Ancillary-Restraints-Antitrust-180x300

As a regular reader of The Antitrust Attorney Blog, you understand that setting prices or allocating markets with your competitor is a terrible idea. Doing so is likely to lead to civil litigation and perhaps even criminal penalties.

Price fixing and market allocation agreements are per se antitrust violations. That means they are the worst of the worst of anticompetitive conduct.

There is, however, a limited circumstance in which what would normally be a per se antitrust violation is instead treated by Courts and government antitrust agencies under the rule of reason:

An ancillary restraint.

You shouldn’t put ancillary restraints in your agreements without the help of an antitrust lawyer. That would be like juggling knives that are on fire. You might be able to do it, but if you make a mistake, you won’t like the results.

What is an Ancillary Restraint?

This isn’t an easy question to answer and, in fact, if you can answer it, you will often know whether your restraint will survive antitrust scrutiny.

Let’s back up a little bit.

In a typical situation, if two competitors agree to fix prices or to split a market (perhaps they will agree to limit their competition for each other’s customers), they commit what is called a per se antitrust violation. What that means is that this type of restraint is so consistently anticompetitive that courts won’t even examine the circumstances—it is per se illegal.

Obviously you should avoid committing per se antitrust violations, unless, of course, you want to experience an antitrust blizzard.

Without further context, such a restraint is often called a naked restraint of trade. That doesn’t mean that the cartel meets at a nudist colony; it means that it is an anticompetitive agreement with nothing surrounding it. Such agreements are almost always done to gain greater profits from the restraint itself.

So what does a non-naked restraint of trade look like? Interesting question. I will answer it, but you have to read through most of this article.

Sometimes two or more parties, even competitors, will put together a joint venture or collaboration that creates what antitrust lawyers often call efficiency. You might normally think of efficiency as running more smoothly or at the same or better result with fewer resources.

But when antitrust attorneys use the term “efficiency” or “efficiency enhancing,” they often mean that the venture or combination will create economic value for the marketplace as a whole that wouldn’t exist but for the agreement. The term often comes up in the merger context, as an antitrust analysis of a merger will examine whether the benefits through efficiency and more exceed any potential anticompetitive harm.

An Ancillary Restraint Example

Sometimes it is easier to understand with an example: Let’s say you have a company called Research that is full of people with PhDs that spend all of their days trying to figure out how to make the world a better place. If someone at Research comes up with a good idea, the company will sometimes manufacture and sell the finished product itself.

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Author: Aaron Gott

Senators Mike Lee, Ted Cruz, and Benjamin Sasse recently proposed a bill to enact the Restoring Board Immunity Act of 2017, which would give state licensing boards antitrust immunity that they may not otherwise be entitled to under the state-action immunity doctrine. The bill provides this immunity if the states fulfill some conditions: they must make efforts to reform their occupational licensing schemes and either provide active supervision of boards by creating an office to oversee them or provide for a specific form of judicial review of licensing board actions.

While the bill seeks to make some promising advancements to curtail overbearing state occupational regulation, it misses the mark in several ways.

As a Bona Law attorney, I regularly help clients suffering the wrath of professional licensing boards. It is very rewarding work, but it is also difficult work because the entire system—from state executive branches to federal courts—overwhelmingly defers to these licensing boards. The boards are confident in their ability to do whatever they want because they’ve enjoyed extreme deference in constitutional cases since the progressive era.

Our most effective tool is the threat of antitrust litigation—a tool that has only recently been used. First I’ll explain how all of this works so that you can better understand why this bill is a bad idea.

How Licensing Boards Work

Most licensing boards are created by some enabling statute that was pushed through the state legislature after a bunch of competitors in the same industry got together and formed a powerful lobby. Nine times out of ten, a professional licensing board justifies its existence and its conduct with vague and unsupported claims that public welfare is at stake. The enabling legislation often provides the governor the authority to appoint members of the profession, and perhaps one or two “public” members (persons who are not part of the profession), to serve on the licensing board.

Invariably, the board members who also compete in the market eventually use their power on the board to benefit their own pecuniary interests:

Licensing Requirements. . Organizations like the Institute for Justice have analyzed state-by-state data and published significant literature about occupational overregulation. The bill appears most focused on licensing requirements. Antitrust litigation typically does not focus on the licensing requirements category of restraints because they are easy to pretextually justify, because the lobbying effort is protected by the Noerr-Pennington doctrine, and because they primarily affect new entrants (who are unlikely to organize a collective resistance, let alone the resources to finance antitrust litigation).

This raises an important question: if most antitrust litigation against boards does not relate to the occupational licensing reforms sought by the bill, why are we considering a broad antitrust exemption as the carrot for states to implement the reforms?

Expanding the Scope of Practice. Where boards prevent competitors who are not licensees within their jurisdiction from competing with them. A seminal example is what occurred in North Carolina Board of Dental Examiners v. FTC: the North Carolina dental board sent cease-and-desist letters to nondentist teeth whiteners asserting that teeth whitening was the practice of dentistry. Teeth whitening is not mentioned in the North Carolina statutes governing dentistry, but the board asserted it anyway because the dental board members and their professional trade group friends were losing profits to disruptive nondentist competitors who offered lower prices to consumers.

Similarly, the California Veterinary Medicine Board recently sent cease-and-desist letters to animal chiropractors, claiming that performing chiropractic adjustments on animals is the practice of veterinary medicine (even though performing human chiropractic adjustments is not the practice of human medicine).

Setting the Rules of Competition. Where boards prevent competitors who are licensees within their jurisdiction from competing in ways they don’t like. For example, some state funeral director boards have imposed or considered imposing substantial infrastructural requirements on their licensees (such as having an embalming room) with the ultimate goal of restricting the geographic scope of competition.

Side note: state funeral director boards have been among the worst culprits of blatant anticompetitive activity, even going so far as enacting rules to prevent monks who handcraft caskets from competing in the lucrative market for casket sales.

As you can see, boards have substantial power and states don’t seem to care that they regularly abuse it. So at first glance, a bill that incentivizes states to reassess their occupational licensing schemes with a critical eye is probably a good thing, right? If that were what it did, and it didn’t attempt to foreclose otherwise legitimate antitrust claims through the state action doctrine, then it wouldn’t be so objectionable.

The Bill

You can read the text of the bill here, but it works like this: all licensing boards and their members are not subject to the Sherman Act if the following conditions are met:

  1. The actions of the board/member are authorized by a nonfrivolous interpretation of the occupational licensing laws of the state.
  2. The state adopts a policy of using less restrictive alternatives to occupational licensing;
  3. The state either:
    1. Enacts legislation providing for active supervision of the actions of an occupational licensing board, which requires creating a central office to oversee all licensing boards; or
    2. Enacts legislation providing for judicial review of occupational licensing laws.

The bill has a savings clause that states the immunity only applies to “personal qualifications required to engage in or practice a lawful occupation.” As you will see below, this clause could be very important, depending on how courts would construe it.

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Lemonade-Stand-Antitrust-300x200

Bona Law filed an antitrust lawsuit on behalf of our client in the Northern District of Georgia alleging antitrust violations in the cement and ready mix concrete markets. More on that later.

But first I am going to tell you a fictional story about your nine-year-old son and his first entrepreneurial endeavor. If you don’t want to hear about your son, you can skip to the next section, about Bona Law’s new case.

The Lemonade Stand

You don’t have a nine-year-old son? Well … you do for this story. Congratulations, it’s a boy!

As you know, your son’s name is Johnny. You call him Little Johnny, but he is growing so fast, you are not sure how much longer the “Little” will last. But you treasure these times because they grow up so quickly.

And speaking of growing up quickly, Johnny sure is maturing. You tried to get him to clean-up around the house for an allowance, but he turned you down. He said he doesn’t want to be an employee and taking a job with you will just lead him into the rat race. Why would he want to do that?

Instead, Johnny says, he wants to start his own business. Ownership is where the money is, he says. Johnny wants to build cash flow, so he can just skip the rat race. Smart kid.

Okay, you say, “why don’t you start a lemonade stand?”

Johnny is excited. This is his first business—his first taste of Capitalism!

“Yes, I’ll build the best lemonade stand in the neighborhood, will serve the best tasting lemonade, and will be very careful with my costs, so I can charge a lower price and sell the most lemonade.”

Apparently Johnny has been paying attention to the business podcasts you have been listening to in the car.

As you know, you just moved to a wonderful neighborhood in the San Diego area. After years on the east coast, dealing with the harsh weather and sometimes harsh people, you are excited that you are now in paradise. The weather is incredible all year here and the constant sunshine puts you in a great mood.

Of course, it is tough to move to a new area, especially for kids. Johnny is excited, but a little nervous. He doesn’t know many kids in the neighborhood yet, and doesn’t start school until the fall—it is still July.

You and he have both noticed, however, that the neighborhood has a few lemonade stands—and many thirsty neighbors—so this might be a good way for him to make some friends and get to know the neighborhood.

You help Johnny build a stand, but to his credit he does most of the work—his enthusiasm for the venture has produced a work ethic in him you’ve never seen. You also admire his efforts to plan out his purchase of supplies, opting for Costco so he can buy what he needs in bulk at a low cost per glass (as he explained to you).

Johnny now has everything ready for his business: a stand with an attractive sign, cups, a money box, raw materials to make lemonade, a cooler, a couple chairs for him and his friend (or you, when you want to stop by), and, most importantly, the joy of ownership from starting his own business. You’ve never seen him so happy.

You drive around the neighborhood with him and discover that other kids seem to be selling lemonade at $7 per glass, which seems a little high, but it is a wealthy neighborhood, so perhaps that is the market price? It has been a warm, surprisingly humid summer in San Diego. You discuss with Johnny how that weather pattern increases demand. Of course, it did seem odd to you that everyone was selling lemonade at exactly $7 per glass, but you dismiss it.

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In the market, there are many ways to buy and sell products or services.

For example, if you want to purchase some coconut milk—my favorite kind of milk—you can walk into a grocery store, go to the milk section, examine the prices of the different brands, and if one of them is acceptable to you, carry that milk to the register and pay the listed price.

Similarly, if you want to purchase a Fitbit Blaze, you find the Fitbit manufacturer’s product in a store or online and pay the listed price. Oftentimes products like this, from a specific manufacturer, are the same price wherever you look because of resale price maintenance or a Colgate policy (to be clear, I am not aware of whether Fitbit has any such program or policy). But these vertical price arrangements are not the subject of this article.

Another approach—and the true subject of this article—is to accept bids to purchase a product or service. Governments often send out what are called Requests for Proposals (RFPs) to fulfill the joint goals of obtaining the best combination of price and service/product and to minimize favoritism (which doesn’t always work).

But private companies and individuals might also request bids. Have you ever renovated your house and sought multiple bids from contractors? If so, that is what we are talking about. If you’ve done this as a real-estate investor, you should read our real-estate blog too.

What is Bid-Rigging?

Let’s say you are a bidder and you know that two other companies are also bidding to supply tablets and related services to a business that provides its employees with tablets. The bids are blind, which means you don’t know what the other companies will bid.

You will likely calculate your own costs, add some profit margin, try to guess what the other companies will bid, then bid the best combination of price, product, and services that you can so the buyer picks your company.

This approach puts the buyer in a good position because each of the bidders doesn’t know what the others will bid, so each potential seller is motivated to put together the best offer they can. The buyer can then pick which one it likes best.

But instead of bidding blind, what if you met ahead of time with the other two bidding companies and talked about what you were going to bid? You could, in fact, decide among the three of you which one of you will win this bid, agreeing to allow the others to win bids with other companies. In doing this, you will save a lot of money.

The reason is that you don’t have to put forth your best offer—you just have to bid something that the buyer will take if it is the best of the three bids. You can arrange among the three bidders for the other two bidders to either not bid (which may arouse suspicion) or you could arrange for them to bid a much worse package, so your package looks the best. The three bidders can then rotate this arrangement for other requests for proposals. Or you offer each other subcontracts from the “winner.”

If you did this, you’d save a lot of money, in the short run.

Of course, in the medium and long run, you might be in jail and find yourself on the wrong side of civil antitrust litigation.

This is what is called bid-rigging. It is one of the most severe antitrust violations—so much so that the courts have designated it a per se antitrust violation.

Bid rigging is also a criminal antitrust violation that can lead to jail time. For example, the Department of Justice, Antitrust Division, recently obtained an indictment of a California real-estate investor that rigged bids for foreclosed properties. This is part of a broader DOJ investigation into bid rigging among real-estate investors.

Bid-rigging conduct also leads to civil antitrust litigation. Many years ago, when I was still with DLA Piper, I spent a lot of time on a case that included bid-rigging allegations in the insurance and insurance brokerage industries called In re Insurance Brokerage Antitrust Litigation.

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Author: Luis Blanquez

In our prior article, we discussed the European Commission’s final report of its study of the EU’s e-commerce market for consumer goods and digital content.

In this article we describe EU investigations and enforcement actions that arose from the EC’s final e-commerce market study. While the final report itself offers companies doing business in the EU helpful guidance, the Commission’s actual conduct is perhaps an even better indicator of how the EC will implement what it learned.

Since the European Commission published its Final Report, it has opened investigation of about 20 companies.

Below is a summary of the relevant cases that the EC recently opened. We expect additional cases in the future in this area, both at EU and national level.

Geo-blocking cases

Video Games

On February 2, 2017, the EC opened an investigation to analyze bilateral agreements between Valve Corporation, owner of the Steam game distribution platform, and five PC video game publishers:  Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax.

This investigation concerns geo-blocking practices, where companies prevent consumers from purchasing digital content, in this case PC video games, because of the consumer’s location or country of residence.  After the purchase of certain PC video games, users need to confirm that their copy of the game is not pirated to be able to play it.  This is done with an activation key.

The investigation focuses on whether such agreements require the use of activation keys for the purpose of geo-blocking.

Clothing Company, Guess

On June 6, 2017, the EC opened an investigation against clothing manufacturer Guess.  The EC is analyzing whether Guess’s distribution agreements impose cross-border sales restrictions on (i) retailers making online sales to consumers in other Member States, (ii) or wholesalers, selling to retailers in other Member States.

Interestingly, as a result, other clothing manufacturers such as Mango, Oysho and Pull&Bear have now started to review and revise their distribution agreements.  Other companies, such as coffee machine manufacturer De Longhi, and photo equipment manufacturer Manfrotto, are doing the same (See here).

Hotel Pricing Discrimination

On February 2, 2017, the EC opened another investigation into hotel accommodation agreements between the largest European tour operators on the one hand: Kuoni, REWE, Thomas Cook and TUI, and Meliá Hotels on the other hand.

The EC encourages hotels to develop and introduce innovative pricing mechanisms to maximize room usage.  But the EC is concerned that these agreements may contain clauses that discriminate among customers based on their nationality or country of residence.  As a result, customers may not be able to see the full hotel availability, or book hotel rooms at the best prices, simply because of the consumer’s nationality or place of residence.

Licensed Merchandising Products

On June 14, 2017, the EC opened more investigations into the licensing and distribution practices of Nike, Sanrio and Universal studios.  These three companies license intellectual property rights to manufacturers of merchandising products such as the Fútbol Club Barcelona, Hello Kitty and Minions merchandise, respectively.

The EC is concerned that these companies, in their role as licensors of rights for merchandising products, may have restricted the ability of their licensees to sell licensed merchandise cross-border and online.

Resale Price Maintenance cases

Consumer electronics manufacturers

The EC has opened another investigation against Asus, Denon & Marantz, Philips and Pioneer.  In this case, the EC is concerned that the companies involved might be restricting the ability of online retailers to set their own prices for widely used consumer electronics products such as household appliances, notebooks and hi-fi products.

This is the first resale price maintenance case that the EC has initiated in a long time.  Instead, the Member States themselves have scrutinized resale price maintenance at national level during the last decade.

Germany, for example, has recently published a new guidance note on resale price maintenance. The Competition and Markets Authority (“CMA”) in the UK also published additional guidance on these types of pricing agreements in the form of an open letter, a film, a 60-second summary, and  case studies.

Indeed, the CMA recently fined National Lighting Company (NLC), a light fittings supplier, £2.7 million for restricting online prices. They also sent out warning letters to others in the industry.  In 2016, the CMA also fined two other online companies for resale price maintenance practices: Ultra Finishing Limited (“Ultra”) in the Bathroom fittings sector and ITW Limited in the commercial refrigeration sector.

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Author: Luis Blanquez

  1. BACKGROUND

Over the past two years, the European Commission (“EC”) has been scrutinizing the e-commerce market of consumer goods and digital content in the European Union.  This is a key step on the Commission’s Digital Single Market strategy to improve access to digital goods and services.

Such strategy includes legislation to promote cross border e-commerce through the following:

In May 2015, the EC started in parallel its Sector Inquiry to identify possible competition concerns affecting European e-commerce markets.  Its main purpose was to gather information on companies’ conduct and barriers to cross-border online trade, looking at online sales of consumer goods and digital content.  In September 2016, the EC published a report with its preliminary findings, together with a Staff Working Document.

Finally, in May 2017, the EC issued its Final Report.

You can read our follow-up article to this one about ongoing EC enforcement actions arising out of the E-Commerce Report.

You might also enjoy our articles on EU dominance abuse and antitrust compliance programs in the US and EU.

  1. RELEVANT FINDINGS

The EC outlines in the Final Report what it considers as the key issues in the field of e-commerce.  It acknowledges the changing characteristics and fast-growing tendency of a sector with an increasing economic role in today’s economy. It further identifies business practices and barriers that could restrict competition and limit consumer choice.

The EC reviewed more than 2,600 agreements concerning the distribution of goods in the EU, and received more than 6,800 licensing agreements from digital content providers and rights holders.  The main findings in the Final Report differentiate between consumer goods and digital content.

(A) CONSUMER GOODS

Contractual Restrictions on Cross-Border Sales: Geo-Blocking

The Sector Inquiry identifies contractual restrictions between operators in the online market that the EC believes could cause problems.  Unilateral decisions by non-dominant firms, however, fall outside the scope of EU competition law.

But before telling you which contractual restrictions are problematic, let me explain first what the term “geo-blocking” means.  Basically, it refers to practices that prevent cross-border sales in the EU.  These include the following:

  • Blocking access to websites by users located in another Member State—for example when a customer located in Madrid tries to acquire a product via a French website, and is prevented from doing so because the website has been blocked due to its Spanish IP address;
  • Automatic re-routing of a customer to another website of the same or a different service provider—for example when a customer located in Madrid trying to access a French website is directly re-routed to the company’s Spanish website; or
  • Payment refusals based on the place of residence of the customer—for example when the payment to the French website is refused because the credit card used is linked to an address in Spain, or the delivery to Spain is denied based on the customer’s residence.

So back to the relevant contractual restrictions now:  The EC is concerned about how retailers face contractual restrictions from suppliers, which prevent such cross-border selling on-line.

These questioned agreements are ones that (i) are not covered by the EC “safe harbor” under the Vertical Block Exemption Regulation (“VBER”) – this is if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, (ii) preventing cross-border sales between Member States in distribution agreements, may infringe EU Competition rules.

Restrictions on the use of online marketplaces

An online marketplace is a website that facilitates shopping from different sources, such as Amazon or eBay.

An absolute ban on online selling is considered a hard-core restriction under EU law.  There is, however, an important ongoing debate in Europe as to whether an absolute ban on selling via marketplaces is contrary to EU rules.

In Germany, the Bundeskartellamt issued an infringement decision against Asics on its ban to sell via online marketplaces. In April 2017, the Dusseldorf Regional Higher Court found that only the price comparison tool restrictions involved in the case were anticompetitive.

At EU level there are currently two preliminary rulings pending.  One the Coty case, where the high EU court has been asked to analyze the restrictions imposed on a selective distribution agreement by manufacturer Coty on one of its authorized distributors to sell products via third party online platforms. The second one is the Samsung and Amazon case, concerning a ban on resale outside a selective distribution network and on a marketplace, by means of online offers on several websites operating in various Member States.

In its Final Report, the EC does not consider marketplace selling bans as hardcore restraints.  It may, however, still scrutinize them on a case by case basis, if parties to the agreements have market shares above 30%, or there are hardcore restraints involved, according to the VBER.

Selective distribution agreements: Requirements for brick-and- mortar shops

Contractual requirements to operate at least one brick-and-mortar shop under a selective distribution agreement are compatible with the EU competition rules, as long as they are linked to quality or brand image.

The EC, however, states in its Final Report that brick-and-mortar shop requirements imposed for the sole purpose to exclude online operators from the market, may infringe EU competition rules.

Pricing restrictions: Resale Price Maintenance (“RPM”) and Price collusion

E-commerce has significantly increased price transparency, competition on price and opportunities for users to compare different options in the internet.  According to the EC’s investigation, almost 30% of manufacturers systematically track resale prices: 67% track resale prices manually, whereas 38% use specific software (spiders).

The Final Report highlights that this may also increase the risk of RPM or collusion between competitors.

Resale Price Maintenance (RPM)

The imposition of minimum resale prices is considered a hardcore restriction under EU Competition law.  Similarly, when manufacturers seek to enforce compliance with recommended prices through contractual restrictions or some form of coercion, they may also infringe competition rules.

The EC is concerned that online price transparency may facilitate such practices, making it easier for manufacturers to detect deviations and enforce RPM provisions.

You can read articles on The Antitrust Attorney Blog on Resale Price Maintenance here.

Price collusion

Price fixing between competitors is considered one of the most serious infringements under EU competition rules.

The Final Report found that almost 50% of retailers track online prices of competitors, and 78% of them use software to monitor rivals’ prices, adjusting their own prices accordingly.

The EC is thus concerned that price monitoring may facilitate or strengthen collusion between retailers, by making the detection of deviations from the collusive agreement easier, while allowing them to counteract by adjusting their prices.

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Filed-Rate-Doctrine-Antitrust-300x200

The doctrine of federal antitrust law includes several immunities and exemptions—entire areas that are off limits to certain antitrust actions. This can be confusing, especially because these “exceptions” arise, grow, and shrink over time, at the seeming whim of federal courts.

As a matter of interpretation, the Supreme Court demands that courts view such exemptions and immunities narrowly, but they are still an important part of the antitrust landscape. This includes, prominently, the Filed Rate Doctrine, which is the topic of this article.

Here at The Antitrust Attorney Blog, we write about these antitrust exceptions periodically. In particular, we spend a lot of time on state-action immunity, but have also published articles on, for example, the baseball antitrust exemption, and the business of insurance exception (which, unlike many others, arose from statute: The McCarran-Ferguson Act).

What is the Filed Rate Doctrine?

The filed rate doctrine is simply a judicially created exception to a civil antitrust action for damages in which plaintiffs challenge the validity of rates or tariff terms that have been filed with and approved by a federal regulatory agency.

But what does that mean?

In some industries, notably insurance, energy, and shipping (or other common carriers), the participants must file the rates that they offer to all or most customers with a government agency. This regulatory agency must then, in some manner, approve those rates. This approach is an exception to a typical market and was more common in certain industries pre-deregulation.

The idea of filing these rates is that the benevolent and all-knowing government agency, rather than the market, will best look after customers. It arises from the same seed as socialism and was particularly popular in the early to mid-20th century when the view that educated people could perform better than markets was in vogue.

Anyway, these “filed rates” are still with us and are a defense, through the filed rate doctrine, to certain antitrust actions.

The filed rate doctrine itself arose in a 1922 US Supreme Court case called Keogh v. Chicago & Northwest Railway Co., 260 U.S. 156 (1922). In that case, the plaintiffs sought antitrust damages by arguing that defendants violated the Sherman Act and the rates charged by certain common-carrier shippers were higher than they would have been in a competitive market.

The defendants, however, had filed these rates with the Interstate Commerce Commission (ICC), a federal agency that had approved them. The Supreme Court responded by precluding plaintiffs’ antitrust lawsuit on that basis, as the rates, once filed, “cannot be varied or enlarged by either contract or tort of the carrier.” It is the legal rate.

The Supreme Court has since reaffirmed this holding, most prominently in a case called Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409 in 1986, which you can read at the link if you want to dig deeper.

When Does the Filed Rate Doctrine Preclude Antitrust Liability?

The filed rate doctrine is a defense to an antitrust lawsuit, premised on damages, so long as the claim requires the Court to examine or second guess the rates filed with a federal agency.

So if you are a plaintiff that wants to bring an antitrust action against a defendant that filed rates, you could (1) seek certain types of injunctive relief; and (2) develop your action in a way that doesn’t require the Court to determine liability or calculate damages by comparing current filed rates to a hypothetical rate in a but-for world. This can get complicated, so if you are not an antitrust attorney, you might want to find one.

If you are or represent a defendant that has been sued under the antitrust laws and the defendant company files rates with some agency, you should also seek antitrust-specific guidance. You might have a strong defense.

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Kansas-Real-Estate-Commission-Antitrust-300x169

If you have sold or purchased a home recently, you might be under the impression that real estate commissions—the price to engage a real estate broker—are fixed or otherwise set by law in different geographic markets. They aren’t—to do so amounts to price-fixing, which is a per se violation of the antitrust laws.

Like any other competitor—professional or not—real estate brokers and agents must compete for customer business on price, quality, and everything else. If competing professionals were to join together to fix commissions at a set price, they would violate the antitrust laws. And since it would be a per se violation, there are potential criminal penalties.

In fact, the U.S. Department of Justice, Antitrust Division, is engaged in prosecuting some other real-estate participants for per se antitrust violations—bid rigging: Several Northern California real-estate investors have pled guilty for bid rigging public real estate foreclosure auctions. Similar bid rigging of foreclosure auctions apparently occurred in Georgia, as well. We wrote about these bid rigging investigations long ago when DOJ’s antitrust activity was in its early stages.

But let’s return to real estate brokers and commissions: It is true that in most geographic regions, you see commissions at around the same level, no matter who you hire as a real estate agent. That will sometimes happen in a market; there is a rate that is around the market rate and most will price around that rate.  We wrote a prior article about this situation, where real estate commissions ended up at the same level, but not due to any agreement. This was not an antitrust violation.

For some reason, however, there is an impression with real estate commissions that there is a “standard” or “legal” rate that real estate agents must price. If you are a consumer in this industry, it is important that you know that this is absolutely incorrect. If your real estate broker tells you otherwise, have them read one of our most popular articles: Five Antitrust Concerns for Real Estate Professionals.

Then, go ahead and negotiate. That is your right. You don’t have a right to win the negotiation, but real estate agents don’t have a right to agree among each other on prices either.

If you are a competitor for real estate services, it is particularly important that you understand that you can’t fix prices with other agents. If you do, you might find yourself on the wrong side of an antitrust lawsuit—possibly even brought by Bona Law—as we receive a lot of calls and emails about these issues. Or, worse, you could receive a call from a Department of Justice lawyer that opened an investigation into you or your company.

My interest in this issue goes beyond my role running a boutique antitrust law firm: I am also a long time real estate investor and I have a California real estate license. To capitalize on that background, we recently started a new blog directed at real estate investors, called Titles & Deeds. If you want to learn more, you can read about our real estate blog here.

This, of course, leads us to Kansas. I bet you didn’t see that coming. Let me explain.

Are the Kansas Real Estate Commission and its Members About to Violate the Antitrust Laws?

On June 16, 2017, Andrew Finch, Acting Assistant Attorney General for DOJ, wrote a letter to the Kansas Real Estate Commission expressing concern about a regulation the Commission is considering that would make it easier to fix prices by forbidding real estate brokers from competing on price by offering gift cards or similar items.

Apparently, according to the DOJ law, Kansas state law forbids real estate brokers from offering rebates, but doesn’t define the term “rebates.” The Kansas state ban, of course, is highly anticompetitive. It directly restricts price competition and harms consumers in Kansas. The Kansas government has unfortunately chosen to protect profits in the real estate profession over the well-being of its citizens.

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You may not realize this, but a lot of people don’t like lawyers. We even have our own genre of comedy that predates Shakespeare: lawyer jokes. Here is a common example: What do you call 1000 lawyers at the bottom of the ocean? A good start!

When you heard that joke for the first time, you probably laughed and laughed, shook your head and said, “funny because it’s true.”

So why do people dislike lawyers? To save you time, I’ll focus on one reason and leave the rest for others: Because lawyers spoil the fun by saying “no.”

This reason for not liking lawyers, of course, comes from the business context where companies consult either in-house lawyers or outside counsel about how or whether to proceed on a project or opportunity.

It is the lawyer’s job and duty to risk ruining the party. The business and sales people look at the opportunity and see upside: revenues, more market share, perhaps an important merger or acquisition.

It is the lawyer that must look at the opportunity to see the downside risks: the lawsuits, the disputes, the government reactions or investigations, the response from competitors. Then, oftentimes, the lawyer says “no.” The music stops and people go back to their offices, sometimes frustrated and angry, perhaps thinking that the lawyer should be on the bottom of the ocean. The lawyer is the bad guy, even if he or she is just doing his or her job.

But this isn’t an article defending lawyers.

To be honest, most lawyers aren’t great, or sometimes even good. The same is true of most people in any profession. Only in Garrison Keillor’s Lake Wobegon, Minnesota is everyone above average (of course, he was talking about the children, but you get the point). And many criticisms about lawyers apply to many of members of this profession, including the fact that they just ruin the party by saying “no” all the time.

I think that the lawyer that just says “no” is a lazy lawyer that offers very little value to his or her client. Sometimes the lawyer must say “no,” but in most instances, there should be more and I don’t just mean justifications for the denial.

Of course, a client might come up to a lawyer and say the following: “As you know, we compete in a market with four main players. It seems silly that we spend so much time trying to undercut each other on price and so many resources trying to come out with new features to our product. Our adversaries may lack social grace, they may smell bad, and they certainly aren’t good looking, but they aren’t bad people. We could all make more money if we could just get together, have a meeting, set the price we are all going to charge, maybe divide up the customer base, probably by geography, and vote on features to add to our products.”

An antitrust attorney that hears this from a client, must say “NO,” in all caps, like they are yelling. Of course, after that, they better work on education through antitrust compliance counseling and training. Time to put together an antitrust compliance policy.

But in most instances—even where the client’s idea create risk—a simple “no” is not the right approach, at least from a good antitrust attorney.

The scenario I described above—involving price fixing and market allocation (per se antitrust violations)—is a rare example of a situation where the antitrust laws are almost completely clear.

In most instances, either the law or the application of law is not straightforward enough to entirely preclude the client’s objective. For example, the question of what is exclusionary conduct under Section 2 of the Sherman Act (Monopolization) is not an easy one to answer. There is still great debate among the courts, academics, and economists. Similar issues can arise if you are trying to determine if an exclusive dealing agreement violates the antitrust laws: Sometimes the answer isn’t clear.

Advising Business Clients on Antitrust Risks

I can’t speak for all antitrust attorneys, but here is how I handle counseling clients on antitrust risks:

First, I understand that the perspective of a business is different than the perspective of the typical lawyer.

The attorney, especially the litigator, has grown up (professionally) in a world where they win or lose a motion or case and where something is or isn’t illegal under the law. There are, of course, grey areas, but a young attorney that receives a research project, for example, is tasked with finding the “answer.” And courts have to give decisions on “the law” in such a way that suggests there is an answer, even when the reality is that it could have gone either way. But opinions rarely say that—when they do, it is a credit to the judge.

Businesses, however, make calculated judgments based upon risk, reward, and resources. Opening another factory has obvious risks and rewards and takes resources. The business executive tries to evaluate the risks, judge the potential upside, and compare both of those to the resources necessary to open the factory.

If you tell the business to not open the factory because there are “risks,” you aren’t helping it. The business executive will just stare at you like you are some sort of fool. Of course there are risks; the skill in running a business is to evaluate those risks and incorporate them into decisionmaking.

I understand this perspective even more clearly now, having run Bona Law for several years.

Let’s apply this point to antitrust counseling: If a client comes to me with an opportunity, a project, or even a problem, it does the business little good for me to just say “no, there are risks.” That’s the lazy approach, in my view.

My value as the antitrust attorney in that situation is to help the client fully understand the risk. That is, I try to help the client appreciate the likelihood of the risk coming to fruition and the consequences of the risk, if it hits. And, in fact, the counseling is usually more complicated because there are often multiple risks, each with their own structure of probability and harm.

I do this because this is how businesses make decisions: They incorporate risk into the information that they have and make the best call they can.

Second, I work with the client to come up with options with similar rewards or upsides, but less antitrust risk—or some more preferable sliding scale of the risks and rewards.

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Author: Luis Blanquez

Luis Blanquez is a European Competition Attorney that works with Bona Law.

WHAT IS AN ANTITRUST COMPLIANCE PROGRAM?

An antitrust compliance program is an internal business policy designed by a company to educate directors and employees to avoid risks of anticompetitive conduct.

Companies that conspire with their competitors to fix prices, share markets, allocate customers, production or output limitation; have historically faced severe fines from antitrust enforcement all over the world.

Companies articulating such programs are in the best position to detect and report the existence of unlawful anticompetitive activities, and if necessary, be the first ones to secure corporate leniency from antitrust authorities.  This allows them to avoid substantial fines, and in some jurisdictions, such as the US and the UK, even criminal charges.

But not every program ensures compliance.  A successful compliance program must alert and educate sales force; issue-spot risks; encourage reporting of anticompetitive issues, and deter risky conduct.

Over the years, antitrust authorities all over the world have published some general guidance creating and managing compliance programs.  Even though there are differences between jurisdictions, all of them seem to have the following anchor points in common:

  1. No “one size fits all” model: You must tailor your compliance program.

Effective compliance programs require companies to tailor their internal policies according to their particular situation.

A generic out-of-the-box compliance program is not likely to be effective.  It is more important that the company conducts an assessment of the particular risk areas involved in its day-to-day business activities, with a specific focus on the structure and previous history of the industry.

Interaction of sales people with other competitors, with close attention to trade association meetings, is also an important point to consider.  To illustrate, employees with access to pricing information and business plans are more likely to meet their counterparts from other companies in trade association reunions or industry events.

  1. Development of training programs to educate directors and employees.

A company should ensure antitrust compliance training for all executives, managers and employees, especially those with sales and pricing responsibilities.

Genuinely effective compliance requires that companies apply the antitrust policy and training program to their entire organizational structure, preferably in writing.  It may take the form of a manual and must be plainly worded in all the working languages of the company, so everyone understands it.  The antitrust policy must contain a general description of antitrust law and its purpose, explaining the way the company enforces it, along with highlights of the potential costs of non-compliance.

An effective way to implement an antitrust policy is through a list of “Don’ts”, including illegal conduct such as price-fixing agreements, the exchange of future pricing information, or allocation of production quotas, among other conduct.

You might complement the forbidden conduct with a list of “Red Flags” to identify situations in which antitrust risks may arise (i.e. sales people attending trade associations or industry events).

You might also add a list of “Do’s” because employees are often more receptive to what they can do, rather than what they cannot do.

Finally, companies and their employees should document their antitrust compliance training in writing. This assures that employees take compliance efforts seriously and that antitrust enforcers understand that the company does so too.

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