ANTITRUST UPDATE FOR 2023
One of the key duties entailed in our representation of buying groups and GPO’s to assist them in complying with the antitrust laws.
To that end, it is critical to keep up with recent developments and trends. This year has seen a decided shift toward a more strict interpretation and enforcement of the antitrust laws under the Biden Administration, as well as through private actions. This update will highlight several examples.
Government Enforcement
Withdrawal of “Safety Zones” for Collaborative Efforts in the Health Care Industry. For decades the Antitrust Division of the Department of Justice and the Federal Trade Commission had provided certain safety zones of conduct for competitors within the healthcare industry to share information, such as benchmark surveys and engage in other collaborative activities such as group purchasing. On February 3, 2023, the DOJ announced that it was withdrawing three of its antitrust policy statements. Five months later, on July 14, 2023, the FTC followed suit and withdrew its support of two of those three policies. Although these policy statements were issued for the benefit of health care providers, they were widely relied upon by those in other industries. In announcing their withdrawal of these policy statements, the federal antitrust enforcement agencies asserted that they were “overly permissive” for certain topics such as information sharing, or that they were outdated and no longer reflected market realities. The withdrawal of these safe harbor statements does not automatically make such collaborative activities illegal. Indeed, such safe harbor provisions are supported by case law. But the withdrawal does indicate a more aggressive and a less understanding attitude among the enforcement agencies as to information sharing and joint purchasing activities. [For more details See Information as to Special Charges]
FTC Returns to Enforcement of the Robinson-Patman Act. The Robinson-Patman Act (the “RPA”) was enacted during the great depression in an effort to enable small retailers to buy at the same discounted level as the large retail chains. Under certain circumstances, it made price discrimination by a seller of similar goods between two purchasers illegal. The RPA has been very difficult to enforce because there are more holes in it than a piece of Swiss cheese. There are a number of boxes that must be checked in order to bring a valid claim, and even at that, there are a myriad of defenses that can be raised to defeat the claim. The RPA provides:
“It shall be unlawful for any person engaged in commerce . . . to discriminate in price between different purchasers of commodities of like grade and quality . . . where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them . . . .” 15 U.S.C. § 13(a).
In addition, in the past few decades, enforcement of the RPA has fallen out of favor. There has been little, if any, enforcement of the RPA by governmental agencies in this millennium.
Rather than encouraging discounting and competition, it requires the seller to charge the same price to its customers. In 2007, the Antitrust Modernization Commission stated that the RPA “punishes the very price discounting and innovation in distribution methods that the antitrust laws otherwise encourage.”
The landscape of RPA enforcement appears to be changing. In July 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. It directed the Department of Agriculture to team up with the FTC to determine whether violations of the RPA were occurring by retailers in the food industry. In January of 2023, it was reported that the FTC has launched an investigation as to whether Coca-Cola and Pepsi were engaging in price discrimination practices favoring large retailers. It appears, indeed, that the FTC has reconsidered its prior policies and is using the RPA as another tool in its arsenal.
Interlocking Director and Officer Positions in Competing Companies. Section 8 of the Clayton Act prohibits an officer or director of one company from serving as an officer or director of a competing company under most circumstances. On August 16, 2023, the FTC took its first enforcement action under Section 8 in over 40 years. The FTC a Section 8-type condition in a consent order to a $5.2 Billion deal between two natural gas producers. Under the consent order, the representatives of one of the gas producers were prohibited from serving on the Board of directors of the other company. As a further indication that Section 8 of the Clayton Act is being revitalized, the FTC has proposed changes to the Hart-Scott-Rodino Act form to require the identity of all officers and directors of the merging parties, going back two years, to be disclosed. The FTC would use that information to identify prior, existing or potential interlocking directorships, so that it could take that information into account in determining the danger to competition presented by the proposed merger or acquisition. Similar concerns have surfaced in the Merger Guidelines that were proposed on July 19, 2023. The ability of the investor to appoint board members, observe board meetings, etc. was highlighted. The use of Section 8 is yet another example of the enforcement agencies tightening their regulatory grip on businesses.
New Merger Guidelines Proposed by DOJ and FTC. The new merger guidelines jointly proposed by the Department of Justice and the Federal Trade Commission were published on July 19, 2023, as stated above. These guidelines substantially expand upon the types of competitive harm that the DOJ and FTC will consider as reasons for challenging mergers under Section 7 of the Clayton Act. The major expansion is that the proposed merger guidelines now cover vertical mergers, not just horizontal mergers. (A horizontal merger pertains to two competitors at the same distribution level, whereas a vertical merger involves companies at different levels of the distribution chain, e.g., a manufacturer and a distributor). For many decades, the courts, as well as the antitrust enforcement agencies, have generally acknowledged that a collaboration or merger done vertically is much less potentially harmful to competition than when such activities are undertaken horizontally. So, the fact that the enforcement agencies are now providing antitrust guidelines with respect to vertical mergers is another strong indication of their intent to increase the scope of their enforcement actions. It also further picks up on the sentiment they have expressed in other published notices regarding the need to update their policies to keep up with changing circumstances. See the discussion, above, regarding the withdrawal of safety zones for collaborative activities. In commenting upon these proposed merger guidelines, FTC Commissioner Kelly Slaughter stated, “few transactions in today’s economy are purely horizontal or vertical,” and noting, “some include components of both,” or have dimensions that defy categorization.
Private Action Claims
7th Circuit Court of Appeals Reverses; Keeps Antitrust Challenge to McDonald’s Anti-Poaching Franchise Contract Provision, Alive. A non-poaching agreement refers to a covenant between two parties that one or both of them will not hire the other’s employees. If there is no legitimate underlying reason for the parties to have the anti-poaching provision, then it is considered to be “naked,” an unreasonable restraint on trade and unenforceable as a violation of anti-trust law. The antitrust injury created by such provisions is that it limits or restrains the markets who can hire the employees affected by such provisions. The courts had widely recognized two situations where anti-poaching provisions could be viewed as legitimate. One is where a company provides one of its employees to provide specialized consulting services to a customer, such as installing a complicated information technology software program on its computers.
The legitimate fear here is that the customer might seek to bring the consultant “in house” and cut out the consultant’s employer as a middle man. The other situation is where two companies are entering into negotiations for one company to buy the other. The target company could reasonably insist that the acquirer agree not to attempt to hire the target’s employees, in the event the deal does not go through.
The McDonald’s case presented a less compelling situation for honoring the no-poach clause. In this case, the McDonald’s franchisees were placed under a covenant not to hire the employees of other McDonald’s employees until after they have left their job for more than 6 months. The McDonald’s employees sued McDonald’s on the grounds that the no-poach provisions were an antitrust violation under Section 1 of the Sherman Act. The district court dismissed the complaint, finding that the no-poach provision had sufficient business justification to avoid being an unreasonable restraint. However, on appeal, the Seventh Circuit court reversed the dismissal. They held that the question was close enough that it warranted a trial to determine whether the anti-poaching provision was justified under the circumstances.
Plaintiff’s Receive $1.8 Billion Verdict in Price Fixing Case, Which May be Tripled. In a price fixing class action brought in 2019 by home sellers in Missouri, Kansas and Illinois, in late October 2023, the jury found the National Association of Realtors (NAR) liable for $1.8 Billion. This amount could be tripled by the court under federal antitrust laws. The jury found that there was a conspiracy among the realtors by following the NAR rule that required the buyer’s agent to be paid out of the 5.5% seller’s real estate commission, which they determined to be a form of price fixing. This type of success is likely to spur additional price fixing lawsuits in the private sector. Indeed, a similar lawsuit is already pending and reportedly another price fixing class action is about to be filed against NAR, Weichert Realtors, Redfin, Douglas Elliman, United Real Estate and Compass, among others. The Department of Justice may also investigate this practice in the real estate industry.
These developments, taken together, portend a shift toward a much more active enforcement of the antitrust laws both by the government and by the private sector. The “safety zones” and comfort zones from antitrust enforcement that businesses have enjoyed over the last several decades have been literally and figuratively withdrawn.
