Question: Is it illegal for us discuss as a group whether it would be advisable for our members to charge a surcharge to their customers for paying by credit card?Sharing pricing information, even when it is as to a small percentage of the overall price structure is a dangerous practice and should not be permitted to occur at buying group meetings. Admittedly, sharing pricing information or pricing practices is not illegal in of itself. But it is the first step of an illegal price fixing conspiracy.
Section 1 of the Sherman Act makes it criminally and civilly illegal for two or more businesses to conspire to restrain trade.
An agreement among group members as to what prices to charge their customers is a form of horizontal price fixing and is per se illegal. The term “horizontal” refers to the fact that those engaging in the conspiracy are at the same level of distribution, which would generally be the case of members of a buying group. The courts have found it much more dangerous for competitors to agree upon prices to be charged to their respective customers than for a manufacturer and a distributor (who are in a vertical relationship) to agree upon prices to be charged to the distributor’s customers. The difference in the two situations is so significant, that US Supreme Court rulings indicate that horizontal price fixing activities are deemed to be illegal on their face, regardless of ameliorating circumstances. One just has to prove it occurred for it to be illegal. Vertical price fixing, on the other hand, is considered under the so-called “rule of reason.” The court balances the pro-competitive aspects against the anti-competitive aspects of the activity to determine whether the good outweighs the bad. While it may be oversimplifying things, generally, if the court finds the rule of reason applies, the battle is highly likely to be won by the defendants. Only in exceptional circumstances does a court find against a defendant when the rule of reason is applied.
With that short tutorial on how antitrust law works, one can readily see the slippery slope group members are on when they discuss their pricing policies with each other. In the context of whether they should be permitted to discuss a surcharge to customers who pay by credit card, suppose there are only two of the members who are doing such surcharges. They report to the group that their customers have been understanding and have not complained. They point out that they have saved millions of dollars in credit card fees by being able to pass this cost along to the customers. There is no commitment or agreement made among the members as to what their individual plans are. To the contrary, the president of the group warns the members that they must each make their own decisions as to what they will do in their own businesses and there can be no agreement among themselves as to what their position as a group will be as to whether there should be a surcharge applied to credit card payments. He concludes by saying, “you guys can do whatever you want, but as for me, I am convinced. We will start applying a surcharge. One or two others make similar comments about their support of the surcharge and declare their intentions to implement it going forward. Suppose further that within thirty days after the meeting, 15 members who had not been applying the surcharge before the meeting begin doing so. One court in presenting a very similar scenario in its decision, stated that under those circumstances, it was clear there was a price fixing agreement within the group. The judge reasoned that it is highly unlikely that parties engaged in a price fixing collusion would make their commitment to fix prices in a written, signed agreement. Indeed, he said just the opposite is normally the case.
Now let us alter the facts just a bit. What if all they did was share at the group meeting what they are doing regarding a surcharge for credit card payments without discussing what they planned to do in the future? The only two members of the group reported that they encountered very little resistance so far and had saved millions of dollars. After the meeting the same result—fifteen more members start applying the surcharge within 30 days after the meeting. Arguably, no price fixing agreement occurred. There was no discussion of what anyone would do in the future. They each acted independently, not in concert in applying the surcharge. However, they might have a hard sell that no collusion was involved. From an outside observer’s standpint, they would see that before the meeting, only 2 members were applying the surcharge. They would also see that there was some discussion as to what their current practices were. They would then see there was a dramatic shift towards charging the surcharge shortly after the meeting. It would be hard to resist concluding that if this had not been brought up in the meeting that pricing practices of the additional 15 members would not have changed. These circumstances have all the earmarks of a horizontal price fixing conspiracy.
For decades, the Department of Justice and the Federal Trade Commission had joint guidelines that identified safe harbors for price information sharing if certain guardrails were put in place. Although these joint guidelines were prepared for healthcare organizations, they have been used as guidance by others as well. Under these guidelines, if the group had caused an independent company such as their accounting firm to survey the members individually as to what their policy was with regard to such surcharges, compiled the results so that the group would not know which members were or were not engaging in this practice, but could only see the total numbers and finally held on to the results for at least 90 days before releasing the results to the group members, this information sharing would have fallen within a safe harbor of the guidelines. Unfortunately, these guidelines were recently rescinded so that implementing those kinds of safeguards no longer gives assurance that these governmental enforcement agencies would have no interest in such price information sharing activities. The withdrawal of these guidelines does not automatically make every type of price information sharing activity illegal. But it does take way the comfort zones that previously existed while these guidelines were in effect.
Additional factors, if applicable, could lessen antitrust concerns, when taken together with those guardrails indicated above.
For instance, the price survey would have little, if any, anti-competitive if the participants in the survey were not in competition with each other. Further, if the group members represented a small percentage of the sales within their total geographical market, the DOJ and the FTC would be less likely to raise their eyebrows at the price sharing survey.
The above examples of the group discussing individual surcharge policies highlight the dangers entailed with sharing pricing information. None of the participants would have likely thought they were doing anything illegal. They were simply sharing “best practices” with each other. But the discussion undoubtedly impacted their pricing. They put themselves in a quandary. If they had not discussed the topic, each of them could have made whatever adjustments they pleased with regard to how they handled surcharges. But because they had the discussion, any action they took to implement a surcharge policy, would have the appearance of carrying out a collusion despite whatever they intended. What makes the situation particularly insidious is that the government is more likely to prosecute horizontal price fixing as a crime than any other antitrust violation. So, while price fixing is one of the easiest antitrust traps to fall into unintentionally, it is the violation for which one is most likely to serve prison time Antitrust crimes can be punished up to ten years in prison or by fines of up to $1,000,000 for individuals and up to $100,000,000 for corporations.
Well advised buying groups have an antitrust guide they follow at each of the board and membership meetings. Typically, the antitrust guide includes a list of topics that should not be discussed at meetings. At the top of the prohibited topic list should be discussions regarding pricing charged to customers and pricing strategies. Other topics to be avoided are dividing up the market among themselves in terms of customers, products or territories. While it is legal for groups to vote on whether to approve a vendor’s proposal to sell to the group, they cannot require the members to buy only from one vendor to the exclusion of other vendors. Such action would constitute a group boycott. Antitrust guidelines should also require the presence of legal counsel at meetings of the group as part of their antitrust compliance programs.
Ray Law Firm has been helping its buying group clients with their antitrust compliance programs for decades. Among the services it provides to its buying group clients are reviewing the Board and member meeting minutes; reviewing vendor proposals, attending meetings, providing regular updates on antitrust law to the membership and providing counsel as specific situations and questions arise.