The Federal Trade Commission (“FTC”) recently filed lawsuits against three pipe fitting companies alleging that the defendants engaged in price fixing activities and monopolization-related offenses. The FTC’s cases are particularly notable because the price fixing agreements challenged by the FTC were allegedly reached through the companies’ public communications with distributors and a trade association’s disclosure of aggregated sales data. Further, the cases challenged business conduct that is common – exclusive distribution agreements, rebates, and discounting programs – and often viewed as procompetitive or competitively neutral.
The FTC’s lawsuits were brought under Section 5 of the FTC Act, which covers a broader set of conduct than other antitrust laws. One of the defendants – Sigma Corp. (“Sigma”) – has already reached a settlement with the FTC prohibiting it from engaging in any of the conduct challenged by the FTC. The actions against the other two defendants – McWane, Inc. (“McWane”) and Star Pipe Products, Ltd. (“Star Pipe”) – are proceeding in an FTC administrative court.
According to the FTC, McWane, Star Pipe, and Sigma were the three largest suppliers of ductile iron pipe fittings (“DIPF”) to U.S. municipal water systems in 2008, supplying primarily foreign-made products. In 2009, the market dynamic changed with the passage of the American Recovery and Reinvestment Act (“Recovery Act”), which allocated $6 billion to water infrastructure projects conditioned on the use of domestically produced materials. The FTC alleged that the Recovery Act created a separate market for DIPF manufactured in the U.S. At the time, McWane was the only full-line supplier of domestically-produced DIPF. Sigma and Star Pipe considered entering, but only Star Pipe actually did so.
The FTC Complaints
The FTC’s cases are focused generally on four types of conduct.
First, between January 2008 and January 2009, following an invitation from McWane, both Star Pipe and Sigma allegedly agreed with McWane to fix prices for imported DIPF sold in the U.S. As part of the alleged plan, McWane publicly announced price increases that were quickly matched by Star Pipe and Sigma. Based on the complaint, McWane apparently communicated with Star Pipe and Sigma through a public letter sent to its distributors announcing price increases. In the case of Sigma, the FTC also alleged that McWane communicated price increases by telephone.
According to the FTC, the price fixing agreement was facilitated further through the parties’ trade association, the Ductile Iron Fittings Research Association. The trade association would receive information regarding each member’s previous month’s sales broken out by tons shipped, diameter size, and joint type. The trade association would then aggregate the data and distribute it to its member companies within two months of the actual sales. As a result, the trade association allegedly enabled each member company to monitor its own market share and the output levels of its rivals. Because any discounting would have an impact on share, the information disclosed by the trade association enabled the parties to monitor each other’s adherence to the price fixing agreement. According to the FTC, there were no legitimate procompetitive efficiencies to the trade association’s information sharing activities.
Second, the FTC challenged Sigma’s alleged efforts to revive the conspiracy after the trade association’s information exchange was disbanded in early 2009. It is notable that the FTC has challenged Sigma’s invitation to collude even though McWane and Star Pipe declined the invitation, and the FTC alleged no harm to consumers or competition from Sigma’s failed attempt.
Third, the FTC alleged that McWane monopolized a distinct market for U.S.-made DIPF, which had been effectively established by the domestic-only provisions of the Recovery Act. Specifically, McWane entered into an exclusive distribution agreement with Sigma, allegedly in exchange for Sigma’s agreement not to enter the domestic DIPF market. Further, as part of the agreement, Sigma agreed to adopt policies that required its customers to purchase domestic DIPF exclusively from McWane and Sigma. This effectively foreclosed entry by Sigma, thereby preserving McWane’s alleged monopoly in domestic DIPF.
Fourth, the FTC challenged pricing policies adopted by McWane that were designed to prevent entry by Star Pipe into the domestic DIPF market. In particular, McWane allegedly threatened distributors with the loss of accrued rebates and delayed or reduced access to the company’s U.S.-made DIPF if they purchased competing products from Star Pipe. Further, McWane allegedly changed its rebate structure for domestically-produced DIPF in 2011 to require distributors to purchase significant minimum share volumes of McWane products. According to the FTC, these actions foreclosed Star Pipe from a substantial volume of sales opportunities with waterworks distributors, thereby harming Star Pipe and maintaining McWane’s monopoly in domestic DIPF.
Commissioner Rosch’s Dissent
The FTC was not unanimous in its decision to challenge McWane’s rebate and pricing policies. Commissioner Tom Rosch issued a dissenting statement questioning whether the FTC would prevail on these claims, particularly in light of case law upholding certain bundled or volume discounting practices. Commissioner Rosch also objected to the inclusion of Star Pipe as a defendant in the alleged horizontal price fixing scheme based on the view that Star Pipe appeared less culpable and a judge may find it difficult to believe that Star Pipe was both a victim and a co-conspirator.
The FTC’s action in this matter is notable for several reasons.
First, the case is unusual because the alleged price fixing agreements were reached through public communications, such as McWane’s letters to its distributors. The complaint does not reveal much detail on the content of these communications, so it is unclear how the price fixing scheme was executed. Nevertheless, the case is a reminder that companies should be careful with respect to any communications regarding price and other competitively-sensitive terms.
Second, it is not unusual for trade associations in a wide range of industries to collect and distribute the type of sales information distributed in this matter. Although these information exchanges have antitrust sensitivities, they are often appropriate. However, it is important that information exchanges are structured and managed subject to appropriate antitrust guidelines. In this case, the FTC’s settlement agreement with Sigma permits certain exchanges of information, but only under conditions that are more restrictive than safe harbor information sharing guidelines previously established by the agency.1
Third, the case is a reminder that companies with high shares should consult antitrust counsel with respect to their pricing policies, particularly if they include bundled pricing or loyalty rebates. Although such discounts are often procompetitive and benefit consumers, they may raise red flags under certain circumstances.
Fourth, McWane is a reminder that the FTC may challenge attempts or invitations to collude, even if the efforts are rebuffed and no collusion ultimately takes place. The agency is able to challenge such conduct under Section 5 of the FTC Act, which prohibits “unfair methods of competition” and “unfair or deceptive acts or practices.” The FTC considers the FTC Act to be broader than other antitrust laws.
Finally, the FTC’s action is an important reminder of this administration’s approach with respect to antitrust enforcement, and is consistent with Chairman Jon Leibowitz’s assertion that the agency will “use every tool in [its] arsenal” to protect consumers.2