Antitrust
Sherman Act
The Section 1 of the Sherman Act states that every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce is illegal. There must be an agreement or conspiracy among two or more people and the restraint of trade must be “unreasonable”. Examples of agreements that result in an unreasonable restraint of trade include price fixing; allocations of customers or territories; group boycotts; and certain tying arrangements.
The requirement of an “agreement” in Section 1 means that the law does not apply to actions taken by a company unilaterally. However, the courts over the years have been liberal in the interpretation of the agreement or conspiracy requirement. An agreement or conspiracy has been inferred from circumstances such as:
- Meetings attended by competitors followed by collective action (without evidence of discussions).
- An aura of secrecy surrounding meetings among competitors.
- Actions taken by competitors that appear to go against normal self-interest.
- Simultaneous adoption of identical practices by competitors.
The law assumes, cynically perhaps but with some justification, that when competitors get together, they will try to eliminate or reduce any competition that exists between them.
That said, there is no agreement under antitrust law if a company simply announces a policy and independently carries it out. It is also legal for a company to receive complaints and act on them. Further, a corporation cannot combine with itself or one of its subsidiaries. The line between unilateral action and collective action can get blurred in the real world.
Although the Sherman Act prohibits only an “unreasonable” restraint of trade, certain practices have long been deemed unreasonable without further evidence. These are called “per se” violations. All other restraints of trade are judged under the “rule of reason” to determine whether they are unreasonable. A rule of reason analysis entails a detailed examination and balancing of the various competitive factors that bear on the reasonableness of the restriction. This can lead to a wide reaching general inquiry that often results in victory for the defendant. In a rule of reason analysis, among other things, the court looks at the market power of the defendant and considers the extent to which the restriction directly affects the price of goods or services.
- Horizontal Price Fixing. Horizontal price fixing occurs when two or more companies at the same level of market structure fix the price at which they will sell their products. It is per se illegal. Regular exchanges of price information followed by parallel actions can be the basis for the violation. Price fixing also covers actions on matters that have an effect on prices, such as cost of materials, allowances, and promotional schedules. It also covers actions to stabilize prices, or to establish a range of pricing. Price fixing can include agreements regarding freight charges, allowances, volume discounts, and coop advertising funds, as these all have an effect on price. Competitors should never exchange or discuss price information.
- Vertical Price Fixing. Vertical price fixing is price fixing between companies at different levels of market structure, such as a manufacturer and a dealer. It too is per se illegal, but is not defined as harshly as horizontal price fixing. There must be an agreement on the specific prices to be charged. Vertical price fixing is often alleged when a manufacturer terminates a price-cutting dealer.
- Unilateral Action. A manufacturer can take unilateral action to terminate a dealer who cuts prices. Also, a manufacturer can suggest resale prices and then terminate any dealer who does not follow the suggestion, although this program must be strictly administered. A manufacturer can get into trouble in the context of a dealer termination if it demands or receives assurances from dealers on price, gets help from other dealers to enforce price levels, or forces compliance from dealers through coercion.
- Horizontal Non-Price Restraints. Horizontal non-price restraints are agreements to allocate territories, divide customers or limit output. Because these are agreements between direct competitors that reduce competition, they are per se illegal.
- Vertical Non-Price Restraints. Vertical non-price restraints include restraints imposed by a manufacturer on the manner in which a dealer sells or distributes its products. These restraints fall under the rule of reason, and courts generally sustain them. Examples include territorial or customer limitations imposed by a manufacturer on its dealers. The courts have determined that these restraints serve legitimate business objectives by building a strong distribution system and encouraging active dealer promotion and servicing of products. As long as a manufacturer can show solid pro-competitive benefits, the restrictions are generally allowed.
- Dealer Terminations. A typical antitrust case arising out of a dealer termination starts with complaints from dealers about the price cutting behavior of the target dealer. The manufacturer investigates but the price-cutting dealer does not change its behavior. The manufacturer terminates the dealer and sues to collect unpaid accounts. The dealer asserts antitrust counterclaims, and tries to prove there was an agreement or conspiracy among the complaining dealers and the manufacturer to restrain competition by terminating him. As a general matter, the courts have held that there is no antitrust violation when a supplier terminates one dealer and substitutes another. The manufacturer needs to show that the termination was “unilateral” and done for a legitimate business reason. The Supreme Court has said there is no “contract or conspiracy” if a manufacturer receives complaints about a price cutting dealer and decides on its own to terminate.
Collaboration among Competitors
Competitors sometimes believe that collaboration in specific areas, such as joint manufacturing, group purchasing, or exchanges of technical information, can improve their efficiencies and make them more profitable. However, they worry about the impact of the antitrust laws on the collaborations. Fortunately, the federal agencies responsible for enforcing the antitrust laws (the Federal Trade Commission and the Antitrust Division of the Department of Justice) have issued guidelines regarding collaborations among competitors.
The purpose of these guidelines is to help companies determine when a collaboration with a competitor will be evaluated under the “rule of reason,” and whether it will pass muster. As a practical matter, many agreements that fall under the rule of reason are held legal.
The guidelines state that collaborations will be evaluated under the rule of reason if they are part of an “efficiency-enhancing integration” of business functions. An integration of business functions (such as production, distribution or purchasing) is “efficiency-enhancing” if it has the potential to benefit consumers by expanding output, reducing prices or enhancing quality or service. The integration will pass muster under the rule of reason if it “plausibly” generates a pro-competitive benefit to consumers.
For example, assume that manufacturers of identical products pool their orders for slow-moving items into the manufacturing facility of the member that has the lowest manufacturing costs. Aggregating these orders into one manufacturing facility makes better use of the participants’ inventories and manufacturing equipment. These efficiencies make each member a stronger competitor, better able to provide high levels of quality and service. These efficiencies, then, have a positive impact on consumers, which is the ultimate measure of legality under the rule of reason. Of course, the collaboration may not include agreements on the price at which products manufactured through collaboration may be sold. All participants must independently market and set prices for the products made through the collaboration.
A collaboration to exchange information on technical best practices and bad credit risks has obvious pro-competitive benefits. The technical information makes each participant more efficient, creating the possibility of lower prices and higher service levels. The same goes for exchanges of information on bad credit risks.
A collaboration to negotiate joint-purchasing arrangements also has strong pro-competitive efficiencies. The lower costs that can result from these contracts will make the members of the group more efficient.
There must be concrete data to support the efficiencies that the parties intend to achieve. Efficiency claims that are vague or speculative will not be respected. In addition, care must be taken to make sure that the collaboration is not just a means to accomplish a clearly illegal activity, such as fixing prices, dividing territories or allocating customers. Any proposal to exchange information must be monitored carefully to ensure that it does not drift toward prohibited areas.
