This article first appeared in the November 2015 edition of Compliance & Ethics Professional.

You might already be thinking: “Is this another article about why an antitrust compliance program is very important? Really? People in our company are ethical and would not do anything to violate the laws.” But when you were a kid (or maybe even just last week) did you ever get accused of something you didn’t do? That can also happen in the antitrust world. The “accusation” is called a treble-damage antitrust lawsuit, or worse, an indictment.

Even when a company (and its executives) may be blameless, antitrust lawsuits are sometimes brought because an executive made a statement, or wrote a memo or email, that made it seem like there was a violation. An ill-advised statement can be the “smoke” that invites a “Where there is smoke, there is fire” lawsuit. In other words, CEOs and salespeople can say the darndest things that may draw an antitrust lawsuit. In this article, we will give some examples of comments that invited antitrust troubles. We will also discuss how to assess risk in this area and educate employees about how certain words can be misinterpreted and invite trouble.

Antitrust Concerns

There are three primary areas of antitrust concern: cartels, abuse of dominance (i.e., monopoly), and mergers. A brief summary of the law may be helpful. Section 1 of the Sherman Antitrust Act1 states: “Every contract, combination… or conspiracy in restraint of trade or commerce… is declared to be illegal.” This prohibition is limited to “unreasonable” restraints. Price fixing, bid rigging, and other collusion on price among competitors has been held to be per se unreasonable. Price fixing is the prime “evil” under the antitrust laws. In the United States, and in a growing number of jurisdictions around the world, price fixing is punishable by jail sentences for individuals and large fines for corporations.

Practice Tip: When executives know they are on shaky ground, they sometimes write, “Do Not Forward—Delete After Reading!” This document often is not deleted from every place it may exist. Prosecutors are ecstatic when they find it.

Section 2 of the Sherman Act prohibits “monopolization, attempted monopolization, and conspiracy to monopolize interstate commerce or trade.” This section regulates unilateral actions of firms with market strength/market share. In other countries, this is typically referred to as “abuse of dominance,” which is a more descriptive term. Basically, a firm with market power may abuse their dominance if they engage in certain business practices that would go unchallenged if done by a small firm. These “abuses” may include tying arrangements, bundling products, volume discounts, etc. Finally, the government can challenge mergers if the result of the merger is deemed to give the resulting firm too much market power. We’ll take a look at some trouble spots in each of these areas.

Cartels

At a June trade association meeting, multiple airline executives spoke publicly about their plans to be “disciplined” in their approach to pricing and adding extra flights on popular routes. These ill-advised statements quickly drew an Antitrust Division investigation, which was followed in nanoseconds by private, class-action, treble-damage pricefixing cases. Over 74 class-action lawsuits have now been filed. The airline executives might have slipped by unnoticed with their similar statements, except they spoke at a time when ticket prices seemed sky-high while the price of fuel was nosediving.

Reuters story outlined what the airline executives should have known:

This (probe) should not be a surprise to the airlines,” said one antitrust expert who asked not to be identified to protect business relationships. “The word ‘discipline’ is a no no. It’s one of the words you don’t use. It’s like 101 in compliance.”2

Discipline in this context is a “bad word” because the discipline only works if competitors are all disciplined. For example, if one firm raises prices and others don’t, it will likely have to withdraw the price increase. It is, of course, possible that the executives had been counseled against making such statements and simply didn’t follow this sound advice.3

Another example of an ill-advised statement comes from Australia where the necessary “discipline” was expressed more explicitly. The CEO of Fortesque Metals declared at a business dinner: “I’m absolutely happy to cap my production right now. All of us should cap our production now and we’ll find the iron ore price will go straight back up to $70, $80, $90…. Let’s cap our production right here and start acting like grown-ups.”4

Practice Tip: It is not illegal to raise prices or cut output unilaterally (i.e., a decision a company makes on its own). Perhaps this CEO thought he was just stating what his company would do in response to changed market conditions. But public statements like this can be viewed as an invitation to competitors to do the same thing (“I’ll go up if you will.”) and an agreement can be inferred. Even when there is no agreement, an “invitation to collude” has been prosecuted as an attempt to fix prices, rig bids, or violate the FTC’s unfair competition act.5

Here is one last example of an executive who never received, or clearly forgot, antitrust compliance training. Steve Jobs didn’t do Apple any favors when he was interviewed after making the keynote talk at the introduction of the iBookstore. In the video a reporter asks Jobs:

Q: “Why anyone would pay $14.99 for the same eBook they can buy for $9.99 from Amazon?”

Jobs: “Well, that won’t be the case.”

Q: (Reporter tries to clarify) “Meaning you won’t be $14.99, or they won’t be $9.99?”

Jobs: “The prices will be the same.”6

Apple was sued by the Department of Justice, found liable, fined, and is now under a court-ordered antitrust compliance program.

Practice Tip: Apple has gone to court several times complaining about the heavy-handed nature and cost of the court imposed compliance monitor. It would have been much cheaper to have had a robust compliance program.

Practice Tip: When issuing a price increase, memos should not be written such as, “We are going up 5%, but so will all of our competitors.” That may be true—and simply an observation of parallel pricing in a concentrated market. But, better to explain why prices are going up: “We have seen a sharp increase in our raw material costs so we are going up 5%. Our competitors face the same increase, so it is likely they will have to do something similar.”

Abuse of Dominance

In America’s free market economy, it is a legitimate goal of every company to dominate, or even monopolize, their market by offering the best product, with the best service, at the lowest prices. Our legal system encourages this: “[The] drive to succeed lies at the core of a rivalrous economy. Firms need not like their competitors; they need not cheer them on to success; a desire to extinguish one’s rivals is entirely consistent with, often is the motive behind competition.”7

The free market, however, is also premised on competition being open and fair. When a company becomes dominant, its actions may be considered an abuse of dominance or an attempt to monopolize if actions are taken, not to benefit consumers, but to harm competitors. A company with a dominant market share needs to counsel executives on how to document actions to show that they were engaging in pro-competitive actions. Memos like the one below, which found its way to a Supreme Court case, are not helpful: “Put [him] out of business. Do whatever it takes. Squish him like a bug.”8

Practice Tip: It is not possible to give a precise definition of what amount of market share makes a company “dominant.” Over 30% of the market may qualify, but not always. A host of market conditions go into this analysis.

Practice Tip: Always document the pro-competitive reasons for company actions in the marketplace. Justifications that are documented in real time are more persuasive to demonstrate how actions benefitted customers than rationalizations offered at trial (or to the government).

Below are other excerpts from documents produced in litigation that were used against the company that wrote them:

  • “Let’s make sure that [competitor] stays marginalized.”
  • “Competition in our industry just doesn’t really work. Monopoly benefits everyone.”
  • “We have most of the key assets and dominate even our closest competitor”
  • “We pride ourselves on the fences that we have built around our customers. It’s why we dominate the southeast.”

Practice Tip: Sometimes statements are unfairly taken out of context. Or they look bad, but they can be explained. Better to explain how an action is for the benefit of consumers when writing a document than years later in litigation.

Mergers

Another area where poorly written documents can come back to haunt a firm is in the area of mergers. When companies are considering a merger, the deal has to be “sold” to investors, boards of directors, senior executives, etc. There is a temptation to “puff” and overstate that the combined company will be able to dominate the market and raise prices. At the risk of being repetitive, memos should explain specifically how the merger would benefit consumers: efficiencies that lower prices, broader geographic coverage, etc. If a company better serves its customers, it will gain more market share, but explain how that is going to happen.

A few examples of ill-advised comments:

  • ‘The combined firm will be a “900 pound gorilla.”’ – CFO of buyer, In re Chicago Bridge & Iron
  • We are by far the ‘big dog’ of the industry.” – Executive of the buyer after the completed acquisition, In re Chicago Bridge & Iron
  • “We can talk about this but I don’t think we want anything in writing.” – Internal memo of buyer, St. Luke’s Medical Group

In one recent merger challenged by the Department of Justice, the main evidence in the case came from memos written by executives of Bazaarvoice,9 explaining the rational for the merger:

  • “tak[e] out [Bazaarvoice’s] only competitor, who ... suppress[ed] [Bazaarvoice] price points by as much as 15%”;
  • “[e]liminate [Bazaarvoice’s] primary competitor” and “reduc[e] comparative pricing pressure”; and
  • “block entry by competitors” and “ensure [Bazaarvoice’s] retail business [was] protected from direct competition and premature price erosion.”

At trial, company executives testified that these comments were taken out of context or written by people who didn’t really understand the economics of the merger. But, it was too late. The judge credited the memos and found the merger illegal.

Risk Assessment

If budgets were unlimited, compliance training would be a regular, repetitive, companywide event. But, practically speaking, risk assessment always plays a role as to where compliance dollars are spent. Here are a few factors to consider when lobbying for competition/antitrust compliance training dollars.

Price Fixing

In the United States, executives (usually very senior executives) can go to jail. This alone makes compliance training a high priority. Even a company with very small market share can be in a cartel, but cartels are more likely found in concentrated industries with homogenous products. Another note: foreign companies, or foreign subsidiaries of US companies, generally are more in need of compliance training. They may operate in a culture where cooperation between competitors is more accepted and there is less awareness that price fixing is a serious crime in the United States.

Dominance

As name implies, some market power is needed, but it is hard to define precisely how much. Industry leaders need to be more aware of potential dominance problems.

Mergers

The government (DOJ, FTC, or even a state) can challenge a merger of any size if it will result “undue concentration.” Mergers of a certain size need to be reported to the government before the transaction is done. But the government can challenge smaller “non-reportable” mergers even after consummation. A smaller company that has not trained its employees in antitrust compliance should do so when it is even contemplating a transaction, preferably before the first merger-related documents are written.

Practice Tip: If it becomes known that a bad document has been written, the document should not be destroyed if there is litigation or a government investigation. Copies of it exist somewhere—even if just in someone else’s memory. It can be true that “the cover-up is worse than the crime.” And, it may be a crime to destroy documents—even if it is determined that no antitrust violation had occurred.

Conclusion

Regular antitrust training is important, especially for key executives. In-person training is best, incorporating some of the above examples and other “war stories” to drive the message home (and keep the audience awake). Video programs can serve as refreshers. Spot check refreshers may be triggered by certain events: a criminal investigation in a related product market that hits too close to home, a letter from a customer/competitor warning of antitrust action, or a possible merger. Another tool may be occasional document audits or an occasional check of the files for “hot” documents. As with any compliance program, the need to raise antitrust awareness can be accomplished in many ways, but always starts with “buy-in” from the top. After all, it is CEOs who often “say the darndest things.”

Robert E. Connolly, 
Partner, GeyerGorey LLP