FTC Scrutinizing Information-Sharing Agreements

The Federal Trade Commission apparently is turning a closer eye to distribution and information-sharing agreements that could amount to collusion and price fixing, as three companies recently learned the hard way.

Last month, the FTC filed complaints against three of the largest U.S. pipe-fitting suppliers—McWane, Star Pipe Products, and Sigma—alleging that starting in 2008 the companies conspired with one another to fix prices for ductile iron pipe fittings, used in municipal water systems.

The charges reflect the “heightened enforcement efforts of the current FTC,” says Peter Guryan, a partner in the antitrust department of law firm Fried Frank.

The FTC brought the actions under Section 5 of the FTC Act, which prohibits “unfair methods of competition” and “unfair or deceptive acts or practices.” While price-fixing charges more often are brought by the Justice Department for violations of the Sherman Act, there is “nothing unusual in the FTC pursing this particular transaction,” says Kathryn Fenton, a partner with law firm Jones Day.

What's unusual is the vehicle these companies used to exchange information: their industry trade association. According to the FTC complaint, from June 2008 to January 2009, McWane, Star, and Sigma exchanged information about their monthly sales volumes through their trade group, the Ductile Iron Fittings Research Association, so that each company could monitor whether the others were adhering to the terms of their arrangement. To further the conspiracy, the illegal agreement, the FTC charges, allowed each company to raise its prices for the iron pipe fittings twice in 2008 without fear of losing business.

The charges are ringing alarm bells across several industries, since a wide range of industries share sales data through trade associations. The FTC complaint reminds companies that just because a practice is common, that doesn't mean it's legal, lawyers say.

“[This enforcement action] is a reminder of the potential dangers inherent in information sharing with competitors and reinforces the importance of obtaining legal advice on the appropriate parameters of such activities.”

—Kathryn Fenton,

Partner,

Jones Day

Such information sharing, while appropriate and often pro-competitive in nature, also may raise red flags and needs to be properly managed, Guryan says. “Companies need to be aware and exercise care with respect to their public communications regarding pricing and their participation in trade association activities,” he says.

In its complaint, the FTC said collusion between the companies took a more anticompetitive turn in 2009 following enactment of the American Recovery and Reinvestment Act (commonly known as the stimulus bill), which allocated more than $6 billion to U.S. water infrastructure projects with the condition that only domestically produced materials be used.

The FTC alleges McWane illegally monopolized the market for domestically produced pipe fittings by persuading Sigma to abandon its efforts to enter the market as an independent competitor to McWane, and instead act as its distributor.

To exclude Star from the same market, McWane threatened other distributors with the loss of accrued rebates, shipping delays, or reduced access to McWane's products if they purchased competing products from Star. Sigma agreed to adopt similar policies in a joint attempt to freeze Star out of the domestic market and share in a portion of McWane's profits. McWane and Sigma violated the law by participating in this collusive agreement, the FTC said.

THE COMPLAINT

What follows is an excerpt from the Federal Trade Commission's announcement regarding the McWane and Pipe Products cases:

The Alleged Price-Fixing Agreements Among the Three Companies. The FTC alleges that beginning in 2008, McWane, Sigma, and Star participated in an illegal conspiracy to fix the price at which imported DIPF are sold in the United States.

According to the FTC, McWane invited Sigma and Star to collude with it beginning in early 2008, when it communicated to Sigma and Star a plan to raise and fix prices for imported DIPF. The FTC alleges that Sigma and Star accepted McWane's invitation to collude and, to further the conspiracy, each raised its prices for imported DIPF in January 2008 and again in June 2008. Between June 2008 and January 2009, according to the FTC, the three firms exchanged information documenting the volume of their monthly sales through a trade association called the Ductile Iron Fittings Research Association (DIFRA), and each company used this information to monitor whether the other co-conspirators were adhering to the terms of their collusive arrangement.

Even after the DIFRA information exchange was disbanded in early 2009, the FTC contends, Sigma tried to revive the conspiracy by attempting to convince McWane and Star to raise their prices and resume exchanging pricing data in April 2009. However, according to the FTC, at this point McWane and Star refused Sigma's invitation to collude.

The Alleged Anticompetitive Agreement Between McWane and Sigma Relating to the U.S.-Made DIPF Market. According to the FTC, the market for U.S.-made DIPF got a boost in February 2009, when Congress allocated more than $6 billion to U.S. water infrastructure projects through the American Recovery and Reinvestment Act (ARRA) of 2009. The ARRA required that only domestically produced materials be used in many ARRA-funded projects. At the time, McWane allegedly had a monopoly position in the most commonly used U.S.-made DIPF.

Sigma, Star, and another DIPF supplier tried to enter the domestic DIPF market in competition with McWane after the ARRA was passed in 2009. McWane allegedly maintained its monopoly in the market for domestically produced DIPF by agreeing with Sigma that Sigma would abandon its efforts to enter that market and instead, would be compensated by acting as a distributor of McWane's domestically produced DIPF. The complaints against McWane and Sigma allege that both companies violated the law by participating in this agreement, through which Sigma shared in a portion of McWane's monopoly profits, rather than enter the domestic DIPF market as an independent competitor to McWane.

The Alleged Exclusionary Actions by McWane and Sigma. The FTC's complaints against McWane and Sigma also allege that McWane later excluded Star from the domestic DIPF market by threatening to penalize distributors if they bought Star's domestically produced DIPF, and that Sigma agreed to adopt similar policies in a joint attempt with McWane to exclude Star from the domestic market, and thereby to share in a portion of McWane's monopoly profits in that market.

According to the FTC, the plan worked, as many distributors who otherwise would have bought domestic DIPF from Star instead dealt exclusively, or nearly exclusively, with McWane and Sigma, hampering Star's ability to compete with McWane and Sigma. McWane and Sigma's alleged course of conduct harmed consumers by preventing competition in the domestically produced DIPF market that would have resulted in lower prices and other benefits to consumers. The FTC alleges this conduct was anticompetitive and illegal.

The Settlement With Sigma. The proposed settlement order against Sigma is designed to remedy its allegedly anticompetitive tactics. It would prohibit Sigma from:

participating in or maintaining any conspiracy to fix, raise, or stabilize the prices at which DIPF are sold in the United States, or to allocate or divide markets, customers, or business opportunities for DIPF;

soliciting or inviting any competitor to participate in any such anticompetitive conduct; and

participating in or facilitating any agreement between competitors to exchange competitively sensitive information, such as the sales information exchanged through DIFRA, and from otherwise disclosing such information to competitors, except in certain circumstances.

The Commission vote approving the complaint against McWane and Star, and the complaint and proposed consent order against Sigma was 4-0, with Commissioner J. Thomas Rosch issuing a separate statement.

In his statement, Commissioner Rosch wrote that, “While I have voted in favor of issuing both complaints, I respectfully object to the complaints' inclusion of claims against McWane and Sigma to the extent that such claims are based on an exclusive dealing theory ... I also respectfully object to the complaints' naming Star Pipe Products, Ltd. (“Star”), a competitor of McWane and Sigma, as a respondent in an alleged horizontal conspiracy to fix the prices of ductile iron pipe fittings (DIPFs) sold in the United States and in an alleged, related, information exchange ...”

Source: FTC.

Not all of the FTC commissioners agreed fully with the enforcement actions. Commissioner Thomas Rosch issued a two-page dissent, writing that while he voted in favor of the actions, he objected to the charges against Star as a co-conspirator because the company “seems much less culpable than the others.”

“More specifically, I believe that we must be mindful of the consequences of public law enforcement in assessing whether the public interest favors joining Star as a co-conspirator,” Rosch wrote. He also found it difficult to believe that Star could be both a victim of McWane's alleged “threats” to deal exclusively with distributors, and a co-conspirator at the same time.

Rosch further expressed skepticism that the FTC could prevail on its theory of exclusive dealing, pointing to case law in several federal appellate courts that bless the same conduct.

Sigma Settlement

Sigma already has agreed to settle with the FTC by means of a consent decree that does not include monetary penalties or an admission of wrongdoing. In a statement, Sigma said it continues to “strongly dispute” each of the FTC's allegations. “Sigma believes that the FTC's characterization of its business practices as anything other than pro-competitive is completely misplaced, and that Sigma has at all times complied with antitrust laws.” The company said it settled to avoid the cost of litigation.

As part of the settlement, Sigma agreed not to engage in similar anticompetitive tactics in the future. But what makes the settlement with Sigma unusual, Fenton says, is the “fairly draconian remedies” contained in the FTC consent decree, which are considerably more restrictive than those established under the healthcare policy guidelines issued by the FTC and Justice Department in 1996.

Those healthcare policy guidelines essentially created a safe harbor for competitors to share information that met certain criteria. For example, any data shared must be at least 90 days old, and the information must be collected and aggregated by a third party. “Those guidelines have been the reference point that many anti-trust lawyers have used in counseling on data exchanges,” Fenton says.

In this case, the FTC's settlement with Sigma allows for certain exchanges of information, but requires that any data shared must be at least six months old, rather than just 90 days. Additionally, while the trade association may create aggregated statistics, such information must be made publicly available if it is communicated to any contributor.

Having to make that information public and shared with participants is “something that hadn't appeared in the guidelines before,” Fenton says.

“This enforcement action should be of interest to any company involved in competitor information exchanges,” Fenton adds. “It is a reminder of the potential dangers inherent in information sharing with competitors and reinforces the importance of obtaining legal advice on the appropriate parameters of such activities.”

The public comment period over the proposed consent agreement with Sigma closed on Feb. 6. The FTC will now decide whether to make it final.

While the FTC commonly seeks comment over a consent order, changing terms of the consent order as a result of comments would be quite unusual, Fenton says. “I suspect this will be like the vast majority of cases where few, if any, comments will be received, and where the agency will look at them but will not make any changes,” she says.

The FTC received only one comment letter, written by Electrosteel USA (EUSA), a competitor of Sigma. In its letter, EUSA wrote: “In light of the identical price increases on domestic and imported fittings announced by both Sigma and Star Pipe Products on Jan. 20—merely two weeks from the date of the entry of the Sigma consent order—we must ask whether the alleged wrongdoers either continue to engage in improper communications regarding prices or their historic exchanges of proprietary information and market data continue to taint the pricing process.”

Thus, EUSA requests that the FTC further require Sigma, Star, and McWane to publicly disclose all historical data that is at least six months old that was improperly shared among the co-conspirators, including data pertaining to annual sales and geographic demand.

As far as the other two actions, McWane and Star deny the charges and continue to oppose the FTC's administrative complaint, which will be heard before an administrative law judge in September.