Antitrust Law
Prof. Hwang
Final Exam / May 13, 2003

Instructions

1. You have three (3) hours to complete this exam.

2. This is an open book exam. You may use any written materials except other people’s materials or electronic sources (e.g., Lexis, Westlaw or the Internet).

3. This exam consists of 3 questions. Each question will be given equal weight.

4. Write your answers in the blue books provided to you. Use only the right hand side of the page and double-space your work, written or typed. Please write legibly.

5. Thoughtful analysis and application of doctrine are the most valuable attributes of your answers. If you believe you must make assumptions or that you need more information to answer a question, feel free to state what assumptions and additional facts are necessary and discuss how they would affect your analysis.

6. Write your exam number at the top of the exam question packet, your exam envelope and any used blue books. Do not use your name, student ID number or Social Security Number on any exam materials.

7. At the conclusion of the exam, return all exam materials to the exam envelope and submit it to the proctor. Do not seal the envelope.

Good luck

Questions 1 & 2

Background Facts

Over the last two decades, marketing of organic foods that appeal to health- and environment- conscious consumers has become increasing dominated by large chains specializing in such items. The size and brand-name appeal of the large chains have given them cost and consumer-recognition advantages with which smaller independent purveyors of organic groceries are increasingly unable to compete. In response, approximately 25 small and medium-sized organic grocery stores, operating in the metropolitan areas of California, Oregon and Washington have decided to create a cooperative association, OrganiCo.

Among other functions, OrganiCo serves as a purchasing agent for its members. In this capacity, it buys and distributes to the members more than 1,000 different food and related nonfood items, most of which are distributed under brand names owned by OrganiCo. OrganiCo negotiates with the sellers to set the per unit price that each member will pay, and payment is made directly by the member to the seller. Each member pays OrganiCo a fee for the purchasing services, which on a per unit basis, is the same for each member.

Through OrganiCo, the member stores have also created a private-label brand, called “Nature’s Way,” under which the members market a broad range of organic groceries. OrganiCo handles brand advertising and marketing of Nature’s Way products, the budget for which is shared among members according to each member’s sale in the prior year of Nature’s Way branded products. OrganiCo also sets minimum quality standards for Nature’s Way products and certifies that the products are organic. OrganiCo’s marketing efforts have proven hugely successful, and sales of Nature’s Way branded products have grown over the years to rival the private-label brands carried by the large health-food chains, and now commands 30% of the market for branded organic groceries on the west coast. Nature’s Way products are generally sold at a premium to non-organic products but at a level slightly below the organic products carried by the large health food chains.

Stores wishing to join OrganiCo must have its membership application approved by the board of directors of OrganiCo and then by an affirmative vote of 50% of OrganiCo’s members. If, however, the member whose operations are closest geographically to those of the applicant votes against the application, an affirmative vote of 75% of the members is required for approval. Other than the decision to admit a new member, OrganiCo is operated by its own management and board of directors, rather than directly by its members. All of the stock in OrganiCo is owned equally by the members.

Question 1 & 2 refer to the fact pattern on page 2

Question 1

Trey’s Market is a grocery store located in downtown Oakland. Trey has been very successful in the organic foods business and has sales greater than most of the current OrganiCo members. In order to lower its costs of purchasing wholesale organic groceries and wanting to carry Nature’s Way branded products, however, Trey seeks to become a member of OrganiCo. Trey’s application for membership is approved by the board but denied by OrganiCo’s membership.

Trey later learns that Page’s Health Foods, a founding member of OrganiCo whose store is located in South Berkeley, voted against the application, even though two-thirds of the membership voted in favor. In fact, it seems that no applicant within 5 miles of Page’s store has ever been approved as a new member of OrganiCo. Having researched the matter further, Trey learns that no new member has been approved whose store is within 10 miles of a store operated by any existing member.

Trey seeks your advice regarding any claims under the antitrust laws that he may have against Page’s, OrganiCo and/or its members. Analyze the potential claims that Trey could assert and evaluate his chances of prevailing on each.

Question 2

Reba is a recently admitted member of OrganiCo, whose store is located in Walnut Creek. Encouraged by the prospect of lower purchasing costs and ability to carry the Nature’s Way product line, Reba opens a second store in Lafayette. In order to promote her new store, Reba conducts a sale on Nature’s Way products, selling the products at prices significantly below other members’ prices and equal to non-organic private label products being carried by supermarket chains, for example, Safeway Select. Reba will make only an insignificant profit on the Nature’s Way sales but hopes that customers attracted to the sale will buy higher margin products while shopping at the new store, including pre-cooked organic meals she prepares under the brand Reba’s Phinest in the Nation.

Page (referred to in Question 1) learns of Reba’s discounting. At the next OrganiCo membership meeting, Page complains to other members, arguing that Nature’s Way products should be sold at a price similar to that of comparable organic products sold by large health food chains and, in any event, above the price of comparable non-organic products. Within a month of this meeting, OrganiCo members raise the price of Nature’s Way products to the level of organic products sold by large chain stores. Soon thereafter, Reba receives a letter from OrganiCo stating that she must stop discounting or her membership will be revoked.

Reba comes to you for advice, wanting to know if OrganiCo’s threat is enforceable and whether there are possible claims she could raise against OrganiCo or its members in the event that the threat is carried out or as leverage to persuade OrganiCo from carrying out the threat. Advise Reba of her options.

Question 3

You are general counsel of Wilson Chemicals, a manufacturer of pesticides, herbicides and other agricultural chemicals. Wilson has a patent on a pesticide for controlling a pest known as the Icculus Fly. The Icculus Fly is lethal to a variety of fruit trees and is impervious to all other pesticides that have been tested. However, the Icculus Fly cannot reproduce and hence proliferate in orchards unless it has abundant access to a plant known as Carini’s Vine, a common plant near most orchards on whose roots the Icculus Fly larvae feed.

Wilson has recently learned that Forbin Enterprises, an agricultural chemical company based in Switzerland, is developing an herbicide that kills Carini’s Vine and expects to receive a patent on it in three years. Wilson’s CEO is afraid that, once this herbicide becomes available, the demand for Wilson’s pesticide will drop significantly. She wants your opinion on whether Wilson could lawfully engage in the following strategies to deal with this competitive threat:

Advise the CEO of the legality of these options.

End of Exam