For more than a century, the Federal Trade Commission has been protecting the concerns of American consumers. The mission of the Federal Trade Commission or FTC is to protect consumers and competition by preventincomg the anticompetitive, deceptive, and unfair business practices through law enforcement, advocacy, education, and without unduly burdening business activity. The focus of FTC is to ensure that businesses do not form coalitions or adopt business practices that hurt competition, and consumers’ welfare and that consumers have access to accurate information that they need.
Anticompetitive behavior or behavior that is likely to reduce competition is of two types mainly – single-firm conduct (attempt at monopolization by a single firm), horizontal conduct (coalition or agreement between competing players targeted at growing their market power against remaining players).
The focus of this article is the anticompetitive behavior that results from the agreement between competitors. Collaboration between the competing players can often result in anticompetitive behavior and antitrust risks. There are antitrust laws in the United States that are enforced by the DOJ and the FTC mainly and that target to eliminate anti-competitive behavior and to ensure that the economy is seeing fair competition. While competitor collaborations are mostly procompetitive, there are several instances when firms collaborate to a degree that they stop playing independently. There are clear rules that prohibit even the most blatant non-competitive agreements. Such anti-competitive behavior includes price-fixing, bid-rigging, market division, customer allocation, group boycotts, and other types of anti-competitive behavior resulting from competitor collaborations.
It is a type of competitor agreement (can be a written agreement or just a verbal agreement between involved players or can be implied from their conduct) that raises prices, or reduces them or stabilizes prices or the competitive terms. In general, the antitrust laws require each player to set its own prices and other terms without agreeing with a competitor. When competing players try to decide prices and other terms through an agreement among them, it generally works against the consumers’ and the economy’s welfare. Customers want that the prices are set transparently on the basis of demand and supply and not on the basis of competitor agreement. Most often competitor collaboration on setting prices and restricting competition leads to higher prices than normal and losses for the consumers. So, price-fixing done through competitor agreement is among the leading concerns for the government antitrust enforcement.
Price fixing agreements among competitors are almost always illegal, whatever range they fix the prices in. Whether the involved players fix the prices at the minimum price range, at the maximum, or in the mid-range, it is almost always illegal for competing players to enter into a price-fixing agreement.
When price fixing is illegal?
Price fixing is illegal when two or more competitors enter into an agreement and take actions that can lead to higher, lower, or stabilized prices of a given product or services, without any legitimate justification. Generally, the players that forge such agreements do so in secret and such secret collaborations can be very hard to uncover. However, circumstantial evidence can help the investigating agencies uncover such secret dealings.
However, not all price changes or price similarities are illegal. It can also be a result of chance and often they are a result of normal market conditions. For example, prices charged for wheat or similar commodities are generally similar across all sellers. It is mainly because while the products are nearly identical, the prices charged by farmers also rise and fall together without any agreement among them. If the produce of wheat decreases due to a drought, then it growth in costs for all the farmers that are affected. Similarly, if consumer demand for wheat increases suddenly, it will cause the prices of wheat to rise uniformly across all farmers. Price fixing is related to not only prices but also to many other terms that affect the prices that consumers pay like shipping fees, warranties, discount programs, or the financing rates. A discussion of any of the following topics may give rise to antitrust scrutiny for price fixing. These topics include:
- – Present or future prices
- – Pricing policies
- – Promotions
- – Bids
- – Costs
- – Capacity
- – Terms or conditions of sale, including credit terms
- – Discounts
- – Identity of customers
- – Allocation of customers or sales areas
- – Production quotas
- – R&D plans
In case of price fixing, a defendant may argue that there was no such agreement but in case the government or a private party can prove that there was a plain price fixing then there cannot be any defense to it. Defendants cannot argue that the prices were reasonable to consumers or that necessary to avoid cut throat competition or stimulated competition in order to justify their behavior.
An agreement whose aim is to restrict production, sales or output also illegal like direct price fixing, since these practices have the potential to drive the prices of commodities higher. For example, an agreement among competing oil importers to restrict lubricant supply by refusing to import or sell them in Puerto Rico was challenged by the FTC. The agency alleged that it was a conspiracy and an unlawful horizontal agreement that was aimed at restricting output and was inherently anticompetitive as well as generated no cognizable efficiencies that could balance the anticompetitive impact of the agreement. These players were seeking to pressurize the legislature so that they would repeal an environmental deposit fees on lubricants. They had also warned of lubricant shortages as well as higher prices.
If Gasoline prices rise in an area at the same time and by the same amount, is it illegal?
A uniform price change that occurs in the same area at the same time can be a result of price fixing. However, there are also chances that the businesses could be responding to a change in the market conditions. For example, if the prices of crude oil have increased due to changed market conditions in the international oil market, it can cause the wholesale oil prices of gasoline to increase. Local gasoline stations increase the wholesale gasoline prices simultaneously to cover the increased costs. There are other market forces also that make the sellers adjust their prices quickly. For example, publicly posting current prices which is common with most gas stations, encourages the suppliers to adjust prices accordingly so as to avoid loss of sales. However, an antitrust violation may occur if all the gasoline station operators talked to each other about raising prices and entered into an agreement for a common pricing plan.
A company monitors the competitor’s ads and offers similar discounts and sales incentives for the customers, is it illegal?
Matching competitors’ prices is not illegal. There are several businesses in the US that claim to match the lowest prices in the market for the products they sell. That is not illegal. It’s a good business practice and occurs in highly competitive markets. Each business in the United States is free to set its own prices. It can also charge the same price as its competitors. However, if the decision is based on a common agreement of coordination between competing players, then it may be considered illegal.
Many times when bids are being awarded by means of solicitation, bidders may coordinate among themselves to rig the bidding process. This undermines the bidding process and is considered illegal. While bid-rigging may take several forms, one of the most common types of bid-rigging is when competitors agree in advance and coordinate among themselves that which player or firm is going to win the bid. For instance, there are ten players involved in the bidding process of which five form a secret coalition. They enter into an agreement that they will take turns to be the lower bidder, or sit out of a bidding round, or provide unacceptable bids to cover u their scheme to rig the bids. Apart from these actions, there are also other types of bid-rigging schemes or agreements like subcontracting a part of the main contract to the losing bidders or to form a joint venture to submit a single bid. For example, there are three school bus companies that enter into a joint venture to offer transportation services under a single contract with the school district. Instead of integrating their operations that would reduce costs, the companies formed the joint venture mainly to prevent the three players from offering competing bids.
Market Division or Customer Allocation:
Dividing geographical markets or allocating customer segments among players or, the involved parties in a relevant agreement is almost always illegal. Competitors may enter into plain agreements that divide sales territories or assign customers to the involved parties among them. Such agreements are illegal because they are essential anticompetitive or created so that the involved parties do not compete with each other.
For example, FTC discovered that two chemical companies FMC Corporation (based in the US) and Asahi Chemical Industry Co ltd. (based in Japan) entered into a conspiracy to divide the world market for microcrystalline cellulose (MCC) which is a binder used in making medicines (vitamin supplements or tablets). The two companies entered into an agreement for dividing markets. As a part of the agreement, FMC agreed not to sell the product to the customers in Japan or East Asia without the consent of Asahi whereas Asahi agreed not to sell the product in North America or Europe with the consent of FMC. As a result, FMC was restricted from acting as the US distributor for any competing manufacturer of microcrystalline cellulose including Asahi for ten years. Apart from that FMC was also prohibited from distributing in the US any other product that Asahi manufactured.
You want to sell your business and the buyer insists that you sign a non compete clause. Is it illegal or not?
A non compete clause is not always illegal or unethical. A limited non compete clause is commonly found included in business agreements whenever a deal to sell a business is formed. Generally, courts have considered such agreements legal if they are ancillary to the main transaction, reasonably necessary to protect the value of the assets on sales as well as limited in terms of the time and area being covered.
However, in some situations, a non compete clause may be illegal or anticompetitive. Several such antitrust concerns have been raised in the past. One such case that came to light was that of American Renal Associates and Fresenius Medical Care Holdings Inc in 2007.
The proposed acquisition of assets from Fresenius AG by ARA would have made it the only operator of dialysis clinics in the Warwick/ Cranston Area of Rhode Island. The buying agreement included the sales of five Fresenius Clinics to ARA as well as a closure of three more clinics in the Rhode Island and Massachusetts area. After the FTC staff raised antitrust concerns, the two parties had to terminate the agreement.
As a result, FTC challenged the agreement to close the three clinics as a clear agreement to pay a competitor to exit the market. Apart from that, the FTC alleged a section 7 violation in the Warwick/ Cranston market for dialysis services. So, the commission also ordered the parties not to enter any agreement to close the dialysis clinics. The commission order also required ARA to notify the FTC in case it intended to acquire any dialysis centers in the Warwick/Cranston area over the next ten years.
If a company individually decides not to do business with another firm, it may not be illegal. However, if there is a group of competing businesses that together enter into an agreement to not engage in business with a distinct group of target customers or businesses, then such a boycott may be illegal. Competing companies can enter into such agreements to grab or exercise market power. For example, two or more competing companies can enter into an agreement for a group boycott that will be used to implement an illegal price-fixing scheme. In such a case, the competitors will fix the terms of doing business with others where the target would be to raise the prices in their own favor. The involved parties will do business with others on the basis of the terms and conditions set out in their joint agreement. While it will hurt the consumers and the other businesses in the market, the involved firms will benefit by charging higher prices. However, if it is a single firm that independently decides that it will not offer its goods or services at the prevailing services, then it is going to raise any antitrust concerns. Antitrust concerns will arise only when there are two or more companies involved in the agreement. If there are competing players involved in the agreement who together decide to not offer their products or services at prevailing prices in order to achieve higher prices for their products and services, it will definitely give rise to antitrust concerns.
In its history, the FTC has challenged several such actions and decisions in the healthcare industry. For example, healthcare providers like doctors forming an agreement to not deal with insurers or other buyers on terms except the ones laid out in the joint agreement among the group of doctors. Not just in the healthcare industry, but FTCX has also successfully challenged such agreements with other service providers including lawyers in the past. It challenged a group boycott by a group of Superior Court Trial Lawyers to stop providing legal services to indigent defendants in the District of Columbia until the district increased the fees paid to the lawyers in those cases. In this case, the decision of FTC was upheld by the Supreme Court.
Similar boycotts that are targeted at making the entry of new firms into a market are also illegal as well as those aimed to snatch market power away and create a disadvantage for an existing player. FTC has been successful at preventing several such boycotts in the past including one by a group of physicians that aimed to prevent a managed care organization from establishing a competing healthcare facility as well as one by retailers who wanted to force manufacturers to limit the volume of sales they achieved through a competing catalog vendor.
Boycotts that are aimed at cutting prices for the seller are also highly likely to raise antitrust concerns. Such boycotts can be achieved through the help of a common dealer or supplier. For example, in the Toys R US case in 1996, FTC took action against the company for using its dominant position in the toy industry to obtain agreements from the toy suppliers to not sell the same toys to the warehouse clubs that they sold to Toys R Us.
” In October 1998, the Commission issued its decision that Toys “R Us had orchestrated horizontal and vertical agreements with and among toy manufacturers to restrict the availability of popular toys to warehouse clubs, and ordered the company to stop pressuring manufacturers to limit supply or otherwise refuse to sell to discount club stores. Toys “R” Us appealed to the Seventh Circuit, and in August 2000, the appellate court upheld the Commission’s order.
In April 2014, on a petition from Toys “R” Us, the Commission modified its order to set aside certain provisions that restricted the company’s ability to enter into certain conditional supply relationships, finding that Toys “R” Us is no longer the largest toy retailer.”
Such group boycotts can be illegal in other conditions as well if they lack proper business justification and restrict competition. In 1995, FTC charged Santa Clary County Motor Dealers Association with using an illegal boycott to prevent a local newspaper from running articles that told consumers about how to use wholesale price information to negotiate for lower prices when buying cars from local car dealers. In this case, while FTC proved that there was no proper business justification behind the deal, it also affected price competition negatively.
If your company is having difficulties with a particular supplier firm that does not fulfill its commitments in time and does not properly respond to queries (other competing companies have also stopped engaging in business with this supplier), should as a purchasing manager you ask your firm to stop dealing with this supplier?
No, it will not be illegal to stop doing business with such a supplier. First of all, businesses are free to unilaterally choose their business partners. If it is not due to an agreement among competing businesses to stop dealing with a particular supplier, the decision to not deal with the targeted supplier must not be a cause of concern for antitrust agencies.