Chapter Twenty One | Intellectual Property: Copyrights

Purpose Of Copyrights

Copyright law, as with all laws made pursuant to the authority granted by Article 1, Section 8 of the Constitution, is “… [t]o promote the Progress of Science and useful Arts …”. Justice Douglas, writing for the majority in U.S. v. Paramount Pictures, wrote “The copyright law, like the patent statutes, makes reward to the owner a secondary consideration.” In Fox Film Corp. v. Doyal, 286 U.S. 123, 127, (1932) Chief Justice Hughes spoke as follows respecting the copyright monopoly granted by Congress, “The sole interest of the United States and the primary object in conferring the monopoly lie in the general benefits derived by the public from the labors of authors.”

Justice Douglas continued, “It is said that reward to the author or artist serves to induce release to the public of the products of his creative genius. But the reward does not serve its public purpose if it is not related to the quality of the copyright. Where a high quality film greatly desired is licensed only if an inferior one is taken, the latter borrows quality from the former and strengthens its monopoly by drawing on the other. The practice tends to equalize rather than differentiate the reward for the individual copyrights.” (See U.S. v. Paramount Pictures, 334 U.S. 131, 158 (1948)).

Copyright law protects “… original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.” A work of authorship includes (1) literary works; (2) musical works, including any accompanying words; (3) dramatic works, including any accompanying music; (4) pantomimes and choreographic works; (5) pictorial, graphic, and sculptural works; (6) motion pictures and other audiovisual works; (7) sound recordings; and (8) architectural works (17 U.S.C. §102(a)).

The owner of a copyright has “… the exclusive rights to do and to authorize any of the following: (1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly; (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and (6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.” (17 U.S.C. §106).


There are, however, limitations on how far that protection extends beyond the original work. According to the statute, copyright protection does not “… extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied …” that is embodied in such an original work (17 U.S.C. §102(b)).

Subject Matter

The subject matter of a copyright, as described above, includes “… compilations and derivative works …” but protection of “… preexisting material in which copyright subsists does not extend to any part of the work in which such material has been used unlawfully.” Protection of such works only includes material “… contributed by the author …” rather than “… preexisting material employed in the work, and does not imply any exclusive right in the preexisting material.” (17 U.S.C. §103(a) and (b)).

Reproduction And Derivatives

The owner of a copyright has exclusive rights to reproduce, prepare derivative works based upon the copyrighted work, distribute copies by sale or other transfer of ownership, or by rental, lease, or lending, perform the copyrighted work publicly, display the copyrighted work publicly, and perform the copyrighted work publicly by means of a digital audio transmission (17 U.S.C. §106).


Anyone who creates a work is considered the author of that work. In the event that the work is created as a “work for hire” then the organization that sponsored the work is considered the author. A “work made for hire” is defined in §101 as “a work prepared by an employee within the scope of his or her employment …” For example, the coders who created the MacOS did so as employees or independent contractors of Apple. As a result, their work and the cumulative product outcome known as MacOS are considered “works made for hire” pursuant to §101 of the Copyright Act. Thus, the “author” of the MacOS is considered to be Apple.

However, remember an important distinction, copyright embraces only the original expression not any extensions of the original idea. The Feist case examines the necessity of originality when granting a copyright.


Case Study

Feist Publications, Inc. v. Rural Telephone Service Co., Inc.

Supreme Court Of The United States, 499 U.S. 340 (1991)

Procedural Posture

Petitioner publishing company sought review by certiorari of a judgment of the United States Court of Appeals for the Tenth Circuit, which affirmed a grant of summary judgment in favor of respondent phone company in a suit by respondent against petitioner for copyright infringement that arose after petitioner published a directory compiled with information taken from the white pages compiled and published by respondent.


Respondent sued petitioner for copyright infringement because petitioner had used information contained in its white pages in the compilation of its own directory. The court reversed a grant of summary judgment in favor of respondent because the selection, coordination, and arrangement of respondent’s white pages did not satisfy the minimum constitutional standards for copyright protection. Specifically, the court found that respondent’s white pages, which contained only factual information, i.e., phone numbers, addresses, and names listed in alphabetical order, lacked the requisite originality because respondent had not selected, coordinated, or arranged the uncopyrightable facts in any original way.


A telephone company that was a certified public utility providing telephone service to several communities in Kansas, and that was subject to a state regulation requiring all telephone companies operating in the state to issue annually an updated telephone directory, published a typical telephone directory, consisting of white pages and yellow pages. The white pages listed in alphabetical order the names of the telephone company’s subscribers, together with their towns and telephone numbers. The telephone company obtained the data for its white pages from the company’s subscribers, who were required to provide their names and addresses when applying for telephone service from the company. A publishing company, which specialized in areawide telephone directories covering a much larger geographical range than did directories such as that of the telephone company, offered to pay the telephone company for the right to use its white pages listings, but the telephone company refused to license its listings to the publishing company. Subsequently, the publishing company used the telephone company’s white pages listings without the telephone company’s consent. Although the publishing company sought to obtain additional information, such as street addresses, for the listings that it took from the telephone company’s white pages, many of the listings in the publishing company’s areawide directory that covered part of the telephone company’s service area were identical to listings in the telephone company’s white pages. In a copyright infringement suit brought by the telephone company against the publishing company, the United States District Court for the District of Kansas, explaining that courts had consistently held that telephone directories were copyrightable, granted summary judgment to the telephone company (663 F Supp 214). The United States Court of Appeals for the Tenth Circuit, in an unpublished opinion, affirmed the District Court judgment for substantially the reasons given by the District Court (916 F2d 718).

On certiorari, *** it was held that (1) the names, towns, and telephone numbers listed in the white pages were not protected by the telephone company’s copyright in its combined white and yellow pages directory, because the listings in the white pages were not original to the telephone company, since (a) the listings, rather than owing their origin to the telephone company, were uncopyrightable facts, and (b) the telephone company has not selected, coordinated, or arranged these uncopyrightable facts in an original way sufficient to satisfy the minimum standards for copyright protection–under either the Federal Constitution’s Article I, 8, cl 8, which authorizes Congress to secure for limited times to authors the exclusive right to their respective writings, or the Copyright Act of 1976 (17 USCS 101 et seq.), which provides copyright protection for original works of authorship–given that the telephone company’s selection and alphabetical arrangement of the listings lacked the creativity necessary to demonstrate originality; and (2) because the telephone company’s white pages listings lacked the requisite originality for copyright protection, the publishing company’s use of the listings could not constitute copyright infringement.


Alphabetical listings of names, accompanied by towns and telephone numbers, in telephone book white pages held not copyrightable; thus, nonconsensual copying of listings held not to infringe on copyright.


The court reversed the judgment.

The Supreme Court in Feist affirmed that owners’ original expression is not only protected but also that copyright “… encourages others to build freely upon the ideas and information conveyed by a work.” The Court noted that the principle known as the idea/expression or fact/expression dichotomy, is appropriately applied to all works of authorship. And, where applied to a factual compilation, “… assuming the absence of original written expression, only the compiler’s selection and arrangement may be protected; the raw facts may be copied at will. This result is neither unfair nor unfortunate. It is the means by which copyright advances the progress of science and art.” (See Feist, 499 U.S. 340 at 349-350).

Sources of Law

The Copyright Act of 1790, passed by the Second U.S. Congress, was the first federal copyright statute and established U.S. copyright protection with term of 14 years and provided living owners with an option for one 14-year renewal. This act provided protection only to U.S. citizens. The Copyright Act of 1831 was the first major statutory revision of copyright law. It added musical compositions to the list of protected works and extended the initial term of protection to 28 years with an option for one 14 year renewal. The Copyright Act of 1909 represented a substantial revision, extending the initial term to 28 years with the option of renewal for one additional 28-year term. The Townsend Amendment of 1912 added a new form of expression, motion pictures, to the list pf protected works. Although the 1909 Act was revised by the Copyright Act of 1976, it remains the effective for all copyrights granted before the 1976 Act took effect.

The Copyright Act of 1976 (17 U.S.C. §102, et seq.) remains the primary federal law governing copyrights and has been amended several times. The Act regularized the term of copyright protection by eliminating the potential of multiple terms and creating a system of one term running from the work’s creation and continuing for a term consisting of the life of the author plus 70 years after the author’s death. The Act also provides protection for unpublished works and preempts state laws governing copyright. (17 U.S.C. §301, 303).

Two more amendments to the 1976 acre have been adopted by Congress. The Copyright Renewal Act of 1992 eliminated the need for affirmative action by the copyright holder, i.e., filing a renewal application. This amendment had the effect of providing protection for the full term available without the owner’s action. The Copyright Term Extension Act of 1998 (CTEA), often ridiculed as the “Mickey Mouse Protection Act,” extended copyright protection terms to 95/120 years or life plus 70 years. So, the term of protection for works “… created on or after January 1, 1978 …” there is presently “… a term consisting of the life of the author and 70 years after the author’s death.” In the case of a joint work prepared by two or more authors who did not work for hire the Act provides “… a term consisting of the life of the last surviving author and 70 years after such last surviving author’s death.” And, for anonymous works, pseudonymous works, or works made for hire the Act provides “… a term of 95 years from the year of its first publication, or a term of 120 years from the year of its creation, whichever expires first.” (17 U.S.C. §302).

Notice, Registration and Enforcement

Copyright protection of a work arises automatically at the moment of fixation; in other words, as soon as the work appears in some fixed and tangible form. “A work is “fixed” in a tangible medium of expression when its embodiment … is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.” (17 U.S.C. §101).

Pursuant to the Berne Convention, signed by the U.S. in 1989, there is no requirement for completion of a registration process. However, completion of the federal registration process provides some distinct advantages. Certain damages are only available where the work was registered within ninety days of initial publication or prior to any alleged infringement.

Even though a work is protected once it is created and fixed in a tangible form, there are advantages to registration. Registration establishes a public record of the copyright claim and is necessary for works of U.S. origin before an infringement suit may be filed in court. If registration is completed before or within five years of publication, it establishes prima facie evidence in court of the validity of the copyright. Statutory damages and attorney’s fees will be available to the copyright owner in court actions if registration is made within three months after publication of the work or prior to an infringement of the work. If not, only an award of actual damages and profits will be available to the copyright owner.

The inclusion of a copyright notice on materials distributed in the U.S. is optional. If a notice is included on the work, §401 requires that it be “… affixed … in such manner and location as to give reasonable notice of the claim of copyright” and must include:

  1. the symbol © (the letter C in a circle), or
  2. the word “Copyright, or
  3. the abbreviation “Copr.”; and
  4. the year of first publication of the work; in the case of compilations, or derivative works incorporating previously published material, the year date of first publication of the compilation or derivative work is sufficient. The year date may be omitted where a pictorial, graphic, or sculptural work, with accompanying text matter, if any, is reproduced in or on greeting cards, postcards, stationery, jewelry, dolls, toys, or any useful articles; and
    the name of the owner of copyright in the work, or an abbreviation by which the name can be recognized, or a generally known alternative designation of the owner. (17 U.S.C. §401).

Correct examples of copyright notices would include:

  • © 2017, I A.M. Owner, or
  • Copyright 2017, I A.M. Owner, or
  • Copr. 2017, I A.M. Owner


Any copyright owner has the right to bring a legal action against an alleged infringer. Copyright infringement arises whenever a work is distributed, copied, displayed, modified, a derivative is prepared work or performed in public. “In order to establish infringement, two elements must be proven: (1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.” (See Feist, 499 U.S. 340, 362).

Direct Infringement

Direct infringement arises when a person deliberately, and without authorization, engages in the activities described above. For example, if you make a copy of this textbook without the copyright owner’s permission, you will have violated the exclusive right to reproduce and have therefore committed copyright infringement. Likewise, if a music listener makes a copy of a digital music file and shares it with friends, a violation of the exclusive right to reproduce and distribute has occurred. (See A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (2001). Of course, proof of infringement may be difficult, particularly with digital materials. For instance, a copyright owner would be required to show that the alleged infringer both had access to the original work and that they were substantially similar.

The Aereo case resolved a dispute between a provider of an innovative rebroadcasting technology and traditional broadcast media providers. Aereo’s service allowed its subscribers to view over-the-air television on Internet-connected devices. The Court found that the service violated the copyrights of the owners.


Case Study

American Broadcasting Companies, Inc. v. Aereo, Inc.

Supreme Court Of The United States, 134 S. Ct. 2498 (2014)

Procedural Posture

Petitioners, a group of television producers, distributors, and broadcasters, sued respondent, an entity that streamed petitioners’ programs to subscribers over the Internet, claiming copyright infringement. The district court denied petitioners’ request for an order enjoining respondent from providing copyrighted programs to subscribers, and the U.S. Court of Appeals for the Second Circuit affirmed. The U.S. Supreme Court granted certiorari.


Petitioners claimed that respondent violated their rights under the Copyright Act by selling a service that allowed subscribers to watch television programs over the Internet at about the same time the programs were broadcast over the air. A divided panel of the Second Circuit found that respondent did not perform “publicly” within the meaning of the Transmit Clause of the Copyright Act, 17 U.S.C.S. § 101, because it used technology which allowed it to stream programs to each subscriber by sending a private transmission that was available only to that subscriber. The U.S. Supreme Court disagreed. Changes Congress made to the Copyright Act in 1976 were intended to overturn the Supreme Court’s decisions in Fortnightly Corp. v. United Artists Television, Inc. and Teleprompter Corp. v. Columbia Broadcasting System, Inc., and under those changes respondent performed petitioners’ copyrighted works publicly when it streamed the works to subscribers.

The Copyright Act of 1976 gives a copyright owner the exclusive right to perform a copyrighted work publicly. 17 U.S.C.S. § 106(4). The Act’s Transmit Clause defines that exclusive right as including the right to transmit or otherwise communicate a performance of a copyrighted work to the public, by means of any device or process, whether the members of the public capable of receiving the performance receive it in the same place or in separate places and at the same time or at different times. 17 U.S.C.S. § 101.


Business that sold service which allowed subscribers to watch television programs over Internet at about same time programs were broadcast held to violate copyrights of television producers and broadcasters.


The Supreme Court reversed the Second Circuit’s judgment and remanded the case. 6-3 Decision; 1 dissent.

The question before the Court in Aereo was whether the copyright clause of the Constitution allows a company to transmit television programs to its paying viewers over the internet without the permission of the broadcasting network being viewed. The Court found that Aereo’s actions violated the rights of the owner of the copyrights in question.

Contributory Infringement

Contributory infringement is really a form of secondary liability for direct infringement. A person need not engage in behavior that directly infringes on another’s copyright, “… one infringes contributorily by intentionally inducing or encouraging direct infringement, (see Gershwin Pub. Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (CA2 1971), and infringes vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it,” (see Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F.2d 304, 307 (CA2 1963)). Although “[t]he Copyright Act does not expressly render anyone liable for infringement committed by another, these doctrines of secondary liability emerged from common law principles and are well established in the law… .” (see Sony Corp. v. Universal City Studios, 464 U.S., at 434, 486).

The Sony case resolved one of the early disputes raised by the introduction of a disruptive technology that posed a challenge to an entrenched system and addressed the issues of contributory infringement.


Case Study

Sony Corporation Of America v. Universal City Studios, Inc.

Supreme Court Of The United States, 464 U.S. 417 (1984)

Procedural Posture

Petitioners appealed a judgment of the United States Court of Appeals for the Ninth Circuit holding petitioners liable for contributory infringement in respondents’ suit against petitioners for copyright infringement in violation of the Copyright Act, 17 U.S.C.S. § 101 et seq.


Petitioners manufactured and sold home video tape recorders. Respondents owned the copyrights to television programs broadcast on public airwaves. Respondents sued petitioners for copyright infringement, alleging that because consumers used petitioners’ recorders to record respondents’ copyrighted works, petitioners were liable for the copyright infringement allegedly committed by those consumers in violation of the Copyright Act, 17 U.S.C.S. § 101 et seq. The district court held in favor of petitioners. The appellate court reversed. The U.S. Supreme Court held that petitioners demonstrated a significant likelihood that substantial numbers of copyright holders that licensed works for broadcast on free television would not object to having such broadcasts recorded for later viewing by private viewers. The recorders were therefore capable of substantial non-infringing uses and respondents’ sale of the recorders to the general public did not constitute copyright infringement.


Sale of home video tape recorders to the general public did not constitute contributory infringement of copyrights on television programs since there was a significant likelihood that substantial numbers of copyright holders who license their works for broadcast on free television would not object to having their broadcasts time-shifted by private viewers and the plaintiff copyright holders did not demonstrate that time-shifting would cause any likelihood of non-minimal harm to the potential market for, or the value of, their copyrighted works.


The judgment in favor of respondents was reversed where petitioners, as manufacturers of video recorders, did not infringe copyrights.

Vicarious Infringement

Vicarious infringement is another form of secondary liability for direct infringement. A party “… is vicariously liable for the actions of a primary infringer where the defendant (1) has the right and ability to control the infringer’s conduct, and (2) receives a direct financial benefit from the infringement.” (see Fonovisa, Inc. v. Cherry Auction, Inc.; Richard Pilegard, Et Al, 76 F.3d 259 (1996)).

Shapiro is a landmark case on vicarious liability. The court there was faced with a copyright infringement suit against the owner of a chain of department stores where a concessionaire was selling counterfeit recordings.


Case Study

Shapiro, Bernstein & Co., Inc., Et Al. v. H. L. Green Company, Inc.

United States Court Of Appeals For The Second Circuit, 316 F.2D 304 (1963)

Procedural Posture

Plaintiffs challenged a district court’s dismissal of their claims against defendant, a record seller accused of copyright infringement.


Plaintiffs were the copyright proprietors of several musical compositions. Defendant was a company with a record department in each of its stores. Third party defendant was a record manufacturer and dealer who sold records in defendant’s stores. Plaintiffs sued third party defendant for manufacturing knock off records, which were copies of plaintiffs’ records, and selling them without a license. Plaintiffs prevailed on their claims against third party defendant but their suit against defendant was dismissed. The appellate court held defendant liable for illegal sales, even in the absence of intent to infringe, on the basis that knowledge was imputed to defendant. The court further stated that defendant’s liability would stem from a finding that third party defendant was also liable for unlawful sales. The case was reversed and remanded.


The court granted plaintiffs’ claim for relief from the district court’s dismissal of their claims against defendant, a record seller accused of copyright infringement, and the case was remanded for further proceedings on the issue of illegal sales.

Inducing Infringement

Inducement arises when a person persuades or influences someone to act. Grokster developed a second generation peer-to-peer file sharing software that allowed users to share digital music, and other types of digital files, knowingly providing the means for users to engage in infringing behavior. The Court found that Grokster facilitated copyright infringement. This case addresses an issue raised by the rise of new and different ways to infringe on copyrights.


Case Study

Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd.

Supreme Court Of The United States, 545 U.S. 913 (2005)

Procedural Posture

Petitioner copyright holders sued respondent software distributors, alleging that the distributors were liable for copyright infringement because the software of the distributors was intended to allow users to infringe copyrighted works. Upon the grant of a writ of certiorari, the holders appealed the judgment of the United States Court of Appeals for the Ninth Circuit which affirmed summary judgment in favor of the distributors.


Two companies that distributed free software, which allowed computer users to share electronic files through peer-to-peer networks (that is, directly with each other, rather than through central servers), were sued by a group of copyright holders–who (1) alleged that the distributors had knowingly and intentionally distributed their software to enable users to infringe copyrighted works in violation of the Copyright Act (17 U.S.C.S. §§ 101 et seq.), and (2) sought damages and an injunction–where, although the distributors’ software could be used to share any type of digital file, users of the software had mostly used it for unauthorized sharing of copyrighted music and video files.

Discovery revealed that (1) billions of files were shared across peer-to-peer networks each month; and (2) the distributors were aware that users of their software used it primarily to download copyrighted files. Moreover, the record included evidence that the distributors (1) clearly had voiced the objective that software recipients use the software to download copyrighted works; and (2) had actively encouraged infringement by, for example, promoting themselves as alternatives to another file-sharing service that had been sued by copyright holders for allegedly facilitating copyright infringement.

Although the distributors received no revenue from users of their software, the distributors generated income by selling advertising space, and then streaming the advertising to the users (so that, as the number of users increased, the value of the distributors’ advertising opportunities increased). There was no evidence that the distributors had tried to filter copyrighted material from users’ downloads or otherwise to impede the sharing of copyrighted files. ***


The distributors were aware that users employed their free software primarily to download copyrighted files, but the distributors contended that they could not be contributorily liable for the users’ infringements since the software was capable of substantial noninfringing uses such as downloading works in the public domain. The U.S. Supreme Court unanimously held, however, that the distributors could be liable for contributory infringement, regardless of the software’s lawful uses, based on evidence that the software was distributed with the principal, if not exclusive, object of promoting its use to infringe copyright. In addition to the distributors’ knowledge of extensive infringement, the distributors expressly communicated to users the ability of the software to copy works and clearly expressed their intent to target former users of a similar service which was being challenged in court for facilitating copyright infringement. Further, the distributors made no attempt to develop filtering tools or mechanisms to diminish infringing activity, and the distributors’ profit from advertisers clearly depended on high-volume use which was known to be infringing.

Under the “inducement rule” being adopted, for copyright, by the United States Supreme Court in the case at hand, one who distributed a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, going beyond mere distribution with knowledge of third-party action, was liable for the resulting acts of infringement by third parties using the device, regardless of the device’s lawful uses, as:

(1) One infringed contributorily by intentionally inducing or encouraging direct infringement–and infringed vicariously by profiting from direct infringement while declining to exercise a right to stop or limit it–for, although the Copyright Act (17 U.S.C.S. §§ 101 et seq.) did not expressly render anyone liable for infringement committed by another, these doctrines of secondary liability had emerged from common-law principles and were well established.

(2) Although Sony Corp. of America v. Universal City Studios, Inc. (1984) 464 U.S. 417 *** in which the Supreme Court had absolved a distributor of video cassette recorders (which the court had found capable of substantial noninfringing uses) from copyright liability for third parties’ use of the recorders–limited imputing culpable intent as a matter of law from the characteristics or uses of a distributed product, (a) nothing in Sony required courts to ignore evidence of intent if there was such evidence; and (b) the case had not been meant to foreclose rules of fault-based liability derived from common law.

(3) Thus, where evidence went beyond a product’s characteristics or the knowledge that the product might be put to infringing uses–and showed statements or actions, such as advertising, a directed to promoting infringement–Sony’s “staple-article rule” would not preclude liability.

(4) Because the inducement rule premised liability on purposeful, culpable expression and conduct, the rule did nothing to compromise legitimate commerce or discourage innovation having a lawful promise, for under the rule a distributor would not be subjected to liability for merely (a) knowing of infringing potential or of actual infringing uses; or (b) performing ordinary acts incident to product distribution, such as offering customers technical support or product updates.


One who distributes product, capable of lawful and unlawful use, with clearly shown object of promoting copyright infringement held liable for copyright infringement by third parties using product.


The judgment affirming the grant of summary judgment to the distributors was vacated, and the case was remanded for further proceedings.

Defenses to Infringement

The “Fair Use” and the “First Sale” doctrines are defenses to claims of copyright infringement. §107 of the Copyright Act states that the “… fair use of a copyrighted work … for purposes such as criticism, comment, news reporting, teaching, scholarship, or research …” is not copyright infringement. The determination of fair use must consider:

  1. the purpose and character of the use, including whether such use is commercial,
  2. the nature of the copyrighted work,
  3. the amount and substantiality of the portion used, and
  4. the effect of the use on the potential market for the copyrighted work.

The Campbell case evaluated whether the commercial nature of a parody of a Roy Orbison song was fatal to the application of the fair use standard.


Case Study

Campbell v. Acuff-Rose Music, Inc.

Supreme Court of the United States, 510 U.S. 569 (1994)

Procedural Posture

Petitioners, a rap music group being sued by respondent, the corporate owner of an original rock ballad, sought review of the judgment of the United States Court of Appeals for the Sixth Circuit, which reversed a grant of summary judgment in favor of petitioners after finding the commercial purpose of petitioners’ parody of respondent’s song had prevented it from being a fair use under the Copyright Act of 1976, 17 U.S.C.S. § 107.


Petitioners, a rap music group, were sued by respondent, the corporate owner of an original rock ballad, for copyright infringement. Petitioners claimed the song was a parody entitled to fair use protection under the Copyright Act of 1976, 17 U.S.C.S. § 107. The court below found the commercial purpose of petitioner’s parody had prevented it from being a fair use. That judgment was reversed on appeal because the Court found it was error for the court below to have concluded that the commercial nature of petitioners’ parody had rendered it presumptively unfair. The Court held that no such evidentiary presumption was available to address either § 107(1), the character and purpose of the use, or § 107(4), market harm, in determining whether transformative use, such as parody, was a fair one. The Court held that a parody’s commercial character, which tended to weigh against a finding of fair use, was only one element that should be weighed in a fair use enquiry. Therefore, the court below was found to have given insufficient consideration to the nature of the parody under the fair use factors as set forth in § 107 in weighing the degree of copying.


The judgment was reversed and remanded upon the Court’s finding that the court below had erred in concluding the commercial nature of petitioners’ parody had rendered it presumptively unfair. The Court held that a parody’s commercial character was only one element that should be weighed in a fair use enquiry.

The “First Sale” Doctrine also limited the rights of copyright owners. §109(a) of the Act describes an exception to the exclusive right to distribute copies of the protected work. Essentially, this doctrine limits the ability of the copyright owner to its resale, transfer, or use by a purchaser. That said, it only limits the distribution right, not any of the others, including copy, public performance, creation of derivative works, etc. In order for the doctrine to apply ownership is necessary. The doctrine does not “… extend to any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership of it.” (17 U.S.C. §109(d)).

Of course, as with many things, the advent of digital versions of various products present challenges to the existing legal regime. There are two important questions to address when considering the “sale” of a digital work.

First, is it a sale of the original work or just a transfer of a copy. In other words, digital works can be copied easily and at near-zero cost. So, if the purchaser of the physical music record, or physical book for that matter, sells or gifts their copy, they would be delivering their original, and only, owned copy. In the digital space, however, the purchaser of a music file from iTunes or an eBook from Amazon could simply make a copy of that digital file and sell that duplicate rather the original.

The second question that must be addressed relates to whether a “purchaser” of a digital work is actually taking an ownership interest when the work is sold. In the pre-digital age, the purchase of a product, e.g., a book, record, or picture, would actually mean taking possession of a physical manifestation of that product. The sale would represent a transfer of ownership from the seller to the buyer thus meeting the statutory requirement of “ownership” mentioned above. In a digital marketplace, most commercial sellers of digital content use an End User License Agreement (EULA). The use of the EULA means that the transaction grants a license to use the digital product rather than a transfer of ownership. Since the transaction is not a “sale” but the grant of a “license,” the First Sale Doctrine will not apply.

Remedies for Infringement

The Copyright Act prescribes certain remedies for infringement including injunctions and money damages.

§502 authorizes “Any court having jurisdiction of a civil action …” under the Act to “… grant temporary and final injunctions on such terms as it may deem reasonable to prevent or restrain infringement of a copyright.” A plaintiff might seek a temporary injunction in an effort to prevent the infringing behaviors and reduce the damage those behaviors might cause to the plaintiff’s office. The temporary injunction might become permanent if the plaintiff prevails.

While an infringement action is pending, §503 allows a court to take into its custody any infringing copies of the protected works, any articles that may have been used to produce the infringing copies, and any records documenting the manufacture, sale, or receipt of things involved in the alleged infringement.

Infringers are liable for “… actual damages and any additional profits of the infringer … “ or statutory damages under §504. In order to establish to “… the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” These kinds of damages may be difficult to prove so §504 provides for statutory damages “… in a sum of not less than $750 or more than $30,000 as the court considers just.” In the event that the infringement is committed willfully, the court in its discretion “… may increase the award of statutory damages to a sum of not more than $150,000.” Further, §505 authorizes the court, in its discretion, to allow “… the recovery of full costs by or against any party …” and reasonable attorney’s fees as part of the costs.

The Act also provides for criminal penalties where the infringement was committed willfully:

  • for purposes of commercial advantage or private financial gain;
  • by the reproduction or distribution, including by electronic means, during any 180–day period, of 1 or more copies or phonorecords of 1 or more copyrighted works, which have a total retail value of more than $1,000; or
  • by the distribution of a work being prepared for commercial distribution, by making it available on a computer network accessible to members of the public, if such person knew or should have known that the work was intended for commercial distribution. (17 U.S.C. §506).

Digital Issues in Copyright

The transition to a digital economy has, and will, continue to impact copyright law. There are several statutes that address these digital developments.

No Electronic Theft Act of 1997 (NET Act)

Congress, in an effort to address increasing claims of “piracy”, i.e., infringement of digital copyright protected works, amended the Copyright Act with passage of the NET Act. These amendments addressed a loophole in the criminal penalties available under the Copyright Act by amending §506 to make criminal prosecution available even where there was no “… commercial advantage or private financial gain …” shown. (17 U.S.C. §506). It is a federal crime to reproduce, distribute, or share copies of electronic copyrighted works even if the person acts without commercial purpose and/or receives no private financial gain. Prior to the NET Act, intentional infringers of digital works over the Internet did not face criminal penalties unless they enjoyed “… commercial advantage or private financial gain …” (17 U.S.C. §506). Copyright infringement by electronic means now carries a maximum penalty of three years in prison and a $250,000 fine.

Digital Millennium Copyright Act of 1998 (DMCA)

The DMCA addressed several issues of importance in the digital space. It amended the Copyright Act to bring it into conformance with two World Intellectual Property Organizations (WIPO) treaties, the Copyright Treaty and the WIPO Performances and Phonograms Treaty.

It also added Chapter 12, Copyright Protection and Management Systems to the Copyright Act. This chapter prohibits person(s) from circumventing “… a technological measure that effectively controls access to a work …” and producing and sharing “… any technology, product, service, device, component, or part thereof, that is primarily designed or produced for the purpose of circumventing a technological measure that effectively controls access to a work …” protected by the Act. The term “… to “circumvent a technological measure” means to descramble a scrambled work, to decrypt an encrypted work, or otherwise to avoid, bypass, remove, deactivate, or impair a technological measure, without the authority of the copyright owner …”

In other words, the revisions make the creation or uses of anything that allows a person to hack the Digital Rights Management (DRM) controls that limit access to digital products subject to civil and criminal penalties, even if no actual infringement occurs.

Most notable, though, is the creation of “safe harbors” for online service providers (OSP) and internet service providers (ISP). One of the great strengths of the internet is its use as a platform to share information. Of course, that strength provides nearly unlimited opportunities for infringement of copyright protected works.

Pursuant to the DMCA, a service provider is “… an entity offering the transmission, routing, or providing of connections for digital online communications, between or among points specified by a user, of material of the user’s choosing, without modification to the content of the material as sent or received…” or “… a provider of online services or network access, or the operator of facilities therefor …“ (17 U.S.C. §512(k)).

Service providers “… shall not be liable for monetary relief, or … for injunctive or other equitable relief, for infringement of copyright by reason of the provider’s transmitting, routing, or providing connections for, material through a system or network controlled or operated by or for the service provider …” (17 U.S.C. §512(a)). For example, if an OSP or ISP acts only as a conduit, meaning they do modify the user’s traffic, they are free from liability.

Service providers will also not be liable where they provide “… storage at the direction of a user of material that resides on a system or network controlled or operated by or for the service provider, if the service provider does not have actual knowledge that the material or an activity using the material on the system or network is infringing … is not aware of facts or circumstances from which infringing activity is apparent; or upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material …” Note, the service provider cannot receive a financial benefit directly related to the infringing activity. If or when a service provider is notified of claimed infringement, pursuant to the “notice and takedown” provision in the Act, the provider must respond “… expeditiously to remove, or disable access to, the material that is claimed to be infringing …” (17 U.S.C. §512(c)).


Ethical Considerations

Blackwood’s Book

Professor Blackwood has worked all summer to curate the supplementary materials for her new course, Climate Change: Hoax or Catastrophe. She has, to a large degree, relied on only two sources for her curation work. She has reproduced, and plans to use, materials that are only remotely related to the specific subject matter of her course. Also, unfortunately, she has not made a concerted effort to accurately source those materials and will likely be unable to offer attribution for most of the curated materials. What ethical issues are present in these circumstances?



  1. What is the purpose of a copyright?
  2. What are the exclusive rights of the owner of a copyright?
  3. When does a work become fixed?
  4. What is the difference between direct and contributory infringement of a copyright?
  5. Why is the DMCA important?

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
  • 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.


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.”


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)


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.


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.


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.


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?



  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.