Spotting Antitrust Violations: A Guide To Uncover Corporate Misdeeds

Antitrust laws are regulations that encourage competition by limiting the market power of any particular firm. They are designed to protect consumers from predatory business practices and ensure fair competition. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These laws serve three major functions: prohibiting price-fixing and the operation of cartels, restricting mergers and acquisitions that may substantially lessen competition or create a monopoly, and prohibiting monopolization.

The Sherman Act outlaws every contract, combination, or conspiracy in restraint of trade and any monopolization, attempted monopolization, or conspiracy or combination to monopolize. The Clayton Act addresses specific practices that the Sherman Act does not clearly prohibit, such as mergers and interlocking directorates. The Federal Trade Commission Act bans unfair methods of competition and unfair or deceptive acts or practices.

Determining whether a company is breaking antitrust laws involves understanding the specific practices prohibited by these laws and assessing whether the company's actions are harmful to competition and consumers. This may include examining the company's market power, business practices, and impact on prices, quality, and consumer choice.

Price fixing

An example of price fixing is when a group of competing optometrists agreed not to participate in a vision care network unless the network raised reimbursement rates for patients covered by its plan. The optometrists refused to treat patients covered by the network plan, and eventually, the company raised reimbursement rates. This was deemed illegal price fixing by the FTC, and the optometrists were found to have organized an effort to ensure compliance with the agreement.

Price-fixing schemes are routinely investigated by the FBI and other federal law enforcement agencies, and individuals or companies that engage in such practices may face criminal prosecution, including imprisonment of up to ten years and substantial fines.

Bid rigging

Another form of bid rigging involves hiring a competing company as a subcontractor to subvert the bidding process. A company may also decide to form a joint venture with a competing company for the sole purpose of submitting a single bid, without any intention of working together to achieve savings by combining resources or expertise.

Some of the most common forms of bid rigging include:

• Bid rotation: when bidding companies take turns being the winning bidder.
• Bid suppression: when one or more bidders sit out of the bidding so that another party is guaranteed to win.
• Complementary bidding: when companies intentionally submit uncompetitive bids to guarantee that their bid is not selected and another preselected bidder is chosen. This is also called courtesy bidding or cover bidding.
• Phantom bidding: employed in auctions as a way of compelling legitimate bidders to bid higher than they normally would.
• Buyback: a fraudulent practice used in no-reserve auctions where the seller of an item buys the auction item to prevent it from selling at too low a price.

Market allocation

A customer or market allocation conspiracy is an agreement by competitors to divide markets or customers for a product or service. The purpose of the agreement is to eliminate competition for each competitor's designated share of the market. This can be achieved by allowing each competitor the exclusive right to deal with specific customers or classes of customers, geographic portions of a market, or portions of a market divided by percentages or numbers of customers.

Some indicators of market allocation include:

• The same company always wins the contract, or never wins it.
• All companies in the group win an equal volume of business or an equal number of contracts over time.
• Companies show reluctance to give a quote or give a ridiculously high quote.

Monopolies

There are several types of monopolistic behaviour that can be grounds for legal action:

• Exclusive Supply Agreements: This occurs when a supplier is prevented from selling to different buyers. This stifles competition as the monopolist can buy supplies at lower costs, and prevents competitors from manufacturing similar products.
• Tying the Sale of Two Products: When a monopolist has dominance in the market share of one product, but wishes to gain market share in another, it can tie sales of the two products. This forces customers to buy something they may not need or want and is a violation of antitrust laws.
• Predatory Pricing: This is when a company sets its prices very low, often below cost, to drive competitors out of business. Once the competition is gone, the monopolist can raise prices.
• Refusal to Deal: Monopolies can choose who they conduct business with. However, if they use their market dominance to prevent competition, this can be considered a violation of antitrust laws.

In the U.S., the Federal Trade Commission (FTC) and the Department of Justice (DOJ) enforce antitrust legislation. The DOJ goes after antitrust cases involving infrastructure-related areas like the internet, telecommunications, transportation, and banking. The FTC looks at cases involving consumer-related segments.

The core of U.S. antitrust legislation was created by three pieces of legislation: the Sherman Anti-Trust Act of 1890, the Federal Trade Commission Act, and the Clayton Antitrust Act.

The Sherman Act outlaws every contract, combination, or conspiracy in restraint of trade, and any monopolization, attempted monopolization, or conspiracy or combination to monopolize. It imposes criminal penalties of up to $100 million for corporations and $1 million for individuals, along with up to 10 years in prison.

The Federal Trade Commission Act bans unfair methods of competition and unfair or deceptive acts or practices.

The Clayton Act addresses specific practices that the Sherman Act does not clearly prohibit, such as mergers and interlocking directorates. It also prohibits an individual from sitting on boards of competing corporations.

Mergers and acquisitions

An illegal merger occurs when two companies join in a way that may substantially lessen competition or tend to create a monopoly in a given market. This can harm consumers by potentially leading to higher prices or fewer choices for products or services, and it can also harm workers by potentially reducing wages or employment options.

To assess the risk of harm to competition, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) analyse how firms in a given industry compete and whether a merger threatens to substantially lessen competition or create a monopoly. They use a set of Merger Guidelines to determine whether a merger warrants an enforcement action. These guidelines include several analytical frameworks that account for industry-specific market realities and use various indicators to examine the potential impact of a merger on competition.

The main antitrust issue during the review of a merger or acquisition is whether the transaction will substantially lessen competition. The FTC and DOJ can bring suits in courts to block transactions that are deemed illegal. Even closed transactions can be deemed illegal and unwound if they are found to violate antitrust laws.

To limit antitrust risks during the merger or acquisition process, companies should be cautious about sharing competitively sensitive information (CSI). The Sherman Act prohibits competitors, even those planning to merge, from sharing CSI such as price information, confidential customer data, and detailed research and development details. To facilitate information sharing while mitigating risks, companies can share CSI with outside counsel or establish a "clean team" to evaluate the information without it providing value to their organisation.

Additionally, merger agreements should include antitrust provisions to protect all parties involved. These provisions can include "hell or high water" clauses, requiring both parties to use their best efforts to complete the deal, and divestiture provisions, requiring buyers to divest assets to address concerns from antitrust regulators.

Some mergers and acquisitions may also trigger filing obligations based on the size and value of the transaction. An M&A specialist can help determine if a transaction is likely to result in a Hart-Scott-Rodino (HSR) filing obligation, which requires companies to pay filing fees and provide requested documents to antitrust authorities. Violating these rules can lead to significant fines.

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