Articles Posted in Antitrust for Kids

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Authors:  Molly Donovan & Luke Hasskamp

Liv is 8. She just moved to town from out of state and has 3 new neighbor friends Paul, Greg and Adam (“PGA”). The PGA kids seem very nice and well mannered. They wear pastels. And the coolest thing about them: they have a mini-golf course they built in their backyard years ago. It is touted as the best and most exclusive place for kids to play golf and rightly so. All the best mini golfers play there and only there. Frankly, there is no real competition for mini golf in the county.

Even though Liv is new to town, she thinks she has the chops to build a mini-golf course that rivals her neighbors’. Her house is bigger, her backyard is bigger, her parents will buy better equipment, and Liv is going to award the winner of each round a very fancy prize. Kids are thrilled—and one by one, even the best mini golfers start trying Liv’s course.

PGA is not happy. Stunned that Liv would challenge their longstanding position as the best and only course in town, they unilaterally announce that any kid who chooses to play in Liv’s yard will be banned from their original and still most popular and reputable course. Players must choose: one course or the other, but not both.

(The antitrust lawyer is growing concerned. This sounds like a monopolist trying to bully an emerging competitor by cutting off access to customers. What’s worse, Paul and Greg might be depriving kids of meaningful choice when it comes to mini golf.)

And for sure, the kids are upset, but they’re also a bit confused. On the one hand, any business owner has the right to choose with whom they will deal, right? On the other hand, PGA’s decision to punish kids who want to play at Liv’s every once in a while seems wrong.

The kids call their antitrust lawyer, and here’s what she says: you all should file a class action on behalf of every kid in town who wants to play at both courses and have a real choice when it comes to mini golf competition. The PGA contingent is not competing on the merits, that is, they are not getting mini golfers to come to their course by making it better. Instead, they are monopolists who are using their dominance unfairly to box out a nascent competitor. I’ll represent you, although I’m not sure what your monetary damages are. We could try to get an injunction but I’ll need a retainer for that.

Unable to raise enough funds for the retainer, the kids simply call up PGA demanding that their ban be ceased or else nobody will sit with them at lunch or play with them at recess. That did the trick and the ban was called off immediately. Now kids can play at both mini golf courses!

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Antitrust-for-Kids-300x143

Author:  Molly Donovan

Amelia is 9. She makes friendship bracelets that are quite good because she uses high-sheen thread sourced directly from Brazil. Amelia sells the bracelets at school, from anywhere between $5 and $10, depending on how much thread and labor is required to make a particular bracelet.

One day Amelia gets an email from her thread manufacturer stating: “Amelia, Bad news. The cost of embroidery thread has skyrocketed in Brazil—increases of 20% across all manufacturers. Do you want to continue with your regular procurement schedule?”

Amelia has no choice—the Brazilian floss is what makes her friendship bracelets so premium. “Yes,” she replies, “continue with the usual schedule.”

Naturally, due to her rising material costs, Amelia increases the price of her finished bracelets by 20%. Although not happy, the school friends buy them anyway because the bracelets are trending.

One day Amelia learns online that the Brazilian thread manufacturers had raised their prices illegally—in collusion with each other as part of a global thread cartel. As a result, each of the manufacturers is being prosecuted by the DOJ (save the amnesty applicant).

Wait. How could that be when all of the troublesome activity took place in Brazil? Who do the U.S. antitrust enforcers think they are?  Well, little did the thread manufacturers know, there is a U.S. statute called the Foreign Trade Antitrust Improvements Act (FTAIA) under which activities taking place beyond U.S. borders *might* be within reach of U.S. antitrust laws.

[“They should have called me,” says the antitrust lawyer, “I would have told them that.”]

Amelia is incensed. She wonders whether the FTAIA gives her a cause of action even though she’s a U.S. purchaser and the relevant cartel activity took place in Brazil. She’s super savvy. She calls her antitrust lawyer.

Here’s what the lawyer said:

The FTAIA says that there are two main ways in which foreign conduct becomes subject to private claims in the U.S.:  there’s import commerce or direct effects. The language of the statute itself is super confusing—even to grown-up lawyers—so, here’s a relatively simple way to break it down:

  • Import Commerce. Amelia’s is the definitive example of import commerce, i.e., a transaction between an overseas conspirator and a purchaser in the United States. The conspirator invoiced Amelia in the United States and shipped the product directly to her. Pretty clear cut—that’s import commerce and it’s actionable in the United States.

But say that the thread makers first sold the thread to distributors in Brazil and it was the distributors who imported the thread to the United States with no involvement from the manufacturers. That may “count” against the manufacturers as import commerce even though the manufacturers imported nothing to the United States themselves. Depending on the jurisdiction, some U.S. courts say that so long as conspirators targeted a U.S. import market, you have import commerce for purposes of the FTAIA. As a practical matter, targeting could simply mean that the conspirators discussed the fact that thread gets distributed worldwide, including in the United States, so potentially, this is a rather loose test.

  • Direct Effects. For foreign cartel conduct to meet the direct effects test, the conduct must have a direct, substantial and reasonably foreseeable effect on U.S. commerce and the U.S. effect must give rise to the plaintiff’s claim. What? Let’s unpack it:
  • Direct: if the U.S. effect comes immediately after the foreign price-fix, with no intervening steps, it’s direct.

Some courts have adopted an even looser standard—even if the U.S. effect is not immediate, so long as the product enters the U.S. reasonably close in time and steps to the initial sale of the price-fixed product, it’s direct.

For Amelia, there are no steps between the foreign fix and her U.S. purchase, so she’s good here.

  • Substantial: this has come up mainly in component-part cases—where one part of a finished product was subject to the foreign price-fix and the question is whether the component part is too small in size and cost relative to the finished good for the effect of the price-fix to be considered “substantial.”

While it’s not an issue for Amelia, it would be an issue for Amelia’s school friends who did not buy the thread itself, but did buy the finished bracelets. Since thread is the major material component and makes up the entire cost of a bracelet, excluding labor and overhead, it’s safe to say that the U.S. effect on the price of the thread could be “substantial” to a bracelet buyer, particularly if lots of thread came into the United States.

  • Reasonably Foreseeable: this prong hasn’t been litigated a whole lot either, but an objective test seems to be in order, e., there’s reasonable foreseeability if a reasonable person would expect the price-fixed product to wind up in the United States—even if the defendants themselves didn’t have that understanding or didn’t think about it.
  • Gives Rise To: the private plaintiffs who have faced challenges here purchased the relevant products outside the United States and argued that prices increased globally, so that there is some U.S. effect in play. In those cases, the effect in the U.S. may not “give rise to” a claim based on non-U.S. purchases. Amelia doesn’t have an issue here.

Bottom line: the FTAIA is not a serious hurdle for Amelia’s claim against the Brazilian thread makers—she can sue all of them on a theory of joint and several liability for trebled damages.

Morals of the Story: 

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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:

  1. Discussions should stay focused on personal safety guidelines for selling cookies, and how cookie sales are going generally.
  2. No agreements to fix cookie prices—each girl is supposed to price her own cookies individually. That’s part of the fun of competing.
  3. No agreements to divide markets—deals along the lines of “you take this street and I’ll take that street” are prohibited. Members should vigorously compete in all relevant locations.
  4. Any applicant under the age of 15 can be a member of Trooper Girls upon completing the online forms and having them signed by a parent or guardian.

[“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.

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Author: Molly Donovan

Antitrust for Kids is a new blog series designed to explain complex principles of U.S. competition law to practitioners and business people in plain English. Meant to be fun, and tongue-in-cheek, the series will serve as a useful primer to help the audience issue spot and better understand antitrust concepts like price discrimination, vertical restraints, tying, tacit agreements, and more.

Max and Margie are next-door neighbors on Lemon Lane. They both operate competing lemonade stands in their front yards all summer. And, both shop at the same grocery stores to purchase the same three ingredients necessary for making their finished drinks:  fresh lemons, sugar, ice.

While they’ve been frenemies for years, casually exchanging pleasantries at times, this summer the weather is very hot, and so is competition in the local lemonade market. In fact, Max and Margie barely acknowledge each another, unless it’s to bad mouth the other—each complaining that the other makes inferior lemonade.

One day, Margie announces a breakthrough that she’s made in the lemonade space:  STRAWBERRY LEMONADE. It’s a hit. Margie begins charging 2 times over cost for her strawberry drink, and the demand for plain old lemonade (sans strawberries) stops cold.

Max is incensed, naturally, and hatches a scheme to bring Margie down.

Max heads to the largest grocery store in town. There, he tells George (the grocer) that unless George stops selling lemons, sugar and ice to Margie, Max—and more importantly, Max’s dad—will pull all their business from George immediately.  EEEK!  That would be a real problem for George because Max’s dad buys nearly all his ingredients to operate the town’s most popular restaurant from George, which is a serious portion of George’s business.

George feels he has no choice.  He agrees with Max to stop selling lemons, sugar and ice to Margie.

[“Oh no,” thinks the antitrust lawyer, “that’s a vertical agreement, i.e., an agreement between a purchaser and a supplier, to restrain competition for the purchase of lemonade ingredients.”]

“But,” says George, “I don’t want to see all of my business with Margie go to the other grocers in town.  Hear what I’m saying?”  “Good idea,” thinks Max.

Max promptly visits the two other grocers in town, telling them that they’d better not sell lemonade ingredients to Margie, or else Max will boycott and so will his dad, both of whom provide a steady stream of business to these grocers as well (whenever George faces supply issues). Max takes care to add: George already agreed, so all of you grocers need to get on the same page.”

Not sure what else to do, these two additional grocers respectively agree to Max’s proposal. While the idea seems contrary to their individual interests, they can see Max means business and independently decide it’s easiest to comply.

Max circles back with George, telling him that all the grocers in town are on board. George nods.

[“Oh no,” thinks the antitrust lawyer, “now there’s a potential horizontal agreement, i.e., an agreement among competitors in the same level on the supply chain—in this case, the 3 grocers. Such an agreement could be implied even though the grocers never actually spoke to one another.”]

As a result of Max’s scheming, Margie can’t buy the ingredients she needs, and goes out of business. Max never can figure out how to add strawberries to his classic recipe for straight lemonade, so the town is left without strawberry lemonade indefinitely.

Margie’s very upset until she meets an antitrust lawyer to whom she tells her story. The antitrust lawyer explains to Margie that she’s the victim of a hub-and-spoke conspiracy—with Max at the hub, 3 separate vertical agreements between Max and each of the grocers (the spokes), and the 3 grocers all implicitly agreeing with one another, forming a horizontal agreement to boycott Margie on the “rim.” While courts may analyze the arrangement differently depending on the jurisdiction, it’s certainly an antitrust concern anywhere.

With her lawyer’s help, Margie files an antitrust claim, wins trebled damages, and lives happily ever after selling her strawberry lemonade, now world famous.

Max becomes a white-collar lawyer specializing in the defense of executives who allegedly violate the criminal antitrust laws. He’s still single.

THE MORALS OF THE STORY:

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