On February 6, 2014, the Federal Trade Commission (FTC) dismissed the majority of its claims against McWane, Inc., the leading domestic supplier of ductile iron pipe fittings used in water distribution systems in the United States. In its 2012 complaint, the FTC alleged seven counts of unfair competition under Section 5 of the FTC Act. Three counts alleged collusive conduct between McWane and its two primary competitors—Star Pipe Products Ltd. and Sigma Corp—to fix prices and improperly exchange information through an industry association. The remaining four counts charged McWane with acting unlawfully to maintain its monopoly in the domestic fittings market, alleging both exclusionary conduct and unfair restraint of trade.

Unlike the Antitrust Division of the Department of Justice (DOJ), which brings antitrust suits in federal court, the FTC typically litigates in its administrative court before an FTC Administrative Law Judge (“ALJ”). The ALJ tries the case and issues an initial opinion that, if appealed, is reviewed by the full Commission, which currently consists of four Commissioners, as one position is vacant. Defendants can then appeal the full Commission’s final decision to a federal circuit court.

In McWane, FTC Chief ALJ D. Michael Chappell held an administrative trial over two months at the end of 2012. Some 6,000 pages of trial transcript capture the more than 2,000 exhibits and 53 witnesses that Judge Chappell considered. Following trial, Judge Chappell issued a 464-page decision, dismissing the allegations related to collusion, but finding for the FTC on the four counts related to monopolization. Both parties appealed the ALJ decision, and on August 22 oral argument was heard before the full Commission. The full Commission issued its February 6 opinion, dismissing six of the FTC’s seven counts against McWane. On the remaining count, the Commission found McWane violated Section 5 by adopting an exclusionary distribution policy in order to maintain its monopoly in the domestic fittings market.

Collusion: Counts 1 – 3

The ALJ’s initial decision dismissed the allegations that McWane  conspired to raise and stabilize prices in the fittings market, finding that the FTC failed to establish “the existence of an agreement, combination or conspiracy” by a preponderance of the evidence. Judge Chappell was careful to note that he was not “finding that no price fixing conspiracy existed,” but simply that the FTC failed to meet its evidentiary burden. The evidence, according to the ALJ, showed only “parallel ‘intentions’ or ‘steps’ related to pricing policy,” which is insufficient to infer an unlawful agreement.

The FTC posited that the conspiracy among McWane, Sigma, and Star could be inferred from three “episodes” of conduct, including parallel conduct to curtail project pricing, which the FTC sought to use as circumstantial  evidence of an agreement. The FTC pointed to McWane’s pricing protection log, for example, in which it tracked instances of McWane quoting and then holding a particular price for a customer, thus “protecting” the customer  from any price increases. The comments field of McWane’s log included explanations for the price protection, such as “to match Star” or “to match Sigma.” The ALJ was not convinced that this evidenced an agreement to curtail pricing. Judge Chappell characterized the log’s comments as the product of “multiple levels of unverified and potentially inaccurate information,” explained by customers’ motivations to feed McWane and its competitors information to drive down price. There was also a “significant downturn” in the market during the relevant time period, and the ALJ felt the FTC inadequately addressed the economic explanation for the discounted pricing. Overall, the ALJ reasoned that“[a]t best, the evidence shows interdependent or consciously parallel conduct,  unaided by any agreement, which is not illegal.”

Similarly, the ALJ’s initial decision dismissed the allegation that McWane improperly exchanged information to facilitate price fixing. Judge Chappell found that the nature of the information—“aggregated, historic shipment volumes—was insufficiently specific and not the type of information, like pricing-related data, that can facilitate price coordination.”

The full Commission deadlocked 2-to-2 on whether the FTC established collusion and unlawful information exchange. Without a majority decision, the Commission was forced to “dismiss these counts in the public interest.”

Monopolization: Counts 4 – 7

The ALJ held for the FTC on the remaining four counts, finding McWane unlawfully maintained its monopoly in  the domestic fittings market. According to Judge Chappell, McWane imposed an exclusionary distribution policy  on all its customers by way of a “full support program” to forestall Star’s entry into the market. As McWane’s sales force explained to customers, under the “full support program,” if even one branch of a distributor “purchased domestic fittings from Star, ‘all branches would be cut off’” from purchasing McWane products. In addition, Judge Chappell found that McWane unreasonably restrained trade through a Master Distribution Agreement (“MDA”)  with Sigma.

Uncharacteristically, the full Commission largely overturned the ALJ’s decision, upholding only the finding that McWane’s “full support program” was an exclusive dealing policy. In contrast, the Commission disagreed with the ALJ’s reasoning that the MDA was an unreasonable restraint of trade, concluding that the FTC failed to establish  the MDA was likely to have anticompetitive effects in the domestic fittings market. The Commission also rejected the FTC’s theory that the MDA was a market allocation agreement, and thus reversed the ALJ’s holding of liability based on the MDA. Notably, even on its finding of monopolization, the Commission was not in full agreement, as Commissioner Joshua Wright issued a dissenting statement that argued the FTC failed to establish that McWane’s “full support program” harmed competition.

Implications

Despite upholding the monopolization charge related to the “full support program,” the opinion can be viewed as a win for McWane, in part because the collusion charges could potentially have led to the filing of private class action suits against McWane. More systemically, McWane handed the FTC its first defeat at the full Commission stage in nearly two decades.

It is also noteworthy when allegations of collusion are brought by the FTC, and not the DOJ’s Antitrust Division. Although the FTC and DOJ both enforce Section 1 of the Sherman Act, the DOJ has exclusive jurisdiction to bring criminal charges based on price-fixing and other per se violations. The FTC can refer conduct to the DOJ for investigation, but it is not common for inter-agency referrals to be made public. In addition to its joint authority to enforce the Sherman Act, the FTC also has exclusive jurisdiction to enforce the FTC Act. In the past, the FTC has taken the position that Section 5 of the FTC Act is broader than the Sherman Act, but here the full Commission did not analyze whether the alleged conduct would violate only Section 5 , stating that “[w]e rely on case law and other authority applying the Sherman Act for our analysis of the relevant claims.” (Compare consent decrees entered in U-Haul (2010) and Valissis (2006), both involving invitations to collude that the FTC held violated Section 5 of the FTC Act, even though they did not violate Section 1 of the Sherman Act.).

Finally, this case has the potential to impact FTC processes in future investigations, although this is somewhat difficult to predict. The FTC often finds itself in the unique position of serving as both the prosecutor and the judge in antitrust enforcement actions. And the Commission’s history of siding with the agency—even when it means overturning an ALJ decision that was favorable to the defendant—has led many to criticize the process as unfair. In the McWane opinion, the full Commission scaled back an FTC victory from the ALJ level, essentially ruling against itself. Whether this indicates a sea-change remains to be seen. Currently, the 5-person Commission is short one political appointee, making it notable that the gridlock that kept the Commission from finding collusion in this case broke down along parties lines—the two Democrats found collusion, the two Republicans did not. Senate inaction on the pending Democratic nominee has essentially left the tie-breaking seat vacant. Whether there truly has been a shift in the FTC’s home court advantage depends, at least in part, on who fills that seat.