The Federal Trade Commission has announced that Valassis Communications, a public company, has settled charges that it used its quarterly earnings call to attempt to collude with its only competitor.
The FTC charged that Valassis, a leading producer of free-standing newspaper inserts (FSIs), violated the FTC Act by making public statements in its quarterly earnings call with securities analysts that amounted to an invitation to collude with News America Marketing, its only FSI rival, to eliminate competition between the two companies. The FTC action highlights the Commission's intent to use FTC Act enforcement actions to challenge invitations to collude even when the allegedly anticompetitive conduct is exclusively public and there is no evidence of anticompetitive effects.
The Price War over FSIs
Valassis and News America are the only two publishers of FSIs - multi-page booklets containing discount coupons for products sold by various firms. On a typical Sunday, Valassis's and News America's FSIs are distributed to more than 50 million households in hundreds of newspapers nationwide. Valassis and News America were in the midst of an ongoing price war during which FSI prices had decreased from about $6.00 per full page per thousand booklets in 2001 to less than $5.00 per full page per thousand booklets in 2004.
During a quarterly conference call with security analysts in July 2004 that was open to the public and could be heard live on the Internet, Valassis's president and chief executive officer outlined his plan for the coming quarter, which retreated from its previously announced goal of increasing its market share to 50 percent. He announced that Valassis's strategy also included aggressively defending its existing customer base and market share, submitting bids for News America's customers at levels "substantially above current market prices," and monitoring News America's response to this change in Valassis's business strategy.
A Public Invitation to Allocate Customers and Coordinate Pricing?
The FTC viewed the comments made by Valassis as an invitation to allocate customers and to bring an end to the ongoing price war between the two rivals.
According to the Commission, during the call Valassis communicated to its only competitor its proposed terms of coordination for the FSI market, and did so in a very specific manner. Valassis would stop competing for News America customers, only if News America similarly stopped competing for Valassis customers. Valassis also proposed coordinated pricing, thereby allowing the companies to raise prices to their own customers.
It is worth noting that in a duopoly such as this one, it is easy for competitors to establish and enforce agreements to divide a market and coordinate pricing. The FTC believed that Valassis implied that if News America competed for Valassis's customers and market share in the future, then the price war would resume.
Valassis Sought to Facilitate Collusion, FTC Alleged
The FTC's complaint alleged that Valassis's conduct was anticompetitive and constituted a breach of Section 5 of the FTC Act because Valassis acted with the intent to facilitate collusion and without a legitimate business purpose. The FTC did not allege that News America accepted the invitation to collude; nor did it allege that the companies engaged in any conduct that actually caused injury to customers. However, the FTC believed that if Valassis's invitation to collude had been accepted by News America, the likely result would have been higher FSI prices and reduced output.
Consent Order and Settlement Intend to End Anticompetitive Conduct
The consent order and settlement agreement is designed to ensure that Valassis does not engage in the anticompetitive conduct alleged in the complaint. Accordingly, the consent order bars Valassis from inviting collusion and from actually entering into or implementing a collusive scheme.
Things to Consider
Public Statements and Conference Calls: Previous FTC actions challenging invitations to collude generally have addressed private conversations between parties. However, in this case, the complaint against Valassis was entirely based on statements made in a quarterly conference call open to the public. The FTC noted that private negotiation, "in a proverbial smoke-filled room," may well be the most efficient route for collusion, but that anticompetitive coordination can be arranged through public signals and public communications - including speeches, press releases, trade association meetings, and the like. The FTC may view statements made in the context of a conference call with analysts as even more credible than a private communication given the obligation under the securities laws not to make false and misleading statements. In light of the FTC's position regarding invitations to collude, companies should take into careful consideration the public statements they make regarding strategy and pricing.
Full Disclosure vs. Prohibited Anticompetitive Statements: In adopting Regulation FD, the Securities and Exchange Commission explained its position that the market is best served by more, not less, disclosure of information by companies. Indeed, companies have many obvious and important reasons for discussing business strategies and financial results with shareholders, securities analysts and others. The FTC noted that it would likely not interfere with a public communication that is required by the securities laws, but that it felt the public statements made by Valassis went far beyond a legitimate business disclosure. Unfortunately, the FTC's position regarding Valassis's public statements may unduly have a chilling effect on legitimate company disclosure and public statements, because companies fear of running afoul of the FTC Act.
Aggressive Commission Enforcement: Although price-fixing and market-allocation claims usually require evidence of an agreement between two or more competitors, this is not the first time the FTC has argued that an invitation to collude may be a violation of Section 5 of the FTC Act - even if the invitation is not accepted and no anticompetitive agreement ensues. While this consent order does not necessarily expand the types of action that would incur liability under Section 5 of the FTC Act, it does reflect the Commission's continued commitment to aggressive enforcement of the FTC Act and the comprehensive reach of the FTC Act.
This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.
