Antitrust Attack! Antitrust Law for Trade Associations

June 7, 2012

A successful antitrust suit is like a shark attack: hardly anyone has been attacked by a shark, but almost everyone is afraid of it. And for good reason. Much like a shark attack, a successful antitrust suit can be catastrophic for its victims. Defendants in antitrust suits may be liable for millions of dollars in civil forfeitures, triple damages to individual plaintiffs, enormous attorney’s fees and even criminal sanctions. Those are bites that few businesses can withstand.

Trade associations are particularly vulnerable to antitrust suits. As the former Department of Justice Antitrust Division chief said “The members of a trade association, singly and as a group, are sitting on an antitrust powder keg.” Why? Simply put, trade associations are a group of competitors, together in a room, talking business. In these situations, there is the possibility that a lawful trade association meeting can cross the line into an antitrust violation.

The Basics of Antitrust Law

The antitrust laws prohibit anti-competitive behavior, regulate unfair business practices, and encourage competition in the marketplace.These laws are designed to protect both competitors and consumers from those that attempt to control a market through predatory pricing, bid rigging and monopolization. The central antitrust statute, the Sherman Antitrust Act, prohibits: (1) a contract, combination or conspiracy between independent actors; (2) with an anti-competitive purpose or effect; (3) that causes an antitrust injury. Let’s look at how these elements work in practice.

The first element – a contract, combination, or conspiracy between independent actors – is very broad. An antitrust agreement does not have to be explicit or in writing. A knowing nod of the head or wink will suffice to create an antitrust agreement. Why is this first element so wide open? Because people that really mean to break the law or create an antitrust arrangement rarely do so in writing.

The second element is that an agreement’s purpose or effect is to hurt competition. A bid-rigging agreement, for example, is a clear example of an agreement meant to hurt competition. On the other hand, an exclusive dealing agreement between a single supplier and two dealers may effectively prevent new competitors from entering the market. This otherwise neutral agreement may have the effect of hurting competition.

The third element is an antitrust injury. Antitrust injury does not simply mean that someone lost money. Instead, the injury must result from a reduction in competition caused by the antitrust agreement. What does “antitrust injury” look like in practice? Imagine that a group of competitors made an agreement to force another competitor out of the market. If that group was successful, there would be one less competitor in the marketplace. This is a clear antitrust injury.

Now consider an example of an injury to a competitor, but not an antitrust injury. Imagine a city that has ten bowling alleys. Eight of those bowling alleys are failing and are close to shutting down. An outside corporation inserts capital and equipment into the eight failing bowling alleys. Over time, customers leave the two strong bowling alleys and return to the eight propped-up bowling alleys. The owners of the two remaining bowling alleys cry “Antitrust violation! The outside corporation owns 80% of the market! We have been injured by the loss of business!” At first glance, this injury may look like an antitrust injury. But this loss of business is not an antitrust injury. Although their losses were a direct result of the corporation’s gain of market power, the losses were actually caused by an increase in competition, not a decrease.

Successful antitrust claims are rare. It is not an antitrust violation to be the biggest, most efficient competitor in the market. It is not an antitrust violation to join together in a trade association to better market competing products at a trade show. It is, however, an antitrust violation to band together to bully new competitors from entering the market. That action both hurts new competitors and reduces competition.

Common Antitrust Activities  

Price fixing between competitors. Price fixing is the textbook example of antitrust behavior. If the owners of the two largest supply companies talk at a meeting or on the golf course and agree to raise prices, it would likely be an antitrust violation. It would be an agreement between two independent actors with an anti-competitive purpose. The antitrust injury would be the decrease in competition: consumers have one less meaningful choice in terms of price. Agreements to fix prices, warranty terms, return policies, or any other price- related term of tradeare almost always considered antitrust violations.

There is a big difference, however, between price-fixing agreements and a company’s rational decision to match a competitor’s prices. In the second situation, there is no agreement or conspiracy to affect prices. Instead, companies are acting rationally and independently. That is the behavior that antitrust laws are designed to promote.

Bid rigging between competitors. Bid rigging is another easy example of antitrust behavior. When companies put out requests for bids, they expect competitive bids to ensure that they get a good product at the lowest possible price. If competitors secretly agree to allocate projects between them to undermine the bidding process, then the result is less competition and bids that are not as low as they should be. The loser in this situation is the consumer.

Boycotts. Boycotts are an agreement between competitors not to do business with another competitor, supplier, or customer. Boycotts pose difficult antitrust problems. It can be difficult to distinguish between an actual boycott and individual business decisions not to work with another company. The line between an agreement to push someone out of business and individual decisions to avoid working with a subpar company can be blurry at times.

Common Trade Association Activities and Antitrust Violations

The antitrust laws recognize that trade associations must be able to establish and enforce reasonable membership rules in order to function; however, these rules can lead to antitrust allegations.

Admitting new members. Almost all trade associations have certain criteria for admitting new members. Courts understand that trade associations need to restrict membership to businesses that actually work in the trade. It is not an antitrust violation for a local home builder association to prohibit a restaurant from membership. Likewise, restricting membership to a specific geographic area is also acceptable. In short, legitimate criteria for admitting new members into trade associations are acceptable under antitrust laws.

Best Practices:

  • Draft objective and reasonable association rules and criteria for admission of new members.
  • Do not exclude otherwise qualified competitors from membership; this may cross the line into a boycott.

Terminating memberships. Just as trade associations need to control who joins their group, they need to be able to terminate memberships when members do not play by the rules. Again, objective membership rules and fair enforcement of these rules do not violate antitrust laws.

Best Practices:

  • Draft objective and reasonable association rules and enforce them fairly; do not favor certain members over others
  • Never terminate a member business because they are a cost-cutter or otherwise aggressive competitor as this may cross the line into a boycott or price fixing.

Meetings. Trade associations are attractive targets for antitrust plaintiffs because they represent a group of competitors that meet to talk business. There is a risk in every meeting that business-talk will stray into antitrust-talk.

Trade association members have to be leery of creating an inference of an antitrust agreement through their discussions. Remember that the first element of an antitrust violation is an agreement between independent actors. These agreements do not need to be explicit or even intended. So statements like “Our prices are too low,” followed by head nods by everyone in attendance could be construed as an agreement to raise prices.

There is a big difference between discussing the price companies are paying for supplies and whether the member businesses should all raise their labor costs next year. The first topic is fine; the second topic may support an alleged antitrust violation. Members should avoid discussing their individual marketing plans. Members should avoid grousing about how certain competitors are cutting prices and then ask “Isn’t there something we can do about this?” And if anyone in your discussion does want to discuss how to fix those “rotten, price-cutting” competitors, you should immediately leave the room. Better yet, knock over your drink, stick your fingers in your ears, and run out of the room so that everyone knows that you are leaving.

These suggestions do not mean that you should avoid trade associations meetings for fear of an antitrust suit. Members can still discuss business, supplier prices, membership issues, joint marketing efforts, and upcoming events. Just make sure that the conversation does not stray into plots to take down another competitor.

Best Practices:

  • Be aware of antitrust topics and activities. When the conversation strays into those off-limit topics, make other members aware and pull the discussion back on track.
  • Do not talk with other members about your business’s current or future prices or marketing efforts.
  • Remember, if you cannot legally agree to do it, don’t discuss it in a meeting!

Trade shows. Trade shows are the trade association’s opportunity to show off their members and their products. Participating in these joint marketing efforts is a benefit of membership. As such, local trade associations are not required to allow non-members to participate in these events. The exclusion of competitive non-members is only an antitrust violation if access to these trade shows necessary to compete in a market and there are no other marketing alternatives. This is generally not a problem for most trade association as non-members can put on their own trade shows.

Likewise, trade associations generally charge non-members higher fees than members for participating in associating events because members generally cover part of the event fees in their membership dues. There is no requirement that members subsidize or give a free ride to non-members. Few courts have dealt with this issue, but the best approach is to have reasonable and cost-based charges for non-member participation.

Best Practices:

  • Adopt and enforce fair and objective rules and procedures for admittance into trade shows. Non-members may usually be excluded from admittance.
  • If non-members are admitted to trade association events, be sure to charge non-members a reasonable and cost-based event fee.

Conclusion

A successful antitrust suit, like a shark attack, is rare. The three antitrust elements are difficult to prove and courts seem reluctant to find an antitrust violation except in the most glaring examples. But just like dangling your feet in shark-infested waters, there are certain activities that make an antitrust suit much more likely. Using unfair business practices, attempting to drive competitors out of the market, and fixing prices all may lead to an antitrust attack. Trade association and its members need to keep on the look-out for these activities and recognize the shark fin before it’s too late.

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For more information about "Antitrust Attack! Antitrust Law for Trade Associations," contact Robert C. Procter at rprocter@axley.com or 608.283.6762 or Tyler K. Wilkinson at twilkinson@axley.com or 608.283.6783.