Antitrust Basics

1. Antitrust Basics

2. Antitrust Basics

3. Introduction • Fundamental objective of antitrust laws is to protect and promote free and fair competition in the marketplace for the benefit of consumers • Antitrust laws prohibit conduct that reduces competition by unfair means U.S. antitrust laws are the most developed • Criminal and civil penalties are among the most severe • Enforcement efforts are vigorous You should consult legal counsel to ensure compliance with all global antitrust laws

4. Overview of U.S. Antitrust Law • Three primary federal antitrust laws: • Sherman Act • Clayton Act • Federal Trade Commission Act • State and international antitrust laws • Ignorance of the law is no defense • Challenged conduct is judged by two standards: • Some conduct is illegal per se — i.e., prohibited regardless of effect on competition • Most conduct is subject to rule of reason — i.e., permitted if it enhances competition

5. Overview of U.S. Antitrust Law (cont’d) • Three primary federal antitrust laws: • Sherman Act • Clayton Act • Federal Trade Commission Act • State and international antitrust laws • Ignorance of the law is no defense • Challenged conduct is judged by two standards: • Some conduct is illegal per se — i.e., prohibited regardless of effect on competition • Most conduct is subject to rule of reason — i.e., permitted if it enhances competition

6. Overview of U.S. Antitrust Law (cont’d) • Three primary federal antitrust laws: • Sherman Act • Clayton Act • Federal Trade Commission Act • State and international antitrust laws • Ignorance of the law is no defense • Challenged conduct is judged by two standards: • Some conduct is illegal per se — i.e., prohibited regardless of effect on competition • Most conduct is subject to rule of reason — i.e., permitted if it enhances competition

7. Penalties for Antitrust Violations • Violation of Sherman Act is a felony • Many foreign jurisdictions have also criminalized antitrust violations Penalties: • In U.S., individuals may be imprisoned for up to 10 years and fined up to $160 million per violation • In U.S., companies may be fined $100 million or more • In EU, companies may be fined up to 10% of worldwide turnover Private lawsuits can result in judgments for three times the amount of damages plus attorneys' fees

8. Special Note…

9. Recognizing "Red Flags" • It is important to learn how to recognize and deal with antitrust issues in the real world • Antitrust issues typically arise in these contexts: • Relationships with competitors • Relationships with customers • Mergers and acquisitions • Monopolistic behavior • Discrimination in pricing and promotions • Exemptions from antitrust laws • Special industries

10. Relationships with Competitors • Section 1 of Sherman Act prohibits agreement between competitors that unreasonably restrains competition • Each competitor must make its own decisions about price, output, customers and areas of activity • An agreement among competitors may take any form — it does not have to be formal or written • Unlawful conspiracy may be inferred from conduct • Avoid conduct that could give rise to an inference of an agreement • Avoid contacts that could be seen as invitation to collude

11. Relationships with Competitors (cont’d) • Section 1 of Sherman Act prohibits agreement between competitors that unreasonably restrains competition • Each competitor must make its own decisions about price, output, customers and areas of activity • An agreement among competitors may take any form — it does not have to be formal or written • Unlawful conspiracy may be inferred from conduct • Avoid conduct that could give rise to an inference of an agreement • Avoid contacts that could be seen as invitation to collude

12. Relationships with Competitors (cont’d) • Red Flag #1 — Price-Fixing • Agreement between competitors to set price is the most serious type of anti-competitive conduct • Includes agreement to set discounts, freight charges or payment terms • Includes bid-rigging • Price-fixing agreements are "per se" illegal • Never discuss prices, price levels, price trends or pricing policies with competitors • Do not exchange past, present or future price or cost information with competitors

13. Relationships with Competitors (cont’d) • Red Flag #2 — Allocating Markets or Customers • Agreement to allocate customers, territories or business opportunities is always illegal • Competitors cannot agree that one will not sell in certain areas or to certain customers Competitors cannot agree that one will not bid on a certain contract or not compete for customers Red Flag #3 — Boycotts • Agreement not to do business with a supplier or customer, or to do business only with certain suppliers or customers, may be illegal boycott

14. Relationships with Competitors (cont’d) • Red Flag #2 — Allocating Markets or Customers • Agreement to allocate customers, territories or business opportunities is always illegal • Competitors cannot agree that one will not sell in certain areas or to certain customers Competitors cannot agree that one will not bid on a certain contract or not compete for customers Red Flag #3 — Boycotts • Agreement not to do business with a supplier or customer, or to do business only with certain suppliers or customers, may be illegal boycott

15. Relationships with Competitors (cont’d) • Red Flag #4 — Other Improper Competitor Contacts • Never discuss prices, terms, distribution, customers, territories or profit margins with competitors • Applies to informal meetings/discussions, trade-association meetings, trade shows If these subjects are discussed in your presence — • Ask those involved in the discussion to stop • Announce that you don't want to be part of the discussion • Request that minutes reflect your departure • Report incident to the Legal Department as soon as possible

16. Relationships with Customers • Antitrust laws prohibit certain agreements between companies at different levels of distribution chain • Our commercial decisions must be unilateral — there can be no discussions or agreements with a customer, competitor or supplier • We may decide which customers and suppliers we want to deal with as long as we make our decisions independently • We may adopt a business strategy designed to protect our self-interest • Legal Department should review business arrangements that raise any red flags

17. Pop Quiz! • A pricing agreement between a supplier and a customer is always ("per se") illegal. • True. • False.

18. Relationships with Customers (cont’d) • Red Flag #5 — Price-Related Restrictions • Resale-price-maintenance agreements between supplier and customers set prices at which the customers will resell supplier's products or services • Assessed under rule of reason • Seller must provide a reasonable, pro-competitive justification for price restriction Red Flag #6 — Geographic or Customer Restrictions • Legality of agreement between manufacturer and distributor that distributor may sell only in certain territories or to certain types of customers depends on facts and circumstances

19. Relationships with Customers (cont’d) • Red Flag #5 — Price-Related Restrictions • Resale price maintenance agreements between supplier and customers set prices at which the customers will resell supplier's products or services • Assessed under rule of reason • Seller must provide a reasonable, pro-competitive justification for price restriction Red Flag #6 — Geographic or Customer Restrictions • Legality of agreement between manufacturer and distributor that distributor may sell only in certain territories or to certain types of customers depends on facts and circumstances

20. Relationships with Customers (cont’d) • Red Flag #5 — Price-Related Restrictions • Resale price maintenance agreements between supplier and customers set prices at which the customers will resell supplier's products or services • Assessed under rule of reason • Seller must provide a reasonable, pro-competitive justification for price restriction Red Flag #6 — Geographic or Customer Restrictions • Legality of agreement between manufacturer and distributor that distributor may sell only in certain territories or to certain types of customers depends on facts and circumstances

21. Relationships with Customers (cont’d) • Red Flag #7 — Exclusive Dealing • Agreements that require customer to buy all or some of its requirements from one supplier raise antitrust concerns Red Flag #8 — Tying • Agreements in which a supplier offers to sell a customer a desirable product only if customer agrees to buy less desirable product are unlawful under certain circumstances • Legality depends on analysis of supplier's market power in desirable product

22. Relationships with Customers (cont’d) • Red Flag #9 — Reciprocal Dealing • Agreement to buy a supplier's products on the condition that supplier buys your products is reciprocal dealing • Avoid appearance of an agreement that links your purchases from suppliers to their purchases from you Red Flag #10 — Dual Distribution • Manufacturer that uses its own distribution channels and independent distributors must assure that independent distributors are treated fairly

23. Mergers and Acquisitions • Clayton Act prohibits mergers or acquisitions that could substantially lessen competition or create a monopoly • Antitrust issues may arise in acquisition, merger or joint venture involving stock or assets of a competitor, potential competitor, or substantial customer or supplier Red Flag #11 — Pre-Merger Reporting • Parties must submit documents to government agencies to evaluate competitive effects of transaction • Documents should be written with regard to antitrust significance of their contents

24. Mergers and Acquisitions (cont’d) • Clayton Act prohibits mergers or acquisitions that could substantially lessen competition or create a monopoly • Antitrust issues may arise in acquisition, merger or joint venture involving stock or assets of a competitor, potential competitor, or substantial customer or supplier Red Flag #11 — Pre-Merger Reporting • Parties must submit documents to government agencies to evaluate competitive effects of transaction • Documents should be written with regard to antitrust significance of their contents

25. Pop Quiz! • Companies considering a merger are allowed to share information with each other so that they can accurately evaluate their prospective business opportunity. • True. • False.

26. Mergers and Acquisitions (cont’d) • Red Flag #12 — Pre-Closing Information-Sharing • Until the closing of a merger or acquisition, companies involved must remain separate • Coordination of pricing, purchasing, etc., is only permitted once transaction is concluded • Negotiations between competitors are especially tricky • Parties must limit disclosure and exchange of non-public, competitively sensitive information • Disclosures should be on "need-to-know" basis only and protected by written confidentiality agreement

27. Monopolistic Behavior • Sherman Act prohibits monopolization: • Unreasonable business behavior designed to achieve or maintain monopoly power • Attempts and conspiracies to monopolize Applies where a company has power to control prices, drive competitors out or prevent them from entering market • Usual indicator of monopoly power is market share over 60% • Can occur in narrow geographic areas and small segments of broad market • Requires deliberateness — conduct or behavior that shows monopolistic intent

28. In the news…

29. Monopolistic Behavior (cont’d) • Red Flag #13 — Predatory Pricing • Company sells its products below cost with intent to severely damage competitors • Most problematic where company setting prices has significant market power in relevant product market Red Flag #14 — Refusals To Deal • Refusal to deal with customers/suppliers by company with monopoly power violates Sherman Act if company had no legitimate business purpose • Dominant firm that controls an essential facility may have duty to share facility with competitors on non-discriminatory basis

30. Price Discrimination • Robinson-Patman Act prohibits a seller from discriminating between customers on price, terms or promotional services if it substantially lessens competition or creates a monopoly • It is illegal to charge different prices for similar products to competing customers at the same time if price difference lessens competition • Intent of the Act is to prevent large buyers from obtaining unfairly low prices or extra services to detriment of smaller buyers • Seller can defend price differentials based on cost justification, changing market conditions or the need to meet competition

31. Price Discrimination (cont’d) • Robinson-Patman Act prohibits a seller from discriminating between customers on price, terms or promotional services if it substantially lessens competition or creates a monopoly • It is illegal to charge different prices for similar products to competing customers at the same time if price difference lessens competition • Intent of the Act is to prevent large buyers from obtaining unfairly low prices or extra services to detriment of smaller buyers • Seller can defend price differentials based on cost justification, changing market conditions or the need to meet competition

32. Pop Quiz! • Which of the following is not a type of price discrimination addressed by U.S. antitrust laws? • A supplier sells widgets to stores owned by people who are over 40 for $100 each but charges $200 to stores owned by people under 40. • A supplier sells widgets to "big-box" chain stores at $100 each but charges $200 to small, independent stores. • A supplier sells widgets to all its customers at $150 each but includes promotional materials free of charge for orders by its largest customers.

33. Price Discrimination (cont’d) • Red Flag #15 — Meeting Competition • "Meeting competition" defense permits seller to charge lower price to buyer if done in good faith to meet (but not beat) equally low price offered by seller's competitor • Seller must make good-faith effort to verify lower price before giving price cut • Seller should not call competitor directly to verify lower price Red Flag #16 — Promotional Services Company that offers promotional services or allowances must make offers available to all competing customers on proportionally equal terms

34. Exemptions from the Antitrust Laws • Red Flag #17 — Lobbying Activities • Company can engage in activities seeking governmental or judicial action, even if activities are anti-competitive Action aimed at a non-governmental body is not immune from antitrust laws Red Flag #18 — Labor-Related Activities Statutory labor exemption enables workers to organize to eliminate competition among them and to pursue legitimate labor interests Non-statutory exemption applies to agreements that further objectives of national labor policy and do not have unwarranted anti-competitive impact

35. Exemptions from the Antitrust Laws (cont’d) • Red Flag #19 — State Action • State governments may show that a regulatory scheme precludes antitrust liability • Challenged conduct must be clearly expressed as state policy and actively supervised by state Red Flag #20 — Regulated Industries Some industries are so pervasively regulated that they are exempt from U.S. antitrust laws These include agricultural cooperatives, sports broadcasting, rail transportation and ocean shipping Consult Legal Department for questions about exemptions

36. Special Industries • Insurance • "Business of insurance" is exempt from antitrust law, as long as conduct is subject to state regulation and is not agreement to boycott, coerce or intimidate • Healthcare U.S. enforcement agencies have issued guidance on nine types of allowed joint activity Guidance provides safety zone within which activity is unlikely to raise competitive concerns

37. Other Contexts • Government Contracting • Companies bidding on public contracts must know rules prohibiting bid-rigging, market allocation and predatory pricing • Government may permit a teaming agreement between competitors for purpose of keeping costs down Foreign Trade Conduct by foreign companies and individuals that has substantial effect on U.S. imports or exports may be subject to antitrust law U.S. companies doing business internationally may be subject to antitrust laws of other countries or EU

38. Final Quiz

39. Questions?

40. Thank you for participating! This course and the related materials were developed by WeComply, Inc. and the Association of Corporate Counsel.