The U.S. Court of Appeals for the Second Circuit, in Todd v. Exxon, 275 F.3d 191 (2001), recently revitalized an employee’s antitrust challenge to the exchange of salary data among a group of employers. The plaintiff, on behalf of herself and a putative class, sued Exxon and several other oil companies under Section 1 of the Sherman Act, alleging that their exchange of salary and compensation information decreased the level of compensation that companies in the oil and petrochemical industry paid to non-union managerial, professional, and technical ("MPT") employees. The district court dismissed the complaint for failing to state a claim finding, among other things, that plaintiff's proposed relevant market--i.e., the market for services of experienced MPT employees in the oil and petrochemical industry--was implausible and that the structure of the proposed market was not susceptible to the type of anticompetitive effects alleged by the plaintiff. The appellate court, concerned that the plaintiff had no opportunity to present evidence on any of these points, reversed the lower court's dismissal. The reasoning reflected in the Second Circuit's decision, however, will make it more difficult for defendants facing similar claims to dispose of these types of cases at an early stage in the litigation.
Over the last few decades, the courts have provided some guidance on how to analyze antitrust claims directed at information exchange programs among groups of competitors. But, before Todd, the guidance from the courts primarily addressed programs in which a group of sellers exchanged information about the prices at which they sold their respective goods, not the exchange of pricing data among a group of purchasers, such as purchasers of employment services. Although the antitrust enforcement agencies have investigated and, in one case, even challenged information exchanges relating to salary and wage data, there was little meaningful guidance from either the courts or the agencies on how to analyze this particular type of an exchange program among a group of employers. The Todd decision has filled this void, although many companies and trade associations engaging in these types of information exchange programs may not particularly like what the Second Circuit had to say.
The Second Circuit’s findings regarding the appropriate method for defining relevant antitrust markets in these types of cases, i.e., alleged conspiracies among employers to depress salaries and wages, represents perhaps the most intriguing and significant aspect of the Todd decision. The market analysis required under Todd will increase the likelihood that a group of employers would be deemed to have market power in a relevant antitrust market, particularly if the group includes most companies in a particular industry, and, thus, tends to increase the antitrust risks associated with these information exchange programs. Todd, however, suggests some ways to mitigate these risks.
According to Todd, the typical methods for defining a relevant market do not apply in cases involving concerted action among purchasers to depress the prices that they pay for products or services. Because a purchasers’ conspiracy is a "mirror image" of the traditional sellers’ conspiracy, the Second Circuit reasoned that courts must invert the traditional formula for defining relevant antitrust markets when confronted with an antitrust challenge to a purchasers’ conspiracy. In other words, rather than defining antitrust markets in the usual way (i.e., by identifying the universe of all alternatives that purchasers consider to be reasonably interchangeable with the product or service in question), courts must a relevant market encompassing all outlets for sales of the particular products or services that the sellers consider to be reasonable alternatives.
Because the lower court relied on the traditional method for defining a relevant market, the appellate court rejected the lower court’s finding that the plaintiff had alleged an implausible market. According to the district court, the plaintiff failed to allege a legally cognizable market because the proposed market definition was both over-inclusive and under-inclusive: over-inclusive because it grouped accountants, attorneys, engineers, and others in a single market; and under-inclusive because it excluded workers from other industries who could perform the same services as oil and petrochemical industry employees.
The Second Circuit held that the district court’s analysis failed because it asked the wrong basic question. Rather than asking whether employers considered employees across disparate industries to be interchangeable, the court should have analyzed whether the employees considered employment across industries to be reasonable alternatives. The Second Circuit concluded that, when viewed from the employees’ perspective, the plaintiff had alleged a plausible market definition. The Second Circuit’s reasoning could result in a relevant market that includes employees who perform vastly different types of jobs, so long as they all view employment with the same companies or subsets of companies as reasonable alternatives to their other employment opportunities. The appellate court’s reasoning would also allow for a market definition restricted to a single industry. Indeed, the Second Circuit accepted as common sense the plaintiff’s argument that employees’ experiences in the oil industry made them more valuable to oil companies and, thus, make it less likely that they would view job opportunities outside the industry as reasonable alternatives. The court acknowledged, however, that lower-skilled workers would more likely consider jobs in other industries as acceptable alternatives to their present employment.
The court of appeals identified another factor that weighed in favor of an industry-specific market in this case - the allegation that the oil companies relied primarily on salary data gathered from other oil companies through the challenged information exchange program to set their salaries. In other words, the fact that the information exchange program involved only oil companies tends to establish an industry-specific market. The Second Circuit acknowledged this may seem like bootstrapping, but refused to allow that to "negate the well-established probative value" of an antitrust defendant’s perceptions about the companies with which it competes "in defining the market."
In addition to the lower court’s market definition analysis, the appellate court took issue with several other aspects of the lower court’s decision, including the conclusion that the information exchange had no anticompetitive effect because compensation in the industry generally had increased during the period in question. According to the appellate court, the plaintiff pled a legally sufficient anticompetitive effect by alleging that the information exchange program caused salaries to be lower than they otherwise would have been in the absence of the program. Although the court of appeals suggested that the plaintiff may have a difficult time proving this allegation, the court found that allegations could not be dismissed as legally deficient.
The Second Circuit’s analysis may cause some companies to think twice before exchanging salary and compensation information with their competitors, whether through a trade association reporting program, other organizations, or more direct means. Before Todd, many participants in industry-wide salary and compensation surveys may have reasonably concluded that the antitrust risks associated with such surveys were minimal if the survey data relates to job categories that are relevant to multiple industries so that the participating employers compete against numerous non-participating employers in other industries to hire and retain employees. Todd, however, increases the possibility that plaintiffs will be able to secure an industry-specific market definition and eliminate the survey participants justification that they lack market power due to inter-industry competition.
Although Todd may have increased to some degree the antitrust risks associated with exchanging salary and other compensation data with competitors, especially if done on an industry-wide basis, the Second Circuit’s decision also provides guidance on how companies can mitigate these risks. For instance, Todd advises that the oil companies could have lessened any potential anticompetitive effects and any corresponding antitrust risks arising from the information exchange program if the program’s participants had disseminated the information publicly. This would have leveled the playing field in some respects, "making employees more sensitive to salary increases." Public disclosure, however, will not resolve antitrust concerns with information exchanges among competitors in all instances.
Todd provides additional insight into how to avoid antitrust pitfalls in this area by pointing out certain other characteristics of the information exchange program that resulted in heightened anticompetitive concerns. Most of the problematic characteristics identified in Todd could have been avoided if the participants had adhered to the "safety zone" criteria for surveys of price and cost data, set forth in the FTC’s and DOJ’s Healthcare Guidelines. In establishing this safety zone, the antitrust agencies have indicated that they will not challenge, absent extraordinary circumstances, a written survey of prices, salaries, wages or benefits, if:
- An independent third-party manages the survey;
- The survey covers only historical data, usually meaning more than three months old;
- At least five participants provide data for each item reported;
- No one participant’s information accounts for more than 25% (on a weighted basis) of any item reported; and
- All information disseminated is sufficiently aggregated such that the recipients cannot identify the salaries or compensation paid by any particular company.
Failure to satisfy these criteria will not necessarily mean that the survey violates the antirust laws. But survey participants can reduce their antitrust exposure by adhering to as many of these criteria as possible.
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