Trade Meetings and the Antitrust Laws

Trade Meetings and The Antitrust Laws:

Trade Meetings and The Antitrust Laws:

What Business Competitors Need to Know About Antitrust Liability

Bradley C. Nahrstadt

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Adam Smith

The Wealth of Nations (1776).

I.

Introduction

From its very inception, this country has been dedicated to the principles of capitalism and the free market economy. And undoubtedly, one of the cornerstones of these principles is open competition in the marketplace. We as a nation are so concerned about the ability of market competitors to take advantage of free and open competition that for more than 100 years the executive, legislative and judicial branches of government have used their constitutional powers to protect and advance free competition and to regulate those business activities viewed as having harmful market effects.[1]

There is, as a general rule, nothing worrisome or sinister about members of the same trade meeting to discuss mutually beneficial interests. Indeed, trade meetings can allow members to, among other things, disseminate trade information, encourage product standardization through the promulgation of industry standards, and regulate and police the actions of trade members. However, trade meetings, since they attract competitors within a particular industry, can also, absent proper guidance, serve as the catalyst -- intentionally or unintentionally -- for numerous antitrust violations. The purpose of this article is to apprise those who wish to meet as a group of what generally can and cannot be discussed in accordance with the applicable antitrust laws.

II.

The Relevant Federal Antitrust Laws

A. The Sherman Antitrust Act

The Sherman Antitrust Act,[2] the very first federal antitrust statute, was passed in 1890 in order to promote full and fair competition in the interstate and overseas commerce of the United States.[3] Various analysts have categorized the Sherman Act as a natural outgrowth of common law concerns with restraint of trade;[4] as a political response to the Populist and other agrarian political forces of the late Nineteenth Century;[5] as an effort to protect small businesses from rampant monopolization;[6] and, as an attempt to maximize consumer welfare.[7] No matter what the reason for its enactment, one thing is certain: the Act was given a broad, conceptual wording. As a result, courts and legislators have been able to fashion multitudinous remedies under the Act to protect competitive activity in an ever-evolving marketplace. In short, the Sherman Act continues to “retain[] its vitality and effectiveness . . . almost a century after its enactment.”[8]

Section 1 of the Sherman Act prohibits agreements that unreasonably restrain trade.[9] It provides as follows:

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. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.[10]

Section 2 of the Sherman Act outlaws monopolies and attempts or conspiracies to monopolize. It states:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.[11]

As the reader can discern, the Sherman Act sets forth both civil sanctions and criminal penalties for those individuals or corporations found guilty of violating its provisions. In addition, plaintiffs who prove direct damages because of antitrust violations can recover three times the actual damages (treble damages) from the offending party or parties.[12]

In practice, the Sherman Act is subjective and relatively lenient, requiring actual adverse impact on competition before finding a violation and subjecting the violator to criminal penalties and civil suits.[13] The federal courts, in interpreting the application of the Sherman Act, have found most restraints of trade to be lawful if (1) they are connected to a legitimate business purpose, and, (2) they are deemed, as interpreted by the courts, to be economically efficient.[14]

That is not to say, however, that all agreements among competitors will be viewed with a favorable eye. Some types of agreements are deemed to be automatic (“per se”) violations of the Act. In other words, proof of the wrongful act automatically proves an antitrust violation.[15] Actions that are deemed to be illegal under the per se rule are price fixing, group boycotts, production quotas, certain horizontal territorial limitations or market divisions, and some “tying arrangements.” These per se violations are discussed in greater detail subsequently.

B. The Clayton Act

In 1914, in an effort to “arrest the creation of trusts, conspiracies, and monopolies in their incipiency and before consummation,”[16] Congress passed the Clayton Act.[17] That Act is much more strict on allegedly monopolistic activities than is the Sherman Act, since Clayton Act violations require only a probable adverse impact on competition (i.e., anti-competitive tendencies) rather than proof of completed anticompetitive effects.[18]

The government or private parties can obtain federal court injunctions for the following practices that the Clayton Act forbids:

1. Exclusive dealing and tying arrangements for the sale of commodities when such contracts may substantially reduce competition or tend to create monopolies;

2. Two or more significantly competing companies having the same individual serve as a director or high-level officer chosen by the board of directors;[19]and

3. Monopolistic mergers that substantially lessen competition or tend to create monopolies in either a product market or a geographic market. The three types of forbidden monopolistic mergers are horizontal mergers (where the merged entities operate the same type of business at the same level), vertical mergers (where the merged entities operate the same type of business, but at different levels), or conglomerate mergers (where the merged entities are in unrelated businesses).[20]

C. The Federal Trade Commission Act

The Federal Trade Commission Act,[21] also passed in 1914, outlaws “unfair or deceptive [business] practices” and “unfair methods of competition.”[22] The Act grants the Federal Trade Commission sole authority to investigate possible violations and to enforce the law. The Federal Trade Commission essentially considers the following factors when deciding whether a business activity violates the Act: (1) Is it against public policy? (2) Is it immoral, oppressive, unscrupulous, or otherwise unethical? and (3) Does it cause substantial harm to consumers?[23]

The Federal Trade Commission has been empowered to stop unfair or deceptive business practices and unfair methods of competition through a variety of enforcement mechanisms. In order to eliminate unfair business activity, the Federal Trade Commission can issue advisory opinions counseling businesses on the legality of a proposed activity, issue consent decrees (wherein the Federal Trade Commission agrees not to impose severe penalties on the business in return for its agreement to stop engaging in illegal activity), issue cease and desist orders telling businesses to stop breaking certain laws (violations can subject the offending businesses to fines of up to $10,000 per day), or take “extreme measures” (e.g., require divestiture of a business’ assets or subsidiaries or order that the business be dissolved).[24]

D. The Robinson-Patman Act

The Robinson-Patman Act was passed by Congress in 1936.[25] The Act forbids price discrimination, which occurs when a seller charges different prices to different buyers for commodities of like grade and quality. Section 1 of the Robinson-Patman Act prohibits:

[D]iscriminat[ion] in price between different purchasers of commodities of like grade and quality. . . where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly. . . or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them . . ..[26]

The Robinson-Patman Act is invoked when sellers in interstate commerce make sales that occur fairly close in time and if the effect of those sales may be to substantially lessen competition, to tend to create a monopoly, or to otherwise harm or prevent competition.[27] As a legal matter, price differences are usually only allowed if they result from disparities in costs (e.g., shipping or manufacturing expenses), from a good-faith reduction in price to meet competition in a particular region, or from changing market conditions (e.g., imminent deterioration of perishable goods, distress sales, or end-of-season sales of obsolete goods).[28]

III.

The Big Five: Per Se Violations Of The Federal Antitrust Laws

As the author previously mentioned, the courts and regulatory agencies deem five activities to be per se violations of the federal antitrust laws. Those activities are price fixing, group boycotts, production quotas, horizontal territorial limitations, and some tying arrangements. Each of these per se violations will be addressed seriatim.

A. Price Fixing

Price fixing is, at its most basic, the setting of prices for products or services in the marketplace. It should be noted that the courts have broadly defined the term “price-fixing.” For example, credit terms and discounts cannot be fixed, since they are inextricably related to price.[29] The same holds true for agreements to set freight prices, since such arrangements can eliminate competition based upon a purchaser’s distance from a supply source.[30] In addition, agreements among competitors to set a price ceiling (i.e., maximum price agreements) are illegal, since fixing low prices can drive out competitors from the market and reduce non-price competition for product services or optional benefits.[31] Moreover, competitors may not agree among themselves to buy any excess amounts of their commodities nor may they exchange information or disclose or discuss future actions, plans, intentions or recommendations regarding employee compensation, salaries or benefits.[32]

It is also important to note that competitors need not meet and explicitly fix prices or related terms in order to be found guilty of price-fixing. If only a few companies control a given market, those companies, if they follow the pricing policies of the leading firm in that industry --or otherwise mimic one another’s pricing behavior -- may effectively restrict competition.[33] This type of conscious parallelism is legal only if there is no evidence of arrangements, understandings, or practices, however informal, that take from each individual business its capacity to set prices independent of what other businesses have done or may do.[34]

The Department of Justice and the Federal Trade Commission recognize that certain activities among competitors that may, at first glance, appear to have anti-competitive tendencies, can occur as long as certain “antitrust safety zone” guidelines are followed.[35] Two of those activities are the exchange of information about wages, salaries or benefits and the creation and endorsement of joint purchasing agreements.[36] In order for surveys regarding wages, salaries, benefits, prices or costs to comply with the antitrust laws, they must have all of the following characteristics:

· The survey should be in writing;

· It must be managed by a third party (e.g., a consultant, a government agency, academic institution, or trade association);

· The data collected and analyzed in the survey must be at least three months old;

· There must be at least five companies reporting data upon which any disseminated statistic is based;

· No individual company’s data may represent more than 25 percent on a weighted basis of each statistic reported; and

· Any information disseminated through the survey must be sufficiently aggregated such that the recipients cannot identify the prices charged or compensation paid by any particular company.[37]

Informal phone surveys of competitors do not meet these requirements.[38] Nor do surveys reporting results on an identified individual company basis, either by name or by code (e.g., A, B, C).[39] Such informal surveys must be avoided. In addition, the Department of Justice and the Federal Trade Commission have stated that exchanges of information as to future prices for services or goods or exchanges as to future compensation of employees are very likely to be considered anti-competitive since they might lead to coordination among competitors on price or other commercially sensitive variables.[40]

Agreements among competitors to combine their purchases and jointly acquire goods and services have generally been upheld by the courts in part due to the recognition that they can lower the buyers’ costs, which can in turn be passed on to the ultimate consumers.[41] The guidelines issued by the Department of Justice and the Federal Trade Commission provide an antitrust safety zone for joint purchasing arrangements that meet “both of the following criteria: (1) The purchases account for less than thirty-five percent of the total sales of the purchased product or service in the relevant market; and (2) The costs of products and services purchased jointly account in the aggregate for less than twenty-five percent of the total revenue from all goods or services . . . sold by each competing participant in the arrangement.”[42]

It should be noted that joint purchasing agreements falling outside of the safety zone would not necessarily result in antitrust liability. The Department of Justice and Federal Trade Commission policy sets forth three means of lessening potential liability for joint purchasing agreements that do not meet the criteria set forth above. A joint purchasing agreement is likely to meet with Department of Justice and Federal Trade Commission approval if (1) members are not required to use the arrangement for all of their purchases of a particular product or service, (2) negotiations are conducted by an intermediary rather than an employee of a participant, and (3) communications between the purchasing group and each individual participant are not disseminated to other participants.[43]

B. Group Boycotts

A group boycott is defined as a concerted refusal to deal among traders with the intent or foreseeable effect of exclusion from the market of direct competitors of some of the conspirators or a concerted refusal to deal with the intent or foreseeable effect of coercing the trade practices of third parties.[44] Almost all such activity is deemed to be illegal under the Sherman Act.[45]