Keep your friends close, but keep your competitors at a safe distance. Invitations to a competitor to collude – even if no agreement is formed – may generate an RSVP from the Federal Trade Commission to come visit their offices, often courtesy of the solicited competitor who snitched to the FTC. This year-end reminder is highlighted by the FTC's latest enforcement action against a competitor solicitation and "invitation to collude." The FTC recently announced that it reached a consent agreement with Drug Testing Compliance Group, LLC ("DTC") to resolve allegations that DTC violated FTC Act § 5 by inviting a competitor to join in an illegal customer allocation agreement. This settlement demonstrates the FTC's intent to continue looking to Section 5 catch conduct it cannot prosecute under other antitrust laws.

Background

The FTC alleges DTC's president contacted a competitor to complain that the competitor had convinced a DTC customer to switch drug and alcohol testing providers. In a subsequent meeting with the competitor, DTC proposed a "First Call Wins" policy under which each company would refrain from soliciting the customers of the other. According to DTC, the policy would permit each company to sell services without fearing that its prices would be undercut. The FTC's complaint does not allege that the competitor accepted the invitation or that any agreement was formed. In contrast to certain past enforcement actions involving invitations to collude, the FTC also did not allege that the market is concentrated, and thus its complaint does not permit any inference as to the likely competitive effect had the invitation been accepted. Compare In re Valassis Communications, Inc., 141 F.T.C. 247 (2006), which alleged that Valassis, which had historically held a 50% share of newspaper insert advertisements but had recently lost share, extended an invitation to collude to its only significant competitor.

The proposed consent agreement prohibits DTC from communicating with competitors about customers, prospective customers or prices. It contains an exception for dissemination of information to the public through websites or public advertising. The order will remain in effect for 20 years.

Implications

The case demonstrates the FTC will continue to use its powers under Section 5 to pursue unilateral conduct that falls short of an unlawful agreement, including invitations to collude and competitor signaling. 

In another example, in July 2014 the FTC settled allegations against two internet resellers of UPC barcodes, Nationwide Barcode and InstantUPCCodes.com, which invited competitors to jointly raise prices. According to the FTC allegations in that Complaint, the companies exchanged emails with each other and "Competitor A" containing explicit invitations to raise prices:

"Here's the deal Phil, I'm your friend, not your enemy … All 3 of us – US YOU and [Competitor A] need to match the price that [Competitor B] has … I'd say that 48 hours would be an acceptable amount of time to get these price changes completed for all 3 of us. The thing is though we all need to agree to do this or it won't work .. Reply and let me know if you are willing to do this or not."

One competitor responded by encouraging a continuing "dialog" and opined (incorrectly) that an agreement "for one of us to raise prices and then have the others follow" would not constitute illegal price fixing. "A" never responded and the proposal did not result in an agreement on a price increase. Nonetheless, the FTC unanimously found liability for solicitation, noting that although conduct in this case was "particularly egregious, less egregious conduct may also result in Section 5 liability."

Similarly, in December 2015, the FTC approved a final order settling charges that Step N Grip, which sells rug accessories designed to keep rugs from curling at the corners, violated Section 5 by allegedly illegally inviting its closest competitor to collude on fixing and raising prices. When Competitor A lowered its price on Amazon.com to $13.49 to compete more aggressively with Step N Grip, Step N Grip responded by lowering its price on Amazon.com to $12.95. Competitor A followed with a price decrease to $11.95. That same day, Step N Grip lowered its price to $11.95 as well and emailed Competitor A: "We both sell at $12.95? Or, $11.95?" Step N Grip subsequently raised the price of its product to $12.95. Competitor A reported the invitation to collude to the FTC.

These matters highlight that a company can find itself in the FTC's crosshairs as a result of communications with competitors (who may report such contact to the FTC) about competitively sensitive topics such as prices or output, even if there is no agreement to coordinate.

All of these cases allege that the respondents' actions violated Section 5, which prohibits "unfair methods of competition." FTC enforcement of Section 5 with respect to conduct that would not violate the Sherman or Clayton Acts has been the subject of controversy. As we noted in an August alert (available here), the FTC issued a Statement of Enforcement Principles on Section 5, which was its first guidance on its use of Section 5 to police "unfair methods of competition" that may fall outside the scope of the main federal antitrust statutes, the Sherman Act and Clayton Act. The FTC said that it would evaluate conduct "under a framework similar to the rule of reason," which requires an evaluation of the actual or threatened effect of the restraint on competition. However, enforcement of Section 5 against invitations to collude has received broad support, even though such invitations would not violate any other federal antitrust statute. Indeed, each of the enforcement actions mentioned above was approved unanimously by the Commission. Furthermore, in this latest enforcement action, the FTC has announced that its recent Statement of Enforcement Principles will not limit enforcement with respect to invitations to collude. According to the FTC, invitations to collude serve no legitimate business purpose and therefore are "inherently suspect," meaning that they are presumed to be anticompetitive without a showing of an anticompetitive effect or market power. As noted above, the FTC's DTC Complaint does not allege facts from which any specific anticompetitive effect could be inferred. This case confirms that the FTC will pursue a Section 5 challenge even absent concrete evidence of a threatened effect on competition.

So, for the holidays this year, keep your friends and cheer near and your competitors far away.

A copy of the FTC's Drug Testing settlement can be found here