Antitrust Training for Your Sales Team

Jill Jacobson, Husqvarna Erika Ahern, CNA National J. Paul Allen, Contech Engineered Solutions

Session Goals • This session targets communicating key Antitrust topics to your Sales Team. – For that reason, the focus is on spotting issues, recognizing potential problems and escalating those situations within the company (ABC Corp.) to be addressed by appropriate personnel (legal, management, etc.)

• The session is not designed to be an in-depth analysis of specific Antitrust issues for the Legal Department. – Our materials include “A Primer on Antitrust Fundamentals” by Howard Feller of McGuire Woods. This was prepared for an ACC presentation in Charlotte, NC on March 8, 2016.

• Audience participation (taking on the role and asking questions your Sales Team may ask) is highly encouraged. – The “shell” of this presentation, with presenter notes, is provided in PowerPoint format with our materials. Feel free to customize for your own situation from the template.

Resale Price Maintenance Agreements • Resale Price Maintenance (“RPM”) agreements (post-Leegin) are likely beyond the scope of basic training for your Sales Team. – – – –

History prior to Leegin was complex. Leegin provided rule of reason treatment for RPM but is not a “silver bullet.” Many state courts and legislatures (e.g., CA) have expressly rejected Leegin Other states have not yet responded

• Typical approach is to use “belt & suspenders” – First, make price directive unilateral so no agreement can be shown – Second, defend RPM structure under a rule of reason analysis as opposed to the prior per se violation treatment it received (pre-Leegin)

• See p. 12 of H. Feller materials provided

Mergers & Acquisitions • Antitrust implications of mergers and acquisitions are likely beyond the scope of basic training for your Sales Team. – Fun with the cable industry – Usually beyond Sales Team – Part of a larger project

Session Goals • Any questions about structure before we start? • If not, let’s use the improv comedy mantra of “Yes, and” and get involved as opposed to the “No, but” mantra you might be tempted by during the last session of ACC AM 2016

Antitrust Training for the ABC Corp. Sales Team

In-House Lawyer

Federal Antitrust Statutes Sherman Antitrust Act (1890) - First federal statute to limit cartels and monopolies. Purpose: to prohibit agreements in restraint of trade and unfair monopolization Clayton Antitrust Act (1914) - Modification to the Sherman Act • Prohibits sellers from forcing buyers not to deal with the seller’s competitors. • Prohibits sellers from “Tying “ (forcing buyers to buy a product on the condition they buy another product offered by the Seller) Robinson-Patman Act (1936) aka “Anti-price discrimination Act” • Requires sellers to sell to everyone at the same price. • Prohibits buyers from knowingly receiving a better price than others • Prohibits sellers and buyers from using brokerage, allowances, and services to accomplish indirectly what the Act prohibits.

Why do we care? • Business ethics and acumen • Antitrust violations are CRIMINAL offenses – Corporations can be fined up to $100 million – The individuals involved can be fined up to $10 million – The individuals involved can be imprisoned for up to 10 years • There is significant civil liability as well • Customers or competitors injured by anticompetitive conduct can sue for damages – Damages can be automatically tripled – Attorney fees can be awarded – Antitrust litigation is intrusive, costly, and burdensome

Why do we care?

Restraint of Trade • The antitrust laws prohibit agreements between competitors that restrain trade – What’s a “restraint of trade?” • An agreement or joint action between competitors that has an adverse effect on competition or the market (e.g. higher prices, lower output, fewer competitors)

What’s an “agreement”? • What is an agreement under the antitrust laws? – Proposal/offer and acceptance – It doesn’t take a formal contract • It does not have to be written down – It can be verbal – It can even be unspoken/visual • Even body language can be dangerous – Wink, wink • Drawing, etc.

Scenario #1 – Agreement or not? • Suppose you run into one of your competitors. He says, “You know, it would be better if you took the projects north of the river and I take the ones on the south side. It’d be easier and cheaper for everyone, including the customers.” You make a comment about the weather and walk away.

• Is this an “agreement” under the antitrust laws? – No, not by itself – Obviously it is illegal if you agree to it – Even if you don’t explicitly agree to it, you will create the appearance of illegality if you don’t bid on projects in on the other side of the river

The ABC Corp Professional – How do you react? • The point here is that someone else’s mistake can put you in a bad situation too: – Tell your competitor you can’t discuss it and you won’t act on their suggestion. No need to give in-depth explanation. – Report it to your supervisor or someone else in the company – Record what happened without emotion, hyperbole or opinion and emphasize your refusal to discuss it or act on it

Automatic Violations •

Some agreements between competitors are automatically illegal – it doesn’t matter why the agreement was made: – Price-fixing - any agreement between competitors on pricing, terms of sale, credit terms, etc. – Bid-rigging - any agreement between competitors on how much to bid or which jobs to bid – Output/production agreement - any agreement between competitors on how much either or both of them will produce – Territory or customer agreements - any agreement between competitors on the territories or customers each will serve – Boycotts / refusals to deal - any agreement among competitors not to do business with a supplier or customer

These are the types of agreements likely to result in criminal prosecution

Discussions with Competitors •

Discussions with competitors can create risk. Some topics can easily lead to an antitrust violation or create an appearance of illegal conduct: Discussing the following are dangerous areas: » Prices with competitors » Delivery terms, credit terms, conditions of sale with competitors » Bid practices • Bid suppression • Complementary / cover / courtesy bidding • Bid rotation » Customers and/or Suppliers with competitors » Strategies or tactics with competitors » Market conditions with competitors

Trade Associations •

Today’s trade associations typically serve many legitimate purposes, and from an antitrust perspective, most trade association activities are procompetitive or benign.  Providing data to trade associations that is aggregated and distributed to members is OK  Engaging in trade association lobbying efforts is OK  Offering other members discounted rates is not OK  Recent FTC actions against trade associations took issue with trade association rules that prohibited members from:    

using comparative ads offering discounted rates to another member’s clients recruiting other member’s employees without giving prior notice soliciting clients from a rival

 Be careful while engaged in seemingly benign conversation at trade association meetings and (especially!) social activities after the meeting

Discussions with Competitors

What can I talk about? • Efforts to benefit the entire industry through safety innovations, new research, industry-wide promotional efforts, standard-setting • Work with competitors to lobby government

Best to discuss these topics through an established trade association

Antitrust Decision Tree Discussions with Competitors

Discussions With Competitors You are having a conversation with a competitor

What can you discuss?

YES But…

NO

Efforts to benefit the entire industry

PRICING

Safety

Delivery Terms

Research

Credit Terms

Common Standards

Conditions of Sale

Lobbying Government

Bid-rotation or Bid Suppression

Note about Market Conditions: Think it all the way through. If competitors want to discuss the current “market conditions,” what are they likely to follow up with? “Times are tough, so we are going to have to idle 1 of our plants next month.” That clearly goes to future supply and could impact pricing in the market. “Times are tough, so we are going to have to cut price to maintain the same market share.” That obviously goes to price which is a “no-no.” “Times are tough, so we have laid off 2 salespersons and my geographic area is much larger. I probably won’t even get to ND this quarter.” Without competition in ND from ABC, the competitor may raise prices or otherwise effect the market. Do not discuss Market Conditions with a competitor – it is a slippery slope.

Complementary Bidding Strategies or Tactics

Market Conditions

Competitive Information • It is perfectly legal under the antitrust laws to get information about your competitors, including their prices, from your customers • It is helpful to make a record that you obtained the information from a customer • It’s risky to get information about your competitors directly from your competitors (e.g. pricing, bid amounts) – The danger is that this will be viewed as a way for you and your competitor to agree (on pricing, customers, territories, etc.) – It is very risky for competitors to exchange information directly with each other about current or future pricing

Antitrust Decision Tree Acquiring Competitive Information

Acquiring Competitive Information I need to get information about competitors

What is the source?

Public Resources

Customers

Dealers

Competitors

Unacceptable

Acceptable Are you & your Competitor using the customer as a “clearinghouse” for competitive information?

Are you & the dealer providing quotes for the same project?

NO

YES

NO

YES

Acceptable

Unacceptable

Acceptable

Unacceptable

Working with Distribution Dealers who are your customers AND your competitors – OK to discuss issues about the supply of ABC products to a dealer, even though the dealer also competes with you – Avoid discussion with the dealer about the areas on which you are competing (i.e., your price to contractors or what you are bidding on a project).

– Ask yourself – “Is the dealer I am working with right now acting as a customer or a competitor?” – When in doubt ask your manager!

Antitrust Decision Tree What to do if You Suspect a Violation

What to do if You Suspect a Violation You are having a conversation with a competitor

Do you suspect a possible antitrust violation?

YES

Avoid the conversation and change the subject

NO

Tell the competitor you cannot discuss it

Record the incident and your refusal to discuss

Tell your manager about the incident

Remain alert for possible risks

Scenario #2 Competing with your Dealer • ABC and one of our dealers are quoting the same contractors on the same project. – The dealer currently is buying from ABC at a 10% discount from our published List Price / MSRP • Is it okay for ABC to quote the dealer a price for a project on which ABC is also quoting? – YES – here the dealer is in the role of ABC’s customer

Scenario #2 (cont.) Competing with your Dealer • ABC chooses to quote List Price to the contractors who are bidding the job. – The dealer knows from previous projects that we typically quote at List Price. • Can ABC still quote List Price even though that means the dealer is likely to quote the job about 1% below List Price and get the order? – YES, as long as ABC and the dealer have not agreed on their quotes for the project • Can ABC and the dealer agree on the amount of either ABC’s OR the dealer’s submitted bid price? – NO! In this context ABC and the dealer are competitors

Antitrust Decision Tree Discussions with Dealers or Distributors

Discussions with Dealers or Distributors You are having a conversation with a dealer or distributor

Are you quoting a price?

YES

NO Acceptable

Are you competing with the dealer or distributor in this situation?

* Acceptable but avoid risky topic areas

YES

NO

Do NOT Discuss

OK to Discuss

Contractors

Other areas of competition

Selling price

Strategies

Selling strategies Joint promotions

Can ABC refuse to sell to someone? • YES • You do not have to quote everyone who asks for a price. – You can pick and choose to whom you want to quote – You do not have to sell your products just because someone wants to buy them – You can sell to anyone you like, and refuse to sell to anyone you like

Antitrust Decision Tree Selling to Customers

Selling to Customers Are we selling a product to all customers?

NO

Picking & choosing which customers to quote?

YES

Refusing to sell to a particular customer?

Not part of larger boycott or refusal to sell decision with others

Acceptable – you do not have to sell your products just because someone wants to buy

Acceptable – no antitrust risk in selling to all buyers

Can ABC tie or bundle products? • “Tying” means refusing to sell a customer a product unless it also buys another, different product • Tying may be illegal, but only if the seller has a high market share so that the customer really has no choice but to buy the second product as well • “Bundling” – offering a package of products at a reasonable discount is usually okay • You should seek legal advice before entering a contract that could be considered tying – i.e. one where the customer might be reluctantly buying a second product

Antitrust Decision Tree Bundling Products: Is it Unlawful Tying?

Bundling* Products: Is it unlawful tying*? Am I grouping our products?

YES

NO

Is the bundled discount reasonable?

Is there a business reason?

NO

YES

YES

Raises concerns of unlawful tying

Return to Start

NO Review potential missed opportunity

Must customer buy one product to obtain another?

Discuss with counsel

Note: Yes means a buyer must buy Product A or we will not sell Product B

NO YES Unacceptable – raises concerns of unlawful tying

No, buyer is free to choose to buy one or more of our products

Acceptable Discuss with counsel

*Tying – refusing to sell a customer a product unless it also buys another, different product. Tying may be illegal, but only if the seller has a high market share so that the customer really has no choice but to buy the second product as well. *Bundling – offering a package of products at a reasonable discount is usually okay

Can we set any price we want? • YES, but there are some important limitations – Contractual commitments – Price-discrimination laws (Robinson-Patman)

Robinson-Patman Act - Price Discrimination • Good Business Acumen! – Robinson-Patman Act provides a good foundation & general guideline to follow • “Price discrimination” means charging one customer a different price than another customer for the same product

Robinson-Patman Act - Price Discrimination A violation requires that there actually be two sales, from the same seller, to two different purchasers made at different prices around the same time. – Basic rule – a price, discount, or rebate must be “reasonably available” to all buyers for products of “like grade and quality” – There’s no violation, for example, if an unaccepted bid or offer is higher or lower than the price someone else actually paid – This means that the rules for general market pricing (where there are many sales made) are different than the rules for a particular project (where only one sale will be made) – The sales at issue must be “reasonably contemporaneous” – that is, they must occur around the same time

2006 Supreme Court Decision – Interpretation Changes A 2006 decision of the U.S. Supreme Court significantly limited the application of the Robinson-Patman Act in bidding situations - Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. After the Volvo Trucks decision:  It would be difficult to ever show a violation based on different prices being offered in different bidding situations  Bidders for different projects are not in direct competition with each – each project is an individual competition  It would also be difficult to ever show a violation based on a different prices being offered to different bidders for the same project  A violation requires overall injury to competition, which is very unlikely to result from discriminatory pricing for a single project  A single project results in a single sale of the product at issue, and a violation requires two sales at different prices  It is possible that a violation could be shown if the same bidder was given worse pricing for every project over a significant period of time

Robinson-Patman Exceptions • Quantity discounts if “reasonably available” • Meeting your competitor’s price • Different costs to serve the customer • Customers not in competition with each other • Distributors vs. end users

Exception – Quantity Discounts • Quantity discounts are permitted, so long as they are reasonably available to other customers • A quantity discount can be challenged if the quantities required for the discount are so high that only a few customers can realistically earn the discount

Exception – “Meeting Competition” •

Price discrimination is permitted if the price or discount is offered to meet a price or discount offered by your competitor – Suppose a competitor offers your customer a price 10% less than the ABC quoted price. – You can give the customer a 10% discount without making that discount available to other customers. – This exception allows you to match a competitor’s price, but not to beat that price – If ABC beats the competitor’s price, then that price must be reasonably available to other customers – This exception applies only when there is an actual competitive situation – it doesn’t apply just because you are worried about losing the customer’s business

Exception – Cost Justification •

Price discrimination is also permitted if the cost of serving different customers has variables. – Some examples: • Large volume orders • Bundled orders • Handling costs can vary from order to order – Nesting of materials can reduce freight costs • Manufacturing costs can vary from Plant to Plant • Customer credit history (payment history)

• •

The discount given can not be higher than the cost savings associated with that customer The discount must be based on real, quantifiable cost savings

Exception – Distributors vs. End Users • Many territories have multiple dealers and/or distributors – The partnership will justify different pricing structure • Functional Discounts – Dealers do more to help drive the business • Marketing and promotion • Stocking material – inventory • Serving smaller potential customers • Important to handle these consistently – Do you have strategies and tactics to go to market?

Antitrust Decision Tree Setting Prices

Setting Prices & Robinson-Patman Can I set any price I want?

Transactional Quotes

Is there a contract?

Project-based Quotes (single sale)

(multiple future sales)

Are you charging different customers different prices for the same product at the same time?

YES Apply contract pricing

Different costs to serve different customers

Acceptable

Are you charging different customers different prices for the same product at the same time?

Acceptable

YES

NO

WHY?

Acceptable

Customers not competing with each other

Acceptable

Meeting competition

Quantity discount

Other

Acceptable

Reasonably available to all customers?

Check with Counsel may violate RobinsonPatman

YES

Acceptable

NO

Unacceptable – may violate Robinson-Patman

Scenario # 3 - Preferred Dealer • ABC has several dealers that service a particular market. • One of those dealers is much more successful and purchases significantly more material from us than the other dealers. • ABC quotes each of the dealers the exact same price when they are quoting on the same project. • Is there any problem with quoting each dealer the same price for the same project? – NO – It is always okay under the antitrust laws to offer the same price across the board

Scenario # 4 (cont.) - Alternative Quotes • Does the use of these alternative quotes violate the RobinsonPatman Act? NO, for two reasons: 1. A violation requires two sales of the product at different prices • In the context of a single project, there will only be one sale 2. The better price is reasonably available to all of the bidders • If the customer gets a higher price, it is because of the customer’s own decision

Scenario # 4 - Alternative Quotes • ABC has a large private project bidding on a new commercial development. There are multiple products specified on the project and the opportunity could be worth more than $1.5 million in revenue. • The pre-bid strategy is to create two different quotes. The Salesperson will visit with each bidder and offer a lower price before bid time if the contractor will sign our quote and commit the order to ABC (subject to being awarded the contract). If the contractor will not commit the order to the Sales Engineer then the contractor will get a higher priced quotation.

If you are in doubt, ask! • This presentation can’t possibly tell you how to act in every situation that raises antitrust concerns • Our goal is to help you spot situations that may have the potential for risk, so you can seek legal advice when these situations arise • If you have a concern, contact your manager.

When in Doubt, Ask You are dealing with competitors, dealers, distributors, or customers

Are you in doubt about whether an antitrust issue is present?

YES

Look at ABC resources (Intranet)

Helpline

NO

Always keep Call an expert

Manager

alert for risks!

Legal Department

Questions ??