Playing by the Rules: An Antitrust Primer - ABA YLD 101 Practice Series

By Joel R. Samuels

Importance of Antitrust Laws
Most attorneys and corporate leaders find antitrust completely uninteresting at best, downright boring at worst. However, especially in the current economic environment, there are several reasons for the business person, and their counsel, to develop a "cocktail party" knowledge of the antitrust laws. First, many seemingly innocent business decisions have the potential to raise antitrust concerns. Every trade association convention and pricing decision, for example, affects competition. Second, businesses are exposed to antitrust liability from many sources, including federal and state actions, private citizen suits and international enforcement. Third, the penalties for violating the antitrust laws include corporate fines and individual civil and criminal liability. Finally, it is generally easy to comply with the antitrust laws; and just as easy to violate the antitrust laws. This article aims to provide a reason for every in-house counsel, or those who counsel businesses, to develop an awareness of the antitrust laws and be able to recognize certain situations that may present antitrust concerns.

Overview of the Antitrust Laws
There are four federal laws that regulate competition: the Sherman Act, the Clayton Act, the Federal Trade Commission Act and the Robinson-Patman Act.

  • Sherman Act:
    There are two relevant sections of the Sherman Act. Section 1 prohibits "all contracts, combinations and conspiracies in restraint of trade." Conduct prohibited under Section 1 includes price fixing, cartelization, market or customer divisions, unreasonable reduction in production or elimination of a competitor. Section 1 violations can only occur if there is an agreement between two or more parties. However, courts have wide latitude to determine what constitutes an agreement. Agreements can be found in any manner including small talk, conversations over drinks or a round of golf, e-mail, telephone conversations or even a "wink and a nod." Section 2 prohibits unilateral conduct that seeks to unlawfully create or maintain monopoly power such as sham litigation and unfair trade practices.
  • Clayton Act:
    The Clayton Act prohibits business combinations whose effect is to "substantially lessen competition or create a monopoly." The Clayton Act's primary focus is on horizontal mergers. However, it also prohibits exclusive dealing, certain requirements contracts, tying arrangements and interlocking directorates.
  • FTC Act:
    The FTC Act established the Federal Trade Commission and prohibits "unfair methods of competition" as well as "unfair or deceptive acts or practices." Accordingly, the FTC may regulate conduct that might violate the Sherman Act and Clayton Acts.
  • Robinson- Patman Act:
    The Robinson-Patman Act prohibits price discrimination where the effect is to lessen competition or create a monopoly. Buyers may be liable if they induce or knowingly receive a discriminatory price. Both civil and criminal liability is available for Robinson-Patman violations.

Antitrust Enforcers
Antitrust laws are enforced by federal, state and international agencies as well as private citizens. Federal enforcers include the United States Department of Justice Antitrust Division ("Antitrust Division") and the Federal Trade Commission. The Antitrust Division initiates both civil and criminal investigations and often resorts to judicial enforcement. The Federal Trade Commission is authorized to conduct investigations, issue administrative cease and desist orders, impose monetary fines and seek injunctive relief.

Additionally, under the parens patriae doctrine, state Attorneys General may enforce federal and state antitrust laws to protect the welfare of citizens within that state. Groups of states can bring antitrust actions jointly or join federal enforcement activity. Finally, private citizens may also bring suit under federal or state antitrust laws.

Multinational corporations are also subject to international antitrust laws. International enforcers may order equitable relief as well criminal and civil penalties. The European Union, India and China are emerging as leaders in international enforcement. Therefore, it is important to note that non-action or even clearance by U.S. authorities does not ensure similar dispositions by international enforcers. This was notably illustrated in the G.E. / Honeywell merger in 2001, where U.S. enforcers approved the deal, but the European Union alleged that the deal violated its antitrust laws. The merger was not consummated.

Violations of the Antitrust Laws are Costly
Violations of the antitrust laws are costly for both corporations and individuals. Civil liability for violations of the Sherman Act may include fines up to $100,000,000 for corporations and $1,000,000 for individuals. Violations of a FTC cease and desist order may result in fines of $11,000 per violation. Additionally, the agencies are empowered to seek injunctive relief to prevent, and in some cases, attempt to undo, business combinations. Further, successful private plaintiffs may obtain treble damages and attorney's fees.

Criminal enforcement by the Antitrust Division may result in fines and jail time. For example, violations of the Sherman Act can result in a ten-year prison term for individuals. Finally, the non-tangible costs of antitrust violations include lost profits, lost opportunities, decline in stock price and irreparable damage to individual and corporate reputations. Moreover, an antitrust investigation alone can be costly and disruptive to a business.

Application to Day-to-Day Business Activity
There are many areas of day-to-day business activity that may violate the antitrust laws. Accordingly, corporate counsel should be aware of the types of activities which may trigger antitrust enforcement. Quite often seemingly-innocuous conversation and information may raise antitrust issues. Therefore, it is imperative that counsel advise their corporate clients to be mindful that all communication with competitors, suppliers, and consumers may raise antitrust issues. For reference, below are four areas that may present antitrust concerns.

  • Mergers and Acquisitions
    The key inquiry is whether the merger or acquisition would result in the lessening of competition in any line of commerce. One focus is the prevention of monopoly power and the sustained ability to raise prices post-merger. Additional areas of concern include the ability of the merged entity to engage in anticompetive behavior either on its own or in concert with competitors. As a result, the Hart-Scott-Rodino Antitrust Improvements Act requires federal agency notification and approval of any merger or acquisition that exceeds statutory thresholds. Generally, mergers that increase market share above certain thresholds are likely to warrant detailed scrutiny.
  • Trade Associations / Trade Shows
    Trade shows are effective forums for the development of public policy, but are also breeding grounds for anticompetitive behavior. Data and information exchange between competitors is a focus of antitrust concern. Although compilations of public information generally do not raise antitrust concerns, disclosure of non-public information may be impermissible. Impermissible information exchanges include exchanges of current or future pricing information, costs of production and bidding behavior.
  • Information exchanges can facilitate anticompetitive agreements between competitors. Types of prohibited agreements include price fixing, geographic market division, refusals to deal with specific consumer(s) or supplier(s) and bid-rigging. Therefore, upon learning that the corporation is sending representatives to either a trade show or trade association meeting, antitrust or compliance counsel should be contacted in order to advise the individuals of prohibitive topics of conversation.
  • Price Fixing
    Price fixing refers to agreements between competitors on prices charged to consumers or other third parties. Price fixing agreements are per se violations of Section 1 of the Sherman Act and subject the offending party to both criminal and civil liability. To prevent against an allegation of price fixing, businesses should be very cautious about sharing any information between competitors regarding current or future prices or other areas of competition. This includes any information regarding retail price, production costs, terms of sale, levels of output, price changes, discounts, rebate pricing methods, sales periods, bidding processes or any other aspect that affects price or market behavior.
  • Refusal to Deal / Boycotts
    Refusing to deal with a supplier, consumer or competitor without business justification, may trigger antitrust inquiry. Concerted refusals to deal (boycotts) include refusing to certify products, admit new members into a trade association, termination of existing relationships and refusing to enter into new relationships. Horizontal boycotts violate Section 1 of the Sherman Act and are illegal per se. Accordingly, business decisions to terminate relationships or refuse to deal with a firm within the supply chain should be supported by a legitimate business rationale to provide a defense against antitrust inquiry. Finally, corporate representatives attending trade associations or other meetings at which competitors are present should be counseled against exchanging information regarding business relationships with members in the supply chain.

The Bottom Line
Antitrust is an extremely complicated practice area, and while this piece has covered the basics, many additional topics could have been covered, i.e. price discrimination, predatory pricing, bid rigging, dealer terminations, tying arrangements, joint ventures, etc. But, at the end of the day, the old adage rings true: better safe than sorry. If there is any doubt that a proposed business action could raise antitrust concerns, consult antitrust counsel. Further, based on the potential consequences, it is also a good practice to develop an antitrust training program for employees.

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About the Author

Joel Samuels is an associate at Axinn Veltrop & Harkrider LLP in New York City. He can be reached via for any questions about this article.

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