A compliance check for collaborators who also compete

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Last week, Fortiline settled charges that it invited a competing seller of ductile iron pipe (DIP) to fix prices. This is the first case in which the FTC has challenged an invitation to collude by a firm that is in both a horizontal relationship (i.e., direct competitor) and a vertical relationship (i.e., manufacturer-distributor) with the invitee. The proposed consent order prohibits Fortiline from entering into, attempting to enter into, or inviting any agreement with any competitor to raise or fix prices, divide markets, or allocate customers.

Invitations to collude, which are solicitations by one competitor to another to coordinate on price, output, or other important terms of competition, can cause competitive harm, and therefore violate Section 5 of the FTC Act. Invitations to collude are analyzed under the “inherently suspect” standard, which does not require proof that the respondent possesses market power or that the invitee accepted the invitation. Invitations to collude are considered inherently suspect for three reasons. First, the invitation itself may facilitate coordination between direct competitors. Second, it can be difficult to determine whether the invitee accepted the invitation. Finally, the conduct has no legitimate business purpose and finding a violation may deter similar conduct.

Fortiline is a distributor of waterworks infrastructure products, including DIP. According to the Commission’s complaint, Fortiline ceased distributing Manufacturer A’s DIP in North Carolina and most of Virginia in late 2009, and began instead distributing DIP made by Manufacturer B. Having lost its distributor in that region, Manufacturer A began selling its DIP directly to customers. Generally, manufacturers of waterworks infrastructure products that sell direct do not offer certain value-added services offered by a distributor like Fortiline. Instead of offering these services, Manufacturer A offered customers low DIP prices, which caused Fortiline and other DIP distributors to reduce their prices. DIP prices are typically negotiated off of manufacturers’ regularly published price lists, and are expressed in terms of a percentage multiplier of the list price. A higher multiplier indicates a higher price, and vice-versa.

According to the FTC’s complaint, on two occasions in 2010, Fortiline invited Manufacturer A to collude on DIP pricing in North Carolina and most of Virginia. In the first instance, following an in-person meeting between executives of Fortiline and Manufacturer A, the Fortiline executive forwarded an internal company email to Manufacturer A that described how Manufacturer A was undercutting the prices of its rivals, while the other major DIP manufacturers “have been trying to keep their numbers up thus far.” In his own note at the top of the forwarded message, the Fortiline executive concluded: “This is the type of irrational behavior [by Manufacturer A] that we were discussing earlier today. With this approach we will be at a .22 [multiplier] soon instead of a needed .42.”

Later that year, the same executives from Fortiline and Manufacturer A met again, and again Fortiline expressed displeasure that Manufacturer A had sold DIP to a customer at a 0.31 multiplier, which Fortiline complained was 20 percent below market price in the region. The FTC’s complaint charges that these communications constituted unlawful invitations to collude.

As in other situations in which the Commission charged that communications between competitors amounted to an invitation to collude, both messages from Fortiline to Manufacturer A communicated that Fortiline was unhappy with Manufacturer A’s DIP pricing, and that Fortiline wanted Manufacturer A to increase its DIP prices. In this case, however, there was an additional wrinkle. Although Fortiline was selling Manufacturer B’s DIP in direct competition with Manufacturer A in some circumstances, in other circumstances Fortiline was distributing Manufacturer A’s DIP. Thus, Fortiline had both a horizontal relationship (i.e., direct competitor) and a vertical relationship (i.e., supplier-distributor) with Manufacturer A.

Antitrust law recognizes that a supplier and its distributor often have legitimate reasons to communicate about market conditions, including discussing the price charged by the distributor when it re-sells the products of that supplier. However, even if two firms have a vertical (intrabrand) relationship in some instances, that relationship does not immunize them from liability for conduct harming horizontal (interbrand) competition. Fortiline’s role as a distributor for Manufacturer A in some circumstances did not shield it from liability for inviting Manufacturer A to collude to raise the price for DIP sales across the board, including in instances where the two firms were competing to sell DIP to a particular contractor.

The FTC’s Proposed Order bars Fortiline from engaging in prohibited conduct with competitors, including invitations to raise or fix prices, or to divide markets or allocate customers. But in order to avoid chilling procompetitive vertical conduct, the Proposed Order permits Fortiline to engage in beneficial conduct of a lawful manufacturer-distributor relationship. Among other things, the Proposed Order explicitly allows Fortiline to enter into an agreement to buy DIP from a manufacturer, even one with which it may compete under certain circumstances.

Companies should be aware that conduct that is typically appropriate in the context of a pure vertical (i.e., supplier-distributor) relationship may be unlawful where the conduct restrains horizontal competition. Remember that it is the nature of the restraint that matters most. For example, as was the case here, if a firm distributes a supplier’s products, while also competing with that supplier by re-selling the products of a second supplier, the distributor risks liability if it invites the first supplier to collude on the terms of interbrand competition.

In today’s economy, firms have a myriad of complex relationships. Firms that simultaneously compete and collaborate must be mindful of the nature and reach of their agreements, and be careful to avoid violations of the antitrust laws.

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