Deck 45: Environmental Protection

Question 1

For many years Spray-Rite Service Corporation, a wholesale distributor of agricultural chemicals, sold herbicides manufactured by Monsanto. Spray-Rite was a discount operation, buying in large quantities and selling at low margins. Monsanto then announced that it would appoint distributors on a yearly basis and renew distributorships according to whether the distributor could be expected "to exploit fully" the market in its geographic area of primary responsibility. After receiving numerous complaints from other distributors about Spray-Rite's pricing policies, Monsanto refused to renew Spray-Rite's distributorship on the grounds that Spray-Rite had failed to hire trained salesmen and to promote sales to dealers adequately. Spray-Rite filed suit against Monsanto, arguing that Monsanto had terminated Spray-Rite's distributorship as a part of a conspiracy with the complaining distributors. Does the fact that Monsanto terminated Spray-Rite in response to complaints from its other distributors make the termination illegal?

Answer 1

Case summary:
SR Corp. is the wholesale distributor of agricultural chemicals selling herbicides manufactured by MN Co. SR works on a pattern wherein it buys in bulk from the manufacturer and sells the product with low profit margin. Later, MN Co. decided to renew distributorship of distributors every year and renew agreement with only those distributors that are capable of exploiting complete geographic area assigned to them. There were several complaints about SR from other distributors of MN Co. related to its pricing policies. Over these complaints, SR Corp. was given renewed distributorship mentioning reasons that it was not capable of training its sales people properly and that it failed to promote dealership to dealers adequately.
Group boycott stands for the boycott wherein two or more firms stops doing business with a particular firm unless that firm ceases doing business with the potential competitor of the firms that are part of group boycott.
Solution:
In this case, it could be said that the way MN Co. terminated distributorship of SR Corp. in response to complaints from other distributors could be considered as illegal because when a distributor persuades a manufacturer to not to deal with other or rival distributor, then this conspiracy between these two parties refusing to deal with a rival distributor is regarded as the violation of Section 1 of the Sherman Act also called as per se violation. Thus, on this basis it could be concluded that the way MN Co. terminated distributorship of SR Corp. in response to complaints from other distributors could be considered as illegal because MN Co. refused to renew distributorship of SR Corp. by responding to the complaints of other distributors objecting over SR's pricing policies.

Question 2

Hoover Color Corporation alleges that Bayer Corporation, its supplier, discriminated in favor of Bayer's larger distributors of Bayferrox by implementing a volume-based incentive discount pricing system. Under this system, the price each distributor paid for Bayferrox depended on the total amount of the product it purchased. Bayer began its system of volume-based incentive discounts when it was building a large manufacturing plant which had high fixed costs. Bayer pursued its volume-based pricing strategy in order to obtain the bulk orders necessary to make the new plant profitable. Hoover sued Bayer for price discrimination. Is Bayer's price discrimination protected by the meeting competition defense? Explain.

Answer 2

Antitrust laws: These laws are framed by the United states government to protect the customers from the unethical trade practices used by the business to generate more profits for themselves on the cost of customers.
Case summary: Company HC claimed that its supplier company BC discriminated in the favor of its large distributor B with the implementation of a pricing system. Here, the price paid by distributers depended upon the purchase volume. BC pursued this strategy to generate bulk orders.
Direct price discrimination defenses:
A seller can lawfully discriminate in terms of prices if the seller can justify the reason behind the price discrimination. If the reason of price discrimination is to reduce the production cost or transportation cost as a motive of cost saving, then that discrimination would not be considered as a violation of section 2(a). Section 2(a) prohibits price discrimination by a seller to different buyers to reduce the market competition or to create monopoly. A physical difference in the products must be presented for a justifiable price differentiation.
In this case, H sued BC for following a price discrimination strategy based on the volume of the purchase. Here, BC was building a plant which had huge fixed costs associated with it. Here, the company used the volume-based price discrimination under which, the buyers will pay different prices based on the volume of the order. Here, company BC wants to save the cost as it had a new plant under construction. The motive of the company here was to save the cost by generating the revenue based on the quantity-based pricing. Thus, as per Section 2(a), the company BC's price discrimination is not considered as a violation of law.

Question 3

Barkat U. Khan entered into an agreement with State Oil Company to lease and operate a gas station and convenience store owned by State Oil. The agreement provided that Khan would obtain the station's gasoline supply from State Oil at a price equal to a suggested retail price set by State Oil, less a margin of 3.25 cents per gallon. Under the agreement, Khan could charge any amount for gasoline sold to the station's customers, but if the price charged was higher than State Oil's suggested retail price, the excess was to be rebated to State Oil. Khan could sell gasoline for less than State Oil's suggested retail price, but any such decrease would reduce his 3.25 cents-per-gallon margin. After Khan fell behind in lease payments, a state court appointed a receiver to operate the gas station. The receiver operated the station for several months without being subject to the price restraints in Khan's agreement. This permitted the receiver to obtain an overall profit margin in excess of 3.25 cents per gallon by lowering the price of regular-grade gasoline and raising the price of premium grades. Khan sued State Oil, alleging that State Oil had agreed to price-fixing in violation of Section 1 of the Sherman Act by preventing him from raising or lowering retail gas prices. Khan claimed that his allegations state a per se violation of the Sherman Act. Did State Oil's conduct constitute a per se violation of the Sherman Act? Explain.

Answer 3

Sherman Act: It was proposed by the congress to prevent the power accumulation in big firms' hand and to preserve the market competition.
Case summary: person B was in an agreement with company SO for the gas station and convenience stored operated by SO. Person B was restricted to earn not more than 3.25 cents per gallon. B became unable to make lease payments and a receiver was appointed to operate in place of B. B sued the company for section 1 violation.
Price-fixing:
The prices of the commodities are set by the marketplace forces. There are two types of price fixing. One is the horizontal price-fixing as per which, competitors interfere in the market and control the prices. Such types of price-fixing are illegal. The second form of price fixing is the vertical price fixing. In this type of price-fixing, the manufacturers try to control the prices. Such type of price-fixing is lawful. A minimum vertical price fixing agreement between the supplier and manufacturer is illegal.
In this case, the SO company had an agreement with person B to have sell the gasoline at a price having the margin not more than 3.25 cent per gallon. Here, the company replaced person B from selling the gasoline as he was unable to make the lease payments. The replacement of B started making changes in the selling prices by reducing the price of low-quality oil and by increasing the price of high-quality oil. Here, the replacement interfered with the pricing policies provided by the manufacturer and started earning a margin above 3.25 cents per gallon. This practice would be considered as a horizontal price-fixing practice which is an Illegal attempt. Also, the replacement agreed to the terms of the company did not followed the agreement framed by the company SO with person B. Thus, it will be considered as a violation to the section 1 of Sherman act.

Question 4

Sylvania, in an attempt to increase its share of the national television sales market, adopted a franchise plan that limited the number of Sylvania franchises granted in a given area and allowed Sylvania's franchisees to sell only from specified store locations. Continental T.V., a Sylvania franchisee, became dissatisfied when Sylvania appointed one of Continental's competitors in the San Francisco area as a Sylvania franchisee and Continental was then denied permission to sell Sylvania television sets in Sacramento. Continental sued, claiming that Sylvania's location restrictions were a per se violation of Section 1 of the Sherman Act. Is Continental correct? Explain.

Question 5

Northwest Wholesale Stationers is a purchasing cooperative made up of approximately 100 office supply retailers. It acts as the primary wholesalers for its member retailers. While nonmembers also may buy supplies from Northwest, members effectively buy supplies at substantially lower prices than nonmembers. Pacific Stationery, a member of Northwest, sold office supplies at both the wholesale and retail levels. Pacific continued doing this even after Northwest amended its bylaws to prohibit members from engaging in sales at both levels. (A grandfather clause in the amendment permitted Pacific to continue its membership rights.) However, later and without explanation, Northwest's membership voted to expel Pacific from the cooperative venture. Pacific brought an antitrust suit, claiming that its expulsion amounted to a per se illegal group boycott. Has Northwest committed a per se violation of the Sherman Act?

Question 6

The Ivy League universities and MIT formed an Overlap Group that compared proposed financial aid packages for more than 10,000 common admittees. In most cases it eliminated any financial aid variances so that a family's expenses would be the same wherever a student enrolled. After a two-year investigation, the Justice Department brought antitrust charges against the Ivy League schools and MIT for illegally fixing the amounts of financial aid given to prospective students. All of the schools except MIT agreed to settle the antitrust charges by promising not to collude in the future on financial aid, tuition levels, or faculty salaries. After a trial, a federal district court found that the Overlap Agreement constituted price-fixing. Due to the nonprofit status and educational mission of the alleged conspirators, the court declined to apply per se illegality. However, faced with what it believed was a plainly anticompetitive agreement, it applied an abbreviated rule of reason and took only a "quick look" to determine whether MIT presented any plausible procompetitive defenses that justified the Overlap Agreement. It dismissed MIT's argument that the program widened the pool of applicants, increased consumer choice, and opened the doors of the nation's most elite universities to diversely gifted students of varied socioeconomic backgrounds. The district court deemed these explanations to be social welfare justifications and flatly rejected the contention that the elimination of competition may be justified by noneconomic considerations. Should the court have considered MIT's defenses under a rule of reason analysis?

Question 7

Dentsply International manufactures artificial teeth for use in dentures and other restorative appliances and sells them to dental products dealers. The dealers, in turn, supply the teeth and various other materials to dental laboratories, which fabricate dentures for sale to dentists. The relevant market is the sale of prefabricated artificial teeth in the United States. Because of advances in dental medicine, artificial tooth manufacturing is marked by a low-or no-growth potential. Dentsply has long dominated the industry consisting of 12-13 manufacturers and enjoys a 75 percent-80 percent market share on a revenue basis, 67 percent on a unit basis, and is about 15 times larger than its next closest competitor. For more than 15 years, Dentsply has operated under a policy that discouraged its dealers from adding competitors' teeth to their lines of products. Dentsply adopted "Dealer Criterion 6." It provides that in order to effectively promote Dentsply-York products, authorized dealers "may not add further tooth lines to their product offering." Did the exclusivity policy imposed on the dealers violate Section 2 of the Sherman Act?

Question 8

Numerous states commenced lawsuits against the four major tobacco companies (Majors) to recoup health care costs and reduce smoking by minors. Ultimately, the Majors and the state attorneys general executed the Multistate Settlement Agreement (Agreement). Afterwards, 20 other tobacco companies, representing 2 percent of the market, joined the settlement as Subsequent Participating Manufacturers (SPMs). The addition of the SPMs meant that nearly all of the cigarette producers in the domestic market had signed the Agreement. The Majors allegedly feared that any Non- Participating Manufacturers (NPMs), cigarette manufacturer left out of a settlement, would be free to expand market share or could enter the market with lower prices, drastically altering the Majors' future profits and their ability to increase prices to pay for the settlement, A. D. Bedell, a cigarette wholesaler, brought an antitrust lawsuit challenging sections of the Agreement allegedly designed to maintain market share and restrict entry. One measure forces SPMs to pay additional penalties into the settlement fund if they exceed their historic market share. It allegedly discourages the SPMs from underpricing the Majors to increase market share, even if they could efficiently do so. Another part of the Renegade Clause requires that if NPMs gain market share, the Majors may decrease their principal payments to the settlement fund at a rate greater than their actual loss of market share. Finally, the Agreement encouraged the states to enact a model Qualifying Statute that would impose additional taxes on NPMs. Philip Morris and the other majors argued that, even if the Agreement does violate the antitrust laws, they are immune from liability under the Noerr Doctrine, which protects petitioning activity. Is this correct? Explain.

Question 9

Blaine was licensed to operate a Meineke discount muffler shop in Hartford, Connecticut. In the franchise agreement, Meineke agreed not to license or operate another muffler shop within a three-mile area of Blaine's franchise. This dispute arose when Blaine alleged that Meineke licensed other franchises within his territory. He also claimed that Meineke wrongfully refused his request to operate another Meineke franchise in another community. Blaine sued Meineke and the other franchisees, claiming that they violated his franchise agreement and ignored his request for a new franchise in furtherance of a combination or conspiracy to monopolize the Hartford area. Did Meineke violate Section 2 of the Sherman Act?

Question 10

Roland, a substantial dealer in construction equipment, was for many years the area's exclusive distributor of International Harvester construction equipment. After buying Harvester's construction equipment division, Dresser signed a dealership agreement with Roland. The agreement was terminable at will by either party on 90 days' notice. It did not contain an exclusive dealing clause. Eight months later, Roland signed a similar agreement with Komatsu. Several months after discovering this fact, Dresser gave notice to Roland of its intention to terminate its dealership. Roland argued that Dresser's decision to terminate the dealership demonstrated the existence of an implied exclusive dealing contract in violation of Section 3 of the Clayton Act. Did Dresser and Roland have an illegal exclusive dealing contract?