Thursday, July 12, 2012

Antitrust and Unfair Competition, part 3: Bid Rigging.

Bid rigging occurs when a "commercial contract is promised to one party even though for the sake of appearance several other parties also present a bid." [1] This is sometimes done to meet particular quotas regarding how much business must go through the public bidding process, or as a favor to another party. It is also a type of price fixing among competitors to ensure that the party who is supposed to "win" a contract, in fact wins the contract.

In the public sector context, bid rigging results in harm to the agency seeking the bids, and the public. The agency is harmed because they will receive a higher price than they would through a true competitive bid process. The public is harmed because in the public sector context, they are the taxpayers paying the higher price.

In the private sector context, bid rigging still results in harm to the company seeking bids. It does not affect the public, but it would have an ancillary effect on shareholders of publicly-traded companies. The company would have to pay a higher price to a contractor or vendor for goods or services. This would ultimately lead to lower amounts of cash that could be capitalized and distributed to shareholders. Even if the cost to shareholders would be almost negligible each time the bid rigging occurs, its accumulation would likely have a noticeable impact if it became a part of the company's culture in its purchasing department.

You may or may not have come across an incident of bid rigging in your business dealings. Bid rigging is not necessarily common, but it is not unheard of either. People often try to "team up" with other people in other businesses. Sometimes, the tactics they use in implementing their strategy will run afoul of antitrust law. Technical antitrust violations occur much more frequently than one might initially think. People do not always notice the violations as unethical conduct, because they are helping someone they know. They may not recognize that what they are doing is foreclosing competition from otherwise worthy competitors.

[1] Wikipedia, Bid rigging (last visited July 11, 2012).

Wednesday, July 11, 2012

Antitrust and Unfair Competition, part 2: "Good Ole Boy" Networks.

The essence of "good ole boy" networks is a violation of Section 1 of the Sherman Act. As seen in my last post, Section 1 prohibits concerted action restraining trade. A "good ole boy" network is one governed by a close relationship and a sharing of sensitive business information. The close relationship is one involving nearly exclusive dealing. The sharing of sensitive information involves price dissemination, group boycotts, and other conduct that makes no business sense unless there is reciprocity from the other party.

Section 1 deals with horizontal restraints of trade, among other things. A horizontal restraint of trade is concerted anticompetitive conduct by competitors in the distribution chain in order to eliminate, lessen, prevent or foreclose competition from another competitor or competitors. Examples of horizontal restraints include price fixing, price dissemination, market and customer allocations, and group boycotts and concerted refusals to deal. Within these examples, there are numerous subcategories.

"Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service or commodity only at a fixed price, or maintain market conditions such that the price is maintained at a given level by controlling supply and demand." [1] Price dissemination often results in price fixing. Price dissemination occurs when pricing or sensitive business information is exchanged, resulting in a competitive advantage for one or both of the competitors. Market and customer allocations occur when competitors will allocate customers geographically or demographically, resulting in less competition and higher prices for the consumer. Group boycotts occur when "two or more competitors in a relevant market refuse to conduct business with a firm unless the firm agrees to cease doing business with an actual or potential competitor of the firms conducting the boycott." [2]

"Good ole boy" networks engage in all of the above behavior. They do not do so all the time, but such networks are characterized by barriers to entry such as being part of a specific in-group of like-minded individuals with industry experience and friendships, and the sharing of business information in order to help other members of the network succeed in business. Members of the network will share price information, resulting in price fixing. They will allocate customers and markets so as to not encroach on another member's territory. They will pressure other members to not do business with firms that upset them, or do not conduct business their way. They will also give members of their in-group better prices than they give individuals or businesses outside of their group.

If you are part of a "good ole boy" network, be aware that participation in the above behavior can subject you to criminal liability, as well as civil liability. As mentioned before, civil liability for antitrust violations can result in treble damages, or damages three times the actual amount.

In my next post, I will discuss another horizontal restraint often subsumed within price fixing and price dissemination: bid rigging.

[1] Wikipedia, Price fixing, (last visited July 11, 2012).
[2] Wikipedia, Group boycott, (last visited July 11, 2012).

Tuesday, July 10, 2012

Antitrust and Unfair Competition, part 1.

Antitrust and Unfair Competition Law is one of the most complex legal fields. Unlike many other areas of law that simply apply legal doctrine to a given set of facts (one level of abstraction), Antitrust and Unfair Competition Law applies legal doctrine to economic doctrine, and then to a given set of facts (two levels of abstraction). The frames of reference that affect which economic doctrine to apply are fuzzy with Antitrust Law, because the definition of the relevant market can differ greatly. The definition of the relevant market is of paramount importance when determining whether an entity has "Monopoly Power," under Section 2 of the Sherman Act. Monopoly Power is how much market share a given business entity has. If you define the relevant market improperly, a monopolist might appear to have much less of a market share than they actually do.

Section 2 of the Sherman Act ("Section 2") deals with monopolies. Section 1 of the Sherman Act ("Section 1") deals with concerted action restraining trade. Both are nebulously written. Section 2 merely states that persons who monopolize or attempt to monopolize, or combine or conspire with anyone to monopolize any part of trade or commerce, shall be deemed guilty of a felony. Section 1 states that every contract, combination, trust or otherwise, or conspiracy in restraint of trade is illegal. As with Section 2, Section 1 violators are also guilty of a felony. The Clayton Act allows parties injured through Antitrust Law to bring civil actions. Successful civil actions can receive what is called "treble damages," or three times the amount of actual damages.

Neither Section 1, Section 2, nor the Clayton Act can be read literally, because to do so would prohibit much conduct that is not practically anticompetitive and unethical. For instance, noncompete agreements are legal restraints of trade, and quite reasonable when a former employer has imparted an employee with specialized skills and knowledge at great expense. Scholarship limits in the NCAA are also a legal restraint of trade. It is literally a restraint of trade for Division I Football Bowl Subdivision schools to agree to limit their rosters to 85 scholarship players at a given time. But the Court affords governing bodies like the NCAA deference because of the rules needed for effective competition. [1]

That deference comes in the form of the "Rule of Reason." Some conduct is so blatantly anticompetitive that it is per se illegal, or illegal "on its face." Some conduct is so anticompetitive that it only deserves a "Quick Look." Some conduct is anticompetitive, but must be judged carefully. Such conduct is examined using the Rule of Reason, which is a full balancing test of the anticompetitive behavior, its procompetitive effects, and a determination of which outweighs the other.

Section 2 tends to be less relevant to small businesspersons. Attempted monopolization is a crime, but it requires a "dangerous probability" of achieving monopoly power. Usually a small business would not have a dangerous probability of achieving monopoly power, but it all depends on how the relevant market is defined. In a small enough geographic area, some relatively small businesses might indeed be a monopolist. For instance, a company offering a product that has no suitable comparison within the region may very well have monopoly power, with the biggest indicator being that they can have large profit margins because of a lack of competition. In fact, such a scenario is not all that uncommon. But simply having monopoly power is not the issue. Engaging in monopolizing conduct is when the conduct becomes illegal. Monopolizing conduct is conduct that attempts to maintain or achieve monopoly power through anticompetitive behavior.

The take away from Section 2 is that almost all small businesses would not have monopoly power, unless the geographic definition of the market is small enough. However, monopolizing conduct that attempts to foreclose competition is not nearly as uncommon. Even then, without monopoly power, monopolizing conduct does not lead to attempted monopolization unless there is a dangerous probability of monopolization and the intent to do so.

Section 1 will be discussed in greater depth in my next post.

[1] NCAA v. Board of Regents of Univ. of Oklahoma, 468 U.S. 85 (1984).