Blue Rhino and AmeriGas are by far the largest distributors of exchangeable portable steel tanks containing propane. In late March, the Federal Trade Commission, in a 3-1 vote, issued an administrative complaint alleging that the two companies violated FTC Act Section 5 by going beyond procompetitive cooperation to anticompetitive collusion by secretly agreeing to force their common customer, Walmart, to accept lower amounts of propane in the tanks. The allegations will be tried in a formal hearing before an administrative law judge. The matter shows that companies must remain vigilant about antitrust compliance even after legitimate cooperation begins.
Propane exchange tanks are sold to consumers by hardware stores, mass merchandisers and others for use in devices such as barbeque grills and patio heaters. The tanks and the propane they contain are highly standardized. Retailers usually offer a lower price for a pre-filled tank if the consumer exchanges an empty tank; therefore, most customers exchange tanks and the retailers and suppliers must handle them. While Blue Rhino and AmeriGas together control 80% of this market and are the only ones capable of serving national retailers such as Walmart and The Home Depot, neither has refilling and refurbishing facilities in all parts of the country. To obtain such complete coverage, the parties entered "co-packing agreements" to handle the empty exchange tanks for the other party in certain areas. For instance, Blue Rhino refurbishes and refills exchange tanks for AmeriGas in Florida and Missouri while AmeriGas does the same for Blue Rhino in California and New Hampshire.
While the propane exchange tanks have 25 pound capacities, the industry standard was to fill them to 17 pounds for safety reasons. In April 2008, Blue Rhino decided to reduce its fill level to 15 pounds, without any price decrease, allegedly to offset increased input costs. Blue Rhino informed AmeriGas of its decision when it asked if AmeriGas's co-packing facilities could handle the proposed fill reduction. AmeriGas had considered and rejected a similar fill reduction earlier in 2008 for its own tanks, allegedly because it was concerned it would be at a competitive disadvantage if Blue Rhino did not also make the change. Now, AmeriGas changed course and told customers in July 2008 that it was moving to what it called the new "industry standard" of 15 pounds fill.
Customers were not pleased with this effective 13% price increase. Walmart, who purchased from both suppliers, rejected the fill reduction. Other retailers, like Lowe's, agreed to accept it but only if all their competitors, especially Walmart, did so as well. Therefore, Blue Rhino and AmeriGas allegedly agreed not to deviate from their respective proposals and to work together to push Walmart to accept the fill reduction. The FTC complaint describes the numerous calls and emails that then took place between top sales executives of the two companies allegedly keeping each other apprised of their Walmart negotiations. In one email, the Blue Rhino executive told his AmeriGas counterpart to "hang in there." Finally, the two parties issued similarly-worded ultimatums to Walmart within 24 hours of each other in early October. Walmart capitulated.
At the administrative hearing, both Blue Rhino and AmeriGas will be able to present evidence that the decisions of each to implement a fill reduction and insist that Walmart accept it were not collusion or concerted action that violated FTC Act Section 5, despite the evidence of numerous calls and emails. Interestingly, Commissioner Ohlhausen voted against issuing the complaint. In an interview with news organization MLex, Commissioner Ohlhausen said she did not think the theory or evidence showed a violation because the decisions were reached independently — and "it wasn't a close call" — but that now she would see how the evidence develops in the hearing. The matter might also give the FTC another opportunity to explore the extent to which Section 5 coverage is broader than that of Sherman Act Section 1.
Whatever the ultimate outcome, the matter illustrates the potential dangers of communications with competitors, even when that communication originated in the context of a procompetitive joint effort. Also, companies must understand that antitrust issues can arise during the implementation, not just during the formation, of such procompetitive joint efforts.