Associations Antitrust Compliance - Materials Technology ... trade... · Monopoly Leveraging – Use of Market Power in One Market to Create a Competitive Advantage in Another Market

Associations

Antitrust Compliance

October 2013

Robert A. McTamaney

C , L & MARTER EDYARD ILBURNwww.clm.com Partners for Your Business®

General Antitrust Principles

• Competition Benefits Customers • Greater Scrutiny of Dealings With

Competitors Than With Suppliers or Customers

• “Market Power” = Monopoly Power = Additional Burdens

• The Power to Set Prices Without Effective Competitive Response.

• Actions Supported by Legitimate, Pro-competitive, Non-coercive Business Purposes Generally Fine


Basic Rules for Antitrust Compliance

• Competitors may not agree with competitors – On prices, or on terms of sale. – To allocate customers, territories, or markets. – Not to compete, such as bid-rigging – On prices for goods or services they are purchasing – To boycott suppliers/customers for anti-competitive

ends – On levels of production or service.

• Companies may not use dominant market positions to monopolize a market, control prices, or exclude competitors. Generally, Market Power = Monopoly.


Sherman Act - Section 1

• Forbids Contracts, Combinations or Conspiracies in Restraint of Trade.

• Violation Is a Felony. • Unilateral Action = Legal • Same Concerted Action = Illegal


Per Se Antitrust Violations

• Price Agreements With Competitors • Market or Customer Allocation Agreements • Agreements to Limit Service or Boycott

Customers or Suppliers • Agreements on Terms and Conditions of Sale or

Purchase • Resale Price Maintenance Now Rule of Reason

under Federal law, still per se illegal in some states


Law Regarding Conspiracies • Agreement Between Two or More Persons to

Accomplish an Unlawful Objective or a Lawful Objective By Unlawful Means

• Agreement May Be Inferred From Conduct • Things You Can Do Alone You Cannot Do

With Others • Liable for Acts of Co-conspirators • Withdrawal Requires Affirmative Act –

Contact Authorities – Not Just Stop


“Rule Of Reason” Antitrust Issues

• Balance Restrictions vs. Benefits • Bona Fide Joint Ventures • Sharing Information With Competitors • Agreements With Customers or Distributors

to Refuse to Deal With Others • Tying – Conditioning Sale of One Product

(with market power) or Service on Buyer’s Purchase of Another

• Exclusive Dealing; Resale Price Maintenance


Sherman Act - Section 2

Forbids Monopolizing or Conspiring or Attempting to Monopolize.


Section 2 Violations

• Use of Unfair Means to Acquire or Maintain Monopoly Power

• Use of Essential Facilities to Monopolize • Monopoly Leveraging – Use of Market Power

in One Market to Create a Competitive Advantage in Another Market

• Predatory Pricing – Pricing Below Cost to Drive Out Competitors


Clayton Act and FTC Act

• Section 4 – Private Action; Treble Damages, Attorneys Fees and Costs

• Section 5 – Guilty in DOJ Suit Is Prima Facie Evidence of Liability in Civil Suit

• Section 7 – Prohibits Mergers and Acquisitions Likely to Lessen Competition. (HSR Pre-Merger Notification)

• FTC Act Section 5 – “Unfair Methods of Competition”


Market Definition

• Product Market – What Other Products Will Consumers Substitute If Defendant’s Product Becomes Too Expensive?

• Geographic Market – Where Can Consumers Go to Buy Product or Service From Someone Other Than Defendant If Defendant’s Price Is Too High?

• “Functional Interchangeability”


Robinson-Patman Act

• Price Discrimination Between Competing Buyers • Purchase of Commodities, Not Services • Goods of “Like Grade and Quality” • Plaintiff Must Show Actual Harm • Sale in Interstate Commerce • “Primary Line” injures competitors of the

Manufacturer • “Secondary Line” injures a disfavored Buyer not

receiving best price given to favored Buyer • Cost Defense and Meeting Competition Defense


International Transactions • U.S. Antitrust Laws Reach Activities

Abroad Which Have a “Substantial and Reasonably Foreseeable Impact” in U.S.

• Non-residents and Non-citizens of U.S. Can Be Subject to U.S. Antitrust Liabilities

• A Proposed Arrangement May Also Be Impacted by the Competition Laws of the EU or Another Country


Types of Associations

• R&D; Joint Study and Action on Industry Issues

• Joint Advocacy • Benchmarking and Cooperation • Self-Regulation and Codes of Conduct • Adopt and Enforce Technical Standards • Social Camaraderie


Association Problem Areas

• Facilitates Competitor Interaction • Raises Issues of Concerted Activity • Standards Can Be Anti-Competitive • Codes of Conduct and Coercion • Membership Must Be Fairly Open • Mere Membership Is Not An Agreement, But

Members and Officers Are Exposed


Association Problem Areas

• Informal Discussions Between Competitors Who Gather Together at Meetings

• Anticompetitive Membership Restrictions • Anticompetitive Programs Involving

Certification of Products (Generally For Safety or Quality) or Setting of Standards

• Filing of Sham Lawsuits


Information Exchanges

• Benchmarking, Safety, Quality • Concerted Legislative Lobbying • Price Exchange is Most Sensitive • Use Third Party Collector and Share

Aggregate Data Not Most Current • Involve Counsel at Each Step, and

Written Support for the Process


Ductile Iron Fittings Cases

• Consent Decrees -- Information must be at least 6 months old.

• Statistics must cover 6 months and only twice a year. • Must be anonymous aggregation of data from no

fewer than 5, no individual’s data can be more than 25% of total, and no three can be more than 60%.

• Communications (1) at official meetings, (2) written agenda, and (3) in presence of antitrust counsel.

• All statistics must be made public at the same time they are communicated to any contributor.


Association Membership

• Must have “reasonable rules in order to function effectively.” Northwest Wholesale Stationers (1985).

• The more important the membership, the more sensitive any exclusion (boycott) of a logical member.

• Excluded Member Must Show Damages.


Membership Criteria

• Possible Group Boycott • Participant in a Particular Industry • At a Particular Level or Levels • Or in Particular Geographic Areas • Fees Can Vary if Criteria are Logical • Have Objective Rules, Uniformly Applied and

Procedurally Fair. • Different Membership Classes and Rights Can

Be Solution.


Criteria Rules of Reason

• How important is membership? • How objective are criteria? • How consistently are criteria applied? • How fairly are admission and expulsion

and other decisions made? • By members or by disinterested third

parties?


Member Services

• How important are they to compete? • What alternatives are available? • “Mere” cost savings? • Or necessary to stay in business? • Can the service be provided without full

membership? • Fair charges OK for non-members.


Trade Show Access

• Rule of Reason. Objective Fairness. • Importance of Show. • Reasonable Participation Rules. • Not a Private Club. • Participation, Location, Sponsorships,

Prominence all raise issues.


Standards

• Technical, Quality, Safety, Compatibility; Certifications.

• Sherman Act Section 1; FTC Act Section 5; State Laws, Tortious Interference.

• Pro-Competitive – Allied Tube (1988). • Usually Rule of Reason. • Horizontal/Vertical Refusals to Deal.


Standards Issues

• Promulgation Usually Requires Exchange of Confidential Information.

• Cost of Compliance is a Major Factor, but Prices and Margins are Sensitive.

• Quality and Safety Reasons to Justify. • Is the Goal Legitimate? • Is the Standard Reasonably Related? • Balance the Burden vs. the Benefit.


How to Adopt Standards

• Use an Expert Organization. • Involve the Government. • Open the Process to All Affected. • “Due Process” Approach. • Mandatory or Voluntary; Who

Enforces? • Or Mandatory in Fact?


Standards and Patents

• Standards Organizations must expect full disclosure.

• Patent holder gets standard adopted that only its patented product satisfies.

• Instant monopoly! • RAND/FRAND licensing usually the

solution.


Standards Cases

• ASME v. Hydrolevel – Misuse of Pressure Vessel Standard by Competitor.

• Plant Oil (2011) Cases dismissed because compliance not necessary to compete.

• Allied Tube – backdoor exclusion of new PVC product by steel competitors.

• Healthcare cases excluding unqualified doctors.

• Sports League Cases assuring uniformity.


Noerr-Pennington and Lobbying

• Wide antitrust immunity for competitors and associations to seek legislation.

• Noerr (1961) and Pennington (1965) • OK Even if Competition is restricted or

eliminated or a monopoly is created. • First Amendment Trumps Sherman Act. • But Does Not Protect Fraud or Sham

Litigation. Sykes (2010).


Noerr-Pennington and Associations

• Protects Association Support of Legislation.

• Testimony; Political Action Arms. • Litigation Challenging Regulations. • All Are Protected. • But Not Shams or False Testimony or

Illicit Conspiracies. But Bobrick Case.


Noerr-Pennington Exceptions

• Superior Court Trial Lawyers (1990). Noerr does not protect concerted boycott to secure higher rates.

• And does not protect private action aimed at a government, vs. to secure new laws. Carpet Group (2003).


State Action Doctrine

• Parker v. Brown (1943). • California permitted raising growers to

withhold raisins to raise prices. Immune. • Health Care Equalization Committee

(1988). Iowa directed organization to refuse to deal with uncertified chiropractors. Immune.

• Phoebe Putney/Dintelman Cases (2011).


Non-Member Access

• Not Required Unless Access is Only Reasonable Competitive Alternative.

• Fees and Charges Must Be Fair; Not Required to Subsidize Non-Members, Particularly if They Could Have Joined.

• OK to Have Reasonable Advance Access to Results for Members.


Codes of Ethics

• Extremely Important to Maintain Ethics and Reputation of the Industry.

• But Take Care to Avoid Backdoor Boycott, or Subtle Price Agreement, or Concerted Sales Practices.

• Especially Sensitive if Price or Competitive Practices are Dealt With.

• Legitimate, Objective, Uniform, Fair.


Specific Practices

• Avoid Exchange of Price Information, Publication of Members’ Current Prices, and Suggested Retail Prices.

• Do Not Ban Price Cutters, Price Adjusting, or the Development or Sale of Legitimate New Services.

• Do Not Restrict Members’ Services, Allocate Customers or Territories, or Engage in Boycotts or Refusals to Deal.


Trade Association Cases

• National Society of Professional Engineers (1978). Code of Conduct Restricted Bidding.

• ABA (1996) Competitive Law Schools. • National Association of Realtors (2006) Brokers

Barred from On-Line Sales Practices. • National Association of Music Merchants

(2009) Wrongful Price Information Exchange. • American Needle v. NFL (2010) Rule of Reason

Applied to Logo Licensing.


Gray Areas

• Standardization • Certification and Seals of Approval • Standards of Industry-wide Contracts

and Warranties • Codes of Conduct • Trade Show Access • “Mere Membership” is Not Agreement.


Websites

• Members chats and Q&As need careful monitoring.

• Opinions about competitive products must be fair.

• And with full disclosure of any conflict of interest.

• B2B sites require fair access and confidentiality without exclusivity.


Joint Research & Development

• National Cooperative Research and Production Act of 1993

• Standards Development Organization Advancement Act of 2004

• Applies Rule of Reason to JVs and standards development organizations; permits attorneys fees.

• Actual vs. Treble Damages if Notification is filed with DOJ and FTC.


Joint Ventures

• Not Per Se Illegal If Joint Venture Involves a Bona Fide Integration of Resources.

• Venture Then Becomes One Actor. • Market Analysis Used to Measure

Competitive Effects of Proposed Venture. • Creation of a New Product or Service Is a

Pro-competitive Justification. • Elimination of Competition Between Joint

Venture Partners Is the Typical Concern.


Mergers

• Hart Scott Rodino -- 30 Days • FTC or DOJ – “Second Request” • “Item 4(c) and 4(d)” Documents • No Bar to Private Lawsuits


Sherman Act Violations Are Felonies

• Sherman Act Fines up to $100 Million for Corporations and $1 million for Individuals; Prison Sentence up to 10 Years. Maximum fine may be increased to twice the loss suffered or twice the amount gained.

• DOJ averages over $750 million per year. • Also treble damages and attorneys fees. • EU – fines up to 10% of worldwide turnover


Civil Actions

• Treble Damages • Plus Attorneys Fees • Tremendous Costs • And Diversion of Attention


Illustrative U.S. Cases

• HeereMac (Marine Construction Industry) $49 Million

• Archer Daniels Midland (Preservatives) $100 Million

• Hoffman-LaRoche (Vitamins) $500 Million

• Pfizer (Additives) $20 Million • BASF (Sweeteners) $225 Million • International Cartels Were

Involved in 90% of Recent Cases


DOJ Amnesty Program • Stop and Self-Report Before Investigation • Report Wrongdoing Candidly and Completely • Fully Cooperate With DOJ • Make Restitution Where Possible • No Instigation or Coercion of Illegal Conduct • All Directors, Officers, and Employees Who Come

Forward, Admit and Cooperate, Also Amnesty • Sometimes a Race to the Courthouse • Dodd Frank Whistleblower Program


Practical Considerations • Care During Trade Association Meetings and

Other Meetings With Competitors • All Agreements Evaluated for Antitrust Risk • Avoid Coercive Conduct • Proper Documentation of Price Changes • Care in Creating, Preserving, and Discarding

Written Communications, Including E-mail • Think Before You Sue – Antitrust

Counterclaims • Get Legal Advice


Guide to Document Preparation

• What is a document? • Includes draft documents,

letters, emails, attendance notes, meeting transcripts and diary entries

• Rules for document creation • Avoid Sensational or Suggestive

Language • Write positively • Focus on facts • Know when to get advice


Words to Avoid

• Do Not Copy • Destroy After

Reading • Annihilate • Off-the-record • Dominate • Out Of The Market • Leverage

• Hurt • Control • Eradicate • Preempt • Secret Agreement • Kill • Break Down


U.S. Trade Sanctions

• Typically Imposed by President Under Emergency Authority and with Maximum Possible Scope to Cover All Trade by Any U.S. Person with the Target Nation.

• “U.S Person” Includes All Persons in the U.S., All U.S. Citizens and Permanent Resident Aliens, Wherever Located, and All Entities Organized Under the Laws of the U.S.

• Criminal Penalties of up to 20 Years in Prison, $1,000,000 in Corporate Fines and $250,000 (or more) in Individual Fines. Civil Penalties of up to $275,000 Per Violation.



• Afghanistan • Angola • Burma • Cuba* • Iran* • Iraq*

• Liberia • Libya* • North Korea* • Sierra Leone • Sudan*

* Comprehensive Trade embargos currently in place against these nations and others

Target Nations Include



Prohibited Activities • Import of goods or services to the U.S.

originating in a target nation. • Export of goods, technology or services

by a U.S. person to a target nation. This includes transactions through a third country.

• Financial transactions and investment. • Facilitation or approval by a U.S. person

of a transaction between a foreign person and a target nation.


U.S. Anti-Boycott Legislation • Prohibits U.S. Companies and Their Foreign

Affiliates From Participating in Foreign-led Boycotts Against Countries Which Are (A) Friendly to the U.S. and (B) Are Not Themselves Subject to U.S.-Led Boycotts.

• In General, No Prohibition on Complying With Restrictions That a Boycotting Country Places on the Goods It Imports Into Its Own Country, or on the Export of Its Own Goods.

• The Penalty for Each Violation May Include 5 years’ imprisonment, and a Fine up to $50,000 or 5X the Value of the Exports Involved, Whichever Is Greater.


Export Controls

• International Traffic in Arms Regulation (ITAR) – military uses.

• Export Administration Regulations (EAR) -- goods and technology with both civilian and military uses.

• OFAC enforces sanctions against foreign countries and nationals, terrorists and international narcotics traffickers.


Foreign Corrupt Practices Act

• FCPA Prohibits Corrupt Payments to Foreign Government Officials to Obtain or Keep Their Government’s Business.

• Massive Fines and Substantial Prison Sentences in Recent Cases.

• An Employer May Not Pay an Employee’s Fines.


Adopt An Antitrust Policy

• First question a new Member asks. • Announce it at Meetings. • Counsel present at all key meetings. • Agendas and Minutes and Websites and

Membership Criteria all reviewed. • Be conservative – even winning the case

can be very expensive!


Questions

Robert A. McTamaney (212) 238-8711

[email protected]