The Anatomy of a Per-Se-Antitrust Violation

The Internet didn’t fall down after my first post, so I thought I’d try another.

In the US, certain conduct is so obviously anticompetitive that antitrust law labels it per se illegal. These restraints lack redeeming pro-competitive value in almost all instances, so the law allows plaintiffs an important short-cut to pleading and proving such a claim.

The short-cut is that a plaintiff asserting a per-se-antitrust claim need not demonstrate anticompetitive harm. The law presumes such harm. This is huge because this element is one of the most difficult and expensive to prove.

Proving anticompetitive harm is often tough. Plaintiffs usually start by defining the relevant product and geographic markets. This is obvious is some cases; difficult and disputed in others.

Within that defined market, the plaintiff will then usually have to show market or monopoly power, then actual competitive harm in that market that exceeds any competitive benefits from the challenged restraint. It doesn’t always go like this, but that is the typical journey.

Proving all of this almost always requires expert economic testimony, which is—again—almost always disputed by defendants’ economic expert.

So this anticompetitive harm element can become quite burdensome and expensive. That is why fitting a case into a per-se-antitrust package is so valuable for a plaintiff, and risky for a defendant.

Price-fixing agreements usually come to mind as the prototypical per se antitrust violation (keep in mind that antitrust views agreements to limit volume as effectively the same thing). Other examples are market-allocation agreements and certain boycotts.

Let’s talk about market-allocation agreements—as price-fixing is a bit too obvious—so we can see how dangerously easy it is for this per-se-antitrust violation to develop.

Market allocation is an antitrust problem because competitors are agreeing not to compete. The most simple market-allocation agreement is geographic—“you take customers West of the Mississippi, and we will take the ones to the East.”

But sometimes it develops more subtly.

Let’s imagine a Company A and Company B. They are the two biggest competitors to sell an input to toy manufacturers—perhaps a unique type of long-lasting battery that is built directly into toys (so you don’t have to buy them separately) and won’t run out of juice until long after the kids are bored with the toy.

Can you tell that I have a young child?

Anyway, in the Southern-California region, Alex is the salesperson for Company A and Bob has that sales region for Company B. Let’s pretend there are 8-10 toy manufacturers that buy the input in that region and that Bob and Alex seek their business.

Bob and Alex know each other well—they are constantly fighting each other for business. They don’t like each other, and have a rivalry like Cheers and Gary’s Olde Town Tavern—80’s sitcom reference—except that they each win the business about an equal amount of time.

They are cut-throat and play dirty in trying to beat each other for the sale. For example, Bob tells the customers that Alex is a liar and a cheat and Alex makes up embarrassing stories about Bob’s past.

The customers don’t like either one of them—to be honest—but they play them off each other, and periodically switch suppliers to get a better deal. But for the most part, Bob has customers that usually buy from him, and the same is true for Alex.

While Bob and Alex sometimes get a rush from their rivalry, they are both stressed about it, and their respective families are constantly urging them to “chill out” on the insults and gamesmanship because their stress is making them grumpy at home.

One day Bob and Alex happen to be in San Diego at the same time, and run into each other on Karaoke night at a local bowling alley, after a long week for both of them.

A funny thing happens. Instead of their usual hijinks, after a few shots they end up arm-and-arm singing American Pie with a few other patrons. They become emotional and end up talking for hours at an all-night diner after leaving the bar.

It turns out they have a lot in common—same number of kids, similar dreams to retire to a life of fishing, etc.—and they begin to see each other not as evil ogres but as real people.

They swear then and there that they will stop going after each other. Bob will start to respect Alex’s clients and Alex will do the same for Bob. Sure, if Bob’s client calls Alex, Alex will give him and quote, and Bob will do the same if Alex’s client calls. But they agree to stop fighting so hard to steal each other’s client, i.e. fewer cold calls, etc.

Their families are thrilled. Without the added stress, Bob and Alex both lose weight, they are more fun to be around, and generally live a better healthier life.

This looks like a happy ending. But it isn’t.

Bob and Alex—and, by extension, Company B and Company A—have committed a serious per-se-antitrust violation.

They have allocated markets—not by geography, but by incumbency.

This breach can subject them and both of their companies to treble damages and criminal sanctions, including jail time.

By agreeing to either not compete or to compete less to steal each other’s customers, Bob and Alex led their companies into significant antitrust risks, which could lead to both criminal and civil penalties, as well as civil litigation.

And anyone suing them can take a short cut—they need not prove anticompetitive harm.

The lesson here is that while it is important for company officers to understand the basics of antitrust, it is just as essential that the sales people on the ground know the rules of what they can and can’t do.

This is why companies should give their employees antitrust-compliance training. The antitrust violation is not always how you might picture it in the movies: a cigar-smoke-filled room with company leaders laughing at their customers while agreeing to fix prices. Sometimes it develops very innocently, as two sales people realize they want a better life.

 

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You can learn more about my legal background here.