Ten Things: Sherman Act Section 1 – The Monopoly Man Cometh (Again) … and He’s Not Alone!

Antitrust law and Big Tech is hot right now.  BTS/Blackpink K-Pop hot.  Here in the USA at least, where the Department of Justice is on the verge of suing Google for (alleged) competition law violations, the DOJ and the FTC are waist-deep into investigating Big Tech generally, and a panel of the House of Representatives just issued a report calling for the break-up of Big Tech.  In Europe, regulators are looking at specific laws to dampen the influence of Big Tech by limiting certain tactics – and where Amazon is about to take its turn in the dock. Most of the behavior in question is what is known as single-firm conduct, i.e., companies acting alone but in ways that draw scrutiny from competition regulators and private litigants.  I wrote about this a while back in a post titled “Sherman Act Section 2 – The Monopoly Man Cometh.”  Clever title aside,[1] it is a fairly detailed look into single-firm conduct and where problems typically arise.  But, these investigations are also looking at Big Tech contracts and agreements.  So, now is a good time to take a look at Section 1 of the Sherman Act, i.e., agreements between one or more parties that may violate antitrust law.[2]  As you will see, it can be just as murky and confusing as Section 2 (and that’s saying something).  Unlike Section 2, however, it is typically easier to counsel the business on how to stay out of trouble when it comes to improper agreements vs. single-firm conduct.  And, no matter where you practice, most of the concepts below apply as competition law globally is similar when it comes to this issue.  This edition of “Ten Things” provides an overview of Section 1 and lays out some things you should be counseling your business colleagues on to help them avoid tripping up on anticompetitive agreements:

1.  What is Section 1?  You have to give Congress credit for brevity here.  Section 1 states, in its entirety:

“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”

If read literally, Section 1 would prohibit every commercial contract because all contracts cause some restraint on trade.  Fortunately, courts do not and have not read Section 1 literally (sorry to disappoint the strict constructionists out there).  Instead, courts have found that Section 1 only prohibits “unreasonable” restraints of trade – a word that appears nowhere in the statute.  For the most part, understanding Section 1 requires you to understand what types of agreements provide for or create unreasonable restraints.  In some cases, this is easy to do but in many cases, it is a game of “who the &$!# knows?”  The courts also interpret Section 1 to require “concerted” action between two different actors – not a “single firm” acting alone.  This is why companies can agree to pretty much anything with their subsidiaries (100% owned or majority-controlled) and closely affiliated companies (i.e., companies under common control).[3]

2.  Why do I need to be afraid?  I only wish this blog could be long enough to set out all the reasons.  I’ll start with the main reason: people can be stupid.  Really stupid.  So stupid it makes you nauseous and wishing you had the superpower to make their heads explode just like on Season 2 of The Boys on Amazon Prime. But, if you watch The Boys (and you should) you realize that would be very messy and potentially illegal, even here in Texas.  The second reason to be afraid is what I have dubbed the antitrust paradox,[4] i.e., what is good for your business is bad for antitrust exposure and vice versa.  And because most rational business-people want good things to happen for their business the specter of antitrust issues is wandering the hallways – or Zoom rooms – waiting to haunt the in-house legal team.  Here’s an example: it would be great if all competitors charged the same price, so let’s just ask them to do that.  Here’s another: our business would be so much better if our competitors stayed out of each other’s home markets, so let’s just agree to do that.  And finally, if we and our competitors all agreed not to buy Product X from those bastards at Biggo Corp, we could force them to drop the price.  If you don’t know already, all of these are TERRIBLE things to do from a competition law front.  But, a race to the bottom competing on price or features or other areas is terrible for a business but perfectly acceptable and encouraged, by antitrust law.  Many business people are either not be aware, do not care, or do not understand the rules of the road and they will always continue to do dumb stuff that they think is “great for the business.”  Your job, if you choose to accept it, is to educate them and quash the stupid as best you can.  Excited?  Great.  Read on!

3.  Per Se vs. Rule of Reason.  Courts have two main standards for analyzing agreements to determine if they provide for unreasonable restraints of trade.[5]  The first is the per se standard, i.e., the type of agreement is so obviously anticompetitive that there is no further analysis needed.  If you did it, you’re in trouble and welcome to the scaffold.  I highlight the core per se violations below in Paragraph 4.  The second is the “rule of reason” whereby courts review agreements – that do not fall under a per se analysis – to determine if the benefits outweigh any competitive harm.  Under the rule of reason, courts look at the agreement and then (i) define the relevant market (product and geography), (ii) determine the market power of the defendant in that market, and (iii) look for the existence of anticompetitive effects. Assuming there are such effects, the burden then shifts to the defendant to show an objective, pro-competitive justification for the restriction/agreement. Courts look at several factors to weigh any such justification:

  • The intent and purpose in adopting the restriction.
  • The competitive position of the defendant (including market conditions before and after the restraint was imposed).
  • The structure and competitive conditions of the relevant market.
  • Any barriers to entry.
  • The defendant’s “objective” justification for the restriction.

Most antitrust cases fall under the rule of reason which, as you can probably tell by now, means an expensive and prolonged battle between the parties where every document and email is twisted to fit the narrative one side or the other wants to tell.  Which is all ungodly expensive and fraught with risk.  And yes, I know this from traumatic personal experience.

4.  What are we talking about then?  Here are some of the most problematic agreements:

Horizontal Agreements (agreements with competitors)

  • Price fixing – the king of per se violations is an agreement among competitors to fix prices.  And it does not matter if you want to lower prices.  Price fixing is bad.  Very bad.
  • Joint boycotts – another per se violation, e.g., no joining together with other competitors to agree not to do business with another business.
  • Bid Rigging – it is a per se violation to join with competitors to “rig” a bidding process.
  • Dividing customers and/or markets between competitors – don’t do this.  Per se.

 Vertical Agreements (agreements with non-competitors)

  • Tying” – a vertical agreement that can also be a per se violation in some cases is “tying” i.e., using market power for one product to require a customer to buy another one of your products or keep them from buying a competitor’s product.
  • Resale price maintenance – for example, where a manufacturer sells a product to a distributor and then tries to control the price at which the distributor can sell the product to consumers.  This was a pro se violation but now (at least as to federal antitrust law) gets a rule of reason analysis.
  • Exclusivity provisions – provisions requiring one party deal exclusively with another party can be challenged under antitrust law and are reviewed under a rule of reason analysis.
  • “Most Favored Nations” clauses – MFNs (sometimes called “parity clauses”) have recently come under attack by the DOJ and in the EU.  Under an MFN, the other party agrees that it will not pay more to another party than it does to you, or will not sell for a different price than the one charged to you.  Rule of reason applies.
  • No “poaching” agreements – over the past several years the DOJ, in particular, has waged war on agreements that prevent one company from hiring or trying to hire the employees of another.  If the restraint is ancillary to a larger agreement, then it has a good chance of survival.  If it is just a naked agreement between companies not to hire each other’s employees you may have some problems – maybe even per se problems.

Other agreements fall under the rule of reason but the above are the most common.  And you can see the antitrust paradox at work – it would be awesome if no one could hire your employees or undersell your price or deal with your competitors or customers and so forth.  But agreeing to do so, can quickly pull you into an antitrust lawsuit and that is why it’s so important to teach the business where the risks are and the potential consequences – including treble damages.  If that’s not enough, given most per se violations can also be criminal violations of antitrust law, you can usually get an executive’s attention by mentioning their opportunity to spend plenty of time busting rocks in the hot sun[6] as a guest at the Cross Bar Inn.

5.  Direct agreements.  When it comes to the rule of reason, most of the agreements in question are written out.  They are just normal commercial agreements.  That makes proving that an agreement exists pretty easy and the fight is over whether they are reasonable or not.  When it comes to per se violations, sometimes business people are dumb enough to write out agreements to fix prices, or rig bids, or divide markets.  We call these people MBAs… just kidding![7]  Writing it out does make it easy to prove an agreement but recordings, confessions, and eyewitnesses can substitute for written evidence of the agreement.  Which is why I counseled my business colleagues to always act as though they were being recorded when speaking with competitors and to never ever “joke around” when it came to antitrust issues.  And, to always take care when writing anything down that could be misconstrued as an agreement with a competitor to take any action.

6.  Indirect agreements.  Most business people are not dumb enough to write out agreements to do bad things or get caught on a recording, etc.  Antitrust law has developed ways to deal with the prospect of unwritten agreements, i.e., agreements can be proved through circumstantial evidence.  When plaintiffs go down this path, courts hold that you need more than evidence that could be equally consistent with lawful behavior – there needs to also be evidence that tends to exclude the possibility that the parties acted independently.  There needs to be something “more.” The classic example of perfectly legal “conscious parallelism” is gas stations located on four corners of an intersection.  Because they all advertise their prices on large signs, the price at each station is almost always the same – even though there is no agreement between them to all charge the same price.  Airlines and matching fares are more good examples. It’s in their own economic interests to match prices. So, to get over the evidence hurdle, a plaintiff must show the “more,” i.e., something more than simply uniform action by competitors.  These are called “plus factors” – factors that can allow the judge or jury to conclude that there was something more afoot than legal unilateral behavior, i.e., a “wink and a nod.”  The plus factors include:

  • The defendants acted contrary to their individual economic interests (e.g., took prices up when supply was heavy).
  • The defendants had meetings or conversations, i.e., opportunities to agree (which is what trade association meetings are an area of concern for in-house counsel – see below in Paragraph 8).
  • The defendants had a motive to collude (e.g., crushing a maverick competitor)
  • The defendants engaged in abrupt or unprecedented changes in behavior.
  • The industry is concentrated with few competitors (oligopolies are more prone to agreement than a marketplace with dozens of competitors).
  • The “hub and spoke” conspiracy (i.e., trying to “beat the system” by arranging that no competitors talk to each other because a middleman is serving as the hub making vertical agreements (rule of reason) with a bunch of competitor companies serving as spokes who would not otherwise so obviously and directly agree with each other).

7.  Signaling.  While “signaling” falls under the plus factors listed above I have decided to break it out separately because there will come a time when someone asks you, “Hey, can we just put what we want to do out regarding pricing this year in the press and hope our competitors are smart enough to see and silently agree?”  You need to be prepared to tell them why this is a pretty bad idea.  While not defined by statute, signaling typically involves three elements: a) a unilateral statement, b) likely to be heard by a competitor, c) that communicates something about an element of competition (e.g., price, customer terms, market division, capacity plans, etc.).  To be an agreement under Section 1, there must be an offer and then an acceptance – and this is where the battle lies.  There are many ways a company can send a unilateral message to the market, e.g., a press release, an earnings call, website posts, social media, an interview with a trade publication, and so on.  The difficulty is finding the line between announcements that are legitimate business communications vs. those that are not.  Similarly, proving “acceptance” of the offer is challenging as well.  If a competitor acts in its own legitimate economic interest it is hard to prove acceptance of the signal even if the behavior is exactly what the signal asked for.  Still, while signaling is hard to prove it is not something you want to deal with in terms of the cost and effort to defend an investigation or a lawsuit.  For more, see these excellent articles:  Sending the Wrong Message? Antitrust Liability for Signaling and Beware of Public Announcements! Recent European Competition Law Developments on Signalling.

8.  Trade associations/Joint ventures.  One common myth in the land of business people is that antitrust regulation doesn’t apply to trade associations or joint ventures.  Wrong!  Trade associations are one of the key areas of risk as they usually involve competitors joining together in a room to talk about business.  The only thing missing is cigar smoke.  But, seriously, if there is a claim of price-fixing, for example, you can go ahead and slot in any trade association meetings as a plus factor.  It doesn’t mean anything bad actually happened, but it just never looks good when competitors meet.  For more on the risks of trade associations see my Ten Things blog titled Trade Associations and Legal RiskIf your company belongs to a trade association it is critical that the employees who are involved with the association know the ground rules and that you ensure the group has experienced antitrust counsel engaged and present at all meetings.[8]  Joint ventures that involve competitors joining together are also highly problematic and draw close scrutiny from regulators.  You may need to make an HSR filing (or otherwise notify competition regulators) when creating a competitor joint ventures and there must be very good reasons why two or more competitors should be allowed to work together vs. competing.  For more on common issues arising from joint ventures, including antitrust scrutiny, see my blog post titled What In-House Lawyers Need to Know About Joint Ventures.

9.  Mergers & Acquisitions.  In-house counsel also must be wary of Section 1 during the merger and acquisition process, in particular when the target is a competitor of the acquiring company.  If you have been through this process you know the due diligence process involves the sharing of incredibly sensitive competitive data about the target.  Every due diligence list I have worked on requested information about customer contracts, financials, projections, strategy documents, employee contracts, tax returns, research and development, intellectual property, and a host of other commercially and competitively sensitive documents.  Under normal circumstances sharing this information would land the parties in jail.  Regulators understand that some due diligence is necessary, even among competitors.  The solution is generally four-fold:[9]

  • A battle between the legal teams to minimize the data provided (vs. what the acquirer wants to see).
  • Reliance on aggregated and “older” data vs. specific and forward-looking data, along with masking of customer names and redacting other sensitive data.
  • Super strict confidentiality agreements and secure data rooms.
  • A “clean team” to review the information, i.e., individuals at the acquiring company who are not involved in price setting, customer relationships, or day-to-day operations of that company. These individuals usually agree not to move into any of these competitive positions for several years which allows the information they saw to grow stale.

Section 1 continues to apply after the deal is announced but not yet approved by regulatory officials.  While the two companies can engage in integration planning they cannot act as though the deal is done, i.e., no reaching out to customers together re contract terms, combining contract forms, and so forth. This is often called “gun-jumping.”  While the agreement usually puts some limitations on the behavior of the acquired company (i.e., not to do anything “out of the normal course”), it is, and should be, for the most part, business as usual between two competitors until the deal is approved.  This is why it is critical to engage experienced deal and competition law counsel at the outset whenever the company is considering a merger or acquisition.  Likewise, always spend time with the business at the beginning teach them the rules of the road in terms of behavior during the process and about the proper creation of documents.  It only takes one mistake to send the deal down the crapper.  See, e.g., Time for a Conversation About Drafting Documents and Emails.[10]

10.  The “Big Five.”  Okay.  I realize the above is a lot of stuff to take in, especially when – if you’re like me – you never wanted anything to do with antitrust law in law school.  For most in-house counsel, your job is not to be an expert on everything, but know enough to spot risks, get help, and stop bad behavior before it becomes a huge problem.  With that in mind, here are my five rules you should commit to memory and train the business on.  If you (and the business team) can get these five right, you will eliminate a lot of – but not all of – the risk of Section 1 problems:

  • Do not discuss or exchange emails or other documents on prices, customers, markets, marketing, bidding, boycotts, future products and plans, or any other competitively sensitive area with competitors.
  • Do not agree to meet, talk with, “signal,” or enter into any type of agreement with competitors, written or oral, without first checking with the legal department.  Don’t try to use a “middleman” to get around the rules.
  • Don’t write stupid [stuff]. When writing emails and company documents, stick to the facts (minimize the adverbs, adjectives, opinions, “testosterone,” and speculation)[11] and stick to your lane (i.e., what you know).  All substantive merger/acquisition-related documents must be reviewed by counsel while still drafts.
  • If you are at a meeting or on the phone with a competitor, for some valid reason, act like it is being recorded.  And if a competitor raises an improper topic, get up and leave (or hang up) and report the incident to the legal department immediately.
  • Check with legal before agreeing or insisting on any type of exclusive dealing or parity/MFN clause in a contract.

*****

I know this feels a bit “all over the map.”  Given the complexity of antitrust law, it is difficult to distill things down in a way that – hopefully – makes sense and is useful, especially to those who don’t wallow in the world of Section 1 and Section 2 (plus I am no expert on the Sherman Act, so there’s that).  If you work outside the USA, the rules are likely similar but it’s worth digging deeper into the specifics of your jurisdiction – but the above will get you started (and some other good quick resources are Practical Law and Getting the Deal Through).  Finally, get yourself associated with good antitrust counsel who understands your business and who you can call with questions (it’s worth the cost of the hour of time).  That’s all for now.  And if the Monopoly Man knocks – don’t answer!

Sterling Miller

October 18, 2020

Ten (More) Things You Need to Know as In-House Counsel – Practical Advice and Successful Strategies Volume 2 is out.  It’s my second book based on this blog series.  As the ABA says, “All in-house lawyers need to own this book!” The ABA is smart.  Click here to buy it.

I have published three other books: Ten Things You Need to Know as In-House Counsel – Practical Advice and Successful Strategies, The Evolution of Professional Football, and The Slow-Cooker Savant.  I am also available for speaking engagements, coaching, training, and consulting.

Connect with me on Twitter @10ThingsLegal and LinkedIn where I post articles and stories of interest to in-house counsel frequently.  

“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.

*****

[1] Seriously.  I got zero love for the title which I think is an all-time classic riff on The Iceman Cometh, Eugene O’Neill’s seminal play on the human need for self-deception.  Or maybe I’m just delusional?

[2] In the EU, Section 1 is basically the same as Article 81.

[3] See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984) for more on this exciting topic and the boatload of exceptions that frequently (or randomly) apply.

[4] My sincere apologies to the late Judge Robert Bork whose book The Antitrust Paradox (1993) redefined antitrust law.  This is not that paradox.

[5] There is a third, called the “quick look test” which is a hybrid of the two.  But, this is all unwieldy enough that I think just focusing on the Big Two is fair.

[6] If you know the song reference, let me know.

[7] Kind of.

[8] Even so, it’s the side meetings, drinks at the bar, and dinners where counsel is not present that can really cause you problems.  This is where your compliance training program comes into play.

[9] For a more detailed overview, see Practical Pointers for Pre-Merger Information Exchange in Transactions Between Competitors.

[10] But do it correctly.  While I admire a lot of the Google program to teach employees to “write smart” if some of the accusations in a recent New York Times article are accurate, overuse of “privilege” designations or the entire program looking like a way to cover-up bad behavior will likely come back to bite them.

[11] See the excellent article Practice Pointer: Words Matter.

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