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Section 1 of the Sherman Act:
Horizontal Restraints of Trade and Communications Among Competitors
 By
Richard J. Yurko and Nicole M. King
I. Introduction
Section 1 of the Sherman Act provides:
“Every contract, combination in the form of trust or otherwise,
or conspiracy, in restraint of trade or commerce … is declared to
be illegal.”
15 U.S.C. § 1.
This language gives virtually no shape to this statute because, literally,
every contract “restrains” trade. In other words, it is the
purpose of a contract to constitute a transaction of trade, which typically
precludes the opposite or a different contract. In many respects then,
Section 1 of the Sherman Act is the closest thing that we have to a statute
that was destined to operate like common law, through the application
of judicial and economic experience to the business of commerce.
Thus, it is impossible to distinguish, just by reading the Act, what activities
are permissible and what activities are prohibited. For example, the courts
have said repeatedly that only “unreasonable” restraints of
trade are prohibited by Section 1. See generally, Standard Oil Co. of
New Jersey v. United States, 221 U.S. 1, 59- 60 (1911); Continental T.V.
Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 49 (1977). At other times, the
Supreme Court has described the Act as “a comprehensive charter
of economic liberty … [that] rests on the premise that the unrestrained
interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices, the highest quality and the greatest
material progress….” Northern Pacific Railway v. United States,
356 U.S. 1, 4 (1958). Even these words are little more than rhetoric that
can be marshaled, with almost equal ease, to justify any one result over
another.
Over the last century, the decisions in the courts, rather than either
populist or economic rhetoric, have given shape to this broadest of all
statutes. However, many questions remain open, especially in the area
of horizontal restraints on trade and, most particularly, the limits on
competitor communications. This chapter will address some of these questions
and specifically provide guidance to the practitioner advising his or
her clients in the area of competitor communications.
II. Elements of a Section 1
Violation
A brief review of the elements of a Section 1 claim is necessary to understand
what is and is not permissible in communications with competitors. To
prove a Section 1 violation, a plaintiff must show:
• the existence of a contract, combination, or conspiracy among
two or more persons or entities;
• that unreasonably restrains trade or competition; and
• which affects interstate or foreign commerce.
See, e.g., Lee v. Life Ins. Co. of North America, 829 F. Supp. 529, 535
(D.R.I. 1993), aff’d, 23 F.3d 14 (1st Cir.), cert. denied, 513 U.S.
964 (1994). Each of these elements is discussed in detail below.
A. Contract, Combination, or Conspiracy
The first element of a Section
1 violation is that it involves some kind of concerted action with another
person or company. These actions are “combinations, contracts or
conspiracies” in restraint of trade prohibited by Section 1 of the
Sherman Act.
To allege a combination, contract or conspiracy, the complaint “must
identify the co-conspirators, and describe the nature and effects of the
alleged conspiracy.” In re Nine West Shores Antitrust Litigation,
80 F. Supp. 2d 181, 191 (S.D.N.Y. 2000). See also DM Research, Inc. v.
College of American Pathologists, 170 F.3d 53, 55-56 (1st Cir. 1999);
Healthco International, Inc. v. A-dec, Inc., 1989-2 Trade Cas. 68,703,
1989 WL 104064 * 4 (D. Mass. April 17, 1999) (“plaintiff's burden
of proving concerted action will not be satisfied by insubstantial evidence
or unsupported speculations”) citing Monsanto Co. v. Spray Rite
Service Corp., 465 U.S. 752 (1946); Matsushita Electric Industrial Co.,
Ltd. v. Zenith Radio Corp., 474 U.S. 574 (1986); compare General Refractories
Co. v. Stone Container Corp., 1999-1 Trade Cas. 72,393, 1999 WL 14498
*3 (N.D. Ill. Jan. 8, 1999) (express identification of coconspirators
in alleged nationwide price-fixing conspiracy not necessary when plaintiffs
had narrowed the list sufficiently to notify defendants of the nature
of the claims).
The fact that defendants did not have identical motives, or that one party
to the agreement was coerced into participation does not absolve the defendants
of liability under Section 1. See, e.g., Spectators Communication Network,
Inc. v. Colonial Country Club, 253 F.3d 215, 220-221 (5th Cir. 2001)(“Antitrust
law has never required identical motives among co-conspirators, and even
reluctant participants have been held liable for the conspiracy”)
citing United States v. Paramount Pictures, Inc., 334 U.S. 131, 161 (1948).
But see Garshman v. Universal Resources Holding, Inc., 641 F. Supp. 1359,
1371 (D.N.J. 1986) (expressing reluctance to find a conspiracy because
alleged co-conspirator’s actions resulted from coercion).
The following types of agreements can be considered contracts, combinations,
or conspiracies:
1. Express Agreements
A contract, combination, or conspiracy, can be proven by an express agreement.
Addyston Pipe & Steel Co. v. United States, 175 U.S. 211, 213-18 (1899).
An express agreement in violation of Section 1 can manifest itself in
the form of a written contract, a handshake agreement, or a call to action
followed by the action called for. See, e.g., Palmer v. BRG of Georgia,
Inc., 498 U.S. 46, 49 (1990)(revenue-sharing formula in contract between
competing providers of bar review courses coupled with one “plus
factor” illegally restrained trade in violation of the Sherman Act).
Giving an agreement a benign name, like “joint venture agreement”
will not immunize it from violating the antitrust laws. See U.S. DEPARTMENT
OF JUSTICE & FEDERAL TRADE COMMISSION ANTITRUST GUIDELINES FOR COLLABORATIONS
AMONG COMPETITIORS § 3.2 (2000) (hereinafter “Collaboration
Guidelines”) (“In any case, labeling on arrangement a ‘joint
venture’ will not protect what is merely a device to raise price
or restrict output; the nature of the conduct, not its designation, is
determinative”).
2. Agreements Inferred From Conduct
Proof of concerted action under Section 1 of the Sherman Act does not
require the existence of direct testimony regarding an express agreement.
Monsanto Co. Spray-Rite Service Corp., 465 U.S. 752, 764-65 (1984); Interstate
Circuit, Inc. v. United States, 306 U.S. 208, 226 (1939). Most often,
the agreement or conspiracy is not proved by direct testimony but rather
inferred from conduct that appears inexplicable if the actions were truly
independent. See, e.g., E.S. Development, Inc. v. RWM Enterprises, Inc.,
939 F.2d 547, 553-54 (8th Cir. 1991). This is typically the scenario in
which competitor communications will be examined for antitrust violations.
To infer a contract, combination, or conspiracy, the inference of concerted
action must be more probable from the evidence than the inference of independent
action. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475
U.S. 574, 588 (1986). In other words, the court will look to the defendant’s
“motive” to join a conspiracy and whether defendant’s
conduct was consistent with its “independent interest.” Id.
Allegations of concerted action by competitors are frequently based on
“conscious parallelism,” a pattern of uniform business conduct.
Conscious parallelism alone is not sufficient to prove a conspiracy. Theatre
Enterprises, Inc. v. Paramount Film Distributing Corp., 346 U.S. 537,
541 (1954); Souza v. Estate of Bishop, 821 F.2d 1332, 1335 (9th Cir. 1987);
DM Research, Inc. v. College of American Pathologists, 2 F. Supp. 2d 226,
229-30 (D.R.I.) aff’d 170 F.3d 53 (1st Cir. 1999). Similarly, the
fact that one competitor independently chose to copy the actions of another
is insufficient to prove an agreement. Clamp-All Corp. v. Cast Iron Soil
Pipe Institute, 851 F.2d 478, 484-85 (1st Cir. 1988).
To prove an agreement under Section 1, a plaintiff must show, at a minimum,
consciously parallel conduct combined with other “plus” factors.
See, e.g., Blomkest Fertilizer, Inc. v. Potash Corp. of Saskatchewan,
203 F.3d 1028, 1032-33 (8th Cir.)(en banc) cert. denied sub nom Hahnaman
Albrechet, Inc. v. Potash Corp. of Saskatchewan, 531 U.S. 815 (2000).
Plus factors can include the following:
• Self-interest only served by similar conduct. See, e.g., Interstate
Circuit, Inc. v. United States, 306 U.S. 208, 226-28 (1939).
• Artificial standardization of products. See C-O-Two Fire Equipment
Co. v. United States, 197 F.2d 489, 497 (9th Cir.), cert. denied 344 U.S.
892 (1952). But see DM Research, Inc. v. College of American Pathologists,
2 F. Supp. 2d 226, 229 –230 (D.R.I. 1998) aff’d 170 F.3d 53
(1st Cir. 1999) (parallel artificial standardization of reagent-grade
water was insufficient to prove a conspiracy where result of adopting
standard was an increase in costs to alleged conspirators).
• Raising of prices during surplus. See American Tobacco Co. v.
United States, 328 U.S.781, 805 (1946).
• Pretextual reasons for action. See, e.g., Fragle & Sons Beverage
Co. v. Dill, 760 F.2d 469, 474 (1985). But see Moffat v. Lane Co., Inc.,
595 F. Supp. 43, 49 (D. Mass. 1984) citing Bruce Drug, Inc. v. Hollister,
Inc., 688 F.2d 853, 857 (1st Cir. 1982)(fact that business reason advanced
for action against plaintiff is pretextual does not, without more, justify
inference that conduct was result of conspiracy).
• Extensive communications or opportunity for collusion. See, e.g.,
Todd v. Exxon Corp., 275 F.3d 191, 198-99 (2nd Cir. 2001). But see Market
Force v. Wauwatosa Realty Company, 906 F.2d 1167,1172-73 (7th Cir. 1990)(evidence
of informal communications among several parties does not “unambiguously
support an inference of a conspiracy”); Intervest Financial Services
v. S.G. Cowen Securities Corp., 206 F. Supp. 2d 702, 714 (E.D. Pa 2002)
(phone conversation between competitors not direct evidence of conspiracy).
In applying the above test, courts have tended to distinguish between
horizontal restraints (involving allegations of conspiracy by competitors)
from vertical restraints (involving allegations of conspiracy between
a manufacturer and distributor). Thus, to determine whether a conspiracy
can be inferred requires an examination sensitive to the logic of business
and the profit motive.
3. Agreements Within A Single Entity
As discussed above, to allege a violation of Section 1 there must be a
contract, combination, or conspiracy, between two or more actors. However,
the Supreme Court has held that activities of a parent corporation and
a wholly-owned subsidiary are deemed to be within a single entity (one
actor) and therefore do not involve the real multiplicity of actors required
by Section 1. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752,
768 (1984). There are many open questions as to how far the rule announced
in Copperweld applies to more complex entities and arrangements that involve
a high degree of corporate and economic integration but less than that
existing in Copperweld itself.
The following are examples of areas where these questions have been addressed:
• Teams within a league sport have been held to be more like a single
entity than a multiplicity of actors for the purposes of Section 1. See
Brown v. Pro Football, Inc., 518 U.S. 231, 248-50 (1996); Eleven Line,
Inc. v. North Tex. State Soccer Association, 213 F.3d 198 (5th Cir. 2000);
Chicago Professional Sports Ltd. Partnership v. NBA, 95 F.3d 593, 599-600
( 7th Cir. 1996).
• The First Circuit, however, has rejected single entity status
for sports leagues. See Fraser v. Major League Soccer, LLC, 284 F.3d 47,
55-56 (1st Cir. 2002); Sullivan v. NFL, 34 F.3d 1091, 1099 (1st Cir. 1994)
cert. denied 513 U.S. 1190 (1995).
• Also, members of a medical staff deciding on hospital privileges
could be deemed capable of conspiring to deny those privileges to competitors.
But see Oksanen v. Page Memorial Hospital, 945 F.2d 696, 705 (4th Cir.
1991)(hospitals engagement of legally-distinct medical staff in peer review
process not actionable under Section 1 because hospitals and doctors were
behaving as single entity in that context); Weiss v. York Hospital, 745
F.2d 786, 814-815 (3rd Cir. 1984)(holding a hospital is incapable of conspiring
with its own medical staff).
• Conspiracies between corporations and officers (acting for the
themselves vs. for the corporation) has been recognized as another area
where an intra-enterprise conspiracy could exist. The majority of jurisdictions
recognize an “independent personal stake” exception, holding
that corporate officers or employees can conspire with the corporation
when they act in their own interest and stand to benefit personally from
the conspiracy. See, e.g., Fraser v. Major League Soccer, 97 F. Supp.
2d. 130, 136 (D. Mass. 2000) (recognizing “independent personal
stake” exception to the single entity rule but declining to apply
it to operator-investors because their economic interests were not sufficiently
divergent to fall within the exception).
• Individual members of a trade association can conspire with the
trade association itself. Alvord-Polk, Inc. v. F. Schumacher & Co.,
37 F.3d 996, 1007-1008 (3rd Cir. 1994). But see American Council of Certified
Podiatric Physicians & Surgeons v. American Board of Podiatric Surgery,
185 F.3d 606, 619-20 (6th Cir. 1999)(an association’s efforts to
become be the sole certification board for podiatric surgeons did not
establish a conspiracy among an association and its members because the
action was consistent with the association’s independent economic
interests).
B. Effect on Commerce
The second element of a Section 1 violation is that the challenged activity
must effect “trade or commerce.” To establish this element
a plaintiff must show that:
• The challenged activity involves “trade or commerce;”
and
• The effect of the challenged activity is “substantial”
or not “insubstantial.”
15 U.S.C. § 1.
1. Involving Trade or Commerce
The few challenges to the trade or commerce portion of the effects test
have arisen in a university setting. These challenges raised the question
of whether certain activities were charity or nonprofit in nature rather
than in trade or commerce. Courts have concluded that the relevant inquiry
is into the nature of the activity at issue rather than the status of
the entity itself. Compare United States v. Brown University, 5 F.3d 658,
665-66 (3rd Cir. 1993)(court held that universities’ actions in
offering financial aid packages were commercial transactions within the
meaning of the trade or commerce element of Section 1) with Adidas Am.,
Inc. v. NCAA, 40 F. Supp. 2d 1275, 1286 (D. Kan. 1999)(collegiate athletic
association’s rules governing the appearance of commercial logos
on student athlete’s uniforms to protect students from commercial
exploitation considered non-commercial activity of an organization). This
exception for non-profit activities is “narrowly circumscribed”
and does not extend to commercial transactions with a “public service
aspect.” Brown University, 5 F.3d at 666.
2. Effect on Interstate and Foreign Commerce
The more frequent challenge to the second element of a Section 1 claim
is whether a defendants’ activities have substantially effected
“trade or commerce.” See, e.g., McLain v. Real Estate Board
of New Orleans, 444 U.S. 232, 241-242 (1980); Hospital Building Co. v.
Trustees of Rex Hospital, 425 U.S. 738, 743 (1976).
Some circuits only require a showing that defendant’s general business
activities in some way affect commerce. See, e.g., United States v. ORS,
Inc., 997 F.2d 628, 629 (9th Cir. 1993). In the First Circuit, however,
courts require that the challenged activity must itself be likely to affect
commerce. Wells Real Estate v. Greater Lowell Board of Realtors, 850 F.2d
803, 808-10 (1st Cir. 1988)(defendant’s “unlawful” activity
and not merely its “activity generally” must affect interstate
commerce); Cordova & Simonpietri Insurance Agency v. Chase Manhattan
Bank, 649 F.2d 36, 45 (1st Cir. 1981)(same). But see Tropical Air Flying
Services, Inc. v. Carmen Feliciano De Melecio, 158 F. Supp. 2d 177, 183-84
(D.P.R. 2001)(recognizing the district has almost unanimously followed
Summit Health v. Pinhas, 500 U.S. 322 (1991), holding there is no specific
nexus requirement); San Juan Cement, Inc. v. Puerto Rican Cement Co.,
922 F. Supp. 716, 723 (D.P.R. 1996)(same).
In addition, the necessary effect on interstate commerce must be “substantial”
or at least not “insubstantial.” See Loan Store, Inc. v. Independent
Food Stamps Associates, Inc., 671 F. Supp. 844, 847 (D. Mass. 1987) quoting
McLain, 444 U.S. at 246 (to establish jurisdiction under the effects test,
the alleged conduct of a putative antitrust defendant must have a “substantial
and adverse” affect on interstate commerce, or what is apparently
the same thing, a “not insubstantial effect” on interstate
commerce). This is not a rigorous test. Loan Store, 671 F. Supp. at 847.
As the Supreme Court indicated in McLain, an antitrust complaint should
not be dismissed on jurisdictional grounds unless it appears beyond a
doubt that the plaintiff can prove no set of facts in support of his claim
which would entitle him to relief. Id.
C. Unreasonable Restraints on Trade
The third element of a Section 1 violation is that plaintiff must prove
the challenged activity is an “unreasonable” restraint on
trade. Three types of analysis inform this classification:
• Per se analysis;
• Rule of reason test;
• Truncated rule of reason test.
1. Per Se Violations
Where either economics or experience dictate, a “practice [that]
facially appears to be one that would always or almost always tend to
restrict competition or decrease output,” it will be deemed a per
se violation of Section 1 and condemned without extensive economic analysis
of its effect in the particular case. Broadcast Music, Inc. v. Columbia
Broadcasting System, Inc., 441 U.S. 1, 19-20 (1979); Northern Pacific
Railway v. United States, 356 U.S. 1, 5 (1958); Collaboration Guidelines
§§ 1.2 & 3.1. But these things are not immutable. Conduct
once thought to be per se violations has later been removed from that
sinister realm and conduct once subject to more complex study has been
given that label. See, e.g., Addamax Corp. v. Open Software Foundation,
Inc., 152 F.3d 48, 51-52 (1998). Generally, with the exception of tie-ins,
only horizontal restraints of trade (or agreements among competitors)
are deemed per se illegal. Augusta News Co. v. Hudson News Co., 269 F.3d
41, 47 (1st Cir. 2001). Examples of illegal horizontal price agreements
and agreements that affect/concern price are:
• Price-fixing agreements. United States v. Trenton Potteries Co.,
273 U.S. 392, 398-99 (1927). But see State Oil Co. v. Kahn, 522 U.S. 3,
5 (1997)(excluding from per se treatment vertical maximum resale price
fixing).
• Horizontal agreements to intervene in the market, e.g., to buy
up excess supplies to keep prices up. United States v. Socony-Vacuum Oil
Co., 310 U.S. 150, 218 (1940).
• Horizontal agreements on credit terms. Catalano, Inc. v. Target
Sales, Inc., 446 U.S. 643, 648-49 (1980) (per curiam).
• Agreements specifying a method of quoting price. FTC v. Cement
Institute, 333 U.S. 683 (1948); Sugar Institute v. United States, 297
U.S. 553 (1936).
• Horizontal maximum and minimum price-fixing. Arizona v. Maricopa
County Medical Society, 457 U.S. 332, 348 (1982).
• Agreements to restrict output. United States v. Andreas, 216 F.3d
645, 667 (7th Cir.)(restrictions on output are per se unlawful), cert.
denied, 531 U.S. 1014 (2000); Collaboration Guidelines § 3.2.
• Conspiracies to submit non-competitive rigged bids thereby allocating
successful bids among competitors (i.e. bid-rigging). See, e.g., United
States v. MMR Corp., 907 F.2d 489, 496-97 (5th Cir. 1990)(agreements to
submit high bid and to refrain from bidding are actionable). See also
Collaboration Guidelines § 3.2.
Other, non-price potential per se violations are:
• Agreements to divide markets or allocate customers. United States
v. Topco Associates, 405 U.S. 596, 608 (1972). See also Palmer v. BRG
of Georgia, Inc., 498 U.S. 46, 49-50 (1990)(market division agreements
among potential, as well as actual competitors, is unlawful).
• Concerted refusals to deal or group boycotts. See, e.g., United
States v. General Motors Corp., 384 U.S. 127, 145 (1966). But see Northwest
Wholesale Stationers v. Pacific Stationery & Printing Co., 472 U.S.
284, 296 (1985)(a buying cooperative’s expulsion of a member is
not a group boycott warranting per se illegality). See also FTC v. Indiana
Federation of Dentists, 476 U.S. 447, 459 (1986)(applying a brief rule
of reason analysis to refusal of a group of dentists to forward x-rays
to strike down the refusal); Suzuki of Western Mass, Inc. v. Outdoor Sports
Expo, Inc., 126 F. Supp. 2d 40, 49 (D. Mass. 2001)(concerted refusals
to deal do not amount to per se violations unless they involve horizontal
agreements among direct competitors).
Few agreements are deemed “so pernicious that they are condemned
‘per se’ without regard to the power of the parties to accomplish
their aims regardless of justification and without any need to show an
actual or potential adverse effect on consumer welfare.” Augusta,
269 F.3d 41, 47 quoting, Socony-Vacuum Oil Co., 310 U.S. 150 (1940). Thus,
most competitor communications will be analyzed through the “rule
of reason” test outlined below.
2. Rule of Reason
The legality of most kinds of agreements (e.g., R&D projects, information
sharing, distribution contracts) will be tested under the rule of reason.
Augusta, 269 F.3d at 47. Under the rule of reason analysis, courts determine
whether the pro-competitive results of the conduct in question, outweigh
the anti-competitive effects. See generally U.S. Healthcare, Inc. v. Healthsource,
Inc., 986 F.2d 589, 595 (1st Cir. 1993). This typically means that the
factfinder must consider the wide variety of circumstances that shape
the effect of conduct on the market in the context of the particular persons,
markets, products and actions involved in that instance. Continental T.V.,
Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977).
A rule of reason analysis requires:
• Examination and proof of anticompetitive effect (typically by
expert economic testimony);
• Consideration whether the restraint is a naked restraint on price
or output (unconnected to another, pro-competitive good) or ancillary
to some other purpose;
• Putting the conduct in context by means of a market analysis (relevant
product and geographic markets);
• Countervailing pro-competitive effects;
• Balancing the several competitive effects.
See, e.g., Todd v. Exxon Corporation, 275 F.3d 191, 198-200 (2nd Cir.
2001).
Examples of horizontal conduct tested under the rule of reason are:
• Price agreements that effectively give rise to a new product,
such as a blanket license. Broadcast Music, Inc. v. Columbia Broadcasting
System, 441 U.S. 1, 23-24 (1979). See also Addamax, 152 F.3d 48, 51-53
(1998) (conduct of a joint venture that is strictly ancillary to the production
of a new product is evaluated under the rule of reason).
• Output restrictions within sports leagues. NCAA v. Board of Regents
of the University of Oklahoma, 468 U.S. 85, 100-01 (1984).
• The mere exchange of price information. United States v. U.S.
Gysum Co., 438 U.S. 422, 441 n. 16 (1978); Todd v. Exxon Corporation,
275 F.3d 191, 199 (2nd Cir. 2001).
• Agreements arising from joint ventures. Palmer v. BRG of Georgia,
498 U.S. 46 (1990); Addamax, 152 F.3d at 52; Collaboration Guidelines
§ 3.2.
• Joint purchasing arrangements. See, e.g., Cartrade Inc. v. Ford
Dealers Adv. Association, 446 F.2d 289 (9th Cir. 1971). See also Collaboration
Guidelines § 3.
• Some refusals to deal. See, e.g., U.S. Healthcare, Inc. v. HealthSource,
Inc., 986 F.2d 589, 593 (1st Cir. 1993).
• Covenants not to compete. See, e.g., National Society of Professional
Engineers v. United States, 435 U.S. 679, 689 (1978).
• Patent Pooling. Standard Oil Co. v. United States, 238 U.S. 163
(1931).
3. Truncated rule of reason
If conduct does not fall within a prior per se category, but has little
to commend it from a competitive viewpoint, the Court always has the option
of abbreviating the rule of reason analysis. See, e.g., FTC v. Indiana
Federation of Dentists, 476 U.S. 447, 458 (1986) (condemning the joint
refusal of dentists to forward x-rays to insurers after abbreviated rule
of reason analysis). But see California Dental Association. v. FTC, 526
U.S. 756 (1999) (FTC’s “quick look” rule of reason test
was insufficient to condemn trade association guidelines; full rule of
reason analysis was necessary).
Otherwise known as the “quick
look” doctrine, the abbreviated rule of reason analysis focuses
on only those factors, and undertakes only the degree of factual inquiry,
“necessary to make a sound determination of the overall competitive
effect of the relevant agreement.” Collaboration Guidelines §
3.3. The truncated rule of reason analysis has been applied where horizontal
restraints were instituted by entities such as non-profit educational
institutions, United States v. Brown University, 5 F.3d 658 (3rd Cir.
1993); medical professional associations; FTC v. Indiana Federation of
Dentists, supra; and sports leagues, NCAA v. Board of Reagents, 468 U.S.
85 (1954). The FTC has adopted a similar approach. See, e.g., Massachusetts
Board of Registration in Optometry, 110 F.T.C. 559 (1988).
III. Avoiding Pitfalls in Communication with Competitors
Given these guidelines, it is clear that there are many potential pitfalls
lurking in horizontal dealings among competitors and communications between
competitors. How should one advise clients who have such communications?
While case law is sparse on
what types of communications competitors can have among themselves, applying
the above framework does provide guidance. The following are four major
areas in which clients are likely to encounter questions:
A. Pricing Information
It should surprise no one that the price being charged by one’s
competitors is a key piece of information to a businessperson. Such is
the nature of competition. Learning what competitors are charging can
be pro-competitive as it enables the market participant to approach the
information one would have in a perfectly functioning market. Clearly
permissible actions include the following:
• Shopping the competitor;
• Obtaining all publicly available price data;
• Keeping track of pricing trends and patterns by time, place, and
geographical location;
• Learning from publicly available sources or customers of industry-wide
pricing policies, discounts and programs.
As noted above, merely exchanging pricing information is not a per se
violation of Section 1. United States v. Citizens & Southern National
Bank, 422 U.S. 86, 113, 114 (1975); United States v. Container Corp. of
America, 393 U.S. 333 (1969); Canterbury Liquors & Pantry v. Sullivan,
16 F. Supp. 2d 41 (D. Mass. 1998). However, a price exchange may still
violate Section 1 if the purpose or effect of the price exchange is to
increase or stabilize prices. Container Corp., 393 U.S. at 336-38. Thus,
the obvious antitrust concern is that the collection of information on
a competitor’s prices can also be used as a precursor or adjunct
to an agreement among competitors on what prices should be. Compare United
States v. United State Gypsum Co., 438 U.S. 422 (1978), and United States
v. Container Corp. of America, 393 U.S. 333 (1969), with Cement Manufacturers
Protective Association v. United States, 268 U.S. 563 (1925). See also
Todd v. Exxon Corporation, 275 F.3d 191, 1999 (2001) (Information exchange
is facilitating practice that can help support inference of horizontal
price-fixing agreement).
As a result, antitrust concerns
arise from direct competitor-to-competitor communications as to current
prices because such communications, combined with other factors, such
as conscious parallelism on pricing and/or the disciplining of a market
deviant, could lead to an inference of a horizontal agreement on price
or other concerted action. See, e.g., Theatre Enterprises v. Paramount
Film Distributing Corp., 346 U.S. 537 (1954). But see Blomkest Fertilizer,
Inc. v. Potash Corp. of Saskatchewan, 203 F.3d 1028, 1033-34 (8th Cir.
2000) (no concerted action found despite fact that prices of potash were
roughly equivalent and increased together and purported plus factors,
such as communications about price, were “too ambiguous to support”
an inference of conspiracy).
To obtain the information needed
to compete while minimizing the possibility of the inference of concerted
action, potentially permissible actions (as long as they do not have the
purpose of “stabilizing” prices) would include:
• Use of a neutral third party to gather information from all significant
competitors in the industry and then the presentation of the information
without the identification of individual competitors. See, e.g., In re
Citric Acid Litigation, 191 F.3d 1090, 1098 (9th Cir. 1999)(trade association’s
gathering of information about rival producers did not support inference
of conspiracy); In re Baby Food Antitrust Litigation, 166 F.3d 112, 126
(3rd Cir. 1999) (gathering competitors’ price information by non-neutral
parties can be consistent with independent competitive behavior). But
see Canterbury Liquors & Pantry v. Sullivan, 16 F. Supp. 2d 41 (D.
Mass. 1998).
• Announcement and publication of the current, announced price data
in industry publications. See, e.g., Wallace v. Bank of Bartlett, 55 F.3d
1166, 1169- 70 (6th Cir. 1995)(although publication and evaluation of
prices can serve as means of violation of Section 1, defendant bank’s
publication of customer fees alone did not create an issue of material
fact as to tacit collusion to set price because banks had other legitimate
reasons for disclosure). But see In re Coordinated Pretrial Proceedings
in Petroleum Products Antitrust Litigation, 906 F.2d 432, 446 (9th Cir.
1990)(a conspiracy among oil companies to raise or stabilize prices may
be inferred from proof of consciously parallel pricing together with evidence
that the companies directly exchanged price information, prices were posted
at company offices, and press releases were issued for the purpose of
quickly informing competitors of the price change).
• Occasional anonymous spot checks of current pricing by lower level
employees to test pricing levels;
• Occasional misinformation offered to the competitor. But see Wall
Products Co. v. National Gypsum Co., 326 F. Supp. 295 (N.D. Cal. 1971)(No
court is required by Sherman Act to foster "competition" procured
by fraud and misrepresentation, and the Sherman Act does not prohibit
a defendant from protecting itself therefrom).
Of much more serious concern would be the communication of future pricing
among competitors. Although a substantial, rational case can be made that
future pricing must be communicated to customers for their planning purposes,
Catalano v. Target Sales, Inc., 446 U.S. 643, 647 (1980), communication
of proposed or future pricing to competitors appears much more likely
to be construed as an invitation for a client’s competitors to join
in a price movement. See Canterbury Liquors, at 41; In re Petroleum Products
Antitrust Litigation, 906 F.2d at 445-48. This inference is less tenable
where the proposed price change is a price drop, but even where a price
drop is the subject of a pre-announcement prior to becoming effective,
it can be argued that a modest proposed drop in prices is an invitation
to avoid a steeper price drop and is therefore anti-competitive.
As to prospective price changes,
the only truly safe course would be to avoid any competitor-to-competitor
communication and confine all communication to announcements to customers,
to minimize the inference of coordinated or concerted pricing.
The third rail of competitor-to-competitor
pricing communications is not difficult to imagine. It would include not
only round table discussion of the specific pricing at a trade association
meeting, but also the CEO-to-CEO telephone conversation: raise your prices
by 10%, I’ll do the same tomorrow, and the public be damned. See,
e.g., United State v. American Airlines, 743 F.2d 1114 (5th Cir. 1984),
cert. dismissed, 474 U.S. 1001 (1985).
B. Product Information
Today, it is the rare business that can develop its products in complete
isolation from the products and services of its competitors. Products
in many industries must fit together or be able to be used compatibly.
See, e.g., Addamax Corp. v. Open Software Foundation, 152 F.3d 48 (1998).
Moreover, in today’s vertically integrated business world, your
main competitor may turn out to be one of your main suppliers or one of
your main customers. See, e.g., Augusta News Co. v. Hudson News Co., 269
F.3d 41, 42-44 (2001). Thus, it may become important to share product
information, including trade secrets, patent licenses, and other intellectual
property, with one’s own competitors. See Standard Oil Co. v. U.S.,
238 U.S. 163 (1931) (recognizing and approving the practice of competitors’
cross-licensing of patents (“patent pools”) in order to create
a new product). At the same time, the sharing of such product information
could lead to an inference that the competitors are acting jointly to
exclude alternative designs, to divide markets, or to exclude other competitors.
United States v. Imperial Chemical Indus., 100 F. Supp. 504, 519-31 (S.D.N.Y.
1951) (territorial restraints in know-how licenses as part of a larger
scheme to divide markets). But see Boston Scientific Corp. v. Schneider
(Europe) AG, 983 F. Supp. 245 (D. Mass. 1997) (Patentees' cross-licensing
agreement, providing that neither party would sublicense the other party's
medical device patent, was not refusal to deal in violation of the Sherman
Act; claim was based entirely on alleged overlapping nature of patents,
rather than any joint action by patentees).
In this environment, from an
antitrust perspective, it would appear to be clearly permissible to share
the following types of information under the following conditions:
• The purchase of a competitor’s product in order to reverse
engineer using the product or to ensure compatibility with the client’s
developing product.
• After entering into a contract with a competitor to buy or sell
a certain amount of a product or component part, to share essential product
information reasonably necessary to the completion of the contract, including
planned future development, subject to a confidentiality provision.
To take the sharing of product information one step further, competitors
can consider formal joint ventures, the purchase, sale or licensing of
technology, cross-licensing of technology, cross-licensing, and similar
arrangements. See, e.g., Northwest Wholesale Stationers, Inc. v. Pacific
Stationery and Printing Co., 472 U.S. 284, 296 (1985); Addamax, 152 F.3d
at 52. Such arrangements among competitors must be subjected to rule of
reason antitrust analysis, but, if carefully structured after consideration
of the nature of the affected industry and technology, they will often
be upheld. See Addamax, 152 F.3d 48, 52-53 (joint venture between competitors
producing a new product approved on the basis that it may provide a productive
contribution to the economy and any ancillary conduct to this venture
will be analyzed under the rule of reason). See also Collaboration Guidelines
§§ 3.31, 3.2.
The third rail -- Obviously,
the sharing of product and product development information will run afoul
of the antitrust law if such shared information is a precursor or quid
pro quo for price agreements, territorial divisions, or joint boycotts.
See Engine Specialties Inc. v. Bombardier Ltd., 605 F.2d 1, 10-11 (1st
Cir. 1979).
C. Customer Credit Information
The competitors in any industry will, almost by definition, be seeking
to serve the same client/customer base. Each competitor who has served
a particular customer has some information, generally very incomplete,
regarding that customer’s credit profile and history. It would then
seem rational for the competitors to wish to exchange such information
if, by doing so, the competitor could gain a better understanding of the
credit risks involved in selling to a particular customer.
There are two primary risks
involved in credit information-sharing. The first risk is that the sharing
of information regarding a customer’s creditworthiness will either
include or evolve into an implied or explicit agreement as to typical
credit terms. See Catalano v. Target Sales, Inc., 446 U.S. 643 (1980)
(per curiam) (conspiracy to establish standardized credit terms is per
se illegal price-fixing). Credit terms can be seen as an aspect of price
and thus, the competitors are edging close to a per se impermissible horizontal
agreement “on price.” Id. The second concern is that communications
regarding credit history will produce or be misinterpreted as a joint
decision not to sell to a particularly credit-challenged customer. Id.
See also Metro Video Dist. Inc. v. Vestron Video, Inc., 1990-1 Trade.
Cas. 68,986, 1990WL 58463 (D.P.R. 1990).
There is not a credit manager
in the country that would not like to know a particular customer’s
credit history with his competitors and whose job would not be assisted
by having such information. However, few credit managers would like to
run the risk of antitrust litigation (or a trade defamation lawsuit) to
obtain such information. Permissible activity would appear to include:
• Reporting credit histories to third party, disinterested clearinghouses,
which can include industry groups;
• Ad hoc communication of strictly factual, past information on
a particular customer’s credit history, with no overt or subtle
“suggestion” as to future terms or credit availability. E.g.,
Cement Mfrs. Protective Assn. v. United States, 268 U.S. 588, 600 (1925)
(exchange of credit information upheld where there is no implication of
an agreement on credit terms or whether credit should be extended); Zoslaw
v. MCA Distrib. Corp., 693 F.2d 870, 885-86 (9th Cir. 1982) cert. denied,
460 U.S. 1085 (1983) (similar); Metro Video., at *10.
• Disclosure of credit or price information to avoid fraud. See
Cement Mfrs. at 600; Wall Products Co. v. National Gypsum Co., 326 F.
Supp. 295, 315 (N.D. Cal. 1971). But see In re Northwest Airlines Corp.
, 208 F.R.D. 174, 188-95 (E.D. Mich. 2002)(fraud exception did not apply
where alleged fraudulent activity was merely a byproduct of customer self-help).
Activities which have to be carefully monitored and avoided would include:
• Joint industry-wide meetings of credit managers to discuss problem
accounts and customers. But see Metro Video, at *9 (plaintiffs financial
credit information exchanged at industry meeting presented “no problem”
under federal antitrust laws).
• Any suggestion that credit terms within the industry need to be
uniform or consistently applied. Catalano, at 648-49.
The third rail -- “Customer X owes us $500,000 and it is way beyond
terms. I think anyone who sells to this deadbeat is crazy. It would really
help me to collect if you guys would all insist on COD terms until my
little situation with him is resolved. You know I would do the same for
any one of you.”
D. Trade Associations
A great deal of competitor-to-competitor communication occurs at meetings
of industry trade associations. See, e.g., In re Northwest Airlines, at
191-203. There are obviously important pro-competitive (or at least competitively
neutral) reasons for such communications. See, e.g., Nova Designs, Inc.
v. Scuba Retailers Association, 202 F.3d 1088, 1092 (9th Cir. 2000) (declining
to find membership association in and of itself is proof of agreement).
Under Noerr-Pennington, competitors have a constitutional right to get
together to petition the government, including the courts, legislatures,
the executive branch, and administrative agencies. Eastern Railroad Presidents
Conference v. Noerr Motor Freight, Inc., 365 U.S. 127, 136-37 (1961);
United Mine Workers v. Pennington, 381 U.S. 657, 669-70 (1965); California
Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972). In addition,
many trade association play invaluable self-regulatory roles and provide
for the standardization of products which enhance competition. E.g., National
Society of Professional Engineers v. United States, 435 U.S. 679, 687-90
(1978). And purchasing cooperatives, by enabling their members to become
more efficient, are pro-competitive. E.g., Northwest Wholesale Stationers
v. Pacific Stationery & Printing Co., 472 U.S. 284, 295 (1985).
The antitrust concern, of course,
is that a trade association is a fertile ground for the creation and enforcement
of various illegal horizontal activities, such as price-fixing, territorial
allocation, group boycotts, and other concerted action. See, e.g., In
re Citric Acid Litigation, 191 F.3d 1090, 1097-98 (9th Cir. 1999).
Unjustified ouster from or denied admission to a trade association can
constitute a group boycott. But see Northwest Wholesale Stationers, Inc.
v. Pacific Stationery & Printing Co., 472 U.S. 284, 296 (act of expulsion
does not necessarily imply anticompetitive animus). The adoption of a
governing or uniform product or performance standard can constitute illegal
activity if the standard is biasly adopted to benefit one product over
another product. Compare Allied Tube & Con. Corp. v. Indian Head,
Inc., 486 U.S. 492 (1988) with American Council of Certified Podiatric
Physicians & Surgeons, 185 F.3d 606 (6th Cir. 1999)(association’s
efforts to be the sole certificate board for podiatric surgeons did not
establish a conspiracy because association’s independent interests
were served by concerted action). A decision within a trade association
to refuse to perform a certain service or serve a particular clientele
can be seen as a naked restraint. FTC v. Superior Court Trial Lawyers
Association., 493 U.S. 411, 423 (1990). Thus, while membership in trade
associations is obviously permitted, as is attendance at association meetings
and participation in association affairs, the actual actions taken at
such meetings can be quite problematic.
Illegality arises not from participation
in trade association activities generally, but rather in the content,
substance, and context of those association activities. See, e.g., United
States v. American Bar Association, 934 F. Supp. 435 (D.D.C. 1996)(final
judgment)(Department of Justice alleged ABA restrained competition by
using standards for law school accreditation to fix compensation, working
conditions, and to limit competition from non-ABA accredited schools).
Consequently, virtually every trade association of substance has (or should
have) antitrust counsel.
Some examples of association
actions that need to be tested against the “merits” and examined
for unsupported anticompetitive purpose or effect are:
• Association membership criteria and decisions. E.g., Thompson
v. Metropolitan Multi-List, Inc., 934 F.2d 1566, 1580-81 (11th Cir. 1981);
American Bar Association, 934 F. Supp. at 435.
• Association “codes” of conduct and professional regulation.
E.g. DM Research Inc. v. College of American Pathologists, 170 F.3d 53,
57 (1st Cir. 1999).
• Standardized product selection and specifications. Id.
• Agenda items for association meetings. See In re Northwest Airlines,
at 202 (activities and discussions encouraging member to employ greater
diligence in fighting customer “hidden city ticketing” gave
rise to an inference of collusion).
Despite all the preparation in the world for trade association meetings,
some troublesome communications will be had at such association meetings.
Such comments could include:
• “Prices in the industry are too low. We are cutting our
own throats. Let’s each get rational and reasonable about the prices
we charge.”
• “[Large customer] is throwing its weight around. It is not
even paying us our costs. We all have to do something. For our part, we
will no longer serve them.”
• “[New product] Y is a sham; it’s no better than what
we have on the market now. There is no reason we should adjust our product
specs to approve that new product.”
Besides ensuring that any trade association to which your client belongs
is advised by knowledgeable antitrust counsel, you need to prepare your
client’s businesspeople to deal with comments that sound like the
above.
The third rail -- The after-hours, hotel room meeting on prices or customers.
IV. Concluding Thoughts
A. Competitors talk all the time. As counsel, whether in-house or outside,
you will learn of some, but not all, of such contacts without further
investigation.
B. Educate your clients regarding what is permissible, what in certain
circumstances is permissible, and what is almost never permissible. Some
contacts and interaction are clearly permissible under the antitrust laws;
some are likely permissible if addressed properly; some are quite risky
unless substantially and carefully reviewed; some are clearly impermissible
-- the equivalent of the antitrust “third rail.”
C. Encourage them to come to you with questions. Most antitrust issues
do not arrive on your desk with a convenient label attached. (“This
is a Section 1 pricing and joint boycott issue.”) Rather, issues
pass by your desk, if you are lucky, phrased more like “I have heard
that XYZ Corporation is going to be raising its prices on the Deluxe line
by almost 5% and that they won’t be selling to Customer Corp. anymore.
Any problem with us raising our posted prices on our Premiere line by
4% across the board? I’m also thinking of cutting off that deadbeat
Customer Corp., too. Any suggestions on how to do this with the least
exposure?”
D. Do not accept what clients say at face value - - push to learn more.
There are no simple answers to practical questions out there in the business
world. Clients have different tolerances for risk, different abilities
to follow guidelines designed to keep them out of trouble, and different
inclinations to be candid with counsel. For some clients, simply receiving
a demand letter or an antitrust CID would be enough to end a questionable
practice because such a company does not wish to expend resources to defend
marginal conduct. Other clients see such inquiries as par for the course
and have ample resources with which to defend what they consider to be
their essential practices. Know the client.
"Section 1 of the Sherman
Act: Horizontal Restraints of Trade and Communications Among Competitors"
is reprinted with permission from Antitrust Essentials for Small and Midsize
Businesses and Their Lawyers: A Review of the Real World Antitrust Problems
and How to Avoid Them (2002). @MCLE, Inc. All rights reserved.
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