Section 1 of the Sherman Act is the source of most antitrust litigation. It prohibits "every contract, combination ...or conspiracy" which restrains trade. Because §1 refers to contracts, combinations or conspiracies, it necessarily follows that in order for a violation of the act to occur there must be an agreement between two or more parties which are legally capable of conspiring with each other. For example, a parent company and its wholly owned subsidiary cannot conspire.

An agreement must still be found to exist between the two or more entities. The agreement does not need to be formal and, in fact, illegal restraints are usually found where the existence of an agreement was implied solely from the conduct of the businesses. Arrangements between competitors are those most likely to be found illegal.

If an agreement is found between two or more conspirators, the arrangement must unreasonably "restrain trade." The word "restraint" has a special legal definition. Because just about any type of business arrangement results in a restraint of trade, the law protects ordinary and necessary business activities which only have a restraining effect as an unintended consequence. Such restraints are a mere side effect of business practices that are necessary to the operation of a market economy. Therefore the Court has developed a rationale for evaluating whether a restraint should be prohibited. This rationale is known as the Rule of Reason.

Under Rule of Reason analysis a court considers whether an agreement creates or enhances market power. Market power is defined as the ability to exert control over price and/or output or to exclude competition. If market power exists, the court must weigh the pro-competitive benefits of the restraint against the anti-competitive effects. Also the court will consider whether reliance should have been placed upon less restrictive alternatives to achieve similar ends. The court will consider the parties' purposes, and the effect of implementation of the agreement.

For some types of activities the anti-competitive impact will obviously outweigh any benefits. Some activities are in fact inherently anticompetitive. These activities are not evaluated under the Rule of Reason, but instead are termed "per se illegal".

Certain types of anticompetitive activities are determined to be so fundamentally inimical to a market economy that a mere finding that a defendant engaged in these activities is sufficient to prove a violation. These types of activities are per se illegal. Price-fixing, division of markets, group boycotts, and tying arrangements are the per se illegal activities. These types of activities are illegal regardless of presence of market power.

Price-fixing, in its purest form, is exemplified by the backroom deal in which a group of competitors agree to charge a high price in order to make extra profit. However it is also illegal for a group of competitors to agree that no member will charge more than a certain price. The U.S. Supreme Court found that an Arizona Medical Society had engage din illegal price-fixing when its member doctors established such a price cap. [Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982)] This ruling complicates matters for PHDs developing organizations with local doctors in order to compete for maanged care contracts. A large quantity of literature exists elsewhere on this subject because it affects non-public hospitals in the same manner as PHDs. In a nutshell, PHDs may freely develop such arrangements so long as there is significant integration among the parties to the venture, the providers do not control price setting, and the new organization offers a product which is different from the product offered by the individual parties rpevious to the agreement.

A hypothetical example of a division of markets is two hospitals entering an agreement whereby one hospital will provide OB services and the other hospital will provide emergency services. Most health care providers would consider this to be a good thing because it reduces duplication and waste. However, it is banned under antitrust law, absent some special protection, because it creates an artificial monopoly which allows each hospital to control prices.

An illegal group boycott involves a group of competitors who agree not to buy from a vendor or sell to a purchaser. The result of the boycott must be to cut off the boycotted firm's ability to obtain access to the market. Group boycotts are frequently alleged in hospital privileging disputes. The physician who has been excluded from the hospital will allege that the other physicians on the medical staff conspired to bar access to the hospital. Hospitals and medical staffs can obtain an immunity from suits arising from credentialling and peer review activities through the Health Care Quality Improvement Act, which is discussed below.

A tying arrangement occurs when a party will sell one product (the "tying" product) only if the buyer purchases a second product (the "tied" product). The two products must be distinct. Antitrust liability arises if the defendant controls a large share of the market for the tying product. This is because purchasers will have limited alternatives for obtaining the tying product and will be forced to also purchase the tied product. Without the illegal tie-in, purchasers might prefer to obtain the tied product from other sources.

In the health care arena illegal tie-ins are most frequently alleged where there is an exclusive contract between a hospital and a physician group. However courts have consistently refused to review such arrangements under the per se rule.

Practical Consideration

As a practical matter it is much simpler for the plaintiff if the offense can be characterized as a per se illegal activity, rather than being evaluated under rule of reason analysis. If the activity is categorized as per se illegal, the plaintiff almost always wins, while analysis under the rule of reason usually leads to a verdict in favor of the defendant.

Further, as discussed later in this topic, PHDs are authorized to engage in many otherwise per se illegal activities, if they are collaborating with other PHDs. For example, the Interlocal Cooperation Act applicable to rural PHDs specifically allows PHDs to agree to allocate markets for health care services.

Strictly speaking, monopolies, mergers and joint ventures are three separate categories of potential antitrust violations. Section 2 of the Sherman Act prohibits monopolization or attempts to monopolize. In conjunction with § 1 of the Sherman Act, § 7 of the Clayton Act [15 U.S.C. §18], which prohibits mergers and acquisitions which "substantially lessen" competition or "tend to create a monopoly;" governs the federal regulation in these transactions. The Sherman and Clayton Acts also govern the evaluation of joint ventures.

Despite the disparate bases for statutory governance, the analytical tools are largely the same for evaluating the legality of the three activities. The similarity arises because all three prohibitions seek to bar the use of market power in an anti-competitive and anti-consumer manner. As noted above, market power is often defined as the ability to control price and output or to exclude competition. Thus, monopolization is illegal when a firm abuses its market power while attempting to attain, attaining or improperly maintaining monopoly status. A merger will be challenged because it will give the merged firm substantial market power. A joint venture is evaluated as a partial merger.

The market power analysis begins by defining the relevant product market and geographic market, and the alleged monopoly, merged firm or joint venture's share of each market. The product market includes the product sold by the entity plus any sufficiently close substitutes for that product. A second product will be considered a sufficiently close substitute if, given a small but significant price increase on the primary product, a significant number of purchasers will switch to the second product.

The relevant geographic market is calculated in the same manner as the product market. That is, if a small but significant price increase on the primary product will cause a significant number of consumers to travel to another geographic area to obtain the product, that geographic area should be considered part of the relevant geographic market.

Once the appropriate product and geographic markets are defined, the business must be found to control a substantial share of each market (although there is no definite rule, probably at least two-thirds) in order to be called a monopoly. However, even if a monopoly exists, the business must engage in illegal monopoly activity in order to violate §2. Significantly, it is not illegal for a business to be a monopoly, nor is it illegal for that business to make monopoly profits. In order to violate §2, the monopolist or would-be monopolist must use its market power in an effort to bar potential entrants to the market or to eliminate existing rivals.

A merger or joint venture will be challenged with a lesser share of the market. The enforcement agency or private plaintiff uses the product market and geographic market analysis to determine the degree of concentration in each market before and after the merger or joint venture. A highly concentrated market, plus evidence demonstrated by some other economic indicators, may lead to a challenge of the merger or joint venture.

Practical Consideration

Merger, as it applies in the business world, is probably not applicable to a change of ownership that directly involves a PHD. Current state law would not permit a private company to purchase a PHD. If two PHDs decided to combine, their actions would be covered by the state law governing consolidation of local government units. A PHD might purchase the assets of a private company and provide services formerly supplied by that company, however it is unlikely that this would be considered a merger subject to antitrust regulation. Thus, participation in a merger is only likely to be an indirect result of a PHD's participation in a joint venture arrangement.

The state Consumer Protection Act covers the same activities as the federal laws: restraints of trade; monopolies; mergers; and unfair competition. RCW 19.86.920 states the purpose of the act. In part it reads:

Further, RCW 19.86.920 states that the state laws are to be construed in harmony with the federal antitrust statutes.