts and limited federal courts’ ability to issue injunctions in labor disputes. However, the law established no enforcement mechanism of the act’s provisions, so many of the law’s guarantees were “on paper only.”

The Wagner Act of 1935 (officially called the National Labor Relations Act), the true “Magna Carta” for the union movement in the United States, guaranteed the rights of individuals to form labor organizations and specifically outlined “unfair labor practices” of employers. The Wagner Act established an administrative agency, the National Labor Relations Board (NLRB) to enforce the act. Congress passed this legislation under its constitutional authority to regulate “interstate commerce.”

Finding that industrial strife impeded the flow of commerce, Congress gave workers the right to form and join unions in hopes that this right would minimize industrial strife. The Wagner Act was ruled constitutional in Jones and Laughlin Steel v. National Labor Relations Board, 301 U.S. 1 (1937). Unions were widely successful in organizing some of the major industries in the United States in the decade of the 1930’s but to many, unions had begun to act irresponsibly in the period immediately following the end of World War II.

Overriding President Truman’s veto, the Taft-Hartley Act of 1947 amended the National Labor Relations Act. Congress, believing that unions had gained too much power, amended the Wagner Act with more “pro-management” provisions. Individuals now not only had the right to join unions, but also to refrain from joining a union as well. Taft-Hartley specifically established unfair labor practices on the part of unions, which had been non-existent before passage of this legislation. Taft-Hartley increased the size of the NLRB from three to five members. The “closed shop”,in which an employer was restricted to hiring union members only, was ruled illegal. A “union shop,” in which an employee was required either to join a union or pay the union dues within a specified time period was still permitted. Taft-Hartley authorized states to adopt “right to work” laws, giving the employee the right to either join or not join a union.. A provision relating to disputes that involved a “national emergency” was established, giving the President the right to intervene in labor disputes that could create a national emergency or “imperil the national health and safety.” In this case, an 80 day “cooling off” period may be required during which the parties are required to return to the bargaining table. The act also established the Federal Mediation and Conciliation Service to help management and unions avoid industrial conflict.

The Landrum-Griffin Act was adopted in 1959. Officially called the Labor Management Reporting and Disclosure Act (LMRDA), the focus of Landrum-Griffin was not to regulate union-management relations but to regulate union-member relations. The act aimed to correct and prevent union corruption (mainly by the Teamsters) and abuses of the power of unions toward their members. It required the reporting of financial statements, mandated the creation of union constitutions, and required that unions meet in membership conventions minimally once every five years. While many unions felt that some abuses needed correction, they objected to Congress interfering in the internal affairs of unions. Landrum-Griffin passed despite the objections of the American union movement.

Unions

Section 7 of the NLRA recognizes the rights of employees to form a union. Management is prohibited from interfering with any employee right guaranteed by Section 7 relative to organizing and maintaining a union. Employees can petition the NLRB for the right to conduct a representational election in an appropriate “bargaining unit” of the workforce. If the union is successful, it will be the exclusive bargaining agent for the workers in the unit. The bargaining unit elects representatives who will negotiate an agreement (the collective bargaining agreement) with management. Management and labor are required by the act to bargain “in good faith” in relation to the mandatory subjects of bargaining which include “wages, hours, and working conditions.” Issues relating to pay, wages, bonuses, hours of employment, seniority, pensions, group insurance, safety practices, grievance procedures, discipline, procedures for discharge, layoff, recall, and union security are often the specific topic of these negotiations. Management is prohibited from threatening, questioning or spying on workers, threatening to close the business or stop giving wage increases, or committing any other action that would serve to threaten or undermine union organizing activities, The failure of the parties to come to an agreement on a contract through collective bargaining may result in a strike called by the union or a lockout imposed by management.

The Functions of the National Labor Relations Board (NLRB)

The NLRB is an administrative agency with two primary functions: 1) the oversight of union organizing activities and representational elections; and 2) the investigation and adjudication of unfair labor practice charge. The NLRB operates within the Executive Branch of the federal government as an independent agency.

Unions can be recognized in the workplace in three ways: voluntary recognition, election, and pursuant to a bargaining order issued by the NLRB. Voluntary recognition occurs where the union gets a majority of the individuals in a given workplace to sign an “authorization card” indicating that they want the union to represent them. In this instance, the employer concedes to the workers’ desires without conducting a representational election.

If the employer decides not to voluntarily recognize the union, the union will file a Representation Petition with the Regional Office of the NLRB. In this petition, the union will ask for an election. The NLRB will first verify that the union has a “showing of interest,” which is defined as at least 30% of the workers in a bargaining unit signing an authorization card seeking to have the union represent them. The NLRB will first verify that the workers who are seeking representation constitute an “appropriate bargaining unit.” Employers tend to seek larger, heterogeneous bargaining units; unions seek to carve out bargaining units that will most quickly result in recognition of their representation rights. The NLRB utilizes the “Globe Principle” where it will rely heavily on the “desires of the employees” as a controlling factor in determining if a unit is appropriate. The NLRB will screen for “ineligibles’ — independent contractors, supervisors, or professionals who opt not to be combined with non-professional employees in a unit. The union is entitled to the “name and address” list of those in the appropriate bargaining unit under the Excelsior Underwear rule.

The NLRA has been modified over the years to determine what is permissible and impermissible election conduct for both union and management during the course of the election campaign. The NLRB will oversee the election. A “simple majority rule” prevails which requires 50% plus 1 of those who voted in the election (not all the workers in the unit) to vote in favor of a union. If the union wins, it is certified as the exclusive bargaining agent for everyone in the appropriate bargaining unit regardless of the individual’s decision to join the union. If the union loses, another election is barred for one year. A union can also be decertified following that same rules for certification (an NLRB election — 30% showing of interest and simple majority voting in favor of decertifying a union). If the employer’s conduct has been so egregious that the NLRB feels that it would be impossible for employees to vote in an election without fear of reprisal, the NLRB will certify the union, absent an election, as the exclusive bargaining agent. This bargaining order will only occur if the union can show that it had, at one point, a simple majority showing of interest (instead of the 30%) via authorization cards.

The NLRB has jurisdiction of any act or practice that is “arguably an unfair labor practice” or ULP, under the “Garmon Rule.” Parties are forbidden to litigate such issues in any forum other than the NLRB. A ULP filed by a union includes any actions, practices, or statements made by an employer that interfere with, restrains, discriminates against, or coerces employees in their exercise of the right to organize and choose their representatives, and to engage in collective bargaining or engage in protected, concerted activities. Such interference, restraint, or coercion can arise through threats, promises, or impermissible offers to employees. An unfair labor practice also can arise when an employer contributes financial or any other support to a labor organization. (In the case where there are multiple unions competing for the right to represent workers in a representational election, an employer must remain neutral between competing unions.) It is also an unfair labor practice for an employer to dominate, create, or interfere with the formation or administration of any labor organization. Employers are also prohibited from retaliating against an employee for filing a charge with, or giving testimony to, the NLRB, or refusing to engage in good-faith collective bargaining.

A union may commit an unfair labor practice when it causes, or attempts to cause, an employer to hire, discharge, or discriminate against an employee for the purpose of encouraging or discouraging union activity. The same is true when a union restrains or coerces employees in the exercise of their rights not to join a union. The refusal of a labor organization to bargain collectively “in good faith” or to refuse to execute a collective bargaining agreement with an employer are examples of potential unfair labor practices on the part of a union.

Individuals (whether or not a member of a union), unions (acting on their own or on behalf of individuals) and employers may file unfair labor practices (ULPs) charges with the Regional Office of the NLRB, having first attempted to resolve the dispute at the workforce level. The Regional Office will investigate the allegation and may settle the case informally or file a complaint against the party alleged to have committed a violation of the NLRA. If not settled informally, a hearing before an Administrative Law Judge (ALJ) will take place. The NLRB’s remedial powers are solely confined to “restoring the status quo” by ordering back pay, the return of individuals to the payroll, and good faith bargaining. The NLRB is not permitted to assess “punitive damages” for violations of the act.

Parties can appeal the decision of the ALJ to the full NLRB. The NLRB, consisting of five members, will hear the case anew in a de novo proceeding. A party can appeal the Board’s decision to the Circuit Court of Appeals. Appeals from the Circuit Court of Appeal can be made to the United States Supreme Court.

As discussed previously in this chapter, recent NLRB decisions continue to address employee use of information technology and social media both at the workplace and outside of the workplace. Other issues with which the NLRB has recently become involved include unionization of student athletes and graduate student RAs and GAs, the future application of the “Yeshiva Principle” to church-related colleges and universities, joint-employer status, successor employer status, the effect of arbitration agreements, class action waivers, and the use of audio and video recording in the workplace. The role of the NLRB in protecting employee rights and balancing employer concerns will no doubt continue to underscore its importance in resolving issues emerging in the employment relationship.

 

Ethical Considerations

Social Media

Is it fair for an employer to monitor the social media choices of an employee or a prospective employee? Should an employer be able to base a decision to hire or fire a prospective employee or an actual employee based on the information gathered from social media?

Critique: “Since its the employer’s property, the employer should be allowed to hire or fire whomever they choose.”

Is it fair to require workers who do not wish to join a union to nevertheless pay union dues in states that are “union shop” states?

Should the government require employers to provide family leave to their employees?

 

Questions

  1. In light of company and personal pension plans, is there a need for social security retirement benefits? Explain why or why not.
  2. Would self-imposed, industry-wide standards protecting the safety and health of a particular industry’s employees be an improvement over OSHA? Substantiate your answer with fact-based reasons.
  3. How did New Deal legislation improve circumstances under which employees worked?
  4. What effect did the Taft-Hartley Act have on the relationship between labor and management?
  5. How does the National Labor Relations Board prevent unfair labor practices?
  6. A company required all of its employees to authorize deductions from their pay to the United Way, a community charity. The employer terminated an employee when she refused to sign the payroll authorization. Was the employee wrongfully discharged? See Ball v. United Parcel Serv., Inc., 602 A.2d 1176 (Md. 1992)
  7. An employer discharged an otherwise exemplary employee because the employee had a continuing relationship with a co-worker during off duty hours. The employer simply objected to the employee’s immoral lifestyle. The employee claimed discrimination. The employer claimed the defense of the employment at will doctrine. Outcome? See Patton v. J.C. Penney Co., 719 P.2d 854 (Or. 1986)
  8. An employee was discharged when her employer learned that she performed volunteer work at an AIDS center. The employer admitted an irrational fear that the employee’s work at the center would place himself, his family, and his employees at risk. Was this an employer’s overcautious or irrational fears a breach of the implied covenant of good faith? See Brunner v. Al Attar, 786 S.W.2d 784 (Tex. App. 1990)

Chapter Nineteen | Antitrust

Introduction and Overview

The United States economy relies heavily on the free market system to allocate resources fairly and wisely. However, many believe that if left to their own devices, markets will tend to be monopolized where the presence of a single supplier of a product or service will dominate. To prevent this possibility of monopolization, antitrust laws were designed in order to ensure the maximization of consumer welfare and that competition in the market would remain in a healthy state.

There are two major competing schools of thought concerning the proper purpose of antitrust law. The Chicago School sees as the primary purpose of antitrust law the promotion of the maximization of consumer welfare using market principles and efficiency criteria. This ideology results in less striking prohibitive conduct “on its face,” but seeks a factual, case-by-case specific analysis in order to determine if the conduct at issue is illegal. In contrast, the Harvard School believes that antitrust laws are important for the preservation of small businesses in an economy characterized by many sellers in competition with each other; the prevention of concentration of political and economic power in the hands of a few sellers in each industry; and the preservation of essentially local control of business and protection against the effects of labor dislocation.

At their essence, antitrust laws are primarily concerned with regulating private economic power through fostering competition. Competition is desirable for many reasons. Supporters of antitrust legislation believe that competition will guaranty efficiency in resource allocation; foster consumer choice; assure avoidance of concentration of political power; and guaranty fairness in economic behavior. The various antitrust laws focus generally on conduct or business activity, as opposed to more generalized market structure, although an analysis of monopolization will involve both conduct and market structure. To determine whether particular conduct violates antitrust laws requires an understanding of the body of statutes that are generally considered to constitute the antitrust laws.

Antitrust Enforcement

The Antitrust Division of United States Department of Justice and the Federal Trade Commission are primarily responsible for enforcement of antitrust laws in the public sector. Individuals or businesses that claim that they have been injured by anti-competitive behavior may bring a private action under one or more of the federal statutes discussed below. Sometimes an individual suit may be filed in a class action format, brought by a member of a group of persons on behalf of the entire group or class. A parens patriae suit may be brought by the Attorney General of a state on behalf of consumers or taxpayers of a state. These suits protect the rights of citizens who generally cannot protect themselves, and may also further public policy.

Generally, the Antitrust Division has exclusive jurisdiction of the Sherman Act; the Antitrust Division has concurrent jurisdiction with the FTC to enforce the Clayton Act; and the FTC has exclusive jurisdiction to enforce the FTC Act.

Antitrust Remedies

Penalties for violating antitrust laws include criminal and civil penalties:

  • Violations of the Sherman Act: individuals can be fined up to $350,000 and sentenced to up to 3 years in prison. Companies can be fined up to $10 million.
  • Violations of the Clayton Act: individuals injured by antitrust violations can sue the violators in court for three times the amount of damages actually suffered. These are known as treble-damages, and can also be sought in class-action antitrust lawsuits. Damages also include attorneys’ fees and other litigation costs.
  • Violations of the Federal Trade Commission Act: the FTC has the authority to issue an order that the violator stop its anticompetitive practices.
  • Violations of State Antitrust Laws: state antitrust laws often prohibit the same kinds of conduct as the federal antitrust laws. As a result, the penalties state laws impose are also similar and can range from criminal to civil sanctions. (See http://www.legalmatch.com/law-library/article/penalties-for-violating-antitrust-laws.html#sthash.5fUxwaCr.dpuf.)
  • In order to avoid the cost of litigation or further administrative actions, parties may enter into a consent decree, which today is a major source of a resolution of an antitrust case.

Other equitable remedies available to courts include:

  • Divestiture of a unit of a company or of a subsidiary;
  • The requirement that a company license a patent or a trademark that has been used in an anticompetitive manner;
  • Division of a company into smaller components or divisions (AT&T);
  • The requirement that a business cancel a contract that evidences anticompetitive aspects or practices.

In certain cases, a party found to have engaged in anticompetitive practices may be forced to pay three-times the actual damages, called punitive damages, incurred in order to punish that party for its intentional conduct. (MCI v AT&T).

The Statutory Framework

There are three principle statutes operating in the area of antitrust enforcement. The Sherman Act, enacted in 1890, was the first and most important of the federal antitrust laws. The Sherman Act prohibits “contracts, combination, and conspiracies in restraints of trade” and certain monopolistic acts. In 1914, Congress passed the Clayton Act to supplement the general prohibitions of the Sherman Act. The Clayton Act applies to certain forms of price discrimination, certain mergers and acquisitions, certain tying arrangements, and makes certain “exclusive dealing” arrangements illegal. Lastly, the Federal Trade Commission Act (FTC Act), though technically not one of the exclusive antitrust laws, was also passed by Congress in 1914 to strengthen the federal government’s authority when proceeding against business practices, termed “deceptive acts or practices,” that pose a threat to free competition.

The Sherman Act

“The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.” Northern Pacific Railway Co. v United States, 1, 4 (1958). The Sherman Act rests on the premise that the interaction of competitive forces will yield the best allocation of economic resources, the lowest prices, the highest quality, and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.

Section 1 of the Sherman Act — Restraint of Trade

Section 1 of the Sherman Act, found at 15 U.S.C. §1 (1988), provides that “every contract, combination, in the form of a trust or otherwise, or conspiracy, in restraint of trade … is declared to be illegal.” However, since every agreement between an individual and corporation or between individuals involved in a commercial activity restrains trade to a certain degree, the Supreme Court has consistently interpreted the broad language of Section 1 to prohibit restraints which unreasonably restrict competition. There are, however, some practices that are so pernicious that they will be deemed illegal under all circumstances under a per se analysis. The Act prohibits only concerted (i.e., joint) action by two or more parties in restraint of trade. Thus, in determining whether a particular restraint or activity is unlawful, courts apply two tests, namely the rule of reason and the per se rule, both of which are discussed below.

The Rule of Reason

A rule of reason analysis, outlined by Justice Louis Brandeis in Board of Trade of Chicago v. United States (1918), and previously enunciated in Standard Oil of New Jersey v. United States (1911) tests the legality of a particular business practice by examining whether the practice promotes or suppresses competition. Some of the factors considered by the courts in applying the rule of reason includes (i) the positive and negative competitive impacts; business conditions before and after the restraint is imposed; the purpose and nature of the restraint; the intent of the party imposing the restraint; and the existence of less restrictive alternatives which could achieve the same goals.

 

Case Summary

The Standard Oil Company Of New Jersey Et Al v. U.S.

Supreme Court of the United States, 221 U.S. 1 (1911)

The facts, which involve the construction of the Sherman Anti-trust Act of July 2, 1890, and whether defendants had violated its provisions, are stated in the opinion.

Here is a brief statement of the facts of the case as found in the Court’s opinion:

That during said first period, the said individual defendants, in connection with the Standard Oil Company of Ohio, purchased and obtained interests through stock ownership and otherwise in, and entered into agreements with, various persons, firms, corporations, and limited partnerships engaged in purchasing, shipping, refining, and selling petroleum and its products among the various States for the purpose of fixing the price of crude and refined oil and the products thereof, limiting the production thereof, and controlling the transportation therein, and thereby restraining trade and commerce among the several States, and monopolizing the said commerce.

The Court decided that the Sherman Anti-trust Act of July 2, 1890, should be construed in the light of a rule of reason; and, as so construed, it prohibits all contracts and combination which amount to an unreasonable or undue restraint of trade in interstate commerce.

The Court decided that the combination of the defendants in this case was an “unreasonable and undue restraint of trade” in petroleum and its products moving in interstate commerce, and falls within the prohibitions of the act as so construed.

The Court looked at the history of the Sherman Act. It stated: “The terms “restraint of trade,” and “attempts to monopolize,” as used in the Anti-trust Act, took their origin in the common law and were familiar in the law of this country prior to and at the time of the adoption of the act, and their meaning should be sought from the conceptions of both English and American law prior to the passage of the act.”

Further, the Court noted that “At common law monopolies were unlawful because of their restriction upon individual freedom of contract and their injury to the public and at common law; and contracts creating the same evils were brought within the prohibition as impeding the due course of, or being in restraint of, trade.”

In its decision the Supreme Court ruled that the Sherman Act was not intended to restrain the right to make and enforce contracts, whether resulting from combinations or otherwise, which do not “unduly restrain interstate or foreign commerce,” but to protect commerce from contracts or combinations by methods, whether old or new, which would constitute an interference with, or an undue restraint upon, it.

The Sherman Act intended that the standard of the rule of reason which had been applied at the common law should be applied in determining whether particular acts were within its prohibitions.

In apply the Sherman Act to the actual facts of the case, the Supreme Court stated:

The unification of power and control over a commodity such as petroleum, and its products, by combining in one corporation the stocks of many other corporations aggregating a vast capital gives rise, of itself, to the prima facie presumption of an intent and purpose to dominate the industry connected with, and gain perpetual control of the movement of, that commodity and its products in the channels of interstate commerce in violation of the Anti-trust Act of 1890, and that presumption is made conclusive by proof of specific acts such as those in the record of this case.

The Court also commented about the remedy to be applied once the Courts decide that an antitrust violation has been determined:

The remedy to be administered in case of a combination violating the Anti-trust Act is two-fold: first, to forbid the continuance of the prohibited act, and second, to so dissolve the combination as to neutralize the force of the unlawful power.

Finally, the Court made a general comment regarding the relationship of antitrust law to normal business practices.

The constituents of an unlawful combination under the Anti-trust Act should not be deprived of power to make normal and lawful contracts, but should be restrained from continuing or recreating the unlawful combination by any means whatever; and a dissolution of the offending combination should not deprive the constituents of the right to live under the law but should compel them to obey it.

In determining the remedy against an unlawful combination, the court must consider the result and not inflict serious injury on the public by causing a cessation of interstate commerce in a necessary commodity.

Now, look carefully at a case which was decided under a rule of reason analysis:

 

Case Summary

CALIFORNIA DENTAL ASSOCIATION v. FTC

Supreme Court of the United States, 526 U.S. 756 (1999)

Petitioner California Dental Association (CDA), a nonprofit association of local dental societies to which about three-quarters of the State’s dentists belong, provides desirable insurance and preferential financing arrangements for its members, and engages in lobbying, litigation, marketing, and public relations for members’ benefit. Members agree to abide by the CDA’s Code of Ethics, which, inter alia, prohibits false or misleading advertising. The CDA has issued interpretive advisory opinions and guidelines relating to advertising. Respondent Federal Trade Commission brought a complaint, alleging that the CDA violated §5 of the Federal Trade Commission Act (Act), 15 U .S. C. §45, in applying its guidelines so as to restrict two types of truthful, nondeceptive advertising: price advertising, particularly discounted fees, and advertising relating to the quality of dental services. An Administrative Law Judge (ALJ) held the Commission to have jurisdiction over the CDA and found a §5 violation. As relevant here, the Commission held that the advertising restrictions violated the Act under an abbreviated rule-of-reason analysis. In affirming, the Ninth Circuit sustained the Commission’s jurisdiction and concluded that an abbreviated or “quick look” rule-of-reason analysis was proper in this case.

Held:

1. The Commission’s jurisdiction extends to an association that, like the CDA, provides substantial economic benefit to its for-profit members. The Act gives the Commission authority over a “corporatio[n],” 15 U. S. C. §45(a)(2), “organized to carry on business for its own profit or that of its members,” §44. The Commission’s claim that the Act gives it jurisdiction over nonprofit associations whose activities provide substantial economic benefits to their for-profit members is clearly the better reading of the Act, which does not require that a supporting organization must devote itself entirely to its members’ profits or say anything about how much of the entity’s activities must go to raising the members’ bottom lines. There is thus no apparent reason to let the Act’s application turn on meeting some threshold percentage of activity for this purpose or even a softer formulation calling for a substantial part of the entity’s total activities to be aimed at its members’ pecuniary benefit. The Act does not cover all membership organizations of profit-making corporations without more. However, the economic benefits conferred upon CDA’s profit-seeking professionals plainly fall within the object of enhancing its members’ “profit,” which is the Act’s jurisdictional touchstone. The Act’s logic and purpose comport with this result, and its legislative history is not inconsistent with this interpretation.

2. Where any anticompetitive effects of given restraints are far from intuitively obvious, the rule of reason demands a more thorough enquiry into the consequences of those restraints than the abbreviated analysis the Ninth Circuit performed in this case.

(a) An abbreviated or “quick-look” analysis is appropriate when an observer with even a rudimentary understanding of economics could conclude that the arrangements in question have an anticompetitive effect on customers and markets. See, e.g., National Collegiate Athletic Assn. v. Board of Regents of Univ. of Okla., 468 U. S. 85. This case fails to present a situation in which the likelihood of anticompetitive effects is comparably obvious, for the CDA’s advertising restrictions might plausibly be thought to have a net procompetitive effect or possibly no effect at all on competition.

(b) The discount and nondiscount advertising restrictions are, on their face, designed to avoid false or deceptive advertising in a market characterized by striking disparities between the information available to the professional and the patient. The existence of significant challenges to informed decision making by the customer for professional services suggests that advertising restrictions arguably protecting patients from misleading or irrelevant advertising call for more than cursory treatment. In applying cursory review, the Ninth Circuit brushed over the professional context and described no anticompetitive effects from the discount advertising bar. The CDA’s price advertising rule appears to reflect the prediction that any costs to competition associated with eliminating across-the-board advertising will be outweighed by gains to consumer information created by discount advertising that is exact, accurate, and more easily verifiable. This view may or may not be correct, but it is not implausible; and neither a court nor the Commission may initially dismiss it as presumptively wrong. The CDA’s plausible explanation for its nonprice advertising restrictions, namely that restricting unverifiable quality claims would have a procompetitive effect by preventing misleading or false claims that distort the market, likewise rules out the Ninth Circuit’s use of abbreviated rule-of-reason analysis for those restrictions. The obvious anticompetitive effect that triggers such analysis has not been shown.

(c) Saying that the Ninth Circuit’s conclusion required a more extended examination of the possible factual underpinnings than it received is not necessarily to call for the fullest market analysis. Not every case attacking a restraint not obviously anticompetitive is a candidate for plenary market examination. There is generally no categorical line between restraints giving rise to an intuitively obvious inference of anticompetitive effect and those that call for more detailed treatment. What is required is an enquiry meet for the case, looking to a restraint’s circumstances, details, and logic. Here, a less quick look was required for the initial assessment of the CDA’s advertising restrictions.

Vacated and remanded.

The Per Se Rule

Under a per se analysis, courts exercise limited analysis and focus on whether the conduct in question falls within a category which is deemed to be manifestly anticompetitive under all or most circumstances. Under this approach, the business activity or practice is presumed illegal and the courts will not inquire as to the precise harm the conduct may have caused.

Horizontal Restraints of Trade

Horizontal restraints are those among competitors at the same level of the market structure (among manufacturers, distributors, wholesalers, or sellers who are competitors in the marketplace). The most common forms of horizontal restraints are discussed below.

Horizontal Price Fixing

Horizontal price fixing is considered to be one of the most serious antitrust offenses. Price fixing involves agreements between competitors for the purpose, and with the effect, of raising, depressing, fixing, pegging, or stabilizing the price of products or services. Horizontal price fixing is a per se violation of the antitrust laws. In order to constitute per se illegal price fixing, prices do not have to be fixed at a uniform rate. A violation can occur even in situations where competitors agree on a price range, a pricing formula, or an arrangement aimed at stabilizing current prices. Agreements to fix prices among competitors are not excused by any defense or justification. “Whatever economic justification particular price fixing agreements may be thought to have, the law does not permit inquiry into their reasonableness. They are all banned because of their actual or potential threat to the central nervous system of the economy.” United States v. Socony-Vacuum Oil Co., 310 U.S. at 225 n.59. [However, in its 1997 term, the Supreme Court ruled that the setting of a maximum price by a manufacturer would henceforth be judged under a rule of reason rather than a per se analysis. This would seem to be a major break from nearly a half-century of its prior case analysis—although the circumstances involved a vertical restraint.]

Note, certain businesses which are subject to government regulation (for example, airlines, railroads, shipping, stock exchanges, insurance companies, banks) may be permitted to “fix” or set prices or rates without violating the antitrust laws if the appropriate governmental agency has determined that the rates set are in the “public interest.” There are also several other general exemptions from antitrust law including: agricultural marketing cooperatives; bona fide labor union activities; bona fide collective bargaining activities; and professional baseball, through the operation of precedent or stare decisis as determined in Federal Baseball Club v. National League (1922).

The following case illustrates horizontal price fixing.

 

Case Summary

FTC v. Superior Court Trial Lawyers Association

Supreme Court of the United States, 493 U.S. 411 (1990)

Lawyers in private practice who acted as court-appointed counsel for indigent defendants in criminal cases in District of Columbia Superior Court petitioned for review of determination by Federal Trade Commission that lawyers violated antitrust law by organizing and participating in boycott aimed at forcing increase of compensation paid to them.

A group of lawyers in private practice who regularly acted as court-appointed counsel for indigent defendants in District of Columbia criminal cases agreed at a meeting of the Superior Court Trial Lawyers Association (SCTLA) to stop providing such representation until the District increased group members’ compensation. The boycott had a severe impact on the District’s criminal justice system, and the District government capitulated to the lawyers’ demands. After the lawyers returned to work, petitioner Federal Trade Commission (FTC) filed a complaint against SCTLA and four of its officers (respondents), alleging that they had entered into a conspiracy to fix prices and to conduct a boycott that constituted unfair methods of competition in violation of §5 of the FTC Act. Declining to accept the conclusion of the Administrative Law Judge (ALJ) that the complaint should be dismissed, the FTC ruled that the boycott was illegal per se and entered an order prohibiting respondents from initiating future such boycotts. The Court of Appeals, although acknowledging that the boycott was a “classic restraint of trade” in violation of §1 of the Sherman Act, vacated the FTC order. Reasoning that this test could not be satisfied by the application of an otherwise appropriate per se rule, but instead requires the enforcement agency to prove rather than presume that the evil against which the antitrust laws are directed looms in the conduct it condemns, the court remanded for a determination whether respondents possessed “significant market power.”

Held:

Respondents’ boycott constituted a horizontal arrangement among competitors that was unquestionably a naked restraint of price and output in violation of the antitrust laws. Respondents’ proffered social justifications for the restraint of trade do not make the restraint any less unlawful. Nor is respondents’ agreement outside the coverage of the antitrust laws under simply because its objective was the enactment of favorable legislation. The undenied objective of this boycott was to gain an economic advantage for those who agreed to participate.

Division of Markets

Agreements among competitors to divide markets are illegal per se. The per se rule applies regardless of whether the division is based upon geography, customers, the type of transaction, the product involved, or the sequence, e.g., only Firm-A will participate in the first bid and only Firm-B will participate in the second bid. This rule also applies to reciprocal agreements among potential customers; it is per se illegal to agree not to enter a competitor’s market in exchange for its not entering your market.

Case Summary

Palmer v. BRG Of Georgia, Inc.

Supreme Court of the United States, 48 U.S. 46 (1990)

A former law student brought action against providers of bar review courses, alleging that arrangement between the providers pursuant to which one of them withdrew from the Georgia market was violative of the Sherman Act.

In preparation for the 1985 Georgia Bar Examination, petitioners contracted to take a bar review course offered by respondent BRG of Georgia, Inc. (BRG). In this litigation they contend that the price of BRG’s course was enhanced by reason of an unlawful agreement between BRG and respondent Harcourt Brace Jovanovich Legal and Professional Publications (HBJ), the Nation’s largest provider of bar review materials and lecture services. The central issue is whether the 1980 agreement between respondents violated §1 of the Sherman Act. HBJ began offering a Georgia bar review course on a limited basis in 1976, and was in direct, and often intense, competition with BRG during the period from 1977 to 1979. BRG and HBJ were the two main providers of bar review courses in Georgia during this time period. In early 1980, they entered into an agreement that gave BRG an exclusive license to market HBJ’s material in Georgia and to use its trade name “Bar/Bri.” The parties agreed that HBJ would not compete with BRG in Georgia and that BRG would not compete with HBJ outside of Georgia. Under the agreement, HBJ received $100 per student enrolled by BRG and 40% of all revenues over $350. Immediately after the 1980 agreement, the price of BRG’s course was increased from $150 to over $400.

In United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 60 S.Ct. 811, 84 L.Ed. 1129 (1940), we held that an agreement among competitors to engage in a program of buying surplus gasoline on the spot market in order to prevent prices from falling sharply was unlawful, even though there was no direct agreement on the actual prices to be maintained. We explained that “[u]nder the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.” Id., at 223, 60 S.Ct., at 844.

The revenue-sharing formula in the 1980 agreement between BRG and HBJ, coupled with the price increase that took place immediately after the parties agreed to cease competing with each other in 1980, indicates that this agreement was “formed for the purpose and with the effect of raising” the price of the bar review course.

In United States v. Topco Associates, Inc., 405 U.S. 596, 92 S.Ct.1126, 31 L.Ed.2d 515 (1972), we held that agreements between competitors to allocate territories to minimize competition are illegal: “One of the classic examples of a per se violation of §1 is an agreement between competitors at the same level of the market structure to allocate territories in order to minimize competition…. This Court has reiterated time and time again that ‘[h]orizontal territorial limitations … are naked restraints of trade with no purpose except stifling of competition.’ Such limitations are per se violations of the Sherman Act.” Id. at 608, 92 S.Ct., at 1133-34. The defendants in Topco had never competed in the same market, but had simply agreed to allocate markets. Here, HBJ and BRG had previously competed in the Georgia market; under their allocation agreement, BRG received that market, while HBJ received the remainder of the United States. Each agreed not to compete in the other’s territories. Such agreements are anticompetitive regardless of whether the parties split a market within which both do business or whether they merely reserve one market for one and another for the other.

The petition for a writ of certiorari is granted, the judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

Group Boycotts (Concerted Refusals to Deal)

A group boycott, also called a concerted refusal to deal, exists when a group of companies agree to refrain from dealing with another company or companies in order to gain a competitive advantage by forcing the acceptance of certain conditions or by forcing another company or companies out of business. Traditionally, concerted refusals to deal were per se illegal. However, recent decisions of the United States Supreme Court have determined that not all cases involving a refusal to deal would be judged under the per se rule. Although the Supreme Court has not articulated a precise rule, the Court has suggested that the per se rule would be applicable only where the refusal to deal denies the plaintiff access to a supply or facility necessary to be a viable competitor. Since 1985, the majority of the cases involving group boycotts have been analyzed under the rule of reason. The per se approach has generally been limited to cases in which firms with market power boycott suppliers or customers to discourage them from doing business with a competitor.

An important defense to a claim of a group boycott or a concerted refusal to deal is the “business judgment rule.” This defense may be used where a defendant can prove that a decision not to deal with a particular party was based on sound business reasons including business experience, financial ability, or “moral character,” especially as this term may relate to the intangible element of “good will” in a business. The business judgment rule is a frequent defense offered in cases involving franchising or in a variety of labor disputes.

Other Horizontal Agreements

Other agreements among competitors are analyzed under the rule of reason, which balances the pro-competitive and anticompetitive effects of any agreement. Examples of such agreements include, but are not limited to, exchange of information, trade association activities, and joint venture activities.

Vertical Restraints of Trade

Vertical restraints are those that involve firms at different levels of the distribution or marketing chain — in particular between suppliers and customers. Antitrust laws involve two basic categories of vertical restraints: (a) vertical price restraints; and (b) non-price vertical restraints.

Vertical Price Restraints

Vertical price restraints are directed at independent wholesalers and retailers who sell the manufacturer’s products. A vertical price restraint involves an agreement between a manufacturer and a wholesaler or retailer where the manufacturer fixes or sets the price at which the wholesaler or retailer may resell the product. Until recently, such agreements were judged to be illegal per se. Today, however, courts have begun to utilize a rule of reason approach in cases where a franchisor sets a uniform price in order to assure quality control or to support a national advertising campaign.

One exception to a finding of a vertical price restraint occurs in a consignment sale. In a situation where there is a consignment of products in which the manufacturer retains the title, ownership, and risk of loss, and the seller has the right of return of any unsold goods, establishing the resale price may not be unlawful. United States v. General Elec. Co., 272 U.S. 476 (1926). In addition, a seller may advertise or print on the product a “suggested resale price.” Suggesting a resale prices is currently not a violation of the antitrust laws where a retailer is free to charge a higher or a lower price so long as the seller does no more than merely “suggest the price.” A practice called “active exhortation” may run afoul of the “mere suggestion” exception.

Price fixing — both horizontal (between competitors) or vertically (businesses within a marketing chain) may be difficult to prove through overt actions or direct proof. Thus, the Department of Justice often relies on a theory called conscious parallelism in order to make out its case. The doctrine of conscious parallelism may be found in Interstate Circuit where the court held that evidence of a conspiracy between filmmakers was able to be inferred through the unanimity of agreements between the parties and not necessarily through direct evidence. At its essence, conscious parallelism permits the plaintiff to prove price fixing through circumstantial evidence where there is:

  • Knowledge of pricing of competitors;
  • Motivation to keep prices high; and
  • Substantial unanimity (roughly +/-5 %) of the prices of each of the parties involved.

 

Case Summary

Interstate Circuit v. U.S.

Supreme Court of the United States, 306 U.S. 208 (1938)

PER CURIAM.

The Government brought this suit for an injunction against the carrying out of an alleged conspiracy, in restraint of interstate commerce, between distributors and exhibitors of motion picture films. The restraint was alleged to consist in provisions in license agreements which prevented any ‘feature picture’ of the distributors, which had been shown ‘first-run’ in a theater of the defendant exhibitor at an admission price of 40 cents or more, from thereafter being exhibited in the same locality at an admission price of less than 25 cents or on the same program with another feature picture. [304 U.S. 55, 56] The evidence was presented by an agreed statement of certain facts and by oral testimony on behalf of each party. The District Court entered a final decree adjudging that in making the restrictive agreements the distributors had engaged in a conspiracy with the exhibitor, Interstate Circuit, Inc., and its officers in violation of the Anti-Trust Act, 15 U.S. C.A. 1 et seq., and granting a permanent injunction against the enforcement of the restrictions. 20 F.Supp. 868. The case comes here on direct appeal.

Equity Rule 70 1/2, 28 U.S.C.A. following section 723, provides: ‘In deciding suits in equity, including those required to be heard before three judges, the court of first instance shall find the facts specially and state separately its conclusions of law thereon; …

‘Such findings and conclusions shall be entered of record and, if an appeal is taken from the decree, shall be included by the clerk in the record which is certified to the appellate court under rules 75 and 76.’

The District Court did not comply with this rule. The court made no formal findings. The court did not find the facts specially and state separately its conclusions of law as the rule required. The statements in the decree that in making the restrictive agreements the parties had engaged in an illegal conspiracy were not ultimate conclusions and did not dispense with the necessity of properly formulating the underlying findings of fact.

The opinion of the court was not a substitute for the required findings. A discussion of portions of the evidence and the court’s reasoning in its opinion do not constitute the special and formal findings by which it is the duty of the court appropriately and specifically to determine all the issues which the case presents. This is an essential aid to the appellate court in reviewing an equity case, Railroad Commission v. Maxcy, 281 U.S. 82, cited, and compliance with the rule is particularly important in an anti-trust case which comes to this Court by direct appeal from the trial court.

The Government contends that the distributors were parties to a common plan constituting a conspiracy in restraint of commerce; that each distributor would benefit by unanimous action, whereas otherwise the restrictions would probably injure the distributors who imposed them, and that prudence dictated that ‘no distributor agree to impose the restrictions in the absence of agreement or understanding that his fellows would do likewise’; that the restraints were unreasonable, and that they had the purpose and effect of raising and maintaining the level of admission prices; that even if the distributors acted independently and not as participants in a joint undertaking, still the restraints were unreasonable in their effect upon the exhibitor’s competitors.

Appellants, asserting copyright privileges, contend that the restrictions were reasonable; that they were intended simply to protect the licensee from what would otherwise be an unreasonable interference by the distributors with the enjoyment of the granted right of exhibition; that there was no combination or conspiracy among the distributors; that it was to the independent advantage of each distributor to impose the restrictions in its own agreement and that the contention that less than substantially unanimous action would have injured the distributors in making such agreements was contrary to the evidence; and that the restrictions did not have an injurious effect.

We intimate no opinion upon any of the questions raised by these rival contentions, but they point the importance of special and adequate findings in accordance with the prescribed equity practice.

The decree of the District Court is set aside, and the cause is remanded, with directions to the court to state [304 U.S. 55, 58] its findings of fact and conclusions of law as required by Equity Rule 70 1/2, 28 U.S.C.A. following section 723.

It is so ordered.

Decree set aside, and cause remanded.

Non-Price Vertical Restraints

Non-price vertical restraints are generally subject to the rule of reason analysis. Non-price vertical restraints include practices such as termination or non-renewal of a dealer or of a franchise contract, reciprocal dealing, or other vertical territorial restrictions. The legality of such practices depends on a detailed review of the factual circumstances surrounding the restraint to determine whether a practice unreasonably restrains trade.

Section 2 of the Sherman Act — Monopolization

Section 2 of the Sherman Act, found at 15 U.S.C. §2 (1988), states: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire … to monopolize … shall be deemed guilty of a felony.” Thus, Section 2 addresses three offenses: monopolization, attempted monopolization, and conspiracy to monopolize. The focus of attention in this Chapter will be solely on the offense of monopolization.

The monopolization offense has two elements: (i) the possession of monopoly power in a relevant market; and (ii) the willful anticompetitive conduct that creates or perpetuates the monopoly power. Monopoly power is traditionally defined as the power to control market prices or exclude competition. Modern cases, while repeating that formulation, recognize that controlling price and excluding competition are interrelated sources of monopoly power. A relevant market involves both a product or a service and a geographic dimension. The relevant product market is determined principally by considering the reasonable interchangeability of use of the products or can include products interchangeable in production (i.e., if producers can swiftly and inexpensively switch from producing one product to producing the other). The relevant geographic market comprises the locations in which customers can reasonably turn to secure he product. Determining the geographic market depends upon such factors as transportation costs, the need for local sales or service operations, the presence of tariffs or other trade barriers, and the correlation in price movements between different areas.

Because of the difficulty of directly assessing whether a firm has the ability to control price, courts generally appraise monopoly power indirectly, starting with an analysis of market share. A high share of the relevant market will support a presumption of market power. Today, market shares in excess of 70% usually lead to a presumption of monopoly power; market shares below 50% virtually never do, and market shares between 50% and 70% sometimes do, especially as the market share approaches 70%.

In addition to possessing market power, a potential monopolist must also have willfully obtained or maintained that monopoly power in order to violate antitrust laws. However, the nature of the conduct is more important than the monopolist’s intent. Thus, a monopolist that intentionally attains or preserves its power through otherwise fair means, such as low prices, high quality, or clever advertising, does not ordinarily violate Section 2. A violation requires that the means chosen be “predatory” or “anticompetitive.” For example, predatory pricing consists of pricing a product below its relevant cost in order to drive competitors from the market in the short run and then recoup the short-run losses in the long run through monopoly pricing after the competition has bee vanquished. In international business, this practice is sometimes termed as “dumping.” (See Brooke Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993)).

 

Case Summary

United States v. Grinnell Corporation Et Al.

Supreme Court of the United States, 384 U.S. 563 (1966)

Grinnell manufactures plumbing supplies and fire sprinkler systems. It also owns 76% of the stock of ADT, 89% of the stock of AFA, and 100% of the stock of Holmes. ADT provides both burglary and fire protection services; Holmes provides burglary services alone; AFA supplies only fire protection service. Each offers a central station service under which hazard-detecting devices installed on the protected premises automatically transmit an electric signal to a central station. The central station is manned 24 hours a day. Upon receipt of a signal, the central station, where appropriate, dispatches guards to the protected premises and notifies the police or fire department direct. There are other forms of protective services. But the record shows that subscribers to accredited central station service (i.e., that approved by the insurance underwriters) receive reductions in their insurance premiums that are substantially greater than the reduction received by the users of other kinds of protection service. In 1961 accredited companies in the central station service business grossed $65,000,000. ADT, Holmes, and AFA are the three largest companies in the business in terms of revenue: ADT (with 121 central stations in 115 cities) has 73% of the business; Holmes (with 12 central stations in three large cities) has 12.5%; AFA (with three central stations in three large cities) has 2%. Thus the three companies that Grinnell controls have over 87% of the business.

Over the years ADT purchased the stock or assets of 27 companies engaged in the business of providing burglar or fire alarm services. Holmes acquired the stock or assets of three burglar alarm companies in New York City using a central station. Of these 30, the officials of seven agreed not to engage in the protective service business in the area for periods ranging from five years to permanently. After Grinnell acquired control of the other defendants, the latter continued in their attempts to acquire central station companies offers being made to at least eight companies between the years 1955 and 1961, including four of the five largest nondefendant companies in the business. When the present suit was filed, each of those defendants had outstanding an offer to purchase one of the four largest nondefendant companies.

In 1906, prior to the affiliation of ADT and Holmes, they made a written agreement whereby ADT transferred to Holmes its burglar alarm business in a major part of the Middle Atlantic States and agreed to refrain forever from engaging in that business in that area, while Holmes transferred to ADT its watch signal business and agreed to limit its activities to burglar alarm service and night watch service for financial institutions. While this agreement was modified several times and terminated in 1947, in 1961 Holmes still restricted its business to burglar alarm service and operated only in those areas which had been allocated to it under the 1906 agreement. Similarly, ADT continued to refrain from supplying burglar alarm service in those areas earlier allocated to Holmes. In 1907 Grinnell entered into a series of agreements with the other defendant companies and with Automatic Fire Protection Co. to the following effect: AFA received the exclusive right to provide central station sprinkler supervisory and waterflow alarm and automatic fire alarm service in New York City, Boston and Philadelphia, and agreed not to provide burglar alarm service in those cities or central station service elsewhere in the United States. Automatic Fire Protection Co. obtained the exclusive right to provide central station sprinkler supervisory and waterflow alarm service everywhere else in the United States except for the three cities in which AFA received that exclusive right, and agreed not to engage in burglar alarm service. ADT received the exclusive right to render burglar alarm and nightwatch service throughout the United States. (Under ADT’s 1906 agreement with Holmes, however, it could not provide burglar alarm services in the areas for which it had given Holmes the exclusive right to do so.) It agreed not to furnish sprinkler supervisory and waterflow alarm service anywhere in the country and not to furnish automatic fire alarm service in New York City, Boston or Philadelphia (the three cities allocated to AFA). ADT agreed to connect to its central stations the systems installed by AFA and Automatic. Grinnell agreed to furnish and install all sprinkler supervisory and waterflow alarm actuating devices used in systems that AFA and Automatic would install, and otherwise not to engage in the central station protection business. AFA and Automatic received 25% of the revenue produced by the sprinkler supervisory waterflow alarm service which they provided in their respective territories; ADT and Grinnell received 50% and 25%, respectively, of the revenue which resulted from such service. The agreements were to continue until February 1954. The agreements remained substantially unchanged until 1949 when ADT purchased all of Automatic Fire Protection Co.’s rights under it for $13,500,000. After these 1907 agreements expired in 1954, AFA continued to honor the prior division of territories; and ADT and AFA entered into a new contract providing for the continued sharing of revenues on substantially the same basis as before. In 1954 Grinnell and ADT renewed an agreement with a Rhode Island company which received the exclusive right to render central station service within Rhode Island at prices no lower than those of ADT and which agreed to use certain equipment supplied by Grinnell and ADT and to share its revenues with those companies. ADT had an informal agreement with a competing central station company in Washington, D.C., ‘that we would not solicit each other’s accounts.’ ADT over the years reduced its minimum basic rates to meet competition and renewed contracts at substantially increased rates in cities where it had a monopoly of accredited central station service. ADT threatened retaliation against firms that contemplated inaugurating central station service. And the record indicates that, in contemplating opening a new central station, ADT officials frequently stressed that such action would deter their competitors from opening a new station in that area.

Held: The entire accredited central station service business, including such services as automatic burglar alarms, automatic fire alarms, sprinkler supervisory service, and watch signal service, was properly treated as a single ‘relevant market’ in determining existence of monopolization, warranting judgment against defendants who exercised monopoly power over 87% of the business.

The Clayton Act

The primary antitrust statute applicable to mergers is Section 7 of the Clayton Act. A merger may occur when one corporation purchases the stock or assets of another corporation to give the acquiring corporation control over the acquired corporation. The combination of two or more corporations to form a new corporation is called a consolidation. A merger occurs when two or more corporations combine, but one of the combining firms remains in existence, and the other becomes part of or merges into the survivor corporation. Another situation exists where one corporation buys another corporation’s stock and both continue to exist. The buyer is the parent and the acquired corporation becomes the subsidiary. In some cases, a smaller corporation may be successful in “swallowing up” a larger corporation.

Section 7 of the Clayton Act prohibits mergers and acquisitions “in any line of commerce or in any activity affecting commerce in any section of the country, [where] the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” The term “line of commerce” refers to products or services offered by the companies involved in the merger and the term “section of the country” refers to the geographic location where the products or services of the merging companies are made available. Once the relevant line of commerce and section of the country are defined, the court will evaluate the acquisition to determine whether it is likely to substantially lessen competition or create a monopoly.

The most common types of mergers are horizontal mergers, vertical mergers, and conglomerate mergers. A horizontal merger occurs when the merging companies are actual competitors in the relevant product and geographic markets (e.g., between direct competitors such as Google and Facebook). By definition, a horizontal merger will eliminate actual competition; however, a horizontal merger does not automatically result in a violation of the antitrust laws. In evaluating its legality, courts will focus on market share and market concentration. If analysis reveals a high market share, a presumption of illegality is created which may be rebutted. The company would have to produce evidence of “other factors” which demonstrates that the market statistics do not reflect the current or future state of competition in the industry or that consumers would actual benefit by permitting the merger.

A vertical merger involves a merger of companies that have a supplier-customer relationship within a potential marketing chain, e.g., Disney and Pixar or by McDonald’s and the supplier of its straws or other paper products. A vertical merger raises antitrust concerns where the merger may eliminate either a source of supply or a purchaser of supplies and which may have the effect of foreclosing the competitive viability of the remaining companies in the market.

Factors considered by courts in determining the legality of vertical mergers will include trends in the industry, entry barriers, the number of competing suppliers, and the number of purchasers in the relevant market.

Conglomerate mergers are mergers that are neither horizontal nor vertical in nature, e.g., Walt Disney Pictures and American Broadcasting Company (ABC). They are categorized into three classifications: pure conglomerate mergers; product extension mergers; and market extension mergers. A pure conglomerate merger involves the merger of companies that are totally unrelated and have no core economic relationship, e.g., oil company merging with a garment company. A product extension merger occurs when two companies produce and sell non-competitive yet complementary products and the addition of the acquired company’s products reflects a logical extension the acquiring company’s product line. A market extension merger is a merger between two companies that manufacture and sell the same product but do not compete with each other in the same geographic market.

Various theories that have been relied on to successfully challenge conglomerate mergers such as entrenchment, reciprocity, and a foreclosure of potential competition. Entrenchment is premised on the theory that when a large company with substantial resources acquires a dominant company in a different market, the acquired firm will become entrenched in the market causing entry barriers and creating a monopoly situation.

The reciprocity theory has been applied in situations where one company agrees to purchase products from a second company if the second company agrees to purchase certain products it needs from the first company. This creates a situation where competitors of the merged company will be foreclosed from markets that are essential to their competitive viability. As a result, a Section 7, Clayton Act analysis may be invoked to ensure against possible violations.

The potential competition doctrine is based on the premise that the elimination of a potential competitor from a target market may lead to substantial lessening of competition. As a general rule, the threat of new competition keeps businesses more competitive. Ordinarily, the potential of a new entrant exerts a pro-competitive effect on companies doing business in a market. However, when a company enters a new market by acquiring another company already in that market, the perceived potential competition is lost (the new company now has an edge over the other existing companies). It is this perception that Section 7 of the Clayton Act seeks to enjoin.

If it can be established that one of the companies to the merger is a failing company, the fact will be considered by the courts as a possible justification for the otherwise anticompetitive merger. The parties seeking protection of the failing company defense have to prove that the company faces a grave probability of business failure and that the failing company has made a good faith effort to find alternative purchasers. The failing company defense reflects the view that the possible threat to competition by a merger is preferable to the impact on competition that would be caused if the failing company were to go out of business.

 

Case Summary

Cargill, Inc. & Excel Corporation v. Monfort Of Colorado, Inc.

Supreme Court of the United States, 479 U.S. 2014 (1986)

The Nation’s fifth largest beef packer brought action under Clayton Act to enjoin merger between second and third largest beef packers.

Section 16 of the Clayton Act entitles a private party to sue for injunctive relief against “threatened loss or damage by a violation of the antitrust laws.” Respondent, the country’s fifth-largest beef packer, brought an action in Federal District Court under §16 to enjoin the proposed merger of petitioner Excel Corporation, the second-largest packer, and Spencer Beef, the third-largest packer. Respondent alleged that it was threatened with a loss of profits by the possibility that Excel, after the merger, would lower its prices to a level at or above its costs in an attempt to increase its market share. During trial, Excel moved for dismissal on the ground that respondent had failed to allege or show that it would suffer antitrust injury, but the District Court denied the motion. After trial, the District Court held that respondent’s allegation of a “price-cost squeeze” that would severely narrow its profit margins constituted an allegation of antitrust injury. The Court of Appeals affirmed, holding that respondent’s allegation of a “price-cost squeeze” was not simply one of injury from competition but was a claim of injury by a form of predatory pricing in which Excel would drive other companies out of the market.

Held: 1.

A private plaintiff seeking injunctive relief under section 16 must show a threat of injury “of the type the antitrust laws were designed to prevent and that flows from that which makes defendants’ acts unlawful.” Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701. 2. The proposed merger does not constitute a threat of antitrust injury. A showing, as in this case, of loss or damage due merely to increased competition does not constitute such injury. And while predatory pricing is capable of inflicting antitrust injury, here respondent neither raised nor proved any claim of predatory pricing before the District Court, and thus the Court of Appeals erred in interpreting respondent’s allegations as equivalent to allegations of injury from predatory conduct. 3. This Court, however, will not adopt in effect a per se rule denying competitors standing to challenge acquisitions on the basis of predatory-pricing theories. Nothing in the Clayton Act’s language or legislative history suggests that Congress intended this Court to ignore injuries caused by such anticompetitive practices as predatory pricing.

Section 3 of the Clayton Act (15 USC §§12-27), reflects standards similar to those found in Section 1 of the Sherman Act in that it prohibits exclusive dealing arrangements and tying arrangements that may substantially lessen competition or tend to create a monopoly.

A tie-in agreement may occur when a supplier agrees to sell one product only on the condition that the buyer will also purchase a second product. (In franchising, the tying “product” may be a trademark or a service mark.) Tying is an important issue in the business format called franchising. The first product is referred to as the “tying product” while the second product is referred to as the “tied product.” The seller must have an economic interest in the tied product. Tie-in agreements are normally challenged under a rule of reason analysis. As a practical matter, courts will examine the likely effects that the tie-in will have on competition in the relevant market.

For example, a tie-in arrangement may be upheld in a franchise relationship where the franchisor attempts to justify the practice because of sophistication regarding specifications; issues relating to quality control; the necessity of product uniformity; where the product and the franchise is “practically indistinguishable” justification (in essence, there is only “one product”); or under the “new business” exception (usually, for no more than a 6-month period).

A tying arrangement may also be justified in a true “turn key” operation—where a franchisee purchases a fully equipped business operation—but stocked with no more “tied products” than might be required to do business for a limited period of time (normally, no more than a 3-month period).

An exclusive dealership is a situation where a manufacturer agrees with a dealer not to sell its products to other competing dealers within a certain geographic area. Generally, such arrangements are not in violation of antitrust laws absent an anticompetitive purpose. The law recognizes a manufacturer’s right to distribute his products to specific dealers of its own choice.

 

Case Summary

Illinois Tool Works, Inc. v. Independent Ink, Inc.

Supreme Court of the United States, 547 U.S. 28 (2006)

Petitioners manufacture and market printing systems that include a patented printhead and ink container and unpatented ink, which they sell to original equipment manufacturers who agree that they will purchase ink exclusively from petitioners and that neither they nor their customers will refill the patented containers with ink of any kind. Respondent developed ink with the same chemical composition as petitioners’ ink. After petitioner Trident’s infringement action was dismissed, respondent filed suit seeking a judgment of noninfringement and invalidity of Trident’s patents on the ground that petitioners are engaged in illegal “tying” and monopolization in violation of §§ 1 and 2 of the Sherman Act. Granting petitioners summary judgment, the District Court rejected respondent’s argument that petitioners necessarily have market power as a matter of law by virtue of the patent on their printhead system, thereby rendering the tying arrangements per se violations of the antitrust laws. After carefully reviewing this Court’s tying-arrangements decisions, the Federal Circuit reversed as to the §1 claim, concluding that it had to follow this Court’s precedents until overruled by this Court.

Held:

Because a patent does not necessarily confer market power upon the patentee, in all cases involving a tying arrangement, the [***31] plaintiff must prove that the defendant has market power in the tying product.

(a) Over the years, this Court’s strong disapproval of tying arrangements has substantially diminished, as the Court has moved from relying on assumptions to requiring a showing of market power in the tying product. The assumption in earlier decisions that such “arrangements serve hardly any purpose beyond the suppression of competition,” Standard Oil Co. of Cal. v. United States, 337 U.S. 293, 305-306, 69 S. Ct. 1051, 93 L. Ed. 1371, was rejected in United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 622, 97 S. Ct. 861, 51 L. Ed. 2d 80 (Fortner II), and again in Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 104 S. Ct. 1551, 80 L. Ed. 2d 2, both of which involved unpatented tying products. Nothing in Jefferson Parish suggested a rebuttable presumption of market power applicable to tying arrangements involving a patent on the tying good.

(b) The presumption that a patent confers market power arose outside the antitrust context as part of the patent misuse doctrine, and migrated to antitrust law in Inter- national Salt Co. v. United States, 332 U.S. 392, 68 S. Ct. 12, 92 L. Ed. 20. See also Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 62 S. Ct. 402, 86 L. Ed. 363, 1942 Dec. Comm’r Pat. 733; United States v. Loew’s Inc., 371 U.S. 38, 83 S. Ct. 97, 9 L. Ed. 2d 11.

(c) When Congress codified the patent laws for the first time, it initiated the untwining of the patent misuse doctrine and antitrust jurisprudence. At the same time that this Court’s antitrust jurisprudence continued to rely on the assumption that tying arrangements generally serve no legitimate business purpose, Congress began chipping away at that assumption in the patent misuse context from whence it came. Then, four years after Jefferson Parish repeated the presumption that patents confer market power, Congress amended the Patent Code to eliminate it in the patent misuse context. While that amendment does not expressly refer to the antitrust laws, it invites reappraisal of International Salt’s per se rule. After considering the congressional judgment reflected in the amendment, this Court concludes that tying arrangements involving patented products should be evaluated under the standards of cases like Fortner II and Jefferson Parish rather than the per se rule in Morton Salt and Loew’s. Any conclusion that an arrangement is unlawful must be supported by proof of power in the relevant market rather than by a mere presumption thereof.

(d) Respondent’s alternatives to retention of the per se rule–that the Court endorse a rebuttable presumption that patentees possess market power when they condition the purchase of the patented product on an agreement to buy unpatented goods exclusively from the patentee, or differentiate between tying arrangements involving requirements ties and other types of tying arrangements–are rejected.

(e) Because respondent reasonably relied on this Court’s prior opinions in moving for summary judgment without offering evidence of the relevant market or proving petitioners’ power within that market, respondent should be given a fair opportunity to develop and introduce evidence on that issue, as well as other relevant issues, when the case returns to the District Court. 396 F.3d 1342, vacated and remanded.

The Federal Trade Commission Act

The Federal Trade Commission Act (15 USC §§41-51) was enacted in 1914. Section 5(a)(1) prohibits “unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce.” The Act also created the Federal Trade Commission (FTC), an administrative agency with broad powers of enforcement of antitrust laws. The FTC is charged with exclusive authority to enforce Section 5 of the FTC Act or to seek damages for such violations. The public has no right to bring an action under the FTC Act; although FTC actions frequently arise on the basis of consumer complaints, often posted on the FTC website.

 

Case Study

Lippa’s, Inc. v. Lenox, Inc.

United States District Court for the District of Vermont, 305 F. Supp. 182 (1969)

Procedural Posture

Defendant moved to dismiss plaintiff’s private antitrust action on the grounds that service was improper and the statute of limitations had run.

Overview

Plaintiff retailer brought a private antitrust action against defendant manufacturer over its resale price maintenance system, a part of which prohibited transshipping. Defendant filed a motion to dismiss contending service was improper and the statute of limitations had run. The court denied defendant’s motion. Defendant was properly served under the Clayton Act §12, 15 U.S.C.S. §22, and under § 5(b) a pending Federal Trade Commission (FTC) proceeding brought under the Federal Trade Commission Act (FTCA) for retail price maintenance against defendant tolled the statute of limitations. Section 5(b) tolls the statute of limitations in a private action during the pendency of a related proceeding instituted by the United States and for one year after. Proceedings have tolling effect if they are brought to restrain, punish or prevent antitrust law violations. There was no doubt that the FTC complaint was brought either to prevent or restrain violations of any of the antitrust laws. The private action need be only substantially the same, not identical, to satisfy the statute.

Outcome

Defendant’s motion to dismiss was denied because plaintiff’s private antitrust action was substantially similar to the government’s pending proceeding, and the statute of limitations was tolled.

Other Important Statutes

Several other statutes are relevant to the discussion of antitrust. While they will not be discussed in detail, they are nevertheless important in determining proper or improper behavior on the part of market participants.

  • The Robinson-Patman Act (1936), amending Section 2 of the Clayton Act, dealing with price discrimination;
  • The Miller-Tydings Act (1937), amending Section 1 of the Sherman Act, exempting resale price maintenance agreements (so-called “fair trade” agreements which are no longer valid) between a manufacturer and a dealer;
  • The Cellar-Kefauver Act (1952), dealing with anti-merger provisions;
  • The Bank Merger Act of 1966, requiring that all bank mergers must be approved in advance by the banking regulatory agency having jurisdiction, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Comptroller of the Currency;
  • The Hart-Scott-Rodino Act of 1976 introduced a pre-merger requirement into the area of mergers, requiring that both the acquiring company with sales of $100 million and the acquired firm with sales of $10 million or more, must file a notice of merger with the Department of Justice and the FTC 30 days before the merger is finalized.

 

Ethical Considerations

Use Of “Likeness”

Is it ethical for a university to profit from using the “likeness” of one its its athletes without compensating the athlete? Should the award of a scholarship be considered “enough” compensation? Several courts have ruled that such practices violate the Sherman Act’s prohibition against “contracts, combinations or conspiracies” in restraint of trade.

Per Se Rule

Should the “per se” rule in antitrust cases be eliminated? Why shouldn’t the government be required to prove anti-competitive effects in all cases arising under the antitrust laws?

Antitrust v. Labor Law

Do some research on the “non-statutory labor exemption” from antitrust. Do you agree that the collective bargaining process should “trump” the application of antitrust rules to a specific transaction? Under what circumstances?

 

Questions

  1. What rule did the Court enunciate in the Standard Oil case, found above.
  2. What is the import of the Court’s finding that Microsoft “did not export the copies of Windows installed on the foreign-made computers in question”?
  3. What are treble damages in antitrust enforcement cases? When is it appropriate for a court to order treble damages?
  4. Why doesn’t a court analyze antitrust cases under a “per se” rule?
  5. Find a case in the area of sports law involving antitrust. What rule did the court employ in its analysis.
  6. What types of conduct might certain business, otherwise exempted from antitrust scrutiny, engage in that would be a violation if committed by another business entity not so exempted?
  7. Outline the three areas of analysis under the “business judgment rule.”
  8. What is the danger of permitting a car manufacturer to purchase business that supply parts necessary to the final construction of an automobile?
  9. Provide an example of the “practically indistinguishable” exception to the rule against an illegal tie-in.
  10. Find the website of the FTC and cite some recent examples of consumer complaints regarding dangerous products.