Articles Posted in Antitrust Counseling

Articles about antitrust counseling and training.

Section 5 of the FTC ActFTC Commissioner Joshua Wright recently announced his retirement from the FTC Commission to go back to George Mason University School of Law. But he did not go out quietly.

Not only was he incredibly productive during his FTC tenure, but he left right after the Federal Trade Commission issued “Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act.” As you may recall, this was one of his express goals when he first began his work at the FTC.

What is Section 5 of the FTC Act?

Section 5 of the FTC Act declares that “unfair methods of competition in or affecting commerce” are unlawful.

What does that mean?

For most of the FTC’s existence, those of us advising antitrust clients had to piece together inferences from a mere handful of cases that have addressed the Act, while at the same time trying to parse speeches and FTC activity by whatever set of commissioners were in power.

There were some cases—mostly decided in the 1980s—that seemed to limit the FTC’s power under the Act, but the authority is sparse. And the FTC seems to change its mind depending upon who is in power.

That is a problem when you have a client that wants to know if they can undertake some sort of activity. It is even more difficult when your client is already under investigation by the FTC and you have to try to explain to them that the standard of whether they have violated the FTC Act—regardless of the legality of their actions under the Sherman and Clayton Acts—would be determined by their adversary, the FTC.

We could advise the client that some prior cases suggested limiting principles, but it was, in reality, entirely unclear how a court would ultimately approach an enforcement action. And many courts might prefer to defer to the governing agency in interpreting the law the agency administrates.

This open-ended statute, of course, offered the FTC great leverage in its investigations and actions because its targets couldn’t effectively predict the likely scope of Section 5 of the FTC Act. This leverage can lead to forced settlements for targets that don’t know the standard by which the agency will judge them.

And the FTC had not issued any significant guidance about how it would enforce Section 5 of the FTC Act. It was clear to most people in the antitrust community that the Act was potentially broader than the Sherman and Clayton Acts—the traditional antitrust statutes—but the extent and scope were unclear.

(As an aside, the FTC does its antitrust enforcement through this FTC Act, even if it involves existing antitrust statutes, so the only real issue is how much broader is the FTC Act than the other antitrust statutes. The FTC refers to this as their “standalone” Section 5 authority).

The scope of Section 5 of the FTC Act was an important issue because when it comes to competition enforcement there is a very fine line between anticompetitive activity and strong procompetitive activity. Indeed, it isn’t always clear whether a particular type of business practice is either strongly procompetitive or actually anticompetitive.

So if Section 5 of the FTC Act is too broad it might deter conduct that in fact helps competition a great deal, which would undercut the purpose of the statute itself. This is a recurring problem for antitrust enforcement.

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Colgate DoctrineAs an antitrust attorney with an antitrust blog, my phone rings with a varied assortment of antitrust-related questions. One of the most common topics involves resale-price maintenance. “Resale price maintenance” is also one of the most common search terms for this blog.

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 inquiries for two reasons: First, it is something that a comparatively large number of companies need to 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 can review my blog post on Leegin and federal antitrust law here, and you can read my post about resale-price maintenance under state antitrust laws here.

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 the minor exception of the refusal-to-deal doctrine—have no general antitrust-law obligation to do business with any particular company and can thus unilaterally terminate distributors without antitrust consequences (in most instances; please consult an attorney).

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.

Update: You can now read this article translated to French at Le Concurrentialiste.

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Golden Gate Bridge CaliforniaIn an earlier blog post, we discussed Leegin and the controversial issue of resale-price maintenance agreements under the federal antitrust laws. I’ve also written about these agreements here. As you might recall, in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet), the US Supreme Court reversed a nearly 100-year-old precedent and held that resale-price maintenance agreements are no longer per se illegal. They are instead subject to the rule of reason.

But what many people don’t realize is that there is another layer of antitrust laws that govern market behavior—state antitrust law. A few years ago, I co-authored an article with Jeffrey Shohet about this topic. In many instances, state antitrust law directly follows federal antitrust law, so state antitrust law doesn’t come into play. (Of course, it will matter for indirect purchaser class actions, but that’s an entirely different topic).

For many states, however, the local antitrust law deviates from federal law—sometimes in important ways. If you are doing business in such a state—and many companies do business nationally, of course—you must understand the content of state antitrust law. Two examples of states with unique antitrust laws and precedent are California, with its Cartwright Act, and New York, with its Donnelly Act.

California and the Cartwright Act

This blog post is about California and the Cartwright Act. Although my practice, particularly my antitrust practice, is national, I am located in San Diego, California and concentrate a little extra on California.

As I’ve mentioned before, the Supreme Court’s decision in Leegin to remove resale-price maintenance from the limited category of per se antitrust violations was quite controversial and created some backlash. There were attempts in Congress to overturn the ruling and many states have reaffirmed that the agreements are still per se illegal under their state antitrust laws, even though federal antitrust law shifted course.

The Supreme Court decided Leegin in 2007. It is 2015, of course. So you’d think by now we would have a good idea whether each state would follow or depart from Leegin with regard to whether to treat resale-price maintenance agreements as per se antitrust violations.

But that is not the case in California, under the Cartwright Act. Indeed, it is an open question.

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Law-Books-300x225

Sometimes parties will enter a contract whereby one agrees to buy (or supply) all of its needs (or product) to the other. For example, maybe a supplier and retailer 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 can seem quite aggravating. 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 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 bring an antitrust action and it doesn’t mean you won’t win. But, percentage-wise, most exclusive-dealing arrangements don’t implicate the antitrust laws.

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 quite angry and 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 give you some false positives.

So what is an exclusive dealing agreement?

It 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 occur 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.

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real estate agent antitrustI’ve often written about real estate on this blog. There are two reasons for this.

The first and most important reason is because my wife and I invest in real estate and thus talk about real estate, so it is on my mind. In fact, I have my California real-estate license. Bona Law PC also offers real-estate litigation services.

The second reason is that real-estate, in addition to its many advantages, creates many unique competition issues. Real-estate agents often engage in cut-throat competition with each other, sometimes even within the same brokerage firm. Yet, the nature of their job requires them to work together for almost every transaction.

In addition, the markets to sell real-estate are primarily local, even though national brokerage firms may dominate each individual geographic area. Within each locality, there are often a handful of large brokerage firms.

Finally, the market for real-estate services and commissions suggests some supra-competitive pricing in that most firms in a certain area will charge approximately the same commission. And the splits between the buying and selling agents are often equal as well. In the Minneapolis, Minnesota area for example, at least as of a few years ago, selling agents would often receive 3.3% and buying agents 2.7% of the purchase price. In my current market, a small village in North San Diego County, the buying and selling agents typically split the 5% commission.

Suspiciously, while technology and other competition has reduced relative prices for many professionals, commission percentages have held relatively steady for real-estate agents, despite the fact that buyers and sellers (especially buyers) can do much of their own homework online. How many of you have purchased a house without spending a lot of time online yourself looking at listings?

So does that mean that real-estate brokerage firms and agents are violating the antitrust laws all over the country? Should we coordinate a dramatic—made for the movies—event whereby federal agents knock down the doors of real-estate firms all over the country one morning, handcuffing and booking the agents that would do anything to get you in their car to show you some houses?

Probably not yet.

In November of this year, the Sixth Circuit decided a case called Hyland v. Homeservices of America, Inc. that nicely illustrates the line between antitrust violation and what is often called conscious parallelism or oligopolistic price coordination.

In Hyland, a class of people who sold residential real estate in Kentucky and used certain real-estate agents sued several real-estate brokerages as a class action under Section 1 of the Sherman Act. Plaintiffs alleged that defendants participated in a horizontal conspiracy to fix the commissions charged in Kentucky real-estate transactions at an anticompetitive rate.

Like agents in many localities, defendants each charged a typical or standard commission rate of 6%, and mostly resist any attempts to negotiate a lower rate. The buying agent’s commission is typically 3%. These numbers may look familiar to you if you bought or sold real estate recently, as real-estate services for most residential real-estate markets are similarly priced.

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Antitrust SuperheroSome lawyers focus on litigation. Other lawyers spend their time on transactions or mergers & acquisitions. Many lawyers offer some sort of legal counseling. And another group—often in Washington, DC or Brussels—spend their time close to the government, usually either administrative agencies or the legislature.

But your friendly antitrust attorneys—the superheroes of lawyers—do all of this. That is part of what makes practicing antitrust so fun. We are here to solve competition problems; whether they arise from transactions, disputes, or the government, we are here to help. Or perhaps you just want some basic advice. We do that too—all the time.

Perhaps you are a new attorney, or a law student, and you are considering what area to practice? Try antitrust and competition law. Not only is this arena challenging and in flux—which adds to the excitement—but you also don’t pigeonhole yourself into a particular type of practice. You get to do it all—your job is to understand the essence of markets and competition and to help clients solve competition problems.

For those of you that aren’t antitrust attorneys, I thought it might be useful if I explained what it is that we do.

Litigation

Although much of our litigation is, in fact, antitrust litigation, much of it is not. In the business v. business litigation especially, even in cases that involve an antitrust claim, there are typically several other types of claims that are not antitrust.

Businesses compete in the marketplace, but they also compete in the courtroom, for better or worse. And when they do, their big weapon is often a federal antitrust claim (with accompanying treble damages and attorneys’ fees), but they may also be armed with other claims, including trade secret statutes, Lanham Act, patent, tortious interference (particularly popular in business disputes), unfair competition, unfair and deceptive trade practices, and others.

In many instances, in fact, I will receive a call from a client that thinks they may have an antitrust claim. Perhaps they read this blog post. Sometimes they do, indeed, have a potential antitrust claim. But in other instances, an antitrust claim probably won’t work, but another claim might fit, perhaps a Lanham Act claim for false advertising, or tortuous interference with contract, or some sort of state unfair trade practice claim.

Antitrust lawyers study markets and competition and are the warriors of courtroom competition between competitors. If you have a legal dispute with a competitor, you should call your friendly antitrust attorney.

Antitrust litigation itself is great fun. The cases are usually significant, document heavy, with difficult legal questions and an emphasis on economic testimony. Some of them even involve class actions.

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BlackjackSo here’s an idea. Let me know what you think: A hedge fund or other investment vehicle centered on antitrust analysis.

I’ll explain.

As you might know, I am an antitrust attorney. And I write a blog on antitrust and competition law. So, as you may expect, I follow antitrust developments somewhat obsessively at times. As a result, I have a good sense of the practical antitrust implications of certain cases, investigations, or prospective mergers.

I don’t have a crystal ball or anything. Nor do I have any inside information. And since human beings—judges or agency officials—make the relevant decisions, nobody can actually predict what will happen.

But by now, I can review a complaint or a motion to dismiss or description of facts and have a good sense of the strength and risk of the antitrust issues. I think I also have a decent idea how the major antitrust agencies—the FTC and Department of Justice—focus their priorities and like to resolve investigations, cases, and mergers. Like I said, I can’t predict anything with certainty, but there is a high learning curve for antitrust (probably more than most specialties) and I’ve spent a lot of time and effort climbing that curve.

Enough about me—for now anyway.

Let’s talk about antitrust and company stock performance. The obvious scenario is a merger. Two companies, perhaps competitors, announce a merger or acquisition. It isn’t a dead-on-antitrust-arrival merger between the first and second leading companies in a product and geographic market that is easily defined. Instead, it is the sort of merger where the markets are somewhat complicated, perhaps in flux, and it isn’t entirely clear whether an antitrust agency will challenge it or a court will stop it.

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Resale Price MaintenanceSome antitrust questions are easy: Is price-fixing among competitors a Sherman Act violation? Yes, of course it is.

But there is one issue that is not only a common occurrence but also engenders great controversy among antitrust attorneys and commentators: Is price-fixing between manufacturers and distributors (or retailers) an antitrust violation? This is usually called a resale-price-maintenance agreement and it really isn’t clear if it violates the antitrust laws.

For many years, resale-price maintenance—called RPM by those in the know—was on the list of the most forbidden of antitrust conduct, a per se antitrust violation. It was up there with horizontal price fixing, market allocation, bid rigging, and certain group boycotts and tying arrangements.

There was a way around a violation, known as the Colgate exception, whereby a supplier would unilaterally develop a policy that its product must be sold at a certain price or it would terminate dealers. This well-known exception was based on the idea that, in most situations, companies had no obligation to deal with any particular company and could refuse to deal with distributors if they wanted. Of course, if the supplier entered a contract with the distributor to sell the supplier’s products at certain prices, that was an entirely different story. The antitrust law brought in the cavalry in those cases.

You can read my blog post about the Colgate exception here: The Colgate Doctrine and Other Alternatives to Resale-Price-Maintenance Agreements.

In 2007, the Supreme Court dramatically changed the landscape when it decided Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet). The question presented to the Supreme Court in Leegin was whether to overrule an almost 100-year old precedent (Dr. Miles Medical Co.) that established the rule that resale-price maintenance was per se illegal under the Sherman Act.

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It dependsOLYMPUS DIGITAL CAMERA. But probably not. Outside of California, courts may enforce these non-compete agreements arising out of an employment contract. Of course, most courts, no matter what the law and state, view them skeptically. In California, however, the policy against these agreements is particularly strong.

A restrictive covenant is often part of an employment agreement that restricts the employee’s actions after leaving employment. They typically prohibit the employee from competing in particular markets for a period of time after leaving the employer, but may also keep the employee from soliciting the company’s customers or even employees after leaving.

They are, unquestionably, restraints on trade. But are they unreasonable restraints on trade? In many states that is the issue—if they are reasonable, a court will enforce them. What does reasonable mean? Again, it depends. But typically, like other restraints on trade, they must usually be narrowly tailored to serve their purpose. They should contain “reasonable” limitations as to time, geographic area, and scope of activity.

The laws, of course, vary from state to state. But as a practical matter, most judges are skeptical. Some courts will actually rewrite the agreements to make them reasonable.

The purpose of these restraints is to offer protection to an employer that must necessarily share trade secrets and sensitive customer or financial information with their employees. The concern is that this information is so sensitive and easily exploited by a competitor that the employer needs the restrictive covenant to keep an employee from leaving and benefiting from the information as a competitor. It also reduces the likelihood of free-riding on training.

Despite these benefits, California law and courts take a hard stand against certain restrictive covenants. The California Supreme Court in Edwards v. Arthur Anderson LLP explained, for example, that “judges assessing the validity of restrictive covenants should determine only whether the covenant restrains a party’s ability to compete and, if so, whether one of the statutory exceptions to Section 16600 applies.” (exceptions include the sale of goodwill or corporate stock of a business).

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American Needle (Football)When you think about antitrust cases, you usually consider the question—often framed at the motion to dismiss stage as a Twombly inquiry—whether the defendants actually engaged in an antitrust conspiracy.

But, sometimes, the question is whether the defendants are actually capable of conspiring together.

That isn’t a commentary on the intelligence or skills of any particular defendants, but a serious antitrust issue that can—in some instances—create complexity.

So far I’ve been somewhat opaque, so let me illustrate. Let’s say you want to sue a corporation under the antitrust laws, but can’t find another entity they’ve conspired with so you can invoke Section 1 of the Sherman Act (which requires a conspiracy or agreement). How about this: You allege that the corporation conspired with its President, Vice-President, and Treasurer to violate the antitrust laws. Can you do that?

Probably not. In the typical case, a corporation is not legally capable of conspiring with its own officers. The group is considered, for purposes of the antitrust laws, as a “single entity,” which is incapable of conspiring with itself. Of course, the situation is complicated if we aren’t talking about the typical corporate officers, but instead analyzing a case with a corporation and corporate agents (or perhaps in a rare case, even employees) that are acting for their own self-interest and not as a true agent of the corporation. The question, often a complex one, will usually come down to whether there is sufficient separation of economic interests that the law can justify treating them as separate actors.

A lot of tricky issues can arise when dealing with companies and their subsidiaries as well. In Copperweld Corp. v. Independence Tube Corporation, for example, the United States Supreme Court held that the coordinated activities of a parent and its wholly-owned subsidiary are a single enterprise (incapable of conspiring) for purposes of Section 1 of the Sherman Act.

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