Antitrust Alert: U.S. FTC Challenges Ambiguous "Invitation to Collude" in Supplier-Distributor Relationship
The Federal Trade Commission has brought an action challenging an "invitation to collude" by piping distributor Fortiline, which allegedly invited a supplier-competitor to raise prices where they compete in North Carolina and Virginia.
The standards for finding a violation of the FTC Act § 5 for an invitation to collude already are ambiguous. This action brings further ambiguity, as this is the FTC's first invitation to collude case against an entity that is both a direct competitor with, and a distributor for, the alleged invitee. The case therefore raises difficult issues of the nature and amount of evidence needed to establish an invitation to collude where the parties had other, legitimate reasons to communicate. This emphasizes the need for parties in dual distribution networks to be careful in their communications with distributors and manufacturers that might be both partner and competitor. The case also highlights the risk that the antitrust agencies will discover anticompetitive conduct in the course of other investigations.
The August 9 administrative action was authorized by a 2-1 vote of the Commission, which agreed to settle with Fortiline under a consent order that prohibits future efforts to collude.
Ductile iron pipe is used in municipal water systems. According to the FTC's administrative complaint, in most states in which it does business, Fortiline sells ductile iron pipe produced by a company identified in the complaint as "Manufacturer A." Fortiline has largely, but not completely, ceased selling Manufacturer A's products in North Carolina and Virginia, instead selling the products of another manufacturer. In those two states, Manufacturer A distributes its own products. Thus, today Fortiline is a direct competitor of A in North Carolina and Virginia, while a distributor for A in ten other states.
The FTC alleged that Manufacturer A reduced its prices to contractors in North Carolina and Virginia to better compete against distributors like Fortiline that offer additional value-added services. Fortiline and other distributors lowered their prices in response. Following these price reductions, Fortiline twice expressed to Manufacturer A its dissatisfaction with A's pricing. First, Fortiline sent Manufacturer A an email that detailed the lower prices offered in North Carolina by Manufacturer A, comparing it to other pipe manufacturers that "have been trying to keep their numbers up thus far" and calling Manufacturer A's pricing "irrational behavior." Fortiline suggested that, "With this approach we will be at a .22 [pricing multiplier] soon instead of a needed .42." Eight months later, at a trade association meeting, Fortiline complained to Manufacturer A that A had sold directly to a prior Fortiline customer at a 0.31 price multiplier, which was "20% below market."
The Commission claimed these communications were an invitation to collude, which it defines as "an improper communication from a firm to an actual or potential competitor that the firm is ready and willing to coordinate on price or output." The FTC views invitations to collude as inherently, and therefore presumptively, anticompetitive. Similar to a price fixing agreement under Sherman Act § 1, absent a procompetitive justification, the FTC treats an invitation to collude as an FTC Act § 5 violation even without a showing of market power or actual competitive effect. In contrast to Section 1, the FTC reasons it can find a Section 5 violation without proof of an agreement because of the possibility the communication still may have an anticompetitive effect.
The FTC's proposed consent order prohibits Fortiline from entering into, attempting to enter into, or soliciting any agreement with any competitor to raise or fix prices or to allocate or divide markets, customers, or lines of business. It contains exceptions permitting Fortiline to have communications necessary to achieve the procompetitive benefits of a lawful manufacturer-distributor relationship and to negotiate and enter into pipe purchase and sale agreements from or to competitors. The order will remain in effect for 20 years.
Commissioner Ohlhausen dissented from the proposed consent order, stating that the evidence was ambiguous as to whether Fortiline actually extended an invitation to collude and whether the discussions arose in context of Fortiline's competitor or distributor relationship with Manufacturer A.
Similar to past invitation-to-collude enforcement actions, here the FTC did not allege that the competitor accepted the invitation or that the invitation resulted in any agreement on prices. As it has in a series of consent orders extending over 20 years, the Commission considered the unilateral act of soliciting a pricing agreement sufficient to constitute an "unfair method of competition" in violation of FTC Act § 5. In this context, the Commission has extended Section 5 beyond the main antitrust laws: Sherman Act § 1 requires an anticompetitive "agreement" for a violation.
Further, the vertical relationship between Fortiline and Manufacturer A sets this matter apart from previous invitation to collude matters. One might have expected this relationship to cause the FTC to be more cautious in applying its precedents to communications with an arguable business justification. From the early 1990s, when the Commission first articulated the offense of invitation to collude, until the mid-2000s, the Commission has challenged alleged invitations to collude primarily with respect to private communications from one direct competitor to another – in short, communications that were highly unlikely to involve any legitimate business purpose.
Then in 2006, the FTC's In re Valassis Communications complaint for the first time addressed an alleged invitation to collude by means of entirely public communications. In that matter, the Commission claimed that Valassis invited a competitor to increase prices by means of specific statements made to analysts in public conference calls. Despite the procompetitive benefits of discussing current and future business actions with analysts and investors, the Commission was able to conclude that the communication was an invitation to competitors to increase prices, based on both the unprecedented specificity of the target prices identified by Valassis and its threats to retaliate if its competitor did not match those target prices.
Similarly, in 2010 In re U-Haul International alleged an invitation to collude effectuated largely by means of statements to analysts during investor calls. But in that industry, the enormous number of individual prices and the frequency of price changes meant that the specificity that characterized the Valassis communications was lacking. This blurred the line between justifiable communications serving legitimate business objectives and invitations to a competitor.
Since 2010, the Commission's enforcement actions have focused on private communications between arms-length competitors, situations in which there is unlikely to be any legitimate justification. We discussed one of these, In re Drug Testing Compliance Group, in our December 2015 alert.
In re Fortiline introduces a new twist. Although the communications at issue were private, they were not solely between arms-length competitors. The vertical relationship between Fortiline and Manufacturer A meant that Fortiline had not only legitimate, but potentially procompetitive, reasons to communicate with A regarding A's pricing to Fortiline, general price levels, and specific price levels in states other than North Carolina and Virginia. To the extent Fortiline continued to sell Manufacturer A's products to complete existing contracts, Fortiline may even have had reason to discuss price levels of pipe in North Carolina and Virginia. In these circumstances, it may be harder to discern the distinction between legitimate and illegitimate communications. Without access to the full factual record, it is impossible to judge, but Commissioner Ohlhausen's dissent hints that the factual circumstances may have been more complicated than the Commission's complaint would suggest.
The Commission's enforcement action against Fortiline highlights the need for companies in dual distribution situations to be careful in their communications with other distributors as well as with manufacturers that perform dual functions of supplier and competing distributor. The matter confirms that a vertical relationship, such as manufacturer-distributor, will not immunize a firm from antitrust enforcement should communications stray beyond the scope of the vertical relationship into areas where the companies compete.
Finally, although the complaint does not mention how this case came to the FTC's attention, it comes on the heels of the FTC's in-depth investigation of the ductile iron pipe industry and subsequent 2015 complaint alleging a monopolization violation by McWane, Inc., the leading manufacturer in that industry. Companies should be aware that it is possible the antitrust agencies can uncover and challenge unlawful conduct discovered as part of an unrelated investigation, such as a merger or other conduct investigation of a separate company.
For more information, please contact your principal Jones Day representative or any of the lawyers listed below.
Kathryn M. Fenton
Geoffrey D. Oliver
David P. Wales
J. Bruce McDonald
Houston / Washington
+1.832.239.3822 / +1.202.879.5570
Laura E. Malament, an associate in the Washington Office, assisted in the preparation of this Alert.
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