$300 Million Criminal Antitrust Fine Underscores the Importance of Understanding U.S. Antitrust Laws

By Michael R. Bissegger       

            On October 13, 2005, the United States Department of Justice (the “DOJ”) announced that Samsung Electronics Company Ltd. (“Samsung”) had agreed to pay a $300 million fine (the 2^nd largest criminal antitrust fine in U.S. history) as part of its agreement to plead guilty to charges of participating in an international price-fixing conspiracy.[1]  The DOJ’s antitrust investigation has thus far produced charges against three companies and five individuals and total fines over $646 million.  Aside from the historical significance of the size of the fine, the DOJ’s investigation and prosecution of Samsung and others provides an important reminder to all international companies that do business in the U.S. of the importance of understanding and complying with the basic principles of U.S. antitrust laws.

            Companies must remember that free and fair competition based on the value of each firm’s products or services is the fundamental principle the U.S. antitrust laws seek to uphold.  Consequently, cooperation among competitors will generally be viewed skeptically, and is discouraged except in certain limited circumstances.  Most antitrust questions are analyzed under what is called the “Rule of Reason,” whereby all of the effects (both procompetitive and anticompetitive), are analyzed and considered.  Under the Rule of Reason, only those agreements or practices whose anticompetitive effects exceed their procompetitive benefits are declared illegal.  Although a firm’s market share (and the existence of market power) are important elements of most antitrust violations, there are certain agreements or actions among competitors that are considered so indefensible that they are always viewed by the courts as illegal per se (i.e., irrespective of any asserted procompetitive benefits or their impact on competition).

            Examples of per se illegal agreements or understandings among competitors include: (a) “price-fixing,” (b) “market allocation,” including clear limitations on quality competition or product innovation, (c) “tying” and (d) “group boycotts.”  As the recent Samsung case demonstrates, not only are actions implementing or furthering an anticompetitive agreement illegal, but the agreement itself is illegal whether or not it is implemented successfully.  A formal written contract or agreement is not needed for parties to be found to have entered into an illegal agreement.  Moreover, an agreement can be formal or informal, in writing or oral, and may even be inferred from a course of conduct. 

Agreements on Prices or Price Terms

            Price has been called the central nervous system of the U.S. economy.  Not surprisingly, agreements among competitors on price are among the most serious antitrust violations, and many are deemed illegal per se.  It is important to keep in mind that antitrust law defines price quite broadly to include not only actual prices, but pricing formulae, credit terms, discounts, as well as a number of other price-related terms.  Similarly, the antitrust laws treat agreements on output (how much of a good or service a company produces) as agreements on price because an agreement to restrict output has the effect of raising price and therefore, has the same economic effect as an agreement on price itself.  Price-fixing may also include agreements among competitors regarding costs, such as employee compensation or significant inputs to the competitors’ products.  Consequently, the term “price-fixing” may be applied to a number of different situations.  In general, agreement among competitors on any term that directly affects the amount, method, or fact of payment (e.g., whether certain products or services are included in the price or priced separately), could be considered a price-fixing agreement.

Agreements on Customers, Territories, Quality or Product Lines

            It is illegal for competitors (or potential competitors) to agree not to compete with each other, either generally or in specific ways.  Agreements among competitors regarding the geographic areas in which each will or will not sell (or buy), the types of customers each will pursue or target, or the kinds of products and services each will sell are so likely to restrain competition unnecessarily that such agreements will generally be condemned as per se illegal.  Market allocation agreements are illegal even if the parties involved are not currently competitors, and the effect of the market allocation agreement is to prevent the parties from competing in the future.  The prohibition on market allocation or market division agreements does not mean that it is illegal for two competing companies, or potentially competing companies, not to compete in a given market, as long as the lack of competition is not the result of an agreement between the competing companies.  Moreover, the existence of exclusive buyer-seller relationships are not likely to be considered the result of a market allocation agreement if such relationships are the product of a legitimate agreement between an individual buyer and seller, as opposed to an agreement among competing sellers or competing buyers.

Tying Agreements

 

            Tying agreements are agreements to buy a 2^nd product or service as a precondition of sale of a product or service over which the seller has market power.  Tying agreements are also illegal per se.  Such agreements often involve at least one party in a vertical relationship to the other parties to the agreement, such as a seller and multiple buyers.  Although it could be argued that tying agreements are not truly agreements since it usually involves a seller forcing buyers to purchase the 2^nd product, such situations usually include an agreement or understanding among competing buyers that they are all subject to the same condition.  Therefore, competing buyers become participants (albeit sometimes unwilling participants) in an anticompetitive agreement.

 

Group Boycotts

 

Group boycotts (also referred to as concerted refusals to deal) involve agreements among competitors not to do business with another company.  Boycotts can take the form of agreements not to buy from, or sell to, others.  Boycotts are per se illegal if the participants in the boycott possess market power.  As with any conspiracy-based violation, an agreement to boycott can be inferred from circumstantial evidence; e.g., conduct that does not make business sense for any party to engage in unilaterally.  Boycotts often involve a vertical relationship as well.  For example, a manufacturer may organize a boycott of one of the manufacturer’s competitors among some of the manufacturer’s distributors.  That does not mean that a series of exclusive relationships between a manufacturer and several distributors constitutes a boycott.  The key fact is whether or not each distributor knew that its competitors were also agreeing to the exclusive relationships and that the existence of exclusive relationships between the manufacturer and competing distributors was a key factor in each distributor’s decision to enter the exclusive relationship with the manufacturer.

 

Areas of Permissible Competitor Cooperation

 

            Not all cooperation among competitors, however, violates the antitrust laws.  Joint ventures and some other forms of joint conduct are often permissible and procompetitive.  Generally, a legitimate joint venture will bring new products to market or create greater efficiency in the market.  However, almost any joint venture among competitors will require agreements that restrain competition between them.  Thus, the key to determining whether or not those restraints are reasonable (i.e., legal), or unreasonable (i.e., illegal), is whether or not a given restraint on competition is reasonably necessary to achieve the procompetitive aspects of the joint venture, and reasonably tailored so as not to eliminate any more competition than is reasonably necessary to carry out the joint venture.  If a joint venture does not increase output or otherwise provide some benefit that did not exist prior to the joint venture, the venture may be viewed as a “sham.”

            In addition to joint ventures, there are other activities in which competitors may jointly engage that are not necessarily anticompetitive.  Many such activities occur in the context of trade and standard setting associations or groups.  The primary danger in trade and standard setting groups is the potential for such meetings and activities to provide opportunities to collude, or to lead to the creation of unreasonable or anticompetitive barriers to entry, particularly where standard-setting is involved.  When competitors set standards that certain other competitors cannot meet, those other competitors may effectively be excluded from certain business opportunities. Such an exclusion alone is not determinative as to the legality of the established standard, but legal counsel should be consulted to ensure that the standards can be objectively justified and that they have been established in a reasonable and objective manner.

 

            If you have any questions about application of the U.S. antitrust laws to your business and operations, please contact Mike Bissegger at (202) 861-1888 or mbissegger@ebglaw.com, or the EBG attorney with whom you customarily work.

 

 

 

 

 

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Michael R. Bissegger is a member of the firm specializing in Antitrust Law in the firm’s Washington, D.C. office.  Prior to joining EBG in 1996, Mr. Bissegger was a staff attorney in the Federal Trade Commission’s Bureau of Competition.