Dealing with Competitors

• Pages: 1-44

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CHAPTER I

DEALING WITH COMPETITORS

A. What Are the Basic Rules That Govern My Company’s

Interactions with Competitors?

The principal concern raised by “dealing with competitors”—the

subject of this chapter—is a concern under Section 1 of the Sherman Act,

which makes it illegal to enter an agreement that unreasonably restrains

trade.1An agreement or conspiracy between or among competitors with

the sole or principal effect of limiting competition among them along any

parameter—on price, terms, output, or product quality, either generally

or with respect to a specific customer—will likely violate this statute,

exposing both the individual and his employer to enormous criminal

sanctions and civil liability. Because these consequences are so severe,

this chapter focuses not only on what specific conduct might violate

Section 1, but also on how to advise clients to conduct themselves in a

manner that minimizes the risk of being accused unfairly of violating the

statute, i.e., the “best practices” for avoiding even the appearance of an

antitrust violation.

Although antitrust laws sometimes seem complex, a Section 1

violation can be established by proving just two elements: (1) an

agreement that (2) unreasonably restrains trade. Below, we briefly

explore the meaning of thoese two elements.

1. Section 1 of the Sherman Act provides that “[e]very 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.” 15 U.S.C. § 1. The case law has the ter ms

“contract, combination . . . or conspiracy” interchangeably with the term

“agreement.” 1 PHILLIP E. AREEDA &HERBERT HOVENKAMP,ANTITRUST

LAW:ANANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION

¶ 1403 (3d ed. 2006).

2Frequently Asked Antitrust Questions

1. Agreement

A firm or individual cannot violate Section 1 by acting unilaterally;

rather, Section 1 requires an “agreement” between or among at least two

persons or entities with separate economic interests.2Thus, an agreement

that violates Section 1 of the Sherman Act can be between a company

and its competitor, its upstream supply channel, its downstream

distribution channel, its ultimate customers, its joint venturers, or even a

joint venture in which it is one of the joint venturers.

It is important to understand that for Section 1 purposes, an

“agreement” can be, but does not have to be, reflected in a written

document, a firm handshake, or a verbal acknowledgement. An

agreement exists for Section 1 purposes if the parties merely share a

“conscious commitment to a common scheme designed to achieve an

unlawful objective.”3

Such a “conscious commitment” can be proven by direct evidence.

That evidence may take the form of a written contract which contains a

provision that is alleged to restrain competition unreasonably, such as an

exclusivity provision, a resale price maintenance provision, a territorial

restriction on commercial activities, or the like. Or, it may take the form

of an eye witness to an agreement to fix prices, or an admission by a

party that it has participated in such a conspiracy. Or, a verbalized

suggestion, followed by a responsive “knowing wink,” may be enough

evidence to show the requisite “conscious commitment to a common

scheme.”4

2. The Supreme Court has held that an agreement between a parent

company and its wholly owned subsidiary is not an agreement for Section

1 purposes because those two entities do not have independent economic

incentives. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752

(1984). This rationale has been extended to find that agreements between

parent companies and their majority-owned subsidiaries do not fall within

the ambit of Section 1. See Freeman v. San Diego Ass’n of Realtors, 322

F.3d 1133, 1148 (9th Cir. 2003) (“Where there is substantial common

ownership . . . individual firms function as an economic unit and are

generally treated as a single entity.”); see also Novatel Commc’ns v.

Cellular Tel. Supply, 1986 WL 798475 (N.D. Ga. 1986).

3. Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 764 (1984).

4. The American Bar Association’s Model Jury Instructions provide that,

“[t]o establish the existence of a conspiracy, the evidence does not need

to show that its members entered into any formal or written agreement

. . . . The agreement may itself have been entirely unspoken.” See ABA

SECTION OF ANTITRUST LAW,MODEL JURY INSTRUCTIONS IN CIVIL

Dealing with Competitors 3

Alternatively, an agreement can be proven by circumstantial

evidence from which the trier-of-fact may infer an agreement or

conspiracy. Importantly, a court or jury may infer a “conscious

commitment to a common scheme” based largely on the conduct of the

alleged conspirators. Specifically, an agreement for Section 1 purposes

can be inferred from an opportunity to conspire (such as that provided by

meeting with competitors) followed by similar and reasonably

contemporaneous business conduct (such as price increases, output

restrictions, or reductions in quality) that arguably would not be in any

single competitor’s economic self-interest if it were acting alone.5

Many cases brought under Section 1 involve such “parallel conduct”

by competitors. (The antitrust cases use the term “parallel conduct” to

refer to circumstances in which competitors engage in substantially

similar business conduct at about the same time.) Often, the parallel

conduct in question involves price increases, and the question is whether

competitors’ substantially similar and reasonably contemporaneous price

increases “stem[] from independent decision or from an agreement, tacit

or express.”6This is often a very difficult question to answer because, as

the courts have long recognized, there are often innocent explanations for

parallel conduct, including parallel price increases.

ANTITRUST CASES B-2 (2005). See also Esco Corp. v. United States, 340

F.2d 1000, 1007 (9th Cir. 1965) (“A knowing wink can mean more than

words.”); Weit v. Cont’l Ill. Nat’l Bank & Trust Co. of Chi., 641 F.2d

457, 475 (7th Cir. 1981) (“This exchange of information regarding the

‘regular’ interest rate and the interest rate being charged by Pullman is

analogous to ‘(a) knowing wink (which) can mean more than words’ in

determining whether defendants agreed to fix prices.”). But note that in In

re High Fructose Corn Syrup Antitrust Litiga tion, 295 F.3d 651, 654 (7th

Cir. 2002), the Seventh Circuit Court of Appeals said that the:

language [of the Sherman Act] is broad enough . . . to

encompass a purely tacit agreement to fix prices, that is, an

agreement made without any actual communication among the

parties to the agreement . . . . Nevertheless, it is generally

believed . . . an agreeme nt involving actua l, verbalized

communication, must be proved in order for a price-fixing

conspiracy to be actionable under the Sherman Act.

Id. at 654. Thus, a verbalized suggestion, followed by a “knowing wink,”

is enough to infer an agreement for Section 1 purposes.

5. See High Fructose Corn Syrup, 295 F.3d at 654-55; City of Tuscaloosa v.

Harcros Chems., 158 F.3d 548, 570-71 (11th Cir. 1998).

6. Theatre Enters. v. Paramount Film Distrib. Corp., 346U.S. 537, 540

(1954).