Home | Antitrust Laws: Ways Competitors Get in Trouble
Antitrust Laws: Ways Competitors Get in Trouble
ANTITRUST LAWS: WAYS COMPETITORS GET IN TROUBLE
The nation’s primary antitrust law was enacted in 1890—130 years ago. At the time, the Sears, Roebuck & Co. catalogue still advertised for chamber pots, the incandescent light bulb was newly invented, and North Dakota, South Dakota, Montana, and Washington had just been admitted to the union.
We have made a lot of progress in the last 130 years. But to many, the antitrust laws remain clouded in confusion. The actual texts of the antitrust statutes are quite brief. But by determining whether particular facts violate these laws, the courts have issued countless decisions that make antitrust law one of the more complex areas of law for businesses to understand and apply. Policymakers in Congress are now debating whether these laws should be updated for the modern era.
The Sherman Act.
Section 1 of the Sherman Act, which became law in 1890, prohibits “every contract, combination, or conspiracy in restraint of trade” between competitors that unreasonably restrains interstate commerce. Section 2 prohibits any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” The Sherman Act does not prohibit all restraints of trade, just ones that are “unreasonable.”
Minnesota law has a state-law version of the Sherman Act, which is enforced by the Office of the Minnesota Attorney General’s Office.
Some conduct is viewed as so harmful to competition that they are almost always unlawful. These acts are considered “per se” violations of the Sherman Act. Naked agreements between competitors to fix prices or to divide markets and rig bids are examples of actions that the courts have often considered (with notable exceptions that depend on the facts) to be per se unlawful. If an action is illegal per se, the party engaging in it is not allowed to mount an economic justification for the action.
By contrast, some conduct under the antitrust laws is analyzed under the “rule of reason,” meaning the courts balance the anticompetitive and procompetitive effects of the conduct to determine if it is improper. This makes many antitrust cases highly fact-dependent.
Price Fixing.
The United States Department of Justice has defined “price fixing” as “an agreement among competitors to raise, fix or otherwise maintain the price at which their goods or services are sold.” As the Federal Trade Commission notes, “Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor.”
Price fixing does not necessarily involve just an agreement on prices. Some courts have found price fixing when competitors agree on the criteria by which prices are set or where they enter into certain agreements that indirectly affect prices or other terms that affect prices. Not every agreement between competitors that affects prices is price fixing, though.
Price fixing may be proven by direct evidence of an actual agreement to “fix” prices, or by circumstantial evidence. Most businesses know better than to enter into an agreement with their competitors to increase or maintain specific prices. As a result, price fixing is often alleged based on inferences from circumstantial conduct. For example, enforcers may look to records of meetings or phone calls between competitors and whether prices were raised shortly after such conversations.
Businesses can help protect themselves from price fixing allegations by not discussing competitively sensitive information with competitors. This includes information about costs, prices, business strategy, product innovation, and operating margins, among other things. Businesses should especially not discuss future prices, business strategy, costs, or product innovation, or other forward-looking competitively-sensitive information with competitors.
One common question is whether a business can mimic its competitors’ prices. A company does not violate the antitrust laws by matching its competitors published prices. This is called “conscious parallelism,” whereby a competitor consciously mirrors its competitors’ public prices. A classic case of conscious parallelism is when a gas station raises its prices after the gas station on the opposite corner changes its publicly posted prices. As the Federal Trade Commission has noted, “Each company is free to set its own prices, and it may charge the same price as its competitors as long as the decision was not based on any agreement or coordination with a competitor.”
Bid Rigging.
Bid rigging is another type of potentially unlawful conduct. It can occur when competitors manipulate the bidding process. Examples may include agreements among competitors on which one of them will win a bid, purposefully submission of artificially high bids to steer the bid to a certain competitor, or an agreement to sit out the bidding process “this time” in favor of being the winning bidder “the next time.”
For example, ten years ago, several large national insurance brokers were accused by state regulators, including the Minnesota Attorney General, of obtaining sham bids from insurance companies. The regulators alleged that the brokers led some clients to believe that they were soliciting competitive bids from different insurers for their client’s business, when in fact the broker had decided in advance which insurer would get the account and had other insurers provide sham bids—called “B” quotes—to create a false veneer of “shopping around.”
Bid rigging may be discovered circumstantially. Regulators may raise eyebrows at suspicious patterns of bidding activity, such as a low number of bids on an lucrative account (which could reflect an agreement of competitors to sit out bidding) or much higher bids from some competitors (which could reflect an agreement among competitors to submit sham bids). Of course, the presence of such trends may have perfectly innocent explanations, but they may serve as “red flags” to regulators, prompting further inquiry.
To stay clear of problems, businesses should not discuss bids with their competitors and should make sure the bidding process is an arms-length competition among rivals.
The law firm of Swanson Hatch, P.A. represents businesses and professionals in legal compliance and enforcement matters, among other things. Former Minnesota Attorneys General Lori Swanson and Mike Hatch have decades of legal experience in the application of state laws to businesses and regulated professionals. Hatch and Swanson enforced the state antitrust laws while serving as Minnesota Attorneys General. Prior to her twelve years as Minnesota Attorney General, Lori Swanson previously served as Solicitor General and Deputy Attorney General of the State of Minnesota and chaired the Federal Reserve Board’s Consumer Advisory Council in Washington, D.C. Before he became Attorney General, Mike Hatch previously served as Commissioner of the Minnesota Department of Commerce for eight years. Lori Swanson can be reached at lswanson@swansonhatch.com, or at 612-315-3037. Mike Hatch can be reached at mhatch@swansonhatch.com, or at 612-315-3037. The firm’s website is www.swansonhatch.com.
Market Allocation and Group Boycotts.
There are other areas that may raise antitrust concerns.
For example, an agreement between competitors about which business they will each compete for may also run afoul of the antitrust laws. The Justice Department has noted that, “In such schemes, competing firms allocate specific customers or types of customers, products, or territories among themselves. For example, one competitor will be allowed to sell to, or bid on contracts let by, certain customers or types of customers. In return, he or she will not sell to, or bid on contracts let by, customers allocated to other competitors.”
Group boycotts are another potentially unlawful action. The FTC has noted that, “Any company may, on its own, refuse to do business with another firm, but an agreement among competitors not to do business with targeted individuals or businesses may be an illegal boycott, especially if the group of competitors working together has market power.”
Like the other areas mentioned above, whether concerted action constitutes unlawful market allocation or a group boycott is dependent on the particular facts and circumstances.
Industry Groups and Third Parties.
Collaboration among competitors through industry trade groups usually leads to better practices, higher professional standards, and more robust competition. But industry trade groups have sometimes been alleged to be the “middleman” through which horizontal competitors reach unlawful agreements on price or business strategy. Generally, a business cannot do through an industry group or third party, such as an industry consultant, what it cannot do directly with a competitor.
Businesses are sometimes asked to share information of competitively sensitive information with their industry trade groups or data publishers for purposes of conducting and publishing surveys. Information about prospective future prices, costs, or business strategies should never be shared. But the federal antitrust enforcers have established certain guidelines for sharing historical competitively sensitive information in some cases. For example, the guidelines generally require that the data be at least three months old (or older in some industries), contain information from at least five contributors (none of whom represents more than 25 percent of the total data shared), be anonymized so competitors cannot ascertain the identity of the business that reported the data, and that the data be collected by a third party (as opposed to one of the competitors).
Conclusion.
Businesses should be vigilant about not crossing into gray areas when dealing with competitors. A good rule of thumb is to remember that antitrust laws are designed to encourage—not reduce—competition. Businesses should be wary about activities with competitors that shrink competition. They should also be wary about discussing competitively sensitive information with competitors. If in doubt, consult your attorney.
***
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415 612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
The nation’s primary antitrust law was enacted in 1890—130 years ago. At the time, the Sears, Roebuck & Co. catalogue still advertised for chamber pots, the incandescent light bulb was newly invented, and North Dakota, South Dakota, Montana, and Washington had just been admitted to the union.
We have made a lot of progress in the last 130 years. But to many, the antitrust laws remain clouded in confusion. The actual texts of the antitrust statutes are quite brief. But by determining whether particular facts violate these laws, the courts have issued countless decisions that make antitrust law one of the more complex areas of law for businesses to understand and apply. Policymakers in Congress are now debating whether these laws should be updated for the modern era.
The Sherman Act.Section 1 of the Sherman Act, which became law in 1890, prohibits “every contract, combination, or conspiracy in restraint of trade” between competitors that unreasonably restrains interstate commerce. Section 2 prohibits any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” The Sherman Act does not prohibit all restraints of trade, just ones that are “unreasonable.”
Minnesota law has a state-law version of the Sherman Act, which is enforced by the Office of the Minnesota Attorney General’s Office.
Some conduct is viewed as so harmful to competition that they are almost always unlawful. These acts are considered “per se” violations of the Sherman Act. Naked agreements between competitors to fix prices or to divide markets and rig bids are examples of actions that the courts have often considered (with notable exceptions that depend on the facts) to be per se unlawful. If an action is illegal per se, the party engaging in it is not allowed to mount an economic justification for the action.
By contrast, some conduct under the antitrust laws is analyzed under the “rule of reason,” meaning the courts balance the anticompetitive and procompetitive effects of the conduct to determine if it is improper. This makes many antitrust cases highly fact-dependent.
Price Fixing.
The United States Department of Justice has defined “price fixing” as “an agreement among competitors to raise, fix or otherwise maintain the price at which their goods or services are sold.” As the Federal Trade Commission notes, “Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor.”
Price fixing does not necessarily involve just an agreement on prices. Some courts have found price fixing when competitors agree on the criteria by which prices are set or where they enter into certain agreements that indirectly affect prices or other terms that affect prices. Not every agreement between competitors that affects prices is price fixing, though.
Price fixing may be proven by direct evidence of an actual agreement to “fix” prices, or by circumstantial evidence. Most businesses know better than to enter into an agreement with their competitors to increase or maintain specific prices. As a result, price fixing is often alleged based on inferences from circumstantial conduct. For example, enforcers may look to records of meetings or phone calls between competitors and whether prices were raised shortly after such conversations.
Businesses can help protect themselves from price fixing allegations by not discussing competitively sensitive information with competitors. This includes information about costs, prices, business strategy, product innovation, and operating margins, among other things. Businesses should especially not discuss future prices, business strategy, costs, or product innovation, or other forward-looking competitively-sensitive information with competitors.
One common question is whether a business can mimic its competitors’ prices. A company does not violate the antitrust laws by matching its competitors published prices. This is called “conscious parallelism,” whereby a competitor consciously mirrors its competitors’ public prices. A classic case of conscious parallelism is when a gas station raises its prices after the gas station on the opposite corner changes its publicly posted prices. As the Federal Trade Commission has noted, “Each company is free to set its own prices, and it may charge the same price as its competitors as long as the decision was not based on any agreement or coordination with a competitor.”
Bid Rigging.
Bid rigging is another type of potentially unlawful conduct. It can occur when competitors manipulate the bidding process. Examples may include agreements among competitors on which one of them will win a bid, purposefully submission of artificially high bids to steer the bid to a certain competitor, or an agreement to sit out the bidding process “this time” in favor of being the winning bidder “the next time.”
For example, ten years ago, several large national insurance brokers were accused by state regulators, including the Minnesota Attorney General, of obtaining sham bids from insurance companies. The regulators alleged that the brokers led some clients to believe that they were soliciting competitive bids from different insurers for their client’s business, when in fact the broker had decided in advance which insurer would get the account and had other insurers provide sham bids—called “B” quotes—to create a false veneer of “shopping around.”
Bid rigging may be discovered circumstantially. Regulators may raise eyebrows at suspicious patterns of bidding activity, such as a low number of bids on an lucrative account (which could reflect an agreement of competitors to sit out bidding) or much higher bids from some competitors (which could reflect an agreement among competitors to submit sham bids). Of course, the presence of such trends may have perfectly innocent explanations, but they may serve as “red flags” to regulators, prompting further inquiry.
To stay clear of problems, businesses should not discuss bids with their competitors and should make sure the bidding process is an arms-length competition among rivals.
Market Allocation and Group Boycotts.
There are other areas that may raise antitrust concerns.
For example, an agreement between competitors about which business they will each compete for may also run afoul of the antitrust laws. The Justice Department has noted that, “In such schemes, competing firms allocate specific customers or types of customers, products, or territories among themselves. For example, one competitor will be allowed to sell to, or bid on contracts let by, certain customers or types of customers. In return, he or she will not sell to, or bid on contracts let by, customers allocated to other competitors.”
Group boycotts are another potentially unlawful action. The FTC has noted that, “Any company may, on its own, refuse to do business with another firm, but an agreement among competitors not to do business with targeted individuals or businesses may be an illegal boycott, especially if the group of competitors working together has market power.”
Like the other areas mentioned above, whether concerted action constitutes unlawful market allocation or a group boycott is dependent on the particular facts and circumstances.
Industry Groups and Third Parties.
Collaboration among competitors through industry trade groups usually leads to better practices, higher professional standards, and more robust competition. But industry trade groups have sometimes been alleged to be the “middleman” through which horizontal competitors reach unlawful agreements on price or business strategy. Generally, a business cannot do through an industry group or third party, such as an industry consultant, what it cannot do directly with a competitor.
Businesses are sometimes asked to share information of competitively sensitive information with their industry trade groups or data publishers for purposes of conducting and publishing surveys. Information about prospective future prices, costs, or business strategies should never be shared. But the federal antitrust enforcers have established certain guidelines for sharing historical competitively sensitive information in some cases. For example, the guidelines generally require that the data be at least three months old (or older in some industries), contain information from at least five contributors (none of whom represents more than 25 percent of the total data shared), be anonymized so competitors cannot ascertain the identity of the business that reported the data, and that the data be collected by a third party (as opposed to one of the competitors).
Conclusion.
Businesses should be vigilant about not crossing into gray areas when dealing with competitors. A good rule of thumb is to remember that antitrust laws are designed to encourage—not reduce—competition. Businesses should be wary about activities with competitors that shrink competition. They should also be wary about discussing competitively sensitive information with competitors. If in doubt, consult your attorney.
www.swansonhatch.com
431 S Seventh Street, Suite 2545
Minneapolis, MN 55415
612-315-3037
The materials in this article are for informational purposes and do not constitute legal advice, nor does your unsolicited transmission of information to us create a lawyer-client relationship. Sending us an email will not make you a client of our firm. Until we have agreed to represent you, nothing you send us will be confidential or privileged. Readers should not act on information contained in this article without seeking professional counsel. The best way for you to inquire about possible representation is to contact an attorney of the firm. Actual results depend on the specific factual and legal circumstances of each client’s case. Past results do not guarantee future results in any matter.
Disclosure | Unsubscribe
Swanson | Hatch, P.A.
431 S. 7th Street, Suite #2545
Minneapolis, MN 55415
612-315-3037
www.swansonhatch.com