Practical Tips and Pitfalls to Avoid Antitrust Problems
The U.S. antitrust laws are designed to preserve and promote free competition. In a competitive marketplace, there are strong incentives for rival businesses to operate efficiently, keep prices down, and boost their product and service quality. Businesses continue to find innovative ways to achieve these goals, including through efforts that may raise antitrust concerns but are ordinarily lawful — like joint ventures, exclusive arrangements, and benchmarking exercises with competitors.
But the antitrust laws are intricate, and the line between pro-competitive and illegal conduct under these laws is highly dependent on the details. This often makes it difficult for many businesses to know whether certain practices violate antitrust laws. Moreover, even inadvertent violations can result in substantial penalties. As a result, it is essential for companies to understand the basic scope of the antitrust laws and guard against potential missteps.
As a general guide, below is a brief overview of the Sherman Antitrust Act and a discussion of some of the more common antitrust issues encountered by businesses under this law.
Unreasonable restraints: The "Per Se" Violations
Section 1 of the Sherman Act prohibits any agreement among competitors that unreasonably restrains competition. The Supreme Court uses two types of analyses to determine the lawfulness of activities under the Sherman Antitrust Act: per se and Rule of Reason. Per se agreements are so likely to harm competition and to have no significant pro-competitive effect that they are presumed to be illegal without consideration of any evidence that the agreement might have a legitimate business purpose. Types of agreements held to be per se illegal include agreements among competitors to fix prices or output, rig bids, or share or divide markets by allocating customers, suppliers, or territories.
Per se agreements are the most likely to result in substantial antitrust penalties. To avoid per se violations, businesses should adhere to the following basic guidelines:
- Do not agree on, and avoid even discussing, commercially sensitive topics with competitors, such as prices, pricing procedures, costs, customer lists, discounts, profits, credit terms, or production levels.
- Do not agree with any competitors to refuse to sell to certain customers, serve only some areas, or buy from only certain suppliers.
- Note that an "agreement" is the essence of a Section 1 violation. But an agreement does not have to be written or specifically stated. It can also be oral or inferred from conduct, surrounding circumstances and documents such as notes, minutes and memoranda.
- Do not notify other companies prior to reducing prices, establish or agree on uniform price increases or discounts, or agree to maintain floor prices.
- For all contracts that require competitive bidding, limit the number of people in your company who are familiar with the bid terms. The fewer people in your company who know the bid terms, the less likely sensitive information will be disclosed to a competitor.
The Rule of Reason: Joint Ventures, Information Exchanges, and Vertical Restraints
All other agreements under Section 1 of the Sherman Antitrust Act are evaluated under the "Rule of Reason," involving a factual inquiry into an agreement's overall competitive effect. Examples of agreements that are typically evaluated under the Rule of Reason analysis are joint ventures and information exchanges.
One of the most perplexing areas of antitrust law – for practitioners and non-lawyers alike – is joint ventures. Even the term "joint venture" lacks a precise meaning under the antitrust laws. A joint venture typically refers to any form of collaboration, short of a formal merger, by which companies agree to work together to engage in some economic activity or to pursue a common goal. In today's marketplace, competitors often look to pool their resources to expand into foreign markets, produce new brands or innovative products, lower their production costs, and share legal risks.
Federal antitrust agencies have acknowledged that joint ventures are often pro-competitive, allowing companies to combine their expertise to make better use of their assets. Where companies lack the resources to handle projects on their own, joint ventures can increase competition by allowing small and regional firms to compete with larger companies. On the other hand, joint ventures can also create the opportunity for collusion, enhance market power, or eliminate potential competition in the marketplace. Below are a few tips for keeping joint ventures lawful:
- Evaluate the potential anticompetitive harms of the agreement. Does it reduce the parties' ability or incentive to compete independently, create barriers for other competitors to compete, or increase the parties' ability to raise prices or reduce production, service quality, or technical innovation?
- Be prepared to provide a business justification for any joint venture. Does the agreement allow the parties to serve more customers, bring services to customers faster or cheaper, or combine assets or use them more efficiently?
- Avoid oral or informal joint ventures. Consider using letters of intent to define the scope of the joint venture, as well as each party's specific responsibilities.
- Consider the term of the proposed joint venture. The shorter the duration, the more likely the parties will compete against each other in the future.
Information exchange agreements are also judged under the Rule of Reason standard because these agreements have the potential to assist companies in reducing operational costs, making informed purchasing decisions, and competing more effectively. But any agreement or understanding among competitors to disclose or exchange certain data or information can still present antitrust issues, depending on the specific data exchanged and the method of disclosure. Some guidance on keeping information exchanges lawful include:
- Parties should never enter into an agreement based on the information exchanged. This could constitute a per se violation of Section 1 of the Sherman Act.
- The exchange of data and information that is publicly available is generally permissible.
- Rather than competitors directly exchanging information among themselves, the exchange should be managed by an independent third-party, and the data should be sufficiently aggregated so that the parties cannot identify individual companies' information.
- All commercial information exchanged should be at least three months old. Never exchange any data regarding future pricing, discounts, marketing approaches, or costs.
- Limit oral discussions relating to the data exchanged. Do not impose any monitoring or tracking mechanisms to see how each party individually uses the information and data obtained in the exchange.
Finally, antitrust analysis distinguishes between economic relationships among competitors on the same level of distribution (horizontal relationships), and relationships on different distributional levels (vertical relationships). Vertical agreements include those between manufacturers and wholesalers, or wholesalers and retailers. Because these agreements are not between direct competitors, they are generally treated less severely than horizontal agreements. Most vertical constraints, such as exclusive selling arrangements, resale price maintenance agreements and most tying arrangements (where sellers with more than one product combine the sale of one product to that of another), are judged under the Rule of Reason analysis and condemned only when they are determined to be unreasonable based on the totality of the economic circumstances.
Monopolization
Section 2 of the Sherman Antitrust Act prohibits monopolization or any attempted monopolization of any market for a product or service. Unlike Section 1, no agreement or second party is necessary for a violation to occur. Illegal monopolization involves the abuse of economic power, or any activities perceived to lead to monopolistic pricing or other restraints. The focus of attempted monopolization is the attempt to gain economic power through anticompetitive behavior. Economic power can either result from a firm having a large market share or engaging in a number of restrictive agreements.
A company has market power when it is able to set supra-competitive prices or exclude competitors from the market. Under Section 2, the mere possession of market power is not illegal; a violation only occurs if a company acquires, maintains, or expands its market power through anticompetitive means. Activities that can give rise to liability under Section 2, due to the effect of excluding competition, include: exclusive dealing arrangements with customers or suppliers, product tying, bundling or loyalty discounts, most favored nations provisions, refusals to deal with certain customers or suppliers, and predatory pricing schemes under which a company lowers its short-term price in order to eliminate a competitor.
Conclusion
Because application of the antitrust laws is fact-specific, no one set of guidelines can answer every antitrust question that might arise. Further, in addition to the Sherman Antitrust Act, businesses must be aware of and comply with state and other federal antitrust laws. The discussion above, however, attempts to identify a few of the more common business activities that are likely to raise antitrust concerns. To avoid legal missteps the most important tip for businesses is to consult antitrust counsel before engaging in any activity that has the potential to raise prices or reduce supply in a market or before entering into any type of cooperative activity with another company, particularly a competitor.
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.
