PURPOSE OF THE
The United States’ basic economic
philosophy has always been its’ faith in free competition. The purpose of
the antitrust laws is to preserve and promote free competition. The
antitrust statutes were not enacted at one time but emerged over the years
as the need for new laws or changes were recognized.
The statutes use general language rather
than precise definitions of the exact kind of conduct which would violate
the law. Because the antitrust language is so broad, the courts and the
Federal Trade Commission have enjoyed wide discretion in interpreting and
applying the law. Although desirable in a changing society, this flexibility
has at times made it difficult for business to know whether certain
practices violate the law. Many
companies in the United States today are subsidiaries of foreign
corporations whose countries do not have anti-trust legislation. Regardless,
these companies who have facilities and employees in the U.S. are subject to
U.S. antitrust laws.
THE FOUR BASIC U.S.
- Sherman Act — passed in
1890 it is the most important of the antitrust laws. The Act prohibits every
contract, combination or conspiracy between two or more companies which
imposes an unreasonable restraint on trade or commerce. It also prohibits
any monopoly, any attempted monopoly, or any agreement or conspiracy to
monopolize any market for a particular product or service. Over the years, these broad principles have been applied by the
courts to make certain commercial conduct unlawful. The "per se"
rule makes certain practices irrefutably unreasonable, and thus illegal.
Among these practices are agreements to fix certain prices, to divide
markets among competitors, to impose certain group boycotts or to allocate
- Clayton Act
— passed in 1914, the Clayton Act addresses specific practices where the
effect may be to substantially lessen competition or tend to create a
monopoly. The Act's coverage includes tying arrangements, exclusive dealing
arrangements, mergers and acquisitions and inter-related boards of
Robinson-Patman Act —
Enacted in 1936, the Robinson-Patman Act principally deals with
discrimination in prices charged to competing purchasers for products of
like grade and quality. Its purpose is to protect smaller businesses by
limiting the large company's ability to command discriminatory discounts
through its purchasing power.
Federal Trade Commission Act — this law in effect authorizes the Federal Trade Commission to
enforce the other three antitrust laws. The Act prohibits "unfair
methods of competition" and "deceptive practices." Conduct
which does not violate the other federal antitrust laws may nevertheless be
unlawful under the FTC Act. The law is designed to stop anti-competitive
practices in their beginning stages.
applicable, each statute requires some involvement in interstate commerce.
However, even wholly intrastate activity has been ruled to affect interstate
commerce. This standard is often met in a commercial transaction appearing
to be wholly intrastate.
every state has enacted antitrust laws which complement the federal
statutes, and which must be observed when applicable to business activities.
Penalties for violation of the antitrust
laws can be severe. Violation of the Sherman Act is a felony. A criminal
indictment may be instituted by the Justice Department, with corporate
exposure to substantial monetary fines. Individual employees, officers or
directors of the company who authorize or participate in the violation face
felony conviction, imprisonment and substantial monetary fines as well.
Also civil damages may be recovered by
private parties under the Clayton Act. The provisions permit any person
whose business has been injured by an antitrust violation to recover triple
damages plus costs of suit including attorney's fees. Additionally, the
attorney general in each state may file a triple-damage class action on
behalf of all consumers in the state for an antitrust law violation.
Enforcement may also be accomplished by a
court-ordered injunction or by an FTC cease-and-desist order. Civil
penalties may be assessed for violation of court injunctions or
court-approved FTC orders.
PRACTICES WITH YOUR COMPETITORS
- Price Fixing
Perhaps the most widely publicized violation of the Sherman Act is price
fixing between competitors. Agreements between competitors to fix, raise,
lower, stabilize or peg prices, or establish a range of prices, a minimum
price, a maximum price, or a common pricing system are unlawful.
between competitors which affect price have also been held unlawful. Thus an
agreement among competitors to purchase certain amounts of limited products
was unlawful as it decreased market supply and increased price. Similarly,
competitors who agreed to set production levels in order to limit supply
(and thus increase price) acted improperly. Competitors must also avoid
agreements as to the kind or amount of materials to be used in their
products, or the product's formula or design. The price fixing prohibition
also extends to the terms and conditions of sale. Competitors may not agree
as to trade credit terms for its customers, or agree to eliminate
interest-free trade credit. Agreements as to discounts, service charges,
restocking charges, delivery charges and terms, product warranties, rebates,
taxes and the like are unlawful.
It is unlawful
for competitors to agree to follow an open pricing policy where each
promises to adhere without deviation to the prices and terms as announced,
even though each competitor made an independent decision on what the price
for his product should be.
- Allocation of Customers and Territories
Competitors may not agree to allocate specific customers or classes of
customers, or geographic territories among themselves. Sharing the market
may consist of allocating fixed percentages of available business to each
competitor, dividing sales territories on a geographic basis, allotting
customers to each seller or setting volume quotas as to customers or
territories. Market sharing can also result from a competitor's agreement on
bidding practices, or refraining from bidding.
competitors may not sell through a common sales agent where the agent
designates for each competitor the price for his product, production levels,
customers or territories.
- Group Boycott
A group boycott, or concerted refusal to deal with other traders, is
unlawful. Under such an arrangement, competitors agree to refuse to sell to
particular customers or buy from particular suppliers. Thus competitors may
not jointly refuse to sell to price-cutters, or to bad credit risks, or even
to unethical customers.
It is unlawful
for trade association members to agree only to buy from, or sell to,
companies that are also association members. A company may not agree to deal
with a customer only on the condition that such customer refrains from
buying from the company's competitors where there may be a substantial
adverse effect on competition.
The refusal to
deal need not be total. Thus, competitors may not agree that they will deal
with a company only at a discriminatory price or on unfavorable terms which
are not imposed on other companies. Similarly, competitors may not
collectively refuse to buy, sell, install or service products which do not
meet a standard or are not "approved" or "certified" or
Even where there
is no agreement among competitors, a single company that refuses to deal
with another may nevertheless encounter antitrust problems. For example, it
was unlawful for a newspaper to refuse to accept advertising from retailers
who also advertised via a competing radio station. Here the newspaper had
attempted to monopolize the local advertising market by forcing advertisers
to boycott the competing radio station.
- Exchanging Information with Competitors
It is important to avoid the exchange of sensitive business information with
competitors without guidance from legal counsel. The exchange of price lists
or prices charged to customers may violate Section 1 of the Sherman Act even
though there is no agreement to fix prices, due to the natural tendency that
such conduct will produce uniform or stabilized prices in the industry. Of
course, you must obtain this information from some source in order to
compete. But you should be able to show that you did not obtain it directly
from your competitor and that you did not make your lists available to
exchange of credit information on customers among competitors is a
particularly sensitive activity and should be done only under strict
supervision by legal counsel to avoid even the appearance of agreements in
restraint of trade.
- Trade Associations
The functions performed by a trade association for the benefit of its
members and their industry are numerous and diverse. Special care must be
taken when participating in the activities of trade associations or similar
groups where competitors do come together and meet. Experienced legal
counsel is needed to monitor association meetings, programs and activities
to avoid those areas which involve potential antitrust implications.
- Discussion Topics to Avoid
An unlawful agreement among competitors is often alleged, and sometimes
proved, merely by innocent conversations or sharing information with a
competitor. This is circumstantial evidence that an unlawful understanding
was reached. In order to avoid even the appearance of improper concerted
action, you should avoid discussing the following with any competitor:
Prices, pricing procedures,
changes in or stabilization of prices, terms or conditions of sale
Pricing practices of any
Forecasts of price increases
specific company's credit terms, discounts, rebates, freight allowances,
profits, profit margins or costs, market shares or sales territories
Selection, rejection or
termination of one or your suppliers or customers
Production levels or schedules
UNLAWFUL ACTS WITH
- Selection of Customers
Generally a company lacking monopoly power has a right, acting
independently, to choose its customers. This right is not absolute. It may
not be exercised to bring about a result prohibited by the antitrust laws.
For example, a unilateral rejection or termination of a customer who refuses
to adhere to suggested resale prices could be an unfair method of
competition prohibited under the FTC Act. Or a company refusing to do
business with firms who also deal with that company's competitors may be an
unlawful attempt to monopolize prohibited by the Sherman Act.
- Non-price Resale Restrictions
Are non-price resale restrictions agreed to by a company and its customer
lawful? This question can only be answered on a case-by-case basis by
applying the "rule of reason." Under this rule, all the
circumstances in a particular case must be weighed to determine whether the
agreed to non-price restrictions impose an unreasonable restraint on
competition. Examples of
non-price resale restrictions between a company and its customer include: a
requirement that a customer resell the company's products only to approved
or designated persons; a requirement that a customer resell the company's
products only to persons in a designated geographic territory; a requirement
that a customer sell the company's product only from designated stores or
locations. These restrictions should be reviewed in advance by company
counsel as they may be improper.
- Resale Price Maintenance
In almost all cases it is unlawful for a company and one or more of its
customers to agree as to the prices the customer will charge upon resale of
the company's products. However, the legality of maximum resale price
agreements between a vendor and its customer is determined under the
"rule of reason" test. In very limited circumstances where a
"true" consignment of goods takes place, the company consigning
the goods may specify the resale price to be charged by the consignee but
here great caution must be exercised.
It is said that
a company is generally free to announce in advance that it will unilaterally
refuse to deal with any customer who fails to adhere to suggested resale
prices. Here again great caution must be exercised. This rule has been
severely restricted by the courts, and such a unilateral refusal to deal
could violate the antitrust prohibitions against attempts to monopolize or
unfair methods of competition.
- Price Discrimination
The Robinson-Patman Act requires a seller to treat all competing purchasers
equally without discrimination in price. The main provision prohibits a
seller from charging purchasers different prices for goods of like grade and
quality where the effect may be to injure competition. A difference in price
may injure competition for it gives the favored customer an advantage over
the disfavored customer in the resale of the product. Differences in
delivery terms, rebates, service charges and the like, and uncommon
credit terms not related to credit worthiness, are treated as differences in
There are two
principal exceptions to the rule against price discrimination. The
"meeting competition" defense permits the seller to charge a lower
price to one customer if done in good faith in order to meet (but not beat)
an equally low price offered to that customer by one of the seller's
competitors. The seller should
carefully document the competitor's low price before relying on this defense.
Second is the
"cost justification" defense. This defense is extremely difficult
to prove, may involve complex cost accounting and economic theories and
should only be relied on when documented in advance.
- Services, Facilities and Promotional Allowances
A company which furnishes services, facilities or promotional allowances in
connection with the sale of its product intended for resale must make such
services available on proportionately equal terms to all competing
- Exclusive Dealing Arrangements
A company sometimes may enter into a "requirements contract" with
a customer. This commits the contracting buyer to take all or most of its
requirements for a product from the contracting seller. Such exclusive
dealing arrangements are unlawful if the effect may be to substantially
lessen competition or tend to create a monopoly in any line of commerce by
foreclosing other sellers from doing business with the contracting buyer.
Such arrangements require great caution and the prior review of counsel.
- Tying Arrangements
Another customer arrangement which is generally unlawful is the forcing of a
tying arrangement. Here a company conditions the sale of a product or
service on the customer's agreement to also purchase a different
("tied") product or service from the company, or alternatively
refrain from buying it from anyone other than the company.
There are a
number of legal qualifications which modify the general prohibition against
tying arrangements. There are circumstances where a company may properly
sell its product or service in combination. These should be undertaken only
with advance review by counsel.
variation is the reciprocal dealing arrangement, where Company A agrees to
buy Company B's products if Company B buys other products from Company A.
While mere cross-dealings are not unlawful, the use of coercion or market
power to obtain reciprocal sales must be avoided.
ADVERTISING AND PROMOTION
in advertising, sales literature or in sales presentations must be free from
deception to avoid violating the FTC Act. A statement is
"deceptive" if, when considered, as a whole it tends to deceive
the average purchaser. Deception may also occur where certain disclosures
are not made about the product - for example: product changes, composition,
dangers in use, foreign origin of the product, imperfections, and the used
or rebuilt character of the product.
for representations made about a product must be obtained before making
claims to the purchaser. The seller's lack of knowledge that a claim is
false or deceptive will not stop FTC's enforcement of the law.
Dealings with Competitors
Don't agree on and avoid discussing the following topics with any
pricing procedures, changes in or stabilization of prices, terms or
conditions of sale
practices of any industry member
of price increases or decreases
credit terms, discounts, rebates, freight allowances, profits, profit
margins or costs, market shares or sales territories
rejection or termination of one of your suppliers or customers
levels or schedules
or intent to bid or not to bid on a contract
If you are a member of a trade association or similar group, be sure
competent legal counsel monitors the association meetings, programs and
Don't exchange price information (or other sensitive business
information) with competitors without guidance from company counsel. Be able
to show that you obtained information on a competitor's prices from some
source other than the competitor.
Don't agree with any competitor to refuse to sell to certain
customers, or to buy from certain suppliers.
Dealing with Customers
Don't agree with a customer as to the resale price the customer will
charge for your product. Maximum resale price agreements should be reviewed
in advance by company counsel.
Don't agree with a customer as to the persons or markets or
territories where he may resell your product without prior approval of your
Don't discuss your dealings with a customer with any other customer.
Prices, terms of payment, delivery and other conditions of sale of a
product or service must generally be the same for competing purchasers. Any
deviation from a uniform policy should be reviewed in advance by company
A company which furnishes services, facilities or promotional
allowances must make these available to all competing customers on
proportionally equal terms.
10. Avoid requirements contracts, reciprocal dealing agreements and tying
arrangements unless approved by company counsel.
11. Be certain that termination of suppliers or customers is for
justifiable and documented business reasons and in compliance with
applicable state law.
12. Be sure advertising claims are documented in advance.
decisions involving prices, terms and conditions of sale, contacts with
suppliers and customers, advertising and numerous other business activities
frequently have implications under the antitrust laws. These laws are
intricate and inadvertent violations can occur and result in substantial
penalties. Thus it is essential to be aware of the scope of the antitrust
laws and guard against possible violations.
I wish you well!
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or