(By John C. Guadnola)

Last summer we talked about the devastating consequences that can be suffered by any individual or business found to have violated federal or state antitrust law. Today we will discuss two key elements of antitrust law: the concept of conduct being "per se" illegal under the antitrust laws, and the general prohibition against competitors engaging in concerted activity. These concepts touch directly on the areas where trade associations and their members are most vulnerable to charges of anticompetitive conduct.

Per Se Illegality

Section 2 of the Sherman Act, and corresponding laws of every state, make it illegal for businesses to participate in any "contract, combination, or conspiracy" that unreasonably restrains trade. Through case law developed over the past 130 years, the Supreme Court has ruled that certain kinds of conduct are unreasonable, and therefore illegal, "per se." Any behavior by competitors that is a per se violation of the Sherman Act is automatically condemned. The participants are not even given an opportunity to explain or justify their conduct, because their motives are irrelevant.

The classic example of per se illegal conduct is price fixing. It is illegal for competitors to "raise, fix or stabilize" prices. Even if competitors entered into an agreement with the express purpose of lowering prices to benefit consumers, their conduct would be per se illegal. Manipulation of prices by concerted activity of competitors will not be tolerated. Other forms of per se illegal conduct are allocations of territories or customers and group boycotts (where two or more competitors jointly decide not to do business with a third person).

In almost all cases the per se label will only attach if the conduct being challenged is "horizontal" as opposed to "vertical." Horizontal conduct involves businesses that compete with each other at the same level in the distribution process (manufacturers, for example, or distributors). Vertical conduct involves businesses that are in different levels of the distribution process (a manufacturer and a distributor, for example). There are numerous vertical arrangements that are completely legal, even though their horizontal counterparts are per se illegal.

It is per se illegal for two competing manufacturers to agree on the price they will charge retailers, and for two competing retailers to agree on the price they will charge consumers. It is not illegal per se for a manufacturer and a retailer to agree on the price that the retailer will charge to consumers for the manufacturer's product. It is per se illegal for two competing manufacturers to agree to limit the geographic areas in which they sell their products. It is not illegal per se for a manufacturer and a retailer to agree that the retailer will limit its sales to a particular geographic area or even a particular kind of customer. Any of these types of agreement might be unlawful if the person challenging it can prove that it "unreasonably" restrains trade, but that is an extremely difficult thing to prove.

Concerted Activity

The Sherman Act and its state-law corollaries prohibit any kind of formal agreement, but they also prohibit informal agreements or tacit understandings - even "a wink and a nod," in the terms found in some of the cases. In other words, any kind of concerted activity can give rise to an antitrust violation. Whenever two independent businesses take similar or identical action with respect to pricing or any other aspect of their business, there is a possibility that someone - the government or a private plaintiff - will interpret those actions as the result of collusion of some sort.

To make matters worse, it is not necessary for a person bringing antitrust claims to have direct proof of an agreement. All that is required is evidence from which a reasonable person could deduce that the defendants acted in concert (and, in some cases, evidence tending to eliminate the possibility that the defendants were acting independently). In other words, one need not prove that A "conspired" with B to fix prices. All one need to prove is that A and B are competitors, that they were at a trade association meeting or had some opportunity to discuss prices, that shortly thereafter both A and B raised their prices, and that it was likely neither A nor B would have raised prices at that time or in that amount without some kind of an understanding that the other was going to do the same thing.

This obviously makes it extremely dangerous for competitors to engage in any discussion of prices being charged or to be charged in the future. However, it also makes it dangerous to discuss matters that contribute directly to price. For example, a discussion among competitors about increasing raw material costs, to the effect that such costs will directly reduce profits unless passed on in the form of increased prices, when followed by price increases, could easily support an inference that the competitors agreed to such price increases. Similarly, a discussion among competitors about the costs and disadvantages of selling on credit to particular customers, if followed by those competitors withholding or tightening credit to the customers under discussion, is more than enough to support an inference of an illegal group boycott, an illegal agreement to fix prices by limiting credit, or both.

This is not to say that competitors cannot engage in similar or even identical business behavior. A competitor is free to make any business decision it chooses, so long as it makes the decision independently rather than in concert with other competitors. In theory, every single competitor in a particular industry could charge the identical price for its products without violating the law if each pricing decision was made completely independently. However, the circumstances surrounding independent pricing decisions could give rise to an inference of collusion. Therefore, the lesson for businesses seeking to avoid being sued is to be vigilant to the circumstances. Do not engage in discussions of price, no matter how committed you are to making your own decisions about pricing. Do not do something you otherwise would not do (eliminate credit, for example) just because you expect your competitors to do the same thing. Make careful records of everything you consider when you do change prices or do establish new or different sales terms for your customers. In short, act independently, avoid situations where others might question the independence of your actions, and document your business decisions as thoroughly as reasonably practical.

This article was published in the April & May 2008 issue of THE WASHINGTON EXECUTIVE, a publication of the Washington Society of Association Executives.