CH-16 Regulating Competition-Antitrust Laws – The Legal and Regulatory Environment of Business : Exam Guide

16 Key 1. A trust is a fiduciary relationship in which the trustee holds equitable title and the beneficiaries hold legal title to the trust property. Answer: False A trust is a fiduciary relationship concerning property in which one person, known as the trustee, holds legal title to property for the benefit of another, known as the beneficiary. 2. The Department of Justice alone has the power to bring criminal proceedings in cases of violations of antitrust laws. Answer: True The antitrust laws are enforced by the federal and state governments and by private parties. The federal government's basic enforcement procedures are utilized through the Department of Justice and the Federal Trade Commission (FTC). The Department of Justice alone has the power to bring criminal proceedings, but it shares its civil enforcement powers with the FTC. 3. Private parties may bring criminal suits seeking monetary damages or injunction as a means of enforcing antitrust laws. Answer: True In addition to governmental enforcers, private parties may bring civil suits seeking monetary damages or injunction as a means of enforcing the antitrust laws. 4. An express agreement is a must to create a contract in restraint of trade. Answer: False An express agreement is not required to create a contract in restraint of trade. Such contracts may be implied. 5. The Sherman Act regulates monopolies after they are formed, but does not regulate mere attempts to monopolize. Answer: False Section 2 of the Sherman Act regulates monopoly and the attempts to monopolize any part of interstate or foreign commerce. 6. An express agreement is not required to create a contract in restraint of trade. Answer: True An express agreement is not required to create a contract in restraint of trade. 7. Mere possession of monopoly power is not a violation of the Sherman Act. Answer: True Proof of monopoly power alone is not enough. Some monopolies are lawful. If monopoly power is "thrust upon" a firm or if it exists because of a patent or franchise, there is no violation of Section 2 if the firm does not engage in conduct that has the effect or purpose of protecting, enforcing, or extending the monopoly power. 8. The test of reasonableness asks whether challenged contracts or acts are unreasonably restrictive of competitive conditions. Answer: True The test of reasonableness asks whether challenged contracts or acts are unreasonably restrictive of competitive conditions. 9. If an action is determined to be illegal per se, the courts are not required to apply the rule of reason to analyze the case further. Answer: True For agreements or practices that are so plainly anticompetitive and so lacking in any redeeming values that they are conclusively presumed to be illegal without further examination under the rule of reason. These agreements have such a pernicious effect on competition that elaborate inquiry as to the precise harm they may cause or a business excuse for them is unnecessary. They are said to be illegal per se. It is not necessary to examine them to see if they are reasonable. They are conclusively presumed to be unreasonable. 10. Crimes under the Sherman Act are felonies. Answer: True Crimes under the Sherman Act are felonies. 11. Defendants often use a plea of nolo contendere in civil actions to avoid the use of evidence from the trial being used in the criminal case. Answer: False Nolo contendere is an automatic proof deriving from the criminal case which can be avoided if the defendant enters a plea of nolo contendere (no contest) in the criminal case. Because this plea technically is interpreted as avoiding a conviction, the civil plaintiff is left with the burden of proving the antitrust violation. 12. The normal activities of labor unions are exempt from the Sherman Act. Answer: True Certain businesses may be exempt from the Sherman Act because of a statute or as the result of a judicial decision. In addition, normal activities of labor unions are exempt. 13. Horizontal price fixing occurs when manufacturers attempt to set the ultimate retail price for their products. Answer: False Horizontal price fixing is an agreement between competitors to fix prices. The term price fixing means more than setting a price. The price fixing covered by the Sherman Act is that which threatens free competition. 14. If the prices fixed are fair or reasonable, it is not considered to be price fixing. Answer: False It is no defense to a charge of price fixing that the prices fixed are fair or reasonable. It also is no defense that price fixing is engaged in by small competitors to allow them to compete with larger competitors. 15. According to the per se rule, price fixing is illegal only when the parties have control of the market. Answer: False The per se rule makes price fixing illegal whether the parties to it have control of the market or not and whether or not they are trying to raise or lower the market price. It is just as illegal to fix a low price as it is to fix a high price. 16. The per se rule makes price fixing illegal when it results in higher prices but doesn't apply to agreements to ensure lower prices. Answer: False The per se rule makes price fixing illegal whether the parties to it have control of the market or not and whether or not they are trying to raise or lower the market price. It is just as illegal to fix a low price as it is to fix a high price. 17. Agreements between competitors relating to the price to be charged for a product or service are in violation of the Sherman Act if those agreements threaten free competition. Answer: True For example, if partners in a firm set the price of their goods or service, they have engaged in a form of price fixing but not the type envisioned by the Sherman Act. The price fixing covered by the Sherman Act is that which threatens free competition. 18. Under what is commonly referred to as the Colgate doctrine, the Supreme Court recognizes that independent action by a manufacturer is a per se violation of the Sherman Act. Answer: False Under what is commonly referred to as the Colgate doctrine, the Supreme Court recognizes that such independent action by a manufacturer is not a per se violation of the Sherman Act. 19. Resale price maintenance is legal only if there is no coercion or pressure other than the announced policy and its implementation. Answer: True Resale price maintenance is legal only if there is no coercion or pressure other than the announced policy and its implementation. 20. A manufacturer announcing its prices and refusing to deal with those who fail to comply is a method of legally controlling the retail price. Answer: True The primary method of legally controlling the retail price is for a manufacturer simply to announce its prices and refuse to deal with those who fail to comply. 21. Vertical agreements involving pricing (high and low) and territorial arrangements within channels of distribution are analyzed under the rule of reason. Answer: True Vertical agreements involving pricing (high and low) and territorial arrangements within channels of distribution are analyzed under the rule of reason. 22. A vertical territorial agreement is one between a manufacturer and a dealer or distributor. Answer: True A vertical territorial agreement is one between a manufacturer and a dealer or distributor. 23. Concerted activities are illegal per se. Answer: False Competitors sometimes attempt to share some activities or join together in the performance of a function. These are known as concerted activities. A league, acting on behalf of all teams, would be free from antitrust laws since it would not be acting in concert with others. 24. Violations of the original Clayton Act were crimes, and the act contained sanctions for forfeiture of property. Answer: False Violations of the original Clayton Act were not crimes, and the act contained no sanction for forfeiture of property. 25. The Robinson-Patman amendment extends only to transactions in interstate commerce. Answer: True The Robinson-Patman amendment extends only to transactions in interstate commerce; it does not extend to transactions that affect only intrastate commerce. 26. In full-line forcing, the buyer is forced to purchase only one product of the line. Answer: False A common form of tying arrangement is known as full-line forcing. In full-line forcing, the seller compels the buyer or lessee to take a complete product line from the seller. Under these arrangements, the buyer cannot purchase only one product of the line. 27. The Federal Trade Commission is an independent administrative agency charged with keeping competition free and fair through the enforcement of the Sherman Act. Answer: False The Federal Trade Commission (FTC) enforces the Clayton Act. 28. The FTC prevents wrongful actions by the use of cease and desist orders. Answer: True The primary function of the FTC is to prevent illegal business practices rather than punish violations. It prevents wrongful actions by the use of cease and desist orders. 29. The Federal Trade Commission Act was written without a specific definition of what constituted "unfair methods of competition" to allow the FTC to determine whether it existed on a case by case basis. Answer: True The term, unfair methods of competition, was designed by Congress as a flexible concept, the exact meaning of which could evolve on a case-by-case basis. It is generally up to the FTC to determine what business conduct is "unfair." 30. The Federal Trade Commission is tasked with determining whether unfair methods of competition exist but the Commission is not empowered to issue trade rules and guides. Answer: False The FTC periodically issues trade practice rules and guides, sometimes referred to as industry guides. These rules are the FTC's informal opinion of legal requirements applicable to a particular industry's practices. 31. The person who holds legal title to trust property for the benefit of another is the: A. beneficiary. B. bailor. C. bailee D. benefactor. E. trustee. Answer: E. trustee. A trust is a fiduciary relationship concerning property in which one person, known as the trustee, holds legal title to property for the benefit of another, known as the beneficiary. 32. The purpose of the Sherman Act was to: A. legalize monopolies. B. preserve competition. C. create trusts. D. restrict competition. E. legalize trusts. Answer: B. preserve competition. The goal of the Sherman Act is competition. 33. In 1914, Congress, recognizing that the Sherman Act needed to be more specific, enacted the as an amendment to the Sherman Act. A. Clayton Act B. Fair Credit Billing Act C. Securities Act D. Truth in Lending Act E. Robinson-Patman Act Answer: A. Clayton Act In 1914 Congress, recognizing that the Sherman Act needed to be more specific, enacted the Clayton Act as an amendment to the Sherman Act and later twice amended the Clayton Act (1936, 1950) to clarify its provisions. 34. Civil enforcement powers regarding federal antitrust matters belong to: A. the FTC and the Department of Justice. B. the Treasury Department. C. the Department of Revenue and Taxation. D. the courts. E. Department of Labor Answer: A. the FTC and the Department of Justice. The Department of Justice alone has the power to bring criminal proceedings, but it shares its civil enforcement powers with the FTC. 35. Which of the following statements holds true for monopoly power? A. Mere possession of monopoly power violates Section 1 of the Sherman Act. B. Monopoly power "thrust upon" a firm violates Section 2 of the Sherman Act. C. Monopoly power which exists because of a patent or franchise violates the Clayton Act. D. If the firm engages in conduct that has the effect of extending the monopoly power, it does not violate the Sherman Act. E. Proof of monopoly power is insufficient to qualify as a violation of the Sherman Act. Answer: E. Proof of monopoly power is insufficient to qualify as a violation of the Sherman Act. Under Section 2 of the Sherman Act, it is a violation for a firm to monopolize, attempt to monopolize, or conspire to monopolize any part of interstate or foreign commerce. Proof of monopoly power alone is not enough. Some monopolies are lawful. If monopoly power is "thrust upon" a firm or if it exists because of a patent or franchise, there is no violation of Section 2 if the firm does not engage in conduct that has the effect or purpose of protecting, enforcing, or extending the monopoly power. 36. Game designers Troy and Jeff design a new computer game system, and it is manufactured and sold by their company, GameTech. The game system they devise uses new technology that they have created and far exceeds the capabilities of any current gaming systems. It is also so simple to manufacture that they can do so at a very minimal cost. When it hits the market it is so much better and cheaper than the "competition" that they all end up either in bankruptcy or simply withdrawing their products from the market. GameTech's system is now the only gaming system on the market. A. GameTech is guilty of engaging in predatory conduct. B. GameTech has a monopoly which violates the Sherman Act. C. GameTech has a monopoly which does not violate the Sherman Act but violates the Clayton Act. D. GameTech has a monopoly which does not violate either the Sherman or Clayton Act E. GameTech is guilty of variable pricing. Answer: D. GameTech has a monopoly which does not violate either the Sherman or Clayton Act Some monopolies are lawful. If monopoly power is "thrust upon" a firm or if it exists because of a patent or franchise, there is no violation of Section 2 if the firm does not engage in conduct that has the effect or purpose of protecting, enforcing, or extending the monopoly power. 37. Pricing goods at a low level to discourage market entry by competitors is called: A. congestion pricing. B. exemption pricing. C. limit pricing. D. per se pricing. E. variable pricing. Answer: C. limit pricing. Profit-maximizing pricing; limit pricing, whereby the price is limited to levels that tend to discourage entry; and the practice of price discrimination all may tend to prove monopoly power and predatory conduct. 38. For a seller's pricing to be considered predatory conduct, there must be proof that: A. the seller was selling the product at a price below the cost price. B. the prices were intended to drive competitors out of business followed by the wrongdoer recouping these initial losses. C. the prices were significantly lower than those of all competitors within the same product group. D. the buyers were unwilling to buy the product at the seller's prices, and only bought the product from a lack of choice. E. the buyer had other options in the same product line available in different price ranges. Answer: B. the prices were intended to drive competitors out of business followed by the wrongdoer recouping these initial losses. In Weyerhauser Company v. Ross-Simons Hardwood Lumber Company, the U.S. Supreme Court ruled that alleged predatory conduct associated with low prices charged by a seller or high prices paid by a buyer has to meet the same standards. There must be proof the prices were intended to drive competitors out of business followed by the wrongdoer recouping these initial losses. 39. The ________ holds that contracts or conspiracies in restraint of trade are illegal only if they constituted undue or unreasonable restraints of trade and that only unreasonable attempts to monopolize are covered by the Sherman Act. A. rule of per se illegality B. Parker v. Brown doctrine C. rule of reason D. duty-to-deal doctrine E. Ker-Frisbie doctrine Answer: C. rule of reason The rule of reason was announced in Standard Oil Co. v. United States The Supreme Court in that case held that contracts or conspiracies in restraint of trade were illegal only if they constituted undue or unreasonable restraints of trade and that only unreasonable attempts to monopolize were covered by the Sherman Act. 40. The University of Dover and Dover University are bitter cross-town rivals. They compete in everything from sports to academics. The schools, because of shrinking enrollment, make an agreement to give all incoming students free tuition for one semester before raising the existing rates the following semester. This action would be considered: A. a horizontal agreement in violation of the Sherman Act. B. a vertical agreement in violation of the Sherman Act. C. a tying agreement in violation of the Clayton Act. D. a reciprocal dealing agreement violating the Clayton Act. E. a licensing agreement violating the Clayton Act. Answer: A. a horizontal agreement in violation of the Sherman Act. These arrangements among competitors are of a horizontal nature. Courts hold that the sharing among competitors of product information, pricing policies, and territorial allocations is not going to increase competition. Indeed, the anticompetitive results of this sharing results in such arrangements being viewed as illegal per se. 41. Which of the following is true of the Sherman Act? A. Violations may be subject to criminal fines or imprisonment, but not both. B. It covers antitrust activities by corporations, but not by individuals. C. Violations of the Sherman Act may be enjoined by the courts. D. Its sanctions are only civil punishments, and not criminal punishments. E. Crimes under the Sherman Act are misdemeanors. Answer: C. Violations of the Sherman Act may be enjoined by the courts. Crimes under the Sherman Act are felonies. An individual found guilty may be fined up to $1 million and imprisoned up to 10 years. Violations may be enjoined by the courts. 42. Which of the following is true of the triple damages awarded the injured parties under the Sherman Act? A. It applies only to individuals, and not corporations or larger institutions. B. Triple-damage suits cannot impose a fine in excess of any the could be imposed in a criminal proceeding. C. It can only compensate the plaintiff for actual injury. D. Only injured members of the general public can enforce the law. E. Both federal and state governments can file a suit for triple damages. Answer: E. Both federal and state governments can file a suit for triple damages. it allows one's competitors as well as injured members of the general public to enforce the law. Legislation also allows both federal and state governments to file a suit for triple damages. 43. Which of the following types of businesses enjoys a statutory exemption from the Sherman Act? A. Insurance companies B. Pharmaceutical companies C. Educational institutions D. Software companies E. Consumer products companies Answer: A. Insurance companies Certain businesses may be exempt from the Sherman Act because of a statute or as the result of a judicial decision. Among activities and businesses for which there are statutory exemptions are insurance companies; farmers' cooperatives; shipping, milk marketing, and investment companies. 44. According to the Parker v. Brown doctrine: A. the usual and legitimate union activity that is exempt from the Sherman Act. B. concerted efforts to lobby government officials are not anticompetitive. C. the Sherman Act does not apply to state government. D. not all independent action by a manufacturer is a per se violation of the Sherman Act. E. only unreasonable attempts to monopolize were covered by the Sherman Act. Answer: C. the Sherman Act does not apply to state government. In a 1943 case known as Parker v. Brown, the Supreme Court created a state action exemption to the Sherman Act. This state action exemption, referred to as the Parker v. Brown doctrine, is based on the reasoning that the Sherman Act does not apply to state government. 45. In a 1943 case known as Parker v. Brown, the Supreme Court created a ________ exemption to the Sherman Act. A. military B. personal C. participation D. homestead E. state action Answer: D. homestead This state action exemption, referred to as the Parker v. Brown doctrine, is based on the reasoning that the Sherman Act does not apply to state government. 46. Which of the following doctrines exempts certain lobbying activities from the Sherman Act? A. Noerr-Pennington doctrine B. Quick look doctrine C. State action doctrine D. Per se illegality doctrine E. Doctrine of inherency Answer: A. Noerr-Pennington doctrine One exemption from the Sherman Act extends to concerted efforts to lobby government officials, regardless of the anticompetitive purposes of the lobbying effort. The doctrine, known as the Noerr- Pennington doctrine is based on the First Amendment. 47. Which of the following was established by the Noerr-Pennington doctrine? A. Concerted efforts to lobby government officials, regardless of the anticompetitive purposes of the lobbying effort are exempt from the provisions of the Sherman Act. B. When a state acts in its sovereign capacity, it is immune from federal antitrust scrutiny. C. Price fixing is illegal whether the parties to it have control of the market or not and whether or not they are trying to raise or lower the market price. D. Resale price maintenance is legal only if there is no coercion or pressure other than the announced policy and its implementation. E. Conduct directed at price stabilization is per se anticompetitive. A. Concerted efforts to lobby government officials, regardless of the anticompetitive purposes of the lobbying effort are exempt from the provisions of the Sherman Act. Concerted efforts to lobby government officials, regardless of the anticompetitive purposes of the lobbying effort are exempt from the provisions of the Sherman Act. 48. The president of soft drinks bottling company agreed with a competitor to stop discounts to retailers, which earned him a jail sentence. What was his crime? A. Variable pricing B. Vertical price-fixing C. Resale price maintenance D. Predatory conduct E. Horizontal price-fixing Answer: E. Horizontal price-fixing Horizontal price fixing is an agreement between competitors to fix prices. The term price fixing means more than setting a price. 49. Vertical price fixing is also called: A. resale price maintenance. B. predatory maintenance. C. linear price fixing. D. express price fixing. E. gold fixing. Answer: A. resale price maintenance. Attempts by manufacturers to control the ultimate retail price for their products is known as vertical price fixing or resale price maintenance. 50. In the mid-1970s, the Supreme Court interpreted the Sherman Act to include: A. services. B. goods. C. interstate sale of goods. D. real estate. E. stocks. Answer: A. services. In the mid-1970s, the Supreme Court held that the Sherman Act covers services, including those performed by the learned professions such as attorneys-at-law. 51. Which of the following is true of the Sherman Act? A. The Sherman Act applies only to the sale of goods. B. Price fixing in the service sector is permitted under the Sherman Act. C. Maximum-price agreements are illegal, while minimum-price agreements are not. D. The Sherman Act covers services, including those performed by the learned professions. E. An action is not considered to be price fixing if the prices fixed are fair or reasonable. Answer: D. The Sherman Act covers services, including those performed by the learned professions. In the mid-1970s, the Supreme Court held that the Sherman Act covers services, including those performed by the learned professions such as attorneys-at-law. Today, it is just as illegal to fix the price of services as it is to fix the price of goods. 52. Attempts by manufacturers to control retail prices are known as price fixing. A. transfer B. vertical C. lateral D. congestion E. rational Answer: B. vertical Attempts by manufacturers to control the ultimate retail price for their products is known as vertical price fixing or resale price maintenance. 53. The Colgate Doctrine allows: A. resale price maintenance even under coercion. B. a franchisor to require that franchisees purchase all of its equipment and inventory from them. C. the FTC to regulate unfair and deceptive acts or practices in commerce. D. natural monopolies to exist outside of Sherman Act jurisdiction. E. manufacturers to set a price and refuse to deal with those that won't comply. Answer: E. manufacturers to set a price and refuse to deal with those that won't comply. The primary method of legally controlling the retail price is for a manufacturer simply to announce its prices and refuse to deal with those who fail to comply. Under what is commonly referred to as the Colgate doctrine, the Supreme Court recognizes that such independent action by a manufacturer is not a per se violation of the Sherman Act. 54. An agreement to allocate geographical areas among competitors is called a territorial agreement. A. bilateral B. vertical C. horizontal D. competitive E. congeneric Answer: C. horizontal Territorial agreements restrain trade by allocating geographical areas among competitors. They may be either horizontal or vertical. Competing businesses may enter into a horizontal territorial agreement for the purpose of giving each an exclusive territory. 55. An agreement between a manufacturer and a dealer that assigns the dealer or distributor an exclusive territory, while the manufacturer agrees to supply only that dealer in the territory is called a territorial agreement. A. vertical B. conglomerate C. congeneric D. tying E. per se Answer: A. vertical A vertical territorial agreement is one between a manufacturer and a dealer or distributor. It assigns the dealer or distributor an exclusive territory, and the manufacturer agrees not to sell to other dealers or distributors in that territory in exchange for an agreement by the dealer that it will not operate outside the area assigned. 56. Regarding price fixing, which of the following is a correct statement? A. Ethical standards may be used to fix prices, in which case, the price fixing is not subject to the Sherman Act. B. It is legal for competitors to fix a low price if the consumer ultimately benefits. C. Attempts by manufacturers to control the ultimate sale of their product are analyzed under the per se illegality. D. The exchange of price information among creditors is a violation of the Sherman Act. E. Cooperation and cosy relationships between competitors cannot be termed illegal. Answer: D. The exchange of price information among creditors is a violation of the Sherman Act. In one case, indirect price fixing took the form of an exchange of price information. 57. Which of the following is true of the Clayton Act? A. The original Clayton Act contained no sanction for forfeiture of property. B. Organizations injured by a violation could obtain injunctive relief, but individuals could not. C. Enumerated practices have to actually injure competition to be wrongful. D. The burden of proving a violation was left to the plaintiff or victim. E. No action could be taken unless a monopolistic practice substantially affected existing competitors. Answer: A. The original Clayton Act contained no sanction for forfeiture of property. Violations of the original Clayton Act were not crimes, and the act contained no sanction for forfeiture of property. 58. The Robinson-Patman amendment gives the jurisdiction and authority to regulate quantity discounts. A. Consumers' Association B. U.S. Consumer Product Safety Commission C. Department of Commerce D. Department of Justice E. Federal Trade Commission Answer: E. Federal Trade Commission The Robinson-Patman amendment gives the Federal Trade Commission (FTC) jurisdiction and authority to regulate quantity discounts. 59. Predatory pricing was declared illegal by the: A. Robinson-Patman Act. B. Federal Trade Commission Act. C. Sherman Act. D. Wheeler-Lea amendment to the Clayton Act. E. Gramm-Rudman-Hollings Act. Answer: A. Robinson-Patman Act. The Robinson-Patman amendment to the Clayton Act makes it a crime for a seller to sell either at lower prices in one geographic area than elsewhere in the United States to eliminate competition or a competitor, or at unreasonably low prices to drive out a competitor. This statute declared predatory pricing to be illegal. 60. refers to the act of pricing below marginal cost by a company willing and able to sustain losses for a prolonged period to drive out competition. A. Transfer pricing B. Rational pricing C. Congestion pricing D. Predatory pricing E. Psychological pricing Answer: D. Predatory pricing Predatory pricing is pricing below marginal cost by a company willing and able to sustain losses for a prolonged period to drive out competition. 61. The , as permitted by the Robinson-Patman amendment refers to price differentials based on differences in the cost of manufacture, sale, or delivery of commodities. A. good-faith meeting-of-competition defense B. mobile defense C. position defense D. changing conditions defense E. cost justification defense Answer: E. cost justification defense Price differentials based on differences in the cost of manufacture, sale, or delivery of commodities are permitted (cost justification defense). 62. Which of the following statements holds true for the good-faith meeting-of-competition defense as permitted by the Robinson-Patman amendment? A. It applies to a situation when sellers may select their own customers in good-faith and not in restraint of trade. B. It applies to a situation when there could be price differentials based on differences in the cost of manufacture, sale, or delivery of commodities. C. It applies to a situation which involves the setting up barriers to market entry around a product, brand, product line, market, or market segment. D. It applies to a situation when a seller in good faith may meet the equally low price of a competitor. E. It applies to a situation when price changes may be made in response to changing conditions such as sales in good faith in discontinuance of business in the goods concerned. Answer: D. It applies to a situation when a seller in good faith may meet the equally low price of a competitor. A seller in good faith may meet the equally low price of a competitor (good-faith meeting-of- competition defense). 63. The , as permitted by the Robinson-Patman amendment, applies to a situation in which price changes may be made in response to events like actual or imminent deterioration of perishable goods and obsolescence of seasonal goods. A. good-faith meeting-of-competition defense B. mobile defense C. cost justification defense D. changing conditions defense E. position defense Answer: D. changing conditions defense Price changes may be made in response to changing conditions, such as actual or imminent deterioration of perishable goods, obsolescence of seasonal goods, distress sales under court process, or sales in good faith in discontinuance of business in the goods concerned (changing conditions defense). 64. When a product is sold only on condition that the buyer also purchases a second different product from the seller, the transaction is called a/an: A. executory contract. B. exclusive dealing contract. C. reciprocal dealing agreement. D. tying agreement. E. licensing agreement. Answer: D. tying agreement. A tying contract is one in which a product is sold or leased only on the condition that the buyer or lessee purchase a different product or service from the seller or lessor. 65. Full-line forcing is a typical form of a: A. reciprocal agreement. B. exclusive dealing contract. C. requirements contract. D. tying agreement. E. licensing agreement. Answer: D. tying agreement. A tying contract is one in which a product is sold or leased only on the condition that the buyer or lessee purchase a different product or service from the seller or lessor. A common form of tying arrangement is known as full-line forcing. 66. Joshua owns orange groves. He enters into a contract with the local food processing plant whereby he would sell oranges only to that particular food processing plant. Joshua has entered into a contract which would be termed as a(n): A. instalment contract B. exclusive dealing contract C. reciprocal dealing contract D. tying contract E. franchise contract Answer: B. exclusive dealing contract An exclusive dealing contract contains a provision that one party or the other (buyer or seller) will deal only with the other party. 67. In a , a buyer agrees to purchase all of its needs of a given contract from the seller during a certain period of time. A. franchise contract B. instalment contract C. reciprocal dealing contract D. tying contract E. requirements contract Answer: E. requirements contract In a requirements contract, a buyer agrees to purchase all of its needs of a given contract from the seller during a certain period of time. 68. One party offers to buy the other's goods but only if the second party buys other goods from the first party. This is known as a(n): A. franchise contract. B. exclusive dealing contract. C. reciprocal dealing contract. D. tying contract. E. requirements contract. Answer: C. reciprocal dealing contract. A reciprocal dealing arrangement exists when two parties face each other as both buyer and seller. One party offers to buy the other's goods but only if the second party buys other goods from the first party. 69. Mobilink Telecom Inc. deals in the manufacture of mobile handsets. Broadcom deals in the manufacturing Bluetooth personal area network hardware systems and chips. The acquisition of Mobilink Telecom Inc. by Broadcom is an example of a . A. vertical merger. B. horizontal merger. C. conglomerate merger. D. geographic market extension merger. E. freeze-out merger. Answer: B. horizontal merger. A market extension merger describes an acquisition in which the acquiring company extends its markets. This market extension may be either in new products (product extension) or in new areas (geographic extension). 70. Anheuser-Bush, an American corporation, and InBev, a Belgian corporation, finalized a multibillion- dollar merger to form the largest beer company in the world. Anheuser-Bush and InBev, prior to the merger, each sold beer in many countries around the world, including both Belgium and the United States. This merger is best described as a: A. vertical merger. B. horizontal merger. C. conglomerate merger. D. congeneric merger. E. product market extension merger. Answer: B. horizontal merger. A horizontal merger usually combines two businesses in the same field or industry. 71. A merger in which the companies neither compete nor are related as a customer or supplier is called a: A. product market extension merger. B. vertical merger. C. horizontal merger. D. conglomerate merger. E. geographic market extension merger. Answer: D. conglomerate merger. A conglomerate merger is one in which the businesses involved neither compete nor are related as customer and supplier in any given line of commerce. 72. Your school decides to expand and open a new campus in another state. Rather than acquiring land and building new buildings, the school board decides to merge with an existing school that has similar programs in the other state. The school you're merging with is a small commuter school with no dorms. 98% of its students are not only instate, but from the city the school is located in. This merger would be best described as a: A. vertical merger. B. geographic market extension merger. C. product market extension merger. D. horizontal extension merger. E. conglomerate merger. Answer: B. geographic market extension merger. A market extension merger describes an acquisition in which the acquiring company extends its markets. This market extension may be either in new products (product extension) or in new areas (geographic extension). 73. The to the Clayton Act prohibits all acquisitions in which the effect lessened competition substantially in any line of commerce in any section of the country. A. Bricker amendment B. Tyler precedent C. Wheeler-Lea amendment D. Robinson-Patman amendment E. Celler-Kefauver amendment Answer: E. Celler-Kefauver amendment The Celler-Kefauver amendment prohibited all acquisitions in which the effect lessened competition substantially in any line of commerce in any section of the country. Thus, the amendment added vertical and conglomerate mergers to the coverage of Section 7. 74. The Celler-Kefauver amendment that plugged the stock versus asset loophole in the Clayton Act applies to: A. only corporations. B. only partnerships. C. corporations and partnerships. D. corporations, partnerships and sole proprietorships. E. only sole proprietorships. Answer: D. corporations, partnerships and sole proprietorships. In 1950, Congress passed the Celler-Kefauver amendment, which substantially broadened the coverage of Section 7. First, this amendment plugged the stock-versus-assets loophole. 75. The Wheeler-Lea amendment of 1938 made unfair or deceptive acts or practices in commerce illegal under: A. the Sherman Act. B. the Noerr-Pennington doctrine. C. the Clayton Act. D. the Robinson-Patman Act. E. the Federal Trade Commission Act. Answer: E. the Federal Trade Commission Act. The original Section 5 of the Federal Trade Commission Act outlawed unfair methods of competition in commerce and directed the FTC to prevent the use of such, but it offered no definition of the specific practices that were unfair. The Wheeler-Lea amendment in 1938 added that "unfair or deceptive acts or practices in commerce" are also unlawful under Section 5. 76. What led to the enactment of the Sherman Act in 1890? Answer: During its first hundred years, the federal government's role in relation to commerce was that of promoter. The U.S. Constitution itself eliminates trade barriers among the states. In the early and mid- nineteenth century, through its sponsorship of internal improvements such as canals and roads and its support for railroads, the federal government facilitated trade and commerce. But by the end of the nineteenth century business and industrial combinations were so powerful that reformers called on government to break these monopolies and restore healthy competition. The government responded by enacting the Sherman Act in 1890. 77. What is the purpose of the Sherman Act and what does it cover? Answer: The purpose of the Sherman Act is to stop acts that restrain trade or create a monopoly in interstate commerce. Section 1 of the Act prohibits contracts, combinations, and conspiracies in restraint of trade or commerce. Section 2 prohibits monopolies or attempts to monopolize in interstate or foreign commerce. 78. What is required to prove a conspiracy to monopolize? Answer: A conspiracy to monopolize requires proof of specific intent to monopolize and at least one overt act to accomplish it; mere proof of monopoly power or that it was attainable is not required. 79. Can the existence of a monopoly be lawful? Explain why or why not. Answer: Under the Sherman Act, proof of the existence of a monopoly is not enough to establish illegality. Some monopolies are lawful. If monopoly power is thrust upon a firm or if it exists because of a patent or franchise, there is no violation as long as the firm does not engage in conduct that has the effect or purpose of protecting, enforcing or extending the monopoly power. To be illegal, a monopoly must occur due to a deliberate act. Naturally occurring monopolies are not the result of a deliberate act and will generally be legal. 80. Explain the concept of predatory conduct in trade. Answer: Predatory conduct is seeking to advance market share by injuring actual or potential competitors by means other than improved performance. It may be for the purpose of driving out competitors, for keeping them out, or for making them less effective. Pricing policies are frequently examined for proof of predatory conduct. Profit-maximizing pricing; limit pricing, whereby the price is limited to levels that tend to discourage entry; and the practice of price discrimination all may tend to prove monopoly power and predatory conduct. 81. Explain the rule of reason. Answer: The rule of reason was announced in Standard Oil Co. v. United States. The Supreme Court held that contracts or conspiracies in restraint of trade were illegal only if they constrained undue or unreasonable restraints of trade; also, only unreasonable attempts to monopolize were covered by the Sherman Act. As a result, acts that the statute prohibits may be removed from the coverage of the law by a finding that they are reasonable. The test of reasonableness asks whether challenged contracts or acts are unreasonably restrictive of competitive conditions. Unreasonableness can be based on: • The nature or character of the contracts. • Surrounding circumstances giving rise to the inference or presumption that the contracts were intended to restrain trade and enhance prices. 82. "For purposes of the rule of reason, Sherman Act violations may be divided into two categories." Explain. Answer: For purposes of the rule of reason, Sherman Act violations may be divided into two categories. The first category consists of agreements and practices that are illegal only if they impose an unreasonable restraint upon competitors. The other category consists of agreements or practices that are so plainly anticompetitive and so lacking in any redeeming values that they are conclusively presumed to be illegal without further examination under the rule of reason. These agreements have such a pernicious effect on competition that elaborate inquiry as to the precise harm they may cause or a business excuse for them is unnecessary. They are said to be illegal per se. It is not necessary to examine them to see if they are reasonable. They are conclusively presumed to be unreasonable. 83. What is per se illegality and how is it applied? Answer: Per se illegality occurs when competitors enter into agreements that harm or restrain trade or commerce. While it can occur in a vertical arrangement, it is most likely found in horizontal agreements. When an activity is illegal per se, the courts are not required to conduct a complicated or prolonged examination of the economic consequences of the activity to determine whether it is unreasonable. If it is illegal per se, proof of the activity is proof of the violation and proof that it is a restraint of trade. 84. Explain the provision of triple-damage in section 4 of the Clayton Act. Answer: The Sherman Act as amended by the Clayton Act recognizes four separate legal sanctions. The third sanction affords relief to persons, including governments, injured by another's violations of the Sherman Act. Section 4 of the Clayton Act authorizes such victims in a civil action to collect three times the damages they have suffered plus court costs and reasonable attorneys' fees. The triple-damage provisions of the antitrust laws, however, employ the remedy of damages to punish a defendant for a wrongful act in addition to compensating the plaintiff for actual injury. Today it is perhaps the most important sanction for an antitrust violation, because it allows one's competitors as well as injured members of the general public to enforce the law. Legislation also allows both federal and state governments to file a suit for triple damages. 85. "There is a significant relationship between the criminal antitrust prosecution and the civil suit for triple damages." Explain. Answer: There is a significant relationship between the criminal antitrust prosecution and the civil suit for triple damages. If the defendant in a criminal antitrust suit is convicted or pleads guilty, the plaintiff in the related triple damages suit is greatly aided. This result arises from the criminal case's prima facie evidence that an antitrust violation occurred. The cost of the investigation and preparation needed to prove the existence of an antitrust violation is usually substantial. Using the defendant's criminal conviction or guilty plea as proof of the wrong allows the civil plaintiff to concentrate on proving damages, which are then tripled by the court. This automatic proof deriving from the criminal case can be avoided if the defendant enters a plea of nolo contendere (no contest) in the criminal case. Because this plea technically is interpreted as avoiding a conviction, the civil plaintiff is left with the burden of proving the antitrust violation. 86. Name some of the businesses and activities that are exempt from the Sherman Act. Answer: There are statutory exemptions for insurance companies, farmers' cooperatives, shipping, milk marketing and investment companies. Activities required by state law are exempt as are the normal activities of labor unions and lobbying government officials under the Noerr-Pennington doctrine. 87. What is the Parker v. Brown doctrine? Answer: Parker v. Brown created the state action exemption to the Sherman Act. This exemption states that when a state acts in its sovereign capacity, it is immune from federal antitrust scrutiny. 88. What is the Noerr-Pennington doctrine? Answer: One exemption from the Sherman Act extends to concerted efforts to lobby government officials, regardless of the anticompetitive purposes of the lobbying effort. The doctrine, known as the Noerr- Pennington doctrine is based on the First Amendment. For example, Budget Rent-A Car filed suit against Hertz and National Rent-A-Car because the defendants lobbied officials at three state-owned airports to limit the number of car-rental operations. This lobbying was ruled exempt from the Sherman Act under the First Amendment right to petition government for a redress of grievances and recognition of the value of the free flow of information. 89. Differentiate between horizontal and vertical price-fixing. Answer: The philosophy expressed in the Sherman Act believes a competitive marketplace requires that prices be set by the operation of free markets. No competitor should have the economic power to set prices. The price fixing covered by the Sherman Act is that which threatens free competition. Horizontal price fixing is an agreement between competitors to fix prices. It is no defense to a charge of price fixing that the prices fixed are fair or reasonable. It also is no defense that price fixing is engaged in by small competitors to allow them to compete with larger competitors. The per se rule makes price fixing illegal whether the parties to it have control of the market or not and whether or not they are trying to raise or lower the market price. Attempts by manufacturers to control the ultimate retail price for their products is known as vertical price fixing or resale price maintenance. Such efforts result in part from the desire to maintain a high- quality product image, the assumption being that a relatively high price suggests a relatively high quality. 90. What is the Colgate doctrine? Answer: The Colgate doctrine is a recognized legal way for a manufacturer to fix prices and not violate the Sherman Act. This doctrine allows the manufacturer to announce its prices and refuse to deal with those who fail to comply. 91. The cable operators in North Bedford agreed to divide the market among themselves, with each operator assigned a specific region in the city. Discuss the relevance of this agreement with reference to the Sherman Act. Answer: Territorial agreements restrain trade by allocating geographical areas among competitors. They may be either horizontal or vertical. Competing businesses may enter into a horizontal territorial agreement for the purpose of giving each an exclusive territory. As the cable operators of North Bedford are competitors, their agreement is a horizontal territorial agreement. This agreement is illegal per se under the Sherman Act. 92. What are concerted activities? Answer: A concerted activity is one when competitors share information or work together to accomplish a goal. A joint production venture is one type of concerted activity. In 1993, Congress made these easier to operate in the National Cooperative Production Amendments Act. This Act provides protection for joint production ventures through the following provisions: they are subject to the rule of reason analysis rather than the per se illegality standard; they must notify the FTC and the Justice Department of any intent to engage in this kind of activity; and, they are not subject to the normal triple damages provision of the Sherman Act. 93. What led to the enactment of the Clayton Act? Answer: By 1914, it was obvious that the Sherman Act of 1890 had not accomplished its intended purpose. Practices that reduced competition were commonplace. In order to improve the antitrust laws, Congress in 1914 enacted the Clayton Act and the Federal Trade Commission Act. The Clayton Act is more specific than the Sherman Act in declaring certain enumerated practices in commerce illegal. These were practices that might adversely affect competition but were not themselves contracts, combinations, or conspiracies in restraint of trade; such practices did not go far enough to constitute actual monopolization or attempts to monopolize. Further, the enumerated practices did not have to actually injure competition to be wrongful; they were outlawed if their effect may substantially lessen competition or tend to create a monopoly. Thus, the burden of proving a violation was eased. The Clayton Act made it possible to attack in their incipiency many practices which, if continued, eventually could destroy competition or create a monopoly. The idea was to remedy these matters before full harm was done. 94. What necessitated the Robinson-Patman amendment to the Clayton Act? Answer: In the 1920s and early 1930s, various techniques such as large-volume purchases with quantity discounts were used by big retailers, especially chain stores, to obtain more favorable prices than those available to smaller competitors. In addition to obtaining quantity discounts, some large businesses created subsidiary corporations that received brokerage allowances as wholesalers. Another method used by big buyers to obtain price advantages was to demand and obtain larger promotional allowances than were given to smaller buyers. The prevalence of these practices led to the enactment in 1936 of the Robinson-Patman amendment to Section 2 of the Clayton Act. This statute attempted to eliminate the advantage that a large buyer could secure over a small buyer solely because of the larger buyer's quantity purchasing ability. 95. The Robinson-Patman amendment recognizes certain exceptions. What are they? Answer: The Robinson-Patman amendment recognizes certain exceptions or defenses: • Sellers may select their own customers in good-faith transactions and not in restraint of trade. • Price changes may be made in response to changing conditions, such as actual or imminent deterioration of perishable goods, obsolescence of seasonal goods, distress sales under court process, or sales in good faith in discontinuance of business in the goods concerned (changing conditions defense). • Price differentials based on differences in the cost of manufacture, sale, or delivery of commodities are permitted (cost justification defense). • A seller in good faith may meet the equally low price of a competitor (good-faith meeting-of- competition defense). 96. What is the purpose of the The Robinson-Patman amendment? The Robinson-Patman amendment attempts to ensure equality of price to all customers of a seller of commodities for resale. The law protects a single competitor who is victimized by price discrimination. It is a violation both to knowingly give and to receive the benefits of such discrimination. Therefore, the law applies to both sellers and buyers. It is just as illegal to receive the benefit of price discrimination as it is to give a lower price to one of two buyers. The Robinson- Patman amendment extends only to transactions in interstate commerce; it does not extend to transactions that affect only intrastate commerce. In addition, the law is applicable only to the sale of goods; it does not cover contracts that involve the sale of services or the sale of advertising such as television time. The Robinson-Patman amendment gives the Federal Trade Commission (FTC) jurisdiction and authority to regulate quantity discounts. It also prohibits certain hidden or indirect discriminations by sellers in favor of certain buyers. This statute declared predatory pricing to be illegal. 97. What are franchise contracts? Answer: Franchise contracts often require that the franchisee purchase all of its equipment and inventory from the franchiser as a condition of the agreement. These provisions are commonly inserted because of the value of the franchiser's trademark and the desire for quality control to protect it. The legitimate purpose is to maintain the image of the franchise and the product. Customers expect the same product from every retail operation. Such agreements, while anticompetitive, are legal because the legitimate purpose outweighs the anticompetitive aspects. However, a franchiser is not able to license its trademark in such a manner that it can coerce franchisees to give up all alternate supply sources, because such agreements are unreasonable restraints of trade. Franchise agreements are not per se violations; they are subject to the rule of reason. 98. Name and discuss the four different types of mergers. Answer: Horizontal mergers generally combine two businesses in the same field or industry. The two companies were competitors and the merger leads to a greater concentration in the industry. Market extension mergers occur when the acquiring company acts to extend its markets. It may do so either through a product extension in which it acquires a company for its new products, or through a geographic extension where it acquires a company in a location the acquiring company does not yet have a presence. The vertical merger brings together two companies in the line of commerce such as a supplier and a customer of the supplier. Conglomerate mergers unite companies that are neither competitors nor are they in any given line of commerce. 99. Why did Congress pass the Celler-Kefauver amendment? Answer: In 1950, Congress passed the Celler-Kefauver amendment, which substantially broadened the coverage of Section 7. First, this amendment plugged the stock-versus-assets loophole. After 1950, the acquisition of assets was also covered by Section 7. Second, the Celler-Kefauver amendment prohibited all acquisitions in which the effect lessened competition substantially in any line of commerce in any section of the country. Thus, the amendment added vertical and conglomerate mergers to the coverage of Section 7. 100. How does the FTC prevent illegal business practices? The primary function of the FTC is to prevent illegal business practices rather than punish violations. It prevents wrongful actions by the use of cease and desist orders. To prevent unfair competition, the FTC issues trade regulation rules that deal with business practices in an industry plus FTC guidelines on particular practices. The FTC also periodically issues trade practice rules and guides, sometimes referred to as industry guides. These rules are the FTC's informal opinion of legal requirements applicable to a particular industry's practices. Although compliance with the rules is voluntary, they provide the basis for the informal and simultaneous abandonment by industry members of practices thought to be unlawful. FTC guidelines are administrative interpretations of the statutes the commission enforces, and they provide guidance to both FTC staff and businesspeople evaluating the legality of certain practices. Guidelines deal with specific practices and may cut across industry lines. Test Bank for The Legal and Regulatory Environment of Business O. Lee Reed, Marisa Pagnattaro, Daniel Cahoy, Peter Shedd, Jere Morehead 9780073524993, 9780077437336, 9781260161793