Antitrust: Even the name is ominous. And the closer you look at
it, the more vaguely menacing it seems. For example, if you violate
the antitrust laws, you might rack up millions of dollars in fines,
and you might even go to jail.
Maybe worst of all, it seems as if you might actually need to
understand economics to avoid violating the antitrust laws.
But, it isn't that bad. Antitrust law –
or competition law as it is known elsewhere in the
world – is really just about ensuring that our
largely free-market economy works for consumers. The goal is not to
turn you into an antitrust lawyer, or even a lawyer (and certainly
not an economist). The goal is to help you keep your eyes peeled
for potential antitrust issues so that if a competition issue
arises you can call someone who can help.
A little background
The main idea in antitrust is to prevent firms or groups of
firms from obtaining the power to control a market through means
other than competition on the merits. A big part of the focus of
the antitrust laws is on what the firm or firms have done to get
control over the market.
It isn't a violation of the antitrust laws to have monopoly
power, which basically means the power to control a market. After
all, the firm that designs a better product and patents it might
end up in control of its market. Also, it isn't a violation
if a firm with monopoly power charges what the market will bear.
Instead, the focus is on how the firm obtained its monopoly
power.
There are a number of antitrust laws that are more or less specific
to the types of conduct to which they apply. For nonprofit
purposes, the only law you really need to think about is the
Sherman Antitrust Act, sections One and Two.
You can largely even cut that in half: In the association world,
the principal antitrust law to worry about is Section One of the
Sherman Act, which applies to illegal agreements. Section Two of
the Sherman Act, relating to monopolization, pops up only
occasionally in the context of standard-setting and patents.
Section One of the Sherman Antitrust Act is surprisingly brief.
Putting aside a sentence relating to penalties (described more in a
bit), the entire provision is: "Every contract, combination in
the form of trust or otherwise, or conspiracy, in restraint of
trade or commerce among the several states, or with foreign
nations, is declared to be illegal." The provision has three
parts: (1) "Every contract, combination in the form of trust
or otherwise, or conspiracy..."; (2) "in restraint of
trade or commerce" and (3) "among the several states, or
with foreign nations." The first part really just means
agreements. The last bit relates to the power of the federal
government to regulate interstate commerce.
The first question you should always ask when thinking about
Section One is whether there is an agreement. If there is an
agreement, the next question is whether that agreement is likely to
make consumers better off, say by lowering prices, or whether
instead the agreement is likely to make them worse off.
Agreements. Probably the main reason that
antitrust law focuses on associations is that associations are
groups of firms or professionals who are often competitors. Very
often that means that the things that associations do are seen as
being a result of agreements among competitors, and therefore
subject to Section One of the Sherman Act.
Also, association meetings, online listserves and chat rooms, and
other association-facilitated gatherings provide a range of useful
forums for rivals to meet and talk about matters that they perhaps
should not discuss. For the rest of this article, assume that
everything an association does is a result of an agreement among
its members. The courts are a little more forgiving than that, but
it gets complicated.
Restraints of Trade. The more difficult question
is whether the association or its members are doing something that
is in restraint of trade. Generally, antitrust law looks at
agreements in one of two ways. The first way is for those
agreements that, on their face, are so likely to be
anti-competitive that more evidence is not likely to change that
conclusion; there is per se illegality. This means that a plaintiff
only needs to show that the parties made this sort of an
agreement.
The second way antitrust law looks at agreements relates to
agreements that are, on their face, more ambiguous. In that case,
even after an agreement is proven, the plaintiff will need to prove
that the effect of the agreement is to reduce output or raise
prices under the "rule of reason."
The range of agreements that are considered illegal per se has
declined over the years, as the courts have determined that it is
important to understand the effects of the agreements on
competition before condemning them. There are still a number of
agreements that are per se illegal, however, and these violations
can be so serious that it is possible that someone who engages in
this sort of conduct can end up in prison. Per se illegal
agreements include price fixing agreements, agreements to allocate
markets (where firms agree to stay out of each other's
markets so they don't compete), bid rigging and some group
boycotts. Even without time in jail, the stakes can be high.
Penalties for these violations include fines of up to $1 million
for individuals and $100 million for organizations.
The rule of reason is different. It is a relatively detailed look
at the restraint to see if it promotes competition or suppresses
competition. In trying to figure out the answer to that question,
courts will look at the agreement itself; the market power of the
agreeing firms, where market power is usually derived from their
market shares; and any potential efficiency justifications for the
agreement.
In the context of an association, efficiency justifications improve
the operation of the association or help its members better serve
their customers or clients.
Specifics. There are a number of ways that
associations and their members can get on the wrong side of the
antitrust laws, but most of the violations fit into one of two
categories: (1) programs or facilities by associations that are set
up in a way that allows members to violate the antitrust laws, and
(2) rules or decisions by associations that unfairly hinder the
ability of certain firms or types of firms to compete against
members of the association.
Facilities or procedures that allow members to violate the
antitrust laws. Holding meetings and other activities that
bring members together are key functions of virtually all
associations. Of course, those members are usually in
competition with one another and, as such, there is frequently a
concern about what the members say to each other when they meet. To
avoid association meetings being used as part of a price-fixing
conspiracy, a few rules need to be followed: (1) agendas and
presentations should be prepared and distributed in advance of
meetings; (2) care should be taken to keep to these materials at
the meeting unless there is a good reason to depart; and (3)
minutes of the meetings should be prepared that concisely reflect
the discussions.
Association meetings should not be used to talk about prices or
organizational plans regarding output decisions. Other
topics to avoid include whether members should do business with
certain other firms and complaints about the business practices of
other firms. And it can be very helpful to have antitrust counsel
present at association meetings. All of these rules apply to both
discussions in person and via the Internet using discussion board
facilities run or facilitated by the association.
Very often associations will collect data from members and use that
data to create reports that are sent to the membership. These
programs are often useful in advancing the best practices of the
members of the association. But, done incorrectly, they can also
make it easier for members to fix prices. Generally speaking,
association statistical reporting programs should not allow members
to derive information (especially pricing or output information)
about specific competitors from the reports.
The best way to avoid that is to ensure that the reports are based
on data that is relatively old rather than current or
forward-looking. The reports should be aggregated rather than
identifying the data of individual firms, with a large enough group
of responders that individual firm data cannot be easily
discovered. Finally, the reports should be justifiable as a program
that can help members better serve their customers.
Rules that unfairly limit the ability of some firms to
compete. One of the benefits of associations is that they
often provide services to members that are so useful that they
might be necessary for the firms in the industry or profession to
compete. When that is true, it can be an antitrust violation to
restrict the availability of those services to members if it is
difficult for some companies or professionals to become
members.
This is a complicated area. Any decision by an association to limit
membership, expel a member or limit the availability of an
important service will be closely looked at by the courts. These
situations work better for associations when those decisions are
objective and consistently applied, and are backed by a legitimate
reason for the decision based on the pro-competitive needs of the
association.
Finally, expulsion decisions that harm competitors to members of an
association are more likely to be given a pass under the antitrust
laws if decisions are made after due process is given to the
expelled party. Another area where associations sometimes stumble
is when they have codes of ethics, enforceable standards, or other
rules that limit the ability of members to compete. The most common
ways in which these rules might lead to antitrust problems are when
they limit the pricing or output decisions that members can take.
One relatively common example of that sort of a rule is a rule that
limits the ability of members to use truthful advertising regarding
prices or discounts.
One final point to mention is the importance of an antitrust
compliance program. Not only are these programs helpful to keep
associations out of trouble, the absence of a policy can be used as
evidence of wrongdoing when there are problems and might increase
penalties for any violations that occur.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.