The ABCs of Antitrust Representation

Antitrust law is a highly specialized, and constantly evolving area of the law of great importance to business. Even the better than average business lawyer cannot be expected to have the depth of understanding of antitrust principles that the lawyer who practices in the area daily has. What a business can expect of its lawyer, however, is the ability to spot an antitrust problem on the horizon and know when to call for help.

This article seeks to highlight for the general practitioner broad categories of conduct that signal, at a minimum, the need to consider the possible antitrust implications of the client's actions.

Alert practitioners have recently been reminded of the obligation to report certain anticipated mergers to either the Antitrust Division of the Department of Justice (DOJ) or the Federal Trade Commission (FTC) by the spate of news articles reporting the 2000 amendments to the Hart-Scott-Rodino Antitrust Improvement Act of 1976. Effective February 1, 2001, only acquisitions involving assets and/or voting securities of greater than $50 million must be reported and the government allowed to consider the competitive implications before the deal closes. Prior to February 1, the threshold triggering government review was the considerably smaller amount of $15 million.

If the government does not like what it sees about a proposed merger, it can seek to stop the transaction or negotiate an agreement to restructure the deal. Two proposed mergers of particular concern to the Pittsburgh community illustrate what can happen when the government gets involved. On April 27, 2001, the U.S. Court of Appeals for the District of Columbia Circuit issued a preliminary injunction halting the proposed merger between H.J. Heinz Company and the Milnot Holding Corporation, maker of Beech-Nut baby foods. Together, the number two Heinz in the baby food market and the number three Beech-Nut would have controlled in excess of 30 percent of the baby food market. More importantly, only two competitors would have remained, Heinz and Gerber. Heinz announced its intention to abandon the deal after the decision.

In the meantime, the Department of Justice has extended yet again its deadline for announcing its decision on the purchase of US Airways for $11.6 billion by the nation's number one air carrier, United Airlines. In order to gain the government's approval, United is reportedly in negotiations to sell off three regional airlines now owned by US Airways to Atlantic Coast Airlines.

But it would be a mistake to think that just because a client is not of the size of a Heinz or a US Airways or involved in a merger triggering government review that the antitrust laws have no application to the conduct of the business. While it is true that the Sherman Act's prohibition against monopolization or attempted monopolization, 15 U.S.C. § 1, is unlikely to threaten any business which does not enjoy a significant share of the market in which it competes, that part of the law which forbids "contracts, combinations, or conspiracies" that unreasonably restrain trade, 15 U.S.C. § 2, could trap any business unaware of its reach.

Generally speaking, acts by two or more businesses acting together are more likely to run afoul of the antitrust laws than the acts of a single business. Of course, businesses act together all the time without raising the specter of possible antitrust liability, but some agreements among businesses are more problematic than others and should raise a red flag signalling the need for closer analysis in counsel's mind. For example, agreements among competitors (horizontal agreements) will generally require closer scrutiny than agreements among businesses at different levels of the supply chain (vertical agreements).

Even most agreements among competitors are perfectly legal, but some kinds are particularly dangerous. Anytime an agreement among competitors concerns price, it should be subject to close scrutiny by someone knowledgeable in antitrust law. Similarly, agreements that divide up customers or markets among competitors should get counsel's attention. Another kind of agreement among competitors that always deserves a second look is an agreement to refuse to do business with another competitor, or a business that trades with a competitor, or that in some other way is likely to compel another to refuse to do business with the competitor.

Two other kinds of agreements that do not fall within the category of horizontal agreements among competitors but that nonetheless, under some conditions, will be forbidden by the antitrust laws are agreements that require a purchaser to buy a product it does not want in order to get a product it does want (a tying" arrangement) and agreements between suppliers and their distributors setting minimum resale prices.

Each of these kinds of agreements—agreements among competitors fixing prices or dividing customers or markets (including bid rigging), group boycotts, tying, and minimum resale price maintenance—under the right circumstances, are per se violations of the antitrust laws. That means that they cannot be justified by pointing to the benefits for competition and the consumer, as most business agreements, even those among competitors, can be. If the client has engaged in conduct that falls within one of these categories of agreements, it is very likely to be in trouble with the antitrust laws.

Counsel also should keep in mind that agreements like these do not need to be expressed in order to be actionable, but may be inferred. Sometimes meetings among competitors—for example, within the context of a trade association—followed by parallel actions can lead to the inference of an agreement. Anytime competitors are going to get in the same room to talk, even at a meeting of a trade association, counsel should be consulted. Similarly, anytime a business is sharing competitively sensitive information with competitors, it should be on the phone to its lawyer first.

Agreements among competitors that do not fall within any of the forbidden categories are judged by the antitrust laws under what is called "the rule of reason." These agreements not only can, but often are justified by benefits to competition and the consumer. The DOJ and FTC have jointly issued Guidelines for Collaborations Among Competitors which provide guidance to the practitioner on how the government will judge such agreements. Their analysis attempts to compare the state of competition before and after the agreement they are scrutinizing. The central question is whether the agreement is likely to harm competition by increasing the competitors' ability to raise price or reduce output, quality, service, or innovation below what would likely prevail in the absence of the agreement.

Factors relevant to analyzing any agreement among competitors are: (1) whether the agreement allows the parties to continue to compete against each other and their collaborative venture; (2) whether the agreement requires the participants to contribute assets that previously allowed them to effectively compete or would enable them to be effective competitors in the future; (3) whether the extent of the participants' financial interests in the collaboration affects their incentive to continue to compete; (4) whether the manner in which the collaboration is organized and governed enables them to continue to compete; (5) whether the collaboration is likely to facilitate anticompetitive information sharing; and (6) the duration of the collaboration, with shorter generally considered better than longer.

The goal of the analysis is to weigh the procompetitive benefits of a proposed collaboration against the harm it will do to competition and determine which weighs heavier in the scale. Obviously, this is not an easy exercise, but one any practitioner advising a business client seeking to enter an agreement with competitors must undertake.

Clearly, competitors and collaborations which control a significant portion of a market are more likely to be challenged than those involving only a few small players. Absent extraordinary circumstances, the government will not challenge any agreement that produces a collaboration that together with the market shares of the participants does not add up to 20 percent of the market.

For agreements among competitors that do not represent significant shares of a market, the only danger is stumbling into one that is per se illegal.

Note: The Antitrust Guidelines for Collaborations Among Competitors, together with other antitrust guidelines on horizontal mergers, health care, the licensing of intellectual property, and international operations, can all be accessed on the web page of the enforcement agencies, at either www.ftc.gov or www.usdoj.gov.