Ten Things: Sherman Act Section 2 – The Monopoly Man Cometh

When I went to law school way back when there were two topics I swore I had no interest in Tax law and Anti-Trust law.  I avoided those classes like a high school third-period ballroom dancing.  Ironically, as General Counsel, the two biggest pieces of litigation I have worked on were, of course, multiple tax law class actions and a mind-numbing, soul-sucking antitrust dispute.  Which meant, despite my previous oaths, I got a first-class education in both.  Of the two, by far the worst was the anti-trust dispute which involved multiple plaintiffs, the DOJ, and the hyper-focused attention of the CEO, President, and Board of Directors as this was truly a “bet the company” problem.  Not to mention that I did not have a day off (including holidays) for almost two years.

So, why do I bring up all this pain?  Because I wanted to share the most challenging part of the entire dispute – dealing with Section 2 of the Sherman Act.  I’ll get into the details below but will just note here that Section 2 is vast minefield of traps for the unwary and you can easily find your company mired in a litigation quagmire where every contract, every clause, every meeting or action, and every email or PowerPoint comes under scrutiny for alleged uncompetitive behavior all because your company is highly competitive and highly successful.  Sound like a nightmare?  It is.  Meaning, all in-house counsel should have a basic understanding of Section 2 (or the local law equivalent, e.g., EU Article 102 on abuse of a dominant position) so they can keep a sharp lookout for whether, under the right set of circumstances, company actions or plans could risk drawing anti-trust scrutiny or, far worse, an anti-trust lawsuit.  This edition of “Ten Things” sets out the basics of Section 2 and what you need to watch out for:

1.  What is Section 2?  Most in-house lawyers are very aware that their company cannot enter into agreements to boycott, fix prices, divide markets or customers, or agree to bid-rigging – pretty obvious problems under anti-trust law.  These types of multi-party agreements fall under Section 1 of the Sherman Act.  Unlike Section 1, however, Section 2 focuses on single-firm conduct, i.e., the unilateral actions of just one company.  Section 2 states: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce….”[1]  Over the years, US courts have interpreted Section 2 monopolization as requiring: a) the possession of monopoly power in the relevant market; and b) the willful acquisition or maintenance of that monopoly power (other than through superior products or business acumen, or historical accident, i.e., unfairly).[2]  This means you need to start worrying about Section 2 any time your company crosses over 50% market share because that is the point where competitors, customers, and government regulators can start to make your life difficult.

2.  Who/What do you need to be afraid of?  Once your company crosses the 50% market share barrier, things get very different from an anti-trust perspective.  As you’ll see below, things your company did while it was “small” can turn into big problems once it gets “big.”  You’ll need to start watching your back as competitors, customers, government regulators may start to take an interest in your success, and not in a good way.  While the Sherman Act is designed to protect competition and not competitors, that will not necessary stop a competitor or customer from trying to gin up an anti-trust claim as a way of trying to level the playing field or get through court what they could not get in negotiations, either by suing directly or by taking their “claims” to the anti-trust regulators, e.g., the DOJ or FTC.  I can say from experience that anti-trust lawsuits are ungodly expensive, easily tens and tens of millions will get spent defending your company.  And, if the court finds against you, the Sherman Act provides for the tripling of damages along with attorneys’ fees.  Meaning, that if the plaintiff can prove damages of $100 million, that automatically becomes $300 million – plus you’ll likely have to pay for the legal fees and costs incurred by the plaintiff in suing your company.  All the more reason to be ever vigilant as an in-house lawyer.  In addition to money damages, the plaintiff can seek injunctive relief, attempting to get the court to order your company to stop doing something, be it behavior or even stopping the use of certain contractual clauses.  An injunction can be even worse than the monetary damages at issue.  If government regulators take an interest, you will probably have to deal with a costly Civil Investigative Demand, meetings with regulators, and potentially interviews of company witnesses.  Government regulators can take their time with their investigation, leaving your company under a cloud, even if you’ve done nothing wrong.  Most frightening of all is that government regulators can seek to break up your company if it gets too big and engages in uncompetitive practices (see, e.g., Standard Oil, AT&T, and Microsoft).

3.  Product market.   Before you need to start worrying about Section 2 exposure, the first thing you must figure out is whether or not your company has a monopoly.  For purposes of Section 2, this means a monopoly in a “relevant market.”  In particular, a monopoly with respect to a certain product or service in a particular geography.  Accordingly, defining the market is critical to any anti-trust law analysis.  Simply put, the broader the market is in terms of available products and geographic scope, the less likely that any company has a monopoly in that market.  A product market means all the products out there that compete (or potentially could compete) with and are interchangeable with your product or service.  A simple way to look at it is if your product or service wasn’t available, where would customers turn for a substitute?  All of those substitutes comprise the product market.  From a purely business standpoint, you would like there to be no substitutes for your product, as that would allow you to charge whatever the market will bear.  From an anti-trust standpoint, you want there to be many substitutes because, if so, you cannot be a monopolist.  This is the fundamental paradox of antitrust law, whatever is good for your company’s business is likely bad in terms of defending a monopoly claim.  This paradox can guide you in how you teach the business how best to discuss your “market” and ultimately, your company’s market share.

4.  Geographic market.  Once you know the product market, you must also define the geographic market, i.e., where do you sell your products or services? In what region/area do all the competitors compete?  How costly is it to transport products? It may be as small as a single city or town, or it could be a country or even globally, especially with respect to online services.  I think the easiest way to look at this for your company is to consider where do you compete for specific business?  For example, you may be a global online retailer but if you have different websites for different countries/languages and currencies, then the geographic market will likely be country-specific vs. global.

5.  What is monopoly power?  Once there is a properly defined relevant market (product and geography), the next step is to determine whether any of the competitors in that market – including your company – have monopoly power.  Monopoly power is the ability to exclude competition or raise prices and not have any competitive consequences.  Anti-trust regulators define it as the ability to raise price by 5% and keep it at that level without losing sales.  An additional test is market share in the relevant market.  If a company has over 70% market share, it is likely considered a monopolist.  If the company has less than 50% market share, it probably is not a monopolist.  If the company has between 50% and 70% it falls in a grey zone (and where you need to start being vigilant).  Market share alone is not definitive, but it is indicative of monopoly power, especially when there are significant barriers to entry into the market (capital costs, regulatory, etc.).  For example, if a company has 90% market share but competitors can easily enter the market and duplicate the service or product and offer it at a lower price, then the 90% market share company is not a monopolist.  It may briefly enjoy being able to charge whatever the market will bear, but competitors will see those profits and rush into the market to try to capture some of it via lower prices.

6.  Monopoly good?  There is a common misperception that having a monopoly is bad or illegal.  It’s not.  It is perfectly legal in the US for a company to have a monopoly and to exploit it to charge the maximum amount the market will bear.  This is, for all practical purposes capitalism at its finest – build a business and charge as much money as possible for your products and services.  The courts are quite clear that if a company achieves a monopoly because of superior products or business acumen, or by historical accident, it is absolutely 100% fine.  If Company X has obtained a patent, then it has a government-issued monopoly and exclusive right to sell that patented product and it may exclude all others from doing so.  If Company Y sells a service that is so superior to its competitors’ products that consumers are lining up around the block to get it, it may charge whatever it wants for that product.  If Company Z happens to own the only piece of land where Beryllium is found, guess what?  Yep, they can milk that historical accident for all it’s worth.   Where a monopolist (or potential monopolist) gets in trouble is when the attempt to obtain or maintain a monopoly position comes thought anticompetitive means, also known as “exclusionary conduct.”

7.  Exclusionary conduct.  Here’s where Section 2 gets really interesting.  If your company can be characterized as a monopolist, then there is a wide range of conduct that can raise anti-trust risk.  Remember, being a monopolist is not against the law.  But, the willful acquisition or maintenance of that monopoly through the use of anti-competitive or predatory means is.  The problem, however, is that there are few bright lines for companies to follow in terms of knowing when behavior crosses the line from sharp competition (no problem) to exclusionary, anti-competitive conduct (big problem).  And even if your company has no intent to act “badly” you can still find yourself in the crosshairs of an anti-trust lawsuit or investigation.  The lack of clarity as to what constitutes “bad conduct” is as maddening for business executives as it is for in-house counsel.  Here is a partial list of behaviors that can (but not always) cross the line if your company is a monopolist:

  • Refusals to deal (e.g., refusing to do business with a competitor or a “disloyal” customer, especially when there was a prior contractual relationship)
  • Tying (requiring that a customer by a company product as a condition of being able to purchase a product in which the company has a monopoly)
  • Use of Most Favored Nations(“MFN”) clauses
  • Exclusive dealing contracts
  • Loyalty discounts
  • Denial of access to competitors
  • Abuse of standard setting (especially if you have a patent)
  • Bundled pricing
  • Predatory pricing (pricing below costs)
  • Product disparagement
  • Abuse of government process (e.g., filing bogus lawsuits or regulatory actions)
  • General “bad” behavior (also known as “cumulate acts” – where any one act alone would not be a violation but taken all together they create a Section 2 “monopoly stew” which gives the plaintiff the ability to toss stuff on the wall and see what sticks).

If your market share is small, your company can engage in most (but not all) of this behavior with little fear of drawing a Section 2 anti-trust complaint.  Once you cross the 50% market share threshold, however, now you need to start thinking about whether the risk of problems is worth the payoff from the behavior as it can land your company in a world of problems.  Moreover, your risk can hinge on any one of these behaviors or on a combination of them.  And once you get “big,” the other side can try to take any of your actions, behavior, contract clauses, whatever, and try to make it look like you are harming competition, i.e., your company is big and acting badly.  This “antitrust stew” is a hallmark of Section 2 claims because it gives the opposing party many ways to try to show that your company is acting anticompetitively – even if any one of the “ingredients” is not problematic or would fine for a “small” company to engage in.  This is the troublesome part about Section 2 and presents many challenges as in-house counsel in trying to prevent anti-trust lawsuits or investigations.

8.  Business justification.  As mentioned above, anti-trust law in the US is aimed at protecting competition, not competitors.  Anyone bringing an anti-trust complaint must show that your actions harm the competitive process.  Thus, in order to succeed, the plaintiff must have suffered an “anti-trust injury” of the type protected by the Sherman Act.  Unfortunately, this doesn’t necessarily stop anyone from bringing a suit even if their claim of anti-trust injury is weak.  Fortunately, you can defend your alleged anti-competitive behavior if you have a pro-competitive or pro-business rationale.  For example, you might stop doing business with a competitor because they are free-riding on your brand or technology to the detriment of your business.  Or, you might offer loyalty discounts because it provides lower pricing for volume.  Tying can be defended as efficient manufacturing and distribution.  And you may have changed the design of your product, not to thwart competitors from building products that connect to it but to lower production costs.  Just because someone accuses your company of anti-competitive motives, doesn’t mean you cannot defend your actions.  The court will look to see if your company is competing on the merits, in particular, whether you have a rational business purpose behind the challenged behavior.  This test makes up part of the “Rule of Reason,” the analysis courts use when there is not a pro se violation of antitrust law (basically, does the pro-competitive good outweigh the anti-competitive harm).  Your job as in-house counsel is to help ensure that the business is entering into contracts and taking actions pursuant to a legitimate business need such as:

  • Enhanced efficiency/lower costs
  • Promotion of intra-brand competition
  • Stopping “free riding”
  • Higher quality customer service
  • Increased output
  • Better quality products and services
  • Creation of new products and services

9.  “Danger Will Robinson.”  As you can see, dealing with Section 2 claims is quite challenging for in-house lawyers.  What constitutes a violation can be extremely difficult to ascertain or even describe to your business. colleagues  Activity that on its face seems perfectly legitimate can, when combined with other actions (and clever plaintiffs’ lawyers), be made to look like something sinister.  And don’t think for a minute that customers or competitors will hesitate to take action if they think the cost-benefit analysis adds up for them,e.g., can I obtain by litigation what I cannot obtain by contract negotiation?  With this in mind, here are a few things in-house counsel should consider doing once your company’s market share crosses over 50%:

  • Don’t define markets.  Be very watchful over documents and emails prepared by your business colleagues that purport to define the market for your products or services.  Such self-definition can be used against your company if it tries to define the market differently (more broadly) during litigation or investigation.  Get your people used to writing about the “marketplace” or a “channel/segment” of a bigger market.  The bigger the market, the less likely it is you can be found to be a monopolist.
  • Cool the testosterone.  Sure, it’s really fun for the business folks to thump their chests and write about how the company will destroy its competitors, or crush the competition, or jam price increase down customers’ throats, and so on and so on.  You’ve all seen it.  Well, guess what becomes Exhibit 1 at trial when your company is in the cross-hairs of a Section 2 claim?  Yep, all those testosterone-laden emails and documents.  All used to show how “badly” your company behaves, especially when combined with other actions as part of the plaintiff’s monopoly stew served up to a jury near you.  If you do nothing else after reading this post, teach your people how to write smart.
  • Business justification.  Your best friend when challenged with Section 2 claims is a valid business justification for the behavior.  Listen closely when the business describes what it wants to do and why.  Teach the business to focus on the business reasons and drop language that may falsely allude to other motives, especially motives that can be construed as “anticompetitive.”  Remind the business to act professionally at all times, especially when writing.
  • Get good anti-trust counsel.  Like insurance, you may never need it but you should have already identified some antitrust lawyers you can turn to for advice.  For example, your business team may be thinking about entering into an exclusive dealing relationship with a customer.  If your company has over 50% of the market, it’s probably worth an hour of time with antitrust counsel to make sure it is set up properly or if it’s something you should avoid.
  • Keep your ears open.  Constantly look for any indications that a customer, competitor, or the government may be contemplating some type of anti-trust action against your company.  The rumor mill is your friend here.  Likewise, teach the business to forward to you immediately any email or correspondence where the other side is suggesting that you are acting anticompetitively.  At a minimum, you’ll want to respond with the correct statement of the facts.  Finally, stay on top of what’s going on in your company.  It’s rare that someone intentionally seeks to trip anti-trust laws, but it is all to frequent that business people (especially those less experienced) think and act on impulses designed to injure competitors.  If those actions are exclusionary or predatory, you have a problem.  So, always be on the look-out for proposals for the company to act “badly.”

10.  Resources.  I can only scratch the surface here regarding Section 2 issues.  If you are interested in learning more, here are some very useful resources to keep handy:

*****

There’s a lot to focus on above, so here’s the key:  If your company has over 50% market share in the US (or elsewhere) as in-house counsel you need to start educating the business about the heightened scrutiny the company will likely receive and how business practices that were perfectly acceptable before now require more thought.  You need to provide training to the business leaders on the scope of single-conduct Sherman Act Section 2 offenses (vs. only Section 1 training), on writing smart, and on ensuring that legitimate business justifications drive decisions.  While it may not make you popular, you can impress upon them that the huge cost and time suck that comes with an antitrust lawsuit or investigation dwarfs the time spent learning the rules of the road.  Finally, be vigilant and keep your eyes and ears open to what your business colleagues are doing.  It’s much easier to stop something early than it is to try to fix it when it’s too late.

Sterling Miller

May 15, 2018

Ten Things You Need to Know as In-House Counsel: Practical Advice and Successful Strategies is now available for sale.  Described by the American Bar Association as “The one book all in-house counsel need to own!”  Click here for details on how to order.  Perfect for your library, or as a gift to clients or members of the legal department (or your next legal offsite).

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If you find this blog useful, please click “follow” in the top right and you will get all new editions emailed to you directly.  “Ten Things” is not legal advice nor legal opinion and represents my views only.  It is intended to provide practical tips and references to the busy in-house practitioner and other readers. If you have questions or comments, please contact me at sterling.miller@sbcglobal.net.

My first book, “The Evolution of Professional Football,” is available for sale on Amazon and at www.SterlingMillerBooks.com

[1] In countries outside of the US, this is more commonly referred to as abuse of a dominant position.

[2] For today’s purposes, I am not going to discuss the Section 2 offenses of “attempted monopolization” or “conspiracy to monopolize.”  As an in-house practitioner, my worry was heavily tilted toward good, old-fashion “monopolization.”

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