On February 6, the Federal Trade Commission released its opinion and final order in its case against McWane, Inc., a manufacturer of waterworks products.1 The Commission dismissed six of the seven counts against McWane. As we discussed previously with respect to the Initial Decision, the McWane case reflects the FTC’s ongoing concerns about loyalty rebate programs and other conduct that may be seen to promote de facto exclusivity when undertaken by firms with high market shares. The decision is also noteworthy because the Commission did not reverse the Administrative Law Judge’s dismissal of the price-fixing claims, effectively siding with the defendants and against complaint counsel for the first time in many years.

Background

Complaint counsel had alleged that McWane and its two main competitors, Sigma and Star, conspired to raise and stabilize prices in the market for ductile iron pipe fittings.2 The complaint further alleged that McWane had monopolized the market for domestic ductile iron pipe fittings and illegally sought to maintain its monopoly through exclusionary conduct.3

In a May 2013 Initial Decision, an FTC ALJ dismissed the price-fixing counts but held McWane liable on the other four counts.4 Specifically, the ALJ found that McWane had entered into an exclusive distribution agreement with Sigma that unreasonably restrained trade.5 The ALJ also found that McWane had implemented an exclusive dealing arrangement with its customers as a way to exclude Star and other potential competitors from the domestic market.6 We previously discussed the ALJ’s Initial Decision and its implications here.

Both complaint counsel and McWane appealed the Initial Decision.

The Commission’s Opinion

The Commission was unable to reach a majority decision with respect to the price-fixing claims, and thus the ALJ’s dismissal of these counts stands.7

The Commission agreed with the ALJ that McWane had implemented an exclusive dealing policy to exclude Star and other potential entrants from the market for domestic fittings, thereby maintaining its monopoly power and harming competition.8 Specifically, under McWane’s Full Support Program, customers were informed that they must buy all of their domestic fittings requirements from McWane (unless the product was not readily available) or risk losing access to McWane’s products and/or losing their accrued McWane rebates.9 On a 3-1 vote, the Commission ruled that the Full Support Program “was an unlawful exclusive dealing policy that contributed significantly to the maintenance of McWane’s monopoly power in the domestic fittings market.”10 The Commission explained that McWane’s internal business documents made clear that the Full Support Program was intended to exclude Star and other potential entrants from the market.11

However, the Commission unanimously reversed the ALJ’s holding that McWane’s distribution agreement with Sigma constituted an unreasonable restraint of trade.12 The ALJ had held the distribution agreement unlawful under the rule of reason because he found the agreement contained unnecessarily restrictive terms.13 Specifically, the agreement required Sigma to purchase domestic fittings only from McWane and to stop efforts to produce its own domestic fittings, and the agreement effectively set the prices Sigma could charge.14 The Commission rejected the ALJ’s analysis, explaining that, under the rule of reason, the availability of less restrictive alternatives is relevant only if there is first a finding of anticompetitive harm.15 Even in the absence of the distribution agreement, the Commission found, Sigma was not likely to have entered the domestic fittings market,16 so the prohibition on Sigma’s entry was found unlikely to have had an anticompetitive effect.17 The Commission similarly found no evidence of anticompetitive effects from the other provisions of the distribution agreement relied upon by complaint counsel.18

The Commission’s Order

Having found that McWane used an unlawful exclusive dealing policy to maintain its monopoly power in the domestic fittings market, the Commission issued an order prohibiting McWane from requiring exclusivity from its customers.19 Specifically, McWane may not require exclusivity as a condition of selling to a customer, nor may McWane condition the price or terms of an order on a customer’s exclusivity.20 McWane is expressly prohibited from conditioning the price or service afforded to a customer on that customer buying at least half of its domestic fittings requirements from McWane.21 The order also forbids McWane from retaliating against or penalizing a customer for purchasing from a competitor.22

The Commission’s order also places restrictions on the types of discounts and rebates that McWane may offer with respect to its sales of domestic fittings. For ten years, McWane is prohibited from offering any type of retroactive incentive,23 which includes (i) a lump-sum rebate based on the customer’s purchases reaching a specified threshold or (ii) any discount on the price of prior units that is based on the customer’s purchase of additional units.24 However, McWane may offer volume-based discounts that apply only to the units that exceed a specified threshold.25 The company may also provide a rebate so long as it is not conditioned on purchases reaching a particular threshold.26

Appeals Process

McWane may appeal the Commission’s decision in the court of appeals, but it has not yet indicated whether it will do so. McWane has issued a press release in which it denounced the Commission’s finding of a violation as “conflict[ing] with … long-standing legal precedent” and praised Commissioner Wright’s “well-reasoned and lengthy dissent” on the monopolization count.27

Implications

As we discussed previously with respect to the Initial Decision, the cease and desist order in McWane reflects the FTC’s concerns about loyalty rebate programs and other conduct that may be seen to promote de facto exclusivity when undertaken by firms with high market shares. For example, the FTC’s consent decrees in Intel Corp.28 and Transitions Optical29 contain similar provisions. Under its consent decree, Intel is prohibited from conditioning benefits on promises that the customers will only purchase products from Intel, or from using certain discounting structures such as lump-sum discounts available if customers reach certain purchase levels or so-called “all units” discounts that apply to all units once purchases reach a given threshold. Similarly, the FTC’s consent decree with Transitions Optical bans Transitions from conditioning discounts on a customer’s agreement to limit the business it does with Transitions’ competitors or on the share of business the customer gives to Transitions, and prohibits Transitions from using all units discount structures. Though he dissented in this case, FTC Commissioner Joshua Wright likewise has urged that loyalty discounts, including those involving all units discount structures, should be analyzed under an exclusive dealing rubric, rather than treated as pricing conduct that cannot be deemed unlawful unless the price is below cost.30

The opinion also provides significant guidance regarding the issue of potential entry. Before analyzing the terms of McWane’s distribution agreement with Sigma, the Commission first considered whether Sigma was a potential competitor of McWane’s in the domestic fittings market, which according to the Commission would make the distribution agreement a per se unlawful horizontal agreement among competitors. The Commission found that there was not a reasonable probability that Sigma would have entered the domestic fittings market to compete with McWane in the absence of the distribution agreement.31 Although Sigma did explore the possibility of entering that market – including by investigating the capabilities of various domestic foundries and having some sample fittings produced – the Commission characterized Sigma’s actions as merely “preliminary steps” that were “certainly not those of a ‘reasonably probable’ entrant.”32 The Commission emphasized that Sigma invested “no more than $50,000 to $75,000 toward the effort, a nominal sum when compared to Sigma’s estimate that it would need $5 to $10 million to enter the domestic fittings market.”33 The Commission also detailed the significant financial challenges Sigma faced in entering the market.34 This outcome emphasizes the Commission’s view that a firm cannot be considered a potential competitor unless it demonstrates both the intent to enter the market and the ability to do so.35

More broadly, the Commission’s decision in McWane is also noteworthy because the Commission did not reverse the ALJ’s dismissal of the price-fixing claims. In the last twenty years, the Commission has rarely, if ever, upheld an initial decision in which the ALJ found for the defendant,36 and Commissioner Wright has recently pointed out the “near perfect rate at which the Commission rules in favor of FTC staff after an administrative adjudication.”37 The agency has drawn a degree of criticism for this record, with some suggesting it may reflect a biased process. At a November 2013 House Judiciary subcommittee hearing, Representative Spencer Bachus reasoned: “With this kind of record, an unbeaten streak that Perry Mason would envy, a company might wonder whether it is worth putting up a defense at all in a system where the FTC brings the complaint, the case is tried before an administrative law judge at the FTC and the FTC holds the authority to overturn a decision adverse to the agency … .”38 The McWane decision – in which the Commission not only upheld the ALJ’s dismissal but in fact dismissed additional counts – breaks that winning streak and may help to quell criticism of the FTC’s process.

Since the Commission split evenly on the price-fixing counts, the opinion provides no guidance on what type of evidence is sufficient to support a finding of an agreement to fix prices. It is somewhat surprising to see a partisan split on the price-fixing counts, as the question of how much evidence is sufficient to prove an agreement is not usually associated with different schools of thought in antitrust enforcement. It remains to be seen whether this outcome reflects a factspecific disagreement limited to this case or indicates a doctrinal disagreement among the Commissioners on this issue. It is certain, however, that the 2-2 deadlock on the price-fixing counts was only possible because there was no fifth Commissioner available to vote. Until this fifth seat is filled, the Commission may struggle to resolve difficult or contentious issues.