Legal Update

October 2006

Complying with the Antitrust Laws

One of the more common mistakes that executives and sales persons make is their unwitting violation of the antitrust laws, which foster fair and open competition.  When companies engage in unlawful anticompetitive conduct – such as when business rivals improperly collude to set prices rather than compete against one another – consumers usually pay inflated prices.  Antitrust laws thus protect the right of consumers to buy goods and services at a fair price.

Compliance with the antitrust laws is critical in today’s highly competitive business environment, especially in the aftermath of the recent wave of huge corporate scandals that have left many cynical of the motives and dealings of the largest and most highly regarded companies.  The unfortunate truth is that unlawful anticompetitive conduct has occurred in a wide range of industries, including  the electronic, chemical, vitamin, road construction, soft drink, food additive, auction house, and corrugated box and folding carton industries – to name but a few.

An antitrust violation is a serious matter.  Many companies and individuals have paid substantial criminal fines and have faced costly civil lawsuits requiring the payment of treble (triple) damages.  Many individuals have been convicted and sentenced to substantial prison terms for their violations.

Section 1 of the Sherman Antitrust Act prohibits “every contract, combination . . . or conspiracy in restraint of trade.”  The criminal penalties for a violation of Section 1 are quite steep.  A criminal violation of the Sherman Act is a felony that is punishable by up to 10 years in prison, as well as a fine of up to $1 million for individuals and up to $100 million for corporations.  A convicted corporation or individual may also be ordered to make monetary restitution.

The Most Common Antitrust Violations

The three most common antitrust violations occur on a horizontal level among competitors:  price-fixing, bid-rigging and allocation of customers or territories.

Price-fixing occurs when competitors agree to raise, fix or maintain the prices they charge for their goods or services, set a minimum price below which they will not sell, reduce or eliminate discounts, or offer the same credit terms.  While an unlawful agreement may be proved by direct testimony of a witness or a document that refers to an agreement, one may also be established by circumstantial evidence.  Indeed, to prove a violation, there need not be an express or formal agreement or words establishing an explicit agreement.  An agreement may be established by evidence of parallel pricing together with other circumstantial evidence that is inconsistent with independent pricing conduct.  Such other circumstantial evidence – which the antitrust laws call “plus factors” – may, for example, include records of telephone calls between competitors or other inter-company communications, such as at a trade association meeting, or a price move that would not be in the interest of a company but for the existence of an unlawful agreement.

Bid-rigging schemes may take various forms, but all have in common an agreement among some or all bidders to determine in advance who will submit the winning bid.  Because a bid-rigging scheme eliminates or reduces competition among bidding vendors, it increases the price at which the contract is awarded.  In bid rotation schemes, the conspiring vendors agree to take turns being the low bidder on a series of contracts awarded.  In bid suppression schemes, one or more vendors agree not to submit a bid or to withdraw a bid previously submitted so that a given vendor’s bid will be accepted.  In complementary bidding schemes, vendors submit bids that are deliberately high, giving the false appearance that the winning bid was the result of competitive bidding.

In market division or customer allocation schemes, competitors agree among themselves on specific customers or geographic territories.  For example, one vendor agrees only to sell to certain customers or in certain counties in return for another vendor’s agreement not to sell to those customers or in those counties.

Price-fixing, bid-rigging and market division or customer allocation schemes are “per se” illegal.  It is no defense that an agreed-upon price was reasonable or that an agreement on prices, customers or territories was reached to stop price-cutting.  Nor is it a defense that that the competitors just wanted their “share” of the market.

Helpful Measures for Antitrust Compliance

Companies should be proactive in order to comply with the letter and spirit of the antitrust laws and to mitigate potential criminal penalties should violations nevertheless occur.  Here are our top three “best practices”:

1.        Provide Antitrust Education and Training.  Legal counsel with substantial experience and expertise in antitrust law should conduct one or more training seminars on antitrust issues and compliance for all management and sales employees.  Such training is critical to help business professionals recognize and avoid the types of conduct that the antitrust laws prohibit and to educate them when to seek legal advice to avoid potential exposure to criminal or civil liability.

2.        Adopt a Written Antitrust Compliance Policy.  Such a policy should, among other things, make clear that a company will comply strictly with all antitrust laws, provide that it shall be the responsibility of all managers and employees to adhere to the company’s policy, and provide guidance with clear explanations and examples of do’s and don’ts for compliance.

3.        Obtain Statements of Compliance.  A company should require an annual statement of compliance from all management and all employees that acknowledges receipt of the company’s antitrust policy and affirms the individual’s strict compliance with the policy.

In sum, if companies wish to avoid costly antitrust problems, they must be diligent and proactive in their compliance efforts.

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