Author: Molly Donovan
A new episode of the “If I Were You” podcast is here! You can listen to it here. Featuring Fox Rothschild partner Jayashree Mitra talking all about antitrust and cannabis.
This Episode Is About: Antitrust and Cannabis
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.
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.
Authors: Luis Blanquez and Steve Cernak
The adoption of the new Vertical Block Exemption Regulation and Guidelines has created a hectic few months in the European Union for those in the world of antitrust and distribution agreements.
On May 10, 2022, the European Commission (EC) adopted the new Vertical Block Exemption Regulation (VBER), together with the new Guidelines on Vertical Restraints. The core of applicable rules to vertical agreements––those entered into between undertakings operating at different levels of the distribution chain––remains the same, but the EC has now introduced some significant changes, especially for online sales and platforms. The new VBER entered into force on June 1, 2022, and will expire on May 31, 2034. There is also a transitional period of one year for those agreements already in force that satisfy the conditions for exemption under the old VBER, but do not satisfy the conditions under the new VBER.
Like the old, the new VBER allows parties to vertical agreements to determine their compatibility with Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”), by establishing a safe harbor exemption. In a nutshell, when the share of both buyer and seller does not exceed 30% of the relevant market, and absent any “hardcore restrictions” such as territorial or customer restrictions or resale price maintenance among others, their vertical agreements are automatically exempted. Agreements that do not satisfy the VBER conditions may still qualify for an individual exemption under Article 101(3) TFEU.
Dual distribution happens when a supplier is both active upstream, at the wholesale level, but also downstream, selling directly to end customers in competition with other retailers. For instance, through its own online shop or a marketplace.
The new VBER––similarly to the old draft––covers dual distribution as a safe harbor, even though it excludes vertical agreements between competitors. But the new draft includes two important nuances:
Parity obligations, also known as Most Favored Nation clauses or MFNs, require the seller to offer to the purchaser the same or better conditions offered: (i) to those on any other retail sales channel or platforms (wide parity clauses), or through the seller’s direct sales channel, usually its own online website (narrow parity clauses).
Under the new VBER, wide parity clauses are not covered anymore, and companies need to assess them under the individual exemption of Article 101(3) TFEU. But there is again one wrinkle: When it comes to narrow parity obligations in vertical agreements involving the provision of OIS, they may be still excluded from the block exemption in highly concentrated markets with cumulative effects and lack of efficiencies.
The new VBER updates the old definitions of active sales (seller actively approaches a customer) and passive sales (unsolicited request from customer) in light of the new online business environment. For instance, an online website making sales with a domain name from a territory different from the one the distributor is established, or even just using a different language to the one officially established in that territory, is now considered an active sale.
It also introduces what is called “shared exclusivity,” which is the ability to designate up to five exclusive distributors per territory or customer group.
A supplier may also now require exclusive (as opposed to selective) distributors to impose those same restrictions on active sales to their direct (as opposed to indirect) buyers or territories exclusively allocated to other distributors. But a supplier passing on the same restrictions further down the distribution chain is not block exempted. This is a significant difference from selective distribution systems, where the supplier is allowed to impose such restrictions through the whole distribution chain.
Author: Jarod Bona
If you are looking for controversy, you came to the right place. Today, we discuss resale price maintenance, one of the most contentious issues in all of antitrust. If you look around and see a bunch of antitrust economists, hide your screen so they don’t start arguing with each other. Trust me; you don’t want to be stuck in the crossfire of that.
Let’s start with some background: A resale price maintenance agreement is a deal between, for example, a supplier and a retailer that the retailer will not sell the supplier’s product to an end user (or anyone, for that matter) for less than a certain amount. It is a straight vertical price-fixing agreement.
That type of agreement has a storied—and controversial—past. Over a hundred years ago, the Supreme Court in a case called Dr. Miles declared that this type of vertical price fixing is per se illegal under the federal antitrust laws. This is a designation that is now almost exclusively limited to horizontal agreements.
During the ensuing hundred years or so, economists and lawyers debated whether resale price maintenance (RPM) should be a per se antitrust violation. After all, there are procompetitive reasons for certain RPM agreements and the per se label is only supposed to apply to activity that is universally anticompetitive.
After a trail of similar issues over the years, the question again landed in the Supreme Court’s lap in a case called Leegin in 2007. In a highly controversial decision that led to backlash in certain states, the Supreme Court lifted the per se veil from these controversial vertical agreements and declared that, at least as far as federal antitrust law is concerned, courts should analyze resale price maintenance under the rule of reason (mostly).
You can read more about Leegin and how courts analyze these agreements here. And if you want to learn more about how certain states, like California, handle resale price maintenance agreements, you can read this article. Finally, if you are looking for a loophole to resale price maintenance agreements, read our article about Colgate policies and related issues.
Minimum advertised pricing policies (MAP) are related to resale price maintenance: you can read our article on MAP pricing and antitrust here. You might also want to read Steven Cernak’s article about the four questions you should ask before worrying about the antitrust risks of new distributor restraints. And you can listen to a podcast with Molly Donovan and Steve Cernak about MAP Pricing here.
Author: Molly Donovan
We recently released episode 2 of our “If I Were You” podcast. You can listen to this episode about minimum advertised prices here. Featuring Bona Law partner Steve Cernak. Or read our blog version now:
This Episode Is About: Minimum Advertised Pricing (MAP) Programs
Authors: Steven Cernak and Luis Blanquez
Section 8 of the Clayton Act prohibits certain interlocking directorates between competing corporations. But while the prohibition has been around since 1914, most antitrust lawyers pay little attention to it, partly because companies can quickly resolve any issues voluntarily. Recent comments by the new AAG Jonathan Kanter, however, hint that litigation might play a larger role in future Section 8 issues.
The prohibitions of Section 8, in its most recent form, can be simply stated: No person can simultaneously serve as an officer or director of competing corporations, subject to certain jurisdictional thresholds and de minimis exceptions. Truly understanding the prohibition, however, requires understanding all those italicized terms.
First, Section 8’s prohibition applies only if each corporation has “capital, surplus, and undivided profits,” or net worth, of $10M or more, as adjusted. The FTC is responsible for annually adjusting that threshold for inflation and usually announces the change early in the calendar year along with changes to the Hart-Scott-Rodino thresholds. Currently, the threshold is just over $41M.
Section 8 provides an exception where the competitive sales of either or each of the corporations is de minimis. Specifically, no interlocks are prohibited if the competitive sales of 1) either corporation are less than $1M, as adjusted (currently about $4.1M); 2) either corporation are less than 2% of that corporation’s total sales; or 3) each corporation are less than 4% of that corporation’s total sales.
Originally, Section 8 applied only to directors of corporations; however, the 1990 amendments extended the coverage to officers, defined as those elected or chosen by the corporation’s Board. Despite the clear wording of the statute limiting it to officers and directors, courts have considered the possibility that Section 8 might apply when a corporation’s non-officer employee was to be appointed a director of a competitor corporation.
The language of Section 8 clearly applies to interlocks between competing corporations. An interlock between a corporation and a competing LLC would not be covered by the statutory language or the legislative history of the original statute or amendment. The FTC and DOJ have not explicitly weighed in on application to non-corporations, although the FTC’s implementing regulations for Hart-Scott-Rodino cover LLC explicitly as “non-corporate interests” different from corporations. Still, the spirit of Section 8 would seem to cover any such non-corporate interlock. Also, any corporate director who also serves a similar role for a competing LLC would face an increased risk of violating Sherman Act Section 1.
Section 8 clearly applies if the same natural person sits on the boards of the competing corporations. It might also apply if the same legal entity has the right to appoint a natural person to both Boards, even if that entity appoints two different natural persons to the two Boards. That interpretation is consistent with the Clayton Act’s broad definition of “person” and has been supported by both the FTC and DOJ and the one lower court to consider the question.
As with other parts of the antitrust laws, the question of competition between the two corporations requires some analysis. The few courts to look at the question have found that corporations that could be found to violate Sherman Act Section 1 through an agreement would be considered competitors. On the other hand, these same courts did not define competitors more narrowly to be those corporations that would not be allowed to merge under the more extensive analysis of Clayton Act Section 7.
On April 4, 2022, at the ABA Antitrust Spring Meeting, Jonathan Kanter, the assistant attorney general in charge of the Antitrust Division at the DOJ, made during his speech some significant remarks about Section 8. First, he highlighted the fact that the Division is committed to litigating cases using the whole legislative toolbox that Congress has given them to promote competition, including Section 8 of the Clayton Act. Second, he reminded everyone that Section 8 helps prevent collusion before it can occur by imposing a bright-line rule against interlocking directorates. Third, that for too long, Section 8 enforcement has essentially been limited to their merger review process. And last but not least, that the Division will start ramping up efforts to identify violations across the broader economy and will not hesitate to bring Section 8 cases to break up interlocking directorates. The former head from the FTC made a similar statement back in 2019, indicating how Section 8 of the Clayton Act protects against potential information sharing and coordination by prohibiting an individual from serving as an officer or director of two competing companies.
Author: Molly Donovan
If I Were You is a new Bona Law podcast that gives in-house lawyers the essential 5 bullets they need to explain real-world antitrust and competition risks to their business teams. This podcast is a quick 10 minutes or less, easily digestible during a commute or errand, and we hope it becomes a practical resource for in-house lawyers.
I’ll be the regular host of the podcast, which was inspired by one of my favorite in-house friends who said, “A good way to talk to the business side is to say something like, ‘I’m not saying don’t do it, but if I were you, I would do x, y, and z to mitigate the risk.’” And—tah dah—this podcast was born.
Author: Molly Donovan
Every spring, the Trooper Girls sell cookies in their town. Although they’re all members of the same group, the girls compete against each other to be the top cookie seller of the season. The girls hold regular meetings with rules set by the troop leader based on an antitrust course she took in law school:
[“I like these rules,” thinks the antitrust lawyer. The membership criteria are clear and can be fairly and objectively applied, and the meeting discussions seem appropriately restricted to legitimate subjects]
At the first meeting of cookie-selling season, the Trooper Girls were in distress. Practically no cookies had been sold because, unforeseeably, the Ranger Boys had started selling ice cream—a treat much more popular than cookies of late given the unseasonably warm weather.
The de facto ringleader of Trooper Girls—Tina—announced at the meeting, “We all know cookie sales aren’t going well and we all know why. We need to get on the same page, and reconsider cookie prices until the weather returns to normal and this crisis is over.”
The troop leader interrupted, “Tina, I think that’s enough on that. Let’s change the subject.”
[“Uh oh,” thinks the antitrust lawyer. Tina’s comments sound like an invitation to collude. I’m glad the troop leader spoke up, but the damage may be done.]
Tina winked at her Trooper Girl friends and they all basically knew what to do. Meanwhile, the specifics were worked out in whispers during social time after the meeting, and during one-on-one phone calls and text exchanges. Of course, nobody said exactly what price to charge and nobody wrote down any sort of formal agreement—the rules clearly don’t allow that. Instead, the discussions were more along the lines of “let’s think about a 10%-20% discount,” which can’t constitute an “agreement,” right? Specific prices weren’t even discussed.
[“Wrong,” says the antitrust lawyer. “Agreements” don’t have to be explicit at all. A wink and a nod could suffice. Similarly, specific prices need not be discussed—agreements about the general direction of pricing could raise antitrust scrutiny.]
The next day, each member of Trooper Girls cut their cookie prices, all in the 10-20% range, though some a little bit more and some a little bit less.
Suddenly, the weather cooled again and cookie sales took off. The Ranger Boys went out of business completely, unable to compete with the reduced price of the Trooper Girl treats.
Immediately thereafter, the Trooper Girls communicated to one another—in various ways—that it was no longer necessary to keep prices low, each member could do as she pleased, though continued cooperation to return to normal prices was appropriate.
And that’s what happened.
[“Oh no, again.” This could be deemed another anticompetitive agreement, now with indefinite and potentially long-running effects.]
Rick, a member of the Ranger Boys was very sad. For one thing, he was left with a freezer full of ice cream—couldn’t give the stuff away. For another, he had nothing to do on weekends with the Ranger Boys now essentially defunct.
Wisely, Rick did two things. He called an antitrust lawyer, suspicious that something unfair had occurred. And he petitioned the Trooper Girls to join their group.
Although the girls initially refused the application, the antitrust lawyer changed Rick’s life (as antitrust lawyers do) by threatening to sue the Trooper Girls and their individual members for violating the Sherman Act, including by refusing Rick’s application for anticompetitive reasons contrary to the membership criteria.
The Trooper Girls relented—paid Rick not to sue and admitted him in the group. Rick used the settlement money to start his own business making ice cream sandwiches. He used the ice cream leftover in his freezer and Trooper Girl cookies for the sandwich ends (genius!). In the process, Rick sold a lot of ice cream and a lot of cookies—everyone was happy.
THE MORALS OF THE STORY:
*For the Trooper Girl Types and Their Associations: In addition to having clear membership criteria, have a written antitrust compliance policy and train all members to issue spot.
Author: Molly Donovan
Crises that disrupt distribution chains and cause supply shortages tend to prompt discussions among competitors about how to survive. Discussions may begin as relatively innocuous information exchanges but become risky when they turn to coping strategies. This topic can sometimes lead to conversations amongst competitors such as, “We’re all in the same boat, so joint efforts ought to be made to stabilize prices,” or “We, as an industry, should stay on the same page and base future price increases on the rising costs of material costs and/or distribution downstream.” As we know from history (earthquakes, tsunamic, floods), those sorts of discussions are real and prompt DOJ investigations. As difficult as it has been for some businesses, the COVID-19 pandemic will not be a defense to cartel conduct.
So now that at least some aspects of business have returned to normal, it’s an excellent time for in-house counsel to survey the relevant business units to assess whether any potentially anticompetitive conduct occurred over the last couple of years. Counsel can do this inquiry with minimal cost and minimal disruption to business: a few key interviews, a high-level but strategic sweep of emails, and a big picture look at pricing and production figures. Top leadership can deliver messages that make it clear that whistleblowers will be protected (consistent with federal law). Companies can set up a message box so employees can self-report anonymously.
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