Licensing Journal

V O L U M E 2 4 N U M B E R 7
Edited by the Law Firm of Grimes & Battersby

THE

The “Dos and Don’ts” of Communication with Competitors
David W. Simon
David W. Simon is a partner at Foley & Lardner, LLP in Milwaukee, WI. He is a member of the firm’s Litigation Department (White Collar Defense & Corporate Compliance and Antitrust Practice Groups). Mr. Simon represents clients in complex commercial litigation before trial and appellate courts. He also represents corporations and individuals in a variety of criminal and other government enforcement matters, advises clients on corporate compliance issues, and conducts internal investigations. Mr. Simon can be reached at dsimon@foley.com. Just how problematic was that casual conversation with your competitor’s representative at last year’s trade association golf outing? Many executives and managers have occasion to interact with representatives of competitors at trade association meetings, industry trade shows, through sale or purchase transactions, in connection with joint ventures, or even at social events, and have no idea that a simple conversation can expose their employer (and, potentially, themselves) to antitrust liability. This article covers the “dos” and “don’ts” of communications with competitors in these situations. This is an area fraught with antitrust risk, and, as a result, the default rule ought to be “mum’s the word.” Like any simple default rule, however, circumstances sometimes require one to deviate from it. The purpose of this article is to provide guidance on when may safely deviate, what is and what is not an appropriate subject matter for a conversation with a competitor’s representative, and how to avoid inadvertently creating the impression that you have entered into a forbidden agreement with a competitor.

The Legal Framework
The purpose of the antitrust laws is to “preserv[e] free and unfettered competition as the rule of trade.”1 Fundamentally, “antitrust law is about consumers’ welfare and the efficient organization of production. It condemns reductions in output that drive up prices as consumers bid for the remaining supply.”2 Most of the antitrust issues that arise out of communications with competitors fall under Section 1 of the Sherman Antitrust Act, which provides: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce . . . is declared illegal.” This section of the Sherman Act is concerned with concerted, as opposed to unilateral, action, and recognizes that much concerted action between competitors undermines free competition. A Section 1 claim has three elements: (1) there has

AUGUST 2004

The Licensing Journal

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for rigging bids to the United States Agency for International Development (USAID) and 2 The Licensing Journal AUGUST 2004 . are extraordinarily expensive to defend. (2) the agreement must unreasonably restrain trade. Agreements on uniform discounts. Under the per se rule. Allocate product markets. were sent to prison.”4 Any agreement between actual or potential competitors to fix prices is thus per se illegal. a $225 million fine imposed on BASF for its role in the same conspiracy. Only agreements that unreasonably restrain trade are unlawful under the Sherman Act.7 In addition to these enormous corporate fines. with more than 30 defendants receiving jail sentences of one year or longer.6 Antitrust enforcement authorities (primarily the Bureau of Competition of the Federal Trade Commission and the Antitrust Division of the Department of Justice. pricing methods or price-related terms are also per se illegal. in a recent Federal Trade Commission action. with the average jail sentence reaching a new high of more than 18 months. often through criminal prosecutions of the companies and individuals involved. in some cases. or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se. the resulting agreement restrains trade in the sense that Steelinc. and a $100 million fine imposed on ArcherDaniels-Midland for its role in the citric acid and lysine price-fixing conspiracy. or select one of their number to submit the low bid on a particular contract.”3 A per se violation includes any agreement between or among competitors to do any of the following: • • • • Fix prices or other terms of sale. depressing. fixing. where actual or prospective competing bidders agree on the amount bid. Section 4 of the Clayton Act permits the recovery of treble damages by a private party injured in its business or property by any conduct forbidden by the antitrust laws. Agreements between competitors to fix prices are the biggest concern.. fines in excess of $100 million imposed on three different companies involved in the graphite electrodes price-fixing conspiracy. Violations of this nature are also frequently prosecuted criminally. and. an administrative law judge held that an agreement between two record companies to stop discounting and advertising prior “Three Tenors” recordings to avoid competition with a new “Three Tenors” recording they were jointly promoting was a per se violation of the antitrust laws. Bid-rigging. and whether that agreement unreasonably restrains trade.to be an agreement. civil liability also inevitably follows from a per se violation.8 Of course. combination. Prohibited Agreements It is helpful to understand the second element of a Section 1 claim first. The category of unlawful agreements that create the greatest antitrust risk are those that are deemed per se illegal.5 Agreements among competitors on the price at which they will purchase inputs are also illegal per se. former President of Bilhar International Establishment. and (3) the agreement must affect interstate or foreign commerce. In the last four years. Inc.000 in all. the individual managers involved in price-fixing activity have been prosecuted. contracts to purchase steel from Steelsupply Co. defendants in cases prosecuted by the Department of Justice were sentenced to a record number of jail days. Recently. a competitor of Steelsupply. For example. more than 10.. Rig bids. an agreement between competitors to set salaries of certain employees. customers. or territories. An agreement such as this is not an unlawful restraint of trade for purposes of the antitrust laws. cannot fill that order. In recent years we have seen record criminal fines for price-fixing violations. For example. over 75 years of imprisonment have been imposed on antitrust offenders. but also various state law enforcement agencies) aggressively pursue price-fixing conspiracies. This includes. any contract entered into between two businesses restricts trade in some way. For example. the critical elements are the existence of an agreement. in order to develop a sense of what kinds of agreements are prohibited. pegging. Arguably. in government fiscal year 2002. for example. particular categories of horizontal restraints are conclusively presumed unreasonable because the “surrounding circumstances make the likelihood of anticompetitive conduct so great as to render unjustified further examination of the challenged conduct. if AAA Manufacturing. any “combination formed for the purpose and with the effect of raising. a three-year jail term was imposed on Elmore Roy Anderson. which means that they will be found illegal without any analysis into the actual effect the agreement might have on competition. and often result in huge settlements or judgments. or conspiracy among two or more separate entities. Co. or Refuse to deal with certain suppliers. These private suits are often brought as class actions. is also per se illegal. including a $500 million fine imposed on HoffmannLaRoche for its role in the vitamins price-fixing conspiracy. it is no defense that the fixed price is reasonable or the same as the market price. As the US Supreme Court has explained. For present purposes.

under which one provider licensed its product line to the other and gave it the option to buy the assets at the end of the license. A few examples from recent cases provide some guidance. also known as a group boycott.10 An agreement by competitors to refuse to deal with certain companies. you know that. For example.12 the court found that it was appropriate to infer the existence of an agreement based on parallel price increases plus: • Testimony that sales representatives from one defendant left an internal training session to discuss a response to a competitor’s price increase before the competitor’s price increase was offi- • • Communicating with Competitors There are circumstances when representatives of competing companies must communicate with one another. Darling-Delaware Co. It is a rare case in which competitors reduce to writing their agreement to restrain trade.13 a price-fixing agreement was inferred primarily based on communications among the defendants. Recently. Necessary communications with representa- AUGUST 2004 The Licensing Journal 3 . A company may not agree with its competitors to divide territories. including: • Evidence of numerous telephone calls and facsimile transmissions between the various defendants. A former employee’s testimony that his superior told him that there was a mutual agreement and understanding between the defendants not to bother each others’ accounts.14 an agreement among competitors to allocate customers was inferred based on: • A former employee’s testimony that he saw representatives of defendants discuss price and other customer problems while at trade association meetings. in Petruzzi’s IGA Supermarkets. and Testimony that a sales representative from a defendant provided a draft price increase announcement to a sales representative from another defendant at a social event. Testimony from a sales manager of a defendant that he had been sent internal memoranda from competitors relating to the competitors’ prices and pricing policies. and defrauding. price leadership and parallel pricing) by competitors and communications between competitors. not-for-profit. In In re Medical X-Ray Film Antitrust Litigation. Now that’s what you are doing. most cases require a plaintiff or a government enforcement agency to prove that an agreement between competitors must have existed based on circumstantial evidence. for his role in rigging bids submitted to. and Testimony from various witnesses concerning a secretive meeting among the defendants’ representatives. Newark public schools and other government.” Proof of an Agreement The second element of a Section 1 violation is proof of an actual agreement between competitors. A 63-month jail term was imposed on Melvyn Merberg. a former executive of food distributor Jitney.11 • • cially announced. customers. v. Tape recorded conversations between representatives of the defendants that contained the following statements: — “You are blatantly taking accounts that have been existing with Moyer Packing. In In re Catfish Antitrust Litigation. The question of whether an agreement exists almost always turns on whether the facts and circumstances reasonably lead to an inference of a price-fixing conspiracy or some other agreement to commit a per se violation. You’re not playing.. including parallel action (for example. or product markets. the Department of Justice recently challenged agreements between two competing software product providers. Ltd. The Department contended that this arrangement was a per se violation of the antitrust laws because it eliminated the only competitor in the market. Inc. This is an extremely fact-specific inquiry.9 Market or product allocation is also a per se violation. And I’m not the first one that ever talked to you about this. the Court of Appeals for the Sixth Circuit affirmed judgment in favor of a plaintiff on a claim that an automobile dealer orchestrated a conspiracy among area body shops to exclude the plaintiff (a competing body shop) from business referrals. • Finally.for defrauding USAID in connection with construction work in Egypt that the US government funded as a part of the Camp David Peace Accords.. can also be a per se violation.” — “Why don’t you just operate with what you have and not worry about what other people have?” — “The only restrictions that you have in oper ating your business is: Don’t take other people’s accounts. and private entities in the New York City metropolitan area.

and often do. DON’T share any information about your company’s sales. (2) any analysis is based on historical data. and think about what a skillful lawyer might do cross-examining you about that communication. If you are in a meeting at which competitors are present and the discussion turns to one of the forbidden topics discussed. If your company is doing bid work. If you obtain information on a competitor’s current prices. with any other actual or potential bidder. • An agenda is prepared in advance that reflects legitimate discussion topics. DO announce that you believe the topic is forbidden under the antitrust laws. and (3) the analysis contains aggregated data that cannot be tracked to any particular company. One ought to consider how a particular communication might look to a judge or a jury after the fact. Conclusion Any situation that involves communications with competitors brings with it antitrust risk. DON’T join any trade association or industry group without obtaining prior approval from senior management or company counsel. There is rarely any reason to give information about future price increases to your competitors. it is important to take great care when such communications are necessary. Participation in trade associations and industry groups brings with it substantial antitrust risk. Because communicating with representatives of your competitors can lead to an inference of an improper agreement between competitors. Trade associations may. Antitrust cases can be. DON’T discuss any of the forbidden topics with competitors. in a joint venture involving a competitor (an area that is the subject of considerable antitrust litigation and of guidelines issued by the antitrust enforcement authorities. capacity.17 DON’T attend any trade association or industry group meetings unless: • Antitrust counsel is present. It is alright to obtain the current pricing information of a competitor from a customer. leave the meeting. including the following: • • • • • • • • • • • • Price or bids Pricing policies Discounts Terms of sale Capacity Expansion plans. This is an area that requires the exercise of great caution. built upon innocent communications between competitors. bid component information. the antitrust enforcement authorities have brought claims challenging trade association conduct they claimed had the effect of suppressing price competition among trade association members. and often are. DON’T share information on your company’s bid. or current or future strategic plans Production costs Marketing plans or sales strategies and tactics Suppliers Customers Orders or sales Refusals to sell or market to particular parties Even if there is no agreement whatsoever. and report the event to your company counsel to document it in an appropriate way. In recent years. DO document when and from whom it was received. and it is almost always better to err on the 4 The Licensing Journal AUGUST 2004 . Industry statistics programs fall within an antitrust “safety zone” if (1) the data is managed by a third party. discussing these topics with a competitor could doom your company to expensive antitrust litigation. DON’T solicit or obtain information on competitors’ future prices or pricing policies. and • Accurate minutes are kept and circulated. Some antitrust cases have been built largely on a competitor’s price increase announcement that was found in a file that had facsimile traffic on it that reflected transmission before the date that price increase announcement was actually released.tives of competitors might occur in the context of a trade association meeting.15 or in a sale/purchase transaction with a competitor. prices or pricing policies with the trade association unless you get approval from counsel. but there are specific and exacting rules for managing industry statistics consistent with the antitrust laws. that your company policy does not allow you to participate in any such discussion. coordinate industry statistics programs.16 If you are a member of a trade association. it is better to avoid obtaining that information directly from your competitors. The following rules will help minimize the antitrust risk of communications of this nature: DO avoid any situation from which an anti-competitive agreement might be inferred. It is important to consider the antitrust laws when communicating with competitors even in the most innocent sense on a topic that is completely unrelated to the prohibited topics discussed above. or information relating to whether your company will bid.

United States v.. e.S. 998 F.side of avoiding communications that you think even suggest an improper agreement. 8. N.S.htm. 1989). Nat’l Ass’n of Police Equip. June 20. See Status Report: A Summary Overview of the Antitrust Division’s Criminal Enforcement Program. Inc. pages 16-19. Ry. Acad.pdf. Bd. No. August 2004.T. (CCH) ¶ 73. 2002). Supp. 12.gov/atr/public/guidelines/12576. 356 U.S.3d 191 (2d Cir. Va. Pac. Covington Pike Toyota. of Ophthalmology. 908 F. (CCH) ¶ 73..855 (S. 1993). 870 F. 9298 (F.. New York.D. v. 1996). 2002-2 Trade Cas. Volume 24. Supp.usdoj.gov/atr/cases/f11900/1198. 6..gov/atr/public/ criminal/12557. 17. 400 (N.htm. See Federal Trade Commission and US Department of Justice Antitrust Guidelines for Collaborations Among Competitors (April 2000).usdoj.usdoj. In re Medical X-Ray Film Atitrust Litig. see Antitrust Division.pdf.. See United States v. 15. 1. Statement 6 – Provide Participation in Exchanges of Health Care Services (1996). available at http://www. Socony-Vacuum Oil Co. 7. 1. 946 F. Am.2d 1224 (3d Cir.N.0 10. Distribs. 14. 310 U. See US Department of Justice and Federal Trade Commission. Exxon Corp. United States.. Inc. 468 U. 103–104 (1984). 2002) Reprinted from The Licensing Journal. 85.g. 275 F. See.htm. available at http://www.. 4. 2001).D. with permission from Aspen Publishers Inc. 16. NY 1-800-638-8437. For a complete list of corporate criminal antitrust fines in excess of $10 million. No.gov/os/2000/04/ftcdojguidelines. Sherman Act Violations Yielding a Fine of $10 Million or More.C. 02-888-A.2d 397. available at http://www. NCAA v. Miss. available at http://www. A WoltersKluwer Company. Inc. v. 11.Y.ftc. Number 7. 150. Statements of Antitrust Policy in Health Care. of Regents.aspenpublishers.com AUGUST 2004 The Licensing Journal 5 .gov/os/2002/06/polygramid.. See Faulkner’s Auto Body Ctr. See www. United States v.ftc.htm..D. Inc.usdoj. 209 (E. (E. 13. MathWorks. 4 (1958). available at http://www.. Following these basic guidelines for communications with competitors will reduce your company’s exposure to antitrust risk. v. available at http://www. 2..pdf. Darling-Delaware Co.gov/atr/public/guidelines/12576. www. In re Catfish Antitrust Litig. 223 (1940). 9. See Todd v. 2002). 5.gov/atr/public/guidelines/0000.usdoj. Schachar v.771 (6th Cir. Petruzzi’s IGA Supermarkets. 3. See In re PolyGram Holding.D. Fla. 399 (7th Cir. 1995).. 2002) (unpublished). 2002 -2 Trade Cas. Inc.

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