Articles Posted in Antitrust Counseling

Articles about antitrust counseling and training.

Antitrust-for-Kids-300x143

Author: Molly Donovan

You might recall that Max and Margie are next-door neighbors on Lemon Lane.

In a strange turn of events, after Max was found liable for an illegal hub-and-spoke conspiracy against Margie, she let bygones be bygones and hired Max to procure materials for her lemonade stand and to develop new flavors of soft drinks for kids. In that role, Margie and Max agreed that, should Max ever leave Margie’s employ, he wouldn’t compete with Margie by working to sell any kids’ beverages within the city limits for a period of 2 years.

That was all fine until the FTC announced a proposed ban on non-competes, defining “non-compete clause” as a “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Substance is more important than form—so that if any agreement functions as a “non-compete,” under the FTC’s definition, it would be banned, too, regardless of its label.

Now Margie’s in a bind—does she undo her noncompete with Max? Does she try to language around the proposed ban? Does she wait to see if the ban comes to fruition? Certainly, due to their history, she doesn’t fully trust Max who she has trained at length (including in antitrust compliance), is privy to top-secret recipes, and has developed key relationships with Margie’s lemon suppliers, all in the course of his employment with Margie. Given all that, can’t he be stopped from competing against her in the event he works for another beverage company someday?

Here’s what Margie should know: the FTC has recognized two carve-outs to the potential ban—one for non-solicitation agreements and one for non-disclosures. Such agreements aren’t subject to the proposed ban because they don’t “prevent” workers from competing with their former employers. Instead, a non-solicitation would prevent workers only from soliciting clients or customers with whom the former employer has a business relationship. And non-disclosures would prevent workers only from using proprietary information learned during the course of employment in a new job.

If used as an alternative to a non-compete, these types of clauses should continue to be tailored to particular customers, products and geographic areas that are relevant to the employee at issue and the pertinent procompetitive justifications. An overly broad non-solicitation or non-disclosure could be said to function the same as a non-compete and therefore, become subject to the proposed ban.

Margie could consider other options as well. Perhaps a unilateral policy that deferred compensation or other incentive payments will be clawed back should a worker choose to compete, disclose confidential information in a new position, or disparage Margie in some way. Such a policy is not a contractual agreement because it’s unilateral, and it doesn’t prevent Max from competing—it merely discourages him. (Of course, Margie should be sure a clawback is legit under other laws like ERISA).

Further, if Margie is considering a stick, she might also consider a carrot: a unilateral incentive program for workers that don’t compete within a specified time period or a specific geographic region, etc.

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Author: Steven Cernak

Recently, the Federal Trade Commission proposed a nearly complete ban on noncompete provisions in employment agreements. Because it faces the usual lengthy rulemaking process and several expected legal challenges, the proposed rule might not become effective for months, if ever. Through the proposal and attendant publicity, however, the FTC already has drastically changed how such provisions will be used.

Noncompete Basics and the Law Today

Noncompetes prevent workers from leaving an employer to work for other employers, typically competitors. The clauses usually are limited in time and geography. So, for example, a worker is prohibited from working for specific other employers — say, competitors — in a particular geographic area — say, Michigan — for a limited period of time — say, six months after leaving the first employer. Through these clauses, employers hope to better protect their secrets and avoid training a worker for a competitor. For example, a nondisclosure agreement might not adequately prevent use of the first employer’s competitive details that are embedded in the worker’s brain.

Today, such provisions are usually evaluated under state common or statutory law. A handful of states ban them. A few statutorily limit their use to high salary workers. Most try to balance the interests of the employer with those of the worker trying to earn a living in a chosen field. Such provisions are more likely to be upheld if the interests of the employer are legitimate and the restrictions on the worker’s mobility are limited.

FTC Proposed Rule

On January 5, 2023, the FTC proposed a rule that would upend that status quo developed over hundreds of years, declaring nearly all noncompetes as an “unfair method of competition” under the FTC Act, and outlawing nearly all of them. The proposal would allow some noncompetes in the sale of a business and sought comment on partially exempting noncompetes for high salary workers. The proposal would prohibit parties from entering new noncompete provisions and employers from enforcing existing ones. Also, all state laws that were not as restrictive would be pre-empted. The FTC is seeking comment on the proposal through March 10.

Reaction was quick. The proposal at regulations.gov generated thousands of official comments, mostly positive, in the first couple weeks. Negative commentary in the media took several angles. First, some renewed arguments that the FTC does not have the authority to issue rules under its “unfair methods of competition authority.” Others questioned whether the FTC has the authority under recent Supreme Court precedent to answer, without explicit Congressional direction, such a “major question” that has generated thousands of opinions and state laws over hundreds of years.

Finally, even granting that the FTC has the authority for such a rule, some argued that the FTC’s 200+ page notice did not adequately support the wisdom of departing from the typical case-by-case evaluation because other analyses found the overall effect of such noncompetes to be mixed. The FTC will need to consider all the official comments and decide if any tweaks to the proposed rule are appropriates. Unless the rule drastically changes, legal challenges seem certain. Therefore, a ban on nearly all noncompete provisions might not be effective for many months, if ever.

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exclusive-deailng-300x200

Author: Jarod Bona

Sometimes parties will enter a contract whereby one agrees to buy (or supply) all of its needs (or product) to the other. For example, a supplier and retailer might agree that only the supplier’s product will be sold in the retailer’s stores. This usually isn’t free as the supplier will offer something—better services, better prices, etc.—to obtain the exclusivity.

If you compete with the party that receives the benefit of the exclusive deal, this sort of contract may aggravate you. After all, you have a great product, you offer a competitive price, and you know that your service is better. Then why is the retailer only buying from your competitor? Shouldn’t you deserve at least a chance? Isn’t that what the antitrust and competition laws are for?

Maybe. But most exclusive-dealing agreements are both pro-competitive and legal under the antitrust laws. That doesn’t mean that you can’t ever bring an antitrust action under exclusive dealing and it doesn’t mean you won’t win. But, percentage-wise, most exclusive-dealing arrangements don’t implicate the antitrust laws and are uncontroversial.

You can read our article about exclusive dealing at the Bona Law website here.

It is important that I deflate your expectations a little bit at the beginning like this because if you are on the outside looking in at an exclusive-dealing agreement, you are probably angry and you may feel helpless. From your perspective, it will certainly seem like an antitrust violation. And your gut feeling about certain conduct is a good first filter about whether you have an antitrust claim. What I am trying to tell you is that with regard to exclusive dealing, your gut may offer some false positives.

Of course, the market is full of exclusive or partial-exclusive dealing agreements and there are relatively few of these that turn into federal antitrust litigation. So if you see an exclusive-dealing claim in federal litigation, it may be one of the rare instances of an exclusive-dealing antitrust violation. Clients and prospective clients often contact Bona Law about exclusive-dealing agreements that are antitrust violations or close to antitrust violations. And we counsel clients on their own exclusive-dealing agreements. But people don’t call us for most varieties of exclusive dealing, which are perfectly legal under the antitrust laws.

So what is an exclusive dealing agreement?

An exclusive dealing agreement occurs when a seller agrees to sell all or most of its output of a product or service exclusively to a particular buyer. It can also happen in the reverse situation: when a buyer agrees to purchase all or most of its requirements from a particular seller. Importantly, although the term used in the doctrine is “exclusive” dealing, the agreement need not be literally exclusive. Courts will often apply exclusive dealing to partial or de facto exclusive dealing agreements, where the contract involves a substantial portion of the other party’s output or requirements. And if there are only two competitors in a market, for example, the exclusive-dealing agreement may take the form of the more powerful of the two competitors telling customers that if they want the powerful company’s products or services, they can’t also purchase from the other competitor.

You should also understand that loyalty-discount agreements and exclusive dealing agreements are, under the law, sometimes indistinguishable.

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Blockchain-Ethereum-Merge-Group-Boycotts-300x200

Author: Luis Blanquez

Blockchain is an emerging technology that is already changing the way companies do business. But this doesn’t precludn companies using such nascent technology frot getting caught in the same old anticompetitive practices subject to the antitrust laws.

Before diving into the spectrum of anticompetitive behavior that companies using blockchain technology might get involved, let’s first explain below what distributed ledger technology (“DLT”) and blockchain mean, and what are––at least for now––the different types of blockchains.

In the last section of this article, we also analyze how antitrust group boycotts could apply in a blockchain-setting. And we provide two real life recent examples, the Bitmain case and the Ethereum Merge.

What Is Blockchain Technology?

A “blockchain” is a decentralized, electronic register in which transactions and interactions can be recorded and validated in a verifiable and permanent way. A peer-to-peer network where different users or “nodes” share and validate information in a database or network without the need of a centralized and trusted intermediary.

Records of transactions are stored along with other transactions into blocks of data that are linked to one another in a chain, creating a blockchain, which is a type of distributed ledger technology (“DLT”). Each ledger is tamper-proof and recorded using a consensus verification algorithm that encoded every prior block in the blockchain. Once a block is added to the chain, it is virtually impossible to modify. Any change would require modifying every subsequent block of data on the chain. And because each participant on the blockchain has a unique identification key, other users can instantly verify prior transactions involving that participant.

Bitcoin is the first and most prominent use of blockchain technology and has several features that distinguish it from other blockchains, including actual digital scarcity with a programmed limit of 21 million Bitcoin, forever.

With the help of Web3, blockchain technology has opened the door for companies across many industries––not just cryptocurrencies––to make more efficient, inexpensive, and secure business transactions without the need for a centralized authority. In other words, this a whole new ballgame.

Types of Blockchains: Permissionless v. Permissioned

There are two main types of blockchains.

Permissionless (public) blockchains are publicly available and fully decentralized DLTs, which means there is no central authority involved. They allow everyone to interact and participate in the validation process because they are based on open-source protocols, providing strong security. Validators must all vote to adopt the protocols and code that become the decision-making process of the blockchain. This makes it very difficult to change the behavior of the blockchain. Transactions are also fully transparent, and the nodes involved are almost always anonymous. They have, however, some technical restraints such as (i) less control over privacy (everyone has access to what is going on in the blockchain); and (ii) lower scalability and level of performance than permissioned blockchains––mainly due to the wide scope of their verification process and the amount of information they need to process.

Permissioned (private and consortium) blockchains are made by a smaller pool of validators who are partially decentralized DLTs. Only few known (as opposed to anonymous) and previously identified parties can access the ledger and participate in the validation process. Participants need permission to have a copy of the ledger. Thus, even though there is no central authority involved, a short group of participants validate and share the data relevant to transactions. This means less transparency and a higher risk of collusion and abuse of market power because only few nodes manage the transaction verification and consensus process. On the flip side, privacy is stronger, and they are more scalable and customizable.

This distinction is important to identify and analyze antitrust issues, depending on the type of blockchain involved. But the more the blockchain technology develops, the more those differences have become blurred. A combination of small permissioned blockchains with more open, wider, and decentralized ones (although sometimes still using encrypted transactions) had become a common trend. Interoperability between blockchains and existing network externalities are both expected to keep verification prices down while increasing security. In the end, the final configuration of a blockchain and its software code will depend on the strategy and business model selected, which is something that needs to be analyzed on a case-by-case basis, considering the industry and applications involved.

The same applies to the enforcement of antitrust laws to this new technology. That’s why it is essential that companies using blockchain technology have a clear antitrust compliance policy in place and train their key employees accordingly. This is particularly important for those involved with the business strategy of the company and the ones interacting on a regular basis with competitors.

Group Boycotts: The Bitmain case and the Ethereum “Merge”

Private blockchain participants may breach antitrust rules if they exclude competitors from the blockchain without a legitimate business justification. Those who control the blockchain may limit potential competitors access to the chain or may not allow them to conduct transactions therein. This is called a group boycott or a concerted refusal to deal—where multiple entities combine to exclude or otherwise inhibit another party. When that “concerted” boycott involves market power or horizontal control over an essential facility or resource, courts typically always analyze it under the “per se” rule.

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Podcast-Logo-If-I-were-you-300x109

Author: Molly Donovan

A new episode of the “If I Were You” podcast is here! You can listen to it here. Featuring Bona Law partner Jim Lerner.

This Episode Is About: Antitrust and Employment

Why: There are employment-related antitrust risks that all in-house lawyers should be aware of.

The Five Bullets: In-house lawyers, if I were you, I would educate your business team about the following antitrust hot spots related to employment issues…

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Antitrust-for-Kids-300x143

Author:  Molly Donovan

Mr. Potter grows the best pumpkins in town. They’re big and round, perfect for carving, and specially treated with a patented spray that keeps Potter pumpkins squirrel-free for weeks. Genius!

Naturally, all the kids in town buy their Halloween pumpkins from Mr. Potter’s farmstand. They’re a bit more expensive than the competition’s pumpkins, but the price tag is worth the pumpkin perfection.

One thing the kids don’t buy at Mr. Potter’s farmstand: apple cider donuts. Everyone knows that Potter skimps on the cinnamon and sugar and the donuts are too dry besides. The other donuts available in town are loads better.

Seeing that his donuts were mostly going to waste, Mr. Potter could have exited the donut business altogether, but he considered himself a better business person than that. So, here’s what Mr. Potter came up with: no donuts, no pumpkins.

Eeek! Scary.

Mr. Potter made a sign reading:

One pumpkin + ½ dozen donuts = $12. Pumpkins NOT sold separately.

Mr. Potter felt this was perfectly fair—he should be rewarded for his ingenuity and his climb to the top of the local pumpkin market even if his customers felt a bit coerced to buy his donuts.

And the kids did feel coerced—having no choice but to swallow the undesirable donuts to get the pumpkins they needed for Halloween carving.

The donut competitors in town were equally mad. Mr. Potter’s scheme caused their sales to drop off dramatically, practically excluding them from the donut market, at least during the month of October.

But it is what it is, right?

Wrong. Fortunately for everyone (except Mr. Potter), Mikey’s mom happened to be an antitrust lawyer. (Mikey, age 4, was a connoisseur of both donuts and pumpkins, and was understandably very upset over the whole thing.)

When Mikey’s mom learned of Mr. Potter’s Halloween trick she said: this is an antitrust violation called tying!

Tying can run afoul of state and federal antitrust laws. Generally, tying is where a seller makes the sale of one product (or service) contingent on the sale of another product (or service)—leaving the consumer with no choice but to buy both. In tying analyses, most courts look at whether the seller has sufficient market power in the tying product (pumpkins) to unfairly restrain competition in the tied product (donuts).

Here’s what happened next. Mikey’s mom approached Mr. Potter—”Look,” she said. “We want your pumpkins, but not your donuts. Don’t you know this is an antitrust violation? Your donut tie-in is anticompetitive.”

Mr. Potter – clever as he is – responded, “I’m simply making my donuts more competitive. My competition is free to sell pumpkins and donuts together, just as I’m doing. And, I have no real market power for pumpkins anyway when considering the entire county’s many pumpkin patches (beyond just our small town). Plus, my supposed tie has no effects beyond the month of October anyway—no harm, no foul. I’ll take the risk.”

But after giving it more thought, even if he could win a lawsuit, Mr. Potter did not want to invite an expensive and burdensome antitrust litigation. So as most antitrust disputes go, the matter was settled.  Potter agreed to the following: Potter pumpkins sold at wholesale to all local donut shops. The town’s best apple cider donuts sold wholesale to Mr. Potter. No ties, no tricks. The result: Halloween treats for all sold at competitive prices, and everyone lived happily ever after. Until the next Halloween anyway…

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Author: Jarod Bona

We see many antitrust issues in the distribution world—and from all business perspectives: supplier, wholesale distributor, authorized retailer, and unauthorized retailer, among others. And at the retail level, we hear from internet and brick-and-mortar stores and consumers.

The most common distribution issues that come up are resale-price-maintenance (both as an agreement and as a Colgate policy), terminated distributors/retailers, and Minimum Advertised Pricing Policies or MAP polies.

Today, we will talk about MAP Policies and how they relate to the antitrust laws.

What is a Minimum Advertised Price Policy (more commonly known as a MAP policy)?

A MAP policy is one in which a supplier or manufacturer limits the ability of their distributors to advertise prices below a certain level. Unlike a resale-price-maintenance agreement, a MAP policy does not prohibit a retailer from actually selling below any minimum price.

In a resale price maintenance policy or agreement, by contrast, the manufacturer doesn’t allow distributors to sell the products below a certain price.

As part of a “carrot” for following MAP policies, manufacturers often pair the policy with cooperative advertising funds or other benefits for the retailer.

Typical targets of MAP policies are online retailers and competition focused on low prices. These policies also do not typically restrict in-store advertising. The manufacturers that employ MAP policies often emphasize branding in their corporate strategy or have luxury products and fear that low advertised prices for those products will make them seem less luxurious. But these policies exist in many different industries and aren’t limited to luxury brands.

In any event, MAP policies are accelerating in the marketplace. Indeed, brick and mortar retailers that fear “showrooming,” will often pressure manufacturers to implement either vertical pricing restrictions or MAP policies. Not surprisingly, the impetus to implement and enforce MAP policies often come from established retailers that want to limit price competition.

We hear many questions about MAP policies, from both those that want to implement them and those that are subject to them.

Do MAP Policies Violate the Antitrust Laws?

MAP policies don’t—absent further context—violate the antitrust laws by themselves. But, depending upon how a manufacturer structures and implements them, MAP policies could violate either state or federal antitrust law. So the answer to the question of this heading is the unsatisfying “maybe.”

We can, however, add further context to better understand the level of risk for particular MAP policies.

There is some case law analyzing MAP policies, but it is limited, so if you play in this sandbox, you can’t prepare for any one approach. I had considered going through the cases here, but I think that has limited utility.  The fact is that there isn’t a strong consensus on how courts should treat MAP policies themselves. So the best tactic is to understand the core competition issues and make your risk assessments from that.

Because of the limited case law, you should consider, as we do, that there will be a greater variance in expected court decisions about MAP policies, which creates additional risk. This may particularly be the case at the state level because state judges have little experience with antitrust.

In any event, you will need an antitrust attorney to help you through this, so the best I can do here for you to is to help you spot the issues so you can understand if you are moving in the right direction.

If you are familiar with resale price maintenance or Colgate policies, you will notice a lot of overlap with MAP policy issues. But there are important differences.

A minimum advertised price policy is not strictly a limit on pricing. From a competitive standpoint, that helps, but not necessarily a lot. The reality is that a MAP policy can be—for practical reasons—a significant hurdle for online distributors to compete on price for the restricted product. That is, for online retailers, sometimes the MAP policy price is the effective minimum price.

Resale Price Maintenance

Before we go further, let’s review a little bit. A resale price maintenance agreement is a deal between a manufacturer and some sort of distributor (including a retailer that sells to the end user) that the distributor will not sell the product for less than a set price. Up until the US Supreme Court decided Leegin in 2007, these types of agreements were per se illegal under the federal antitrust laws.

Resale price maintenance agreements are no longer per se federal antitrust violations, but several states, including California, New York, and Maryland may consider them per se antitrust violations under state law, so most national manufacturers avoid the risk and implement a unilateral Colgate policy instead.

Under federal law, courts now usually analyze resale-price-maintenance agreements under the antitrust rule of reason. Some misunderstand that this means they are necessarily legal under federal law, but that isn’t correct. The consequence of the US Supreme Court’s Leegin decision is that under federal law, challengers to Resale Price Maintenance policies must now face the the more difficult rule of reason standard instead of the per se standard.

Colgate Policies

Colgate policies are named after a 1919 Supreme Court decision that held that it is not a federal antitrust violation for a manufacturer to unilaterally announce in advance the prices at which it will allow its product to be resold, then refuse to deal with any distributors that violate that policy. You can read our article about Colgate policies here.

The bottom line with Colgate is that in most situations the federal antitrust laws do not forbid one company from unilaterally refusing to deal with another. There are, of course, exceptions, so don’t rely on this point without consulting an antitrust lawyer. And a refusal to deal with a competitor is different than a refusal to supply a customer in retaliation for dealing with a competitor. But that is starting to send us into an entirely different doctrine, so I will stop there.

Back to MAP Policies and Antitrust

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Toys R Us Antitrust Conspiracy

Author: Jarod Bona

Like life, sometimes antitrust conspiracies are complicated. Not everything always fits into a neat little package. An articulate soundbite or an attractive infograph isn’t necessarily enough to explain the reality of what is going on.

The paradigm example of an antitrust conspiracy is the smoke-filled room of competitors with their evil laughs deciding what prices their customers are going to pay or how they are going to divide up the customers. This is a horizontal conspiracy and is a per se violation of the antitrust laws.

Another, less dramatic, part of antitrust law involves manufacturers, distributors, and retailers and the prices they set and the deals they make. This usually relates to vertical agreements and typically invites the more-detailed rule-of-reason analysis by courts. One example of this type of an agreement is a resale-price-maintenance agreement.

But sometimes a conspiracy will include a mix of parties at different levels of the distribution chain. In other words, the overall agreement or conspiracy may include both horizontal (competitor) relationships and vertical relationships. In these circumstances, everyone in the conspiracy—even those that are not conspiring with any competitors—could be liable for a per se antitrust violation.

As the Ninth Circuit explained in In re Musical Instruments and Equipment Antitrust Violation, “One conspiracy can involve both direct competitors and actors up and down the supply chain, and hence consist of both horizontal and vertical agreements.” (1192). One such hybrid form of conspiracy (there are others) is sometimes called a “hub-and-spoke” conspiracy.

In a hub-and-spoke conspiracy, a hub (which is often a dominant retailer or purchaser) will have identical or similar agreements with several spokes, which are often manufacturers or suppliers. By itself, this is merely a series of vertical agreements, which would be subject to the rule of reason.

But when each of the manufacturers agree among each other to enter the agreements with the hub (the retailer), the several sets of vertical agreements may develop into a single per se antitrust violation. To complete the hub-and-spoke analogy, the retailer is the hub, the manufacturers are the spokes and the agreement among the manufacturers is the wheel that forms around the spokes.

In many instances, the impetus of a hub-and-spoke antitrust conspiracy is a powerful retailer that wants to knock out other retail competition. In the internet age, you might see this with a strong brick-and-mortar retailer that wants to protect its market power from e-commerce competitors.

The powerful retailer knows that the several manufacturers need the volume the retailer can deliver, so it has some market power over these retailers. With market power—which translates to negotiating power—you can ask for stuff. Usually what you ask for is better pricing, terms, etc.

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Colgate Doctrine

Author: Jarod Bona

As an antitrust boutique law firm, we receive a varied assortment of antitrust-related questions. One of the most common topics involves resale-price maintenance.

That is, people want to know when it is okay for suppliers or manufacturers to dictate or participate in price-setting by downstream retailers or distributors.

I think that resale-price maintenance creates so many questions for two reasons: First, it is something that a large number of companies must consider, whether they are customers, suppliers, or retailers. Second, the law is confusing, muddled, and sometimes contradictory (especially between and among state and federal antitrust laws).

If you want background on resale-price maintenance, you might also review:

Here, we will discuss alternatives to resale-price maintenance agreements that may achieve similar objectives for manufacturers or suppliers.

The first and most common alternative utilizes what is called the Colgate doctrine.

The Colgate doctrine arises out of a 1919 Supreme Court decision that held that the Sherman Act does not prevent a manufacturer from announcing in advance the prices at which its goods may be resold and then refusing to deal with distributors and retailers that do not respect those prices.

Businesses (with some exceptions) have no general antitrust-law obligation to do business with any particular company and can thus unilaterally terminate distributors without antitrust consequences. Before you rely on this, however, you should definitely consult an antitrust attorney, as the antitrust laws create several important exceptions, including refusal to deal, refusal to supply, and overall monopolization limitations.

Both federal and state antitrust law focuses on the agreement aspect of resale-price maintenance agreements. So if a company unilaterally announces minimum prices at which resellers must sell its products or face termination, the company is not, strictly speaking, entering an agreement.

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