Section 2 of the Sherman Act is a minefield for the unwary and in-house counsel can easily find their company mired in litigation where every contract, meeting, and email comes under scrutiny for alleged “uncompetitive” behavior all because your company is highly competitive and highly successful. Sound like a nightmare? It can be. Below we’ll discuss why Section 2 is something in-house lawyers need to be keenly aware of, especially as their company grows in size.
Unlike Section 1 of the Sherman Act (agreements), Section 2 deals with unilateral action:
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the Several States… shall be guilty of a felony…
US courts have interpreted Section 2 as requiring: a) the possession of monopoly power in the relevant market; and b) the willful acquisition or maintenance of that monopoly power. This means you need to start worrying about Section 2 any time your company crosses over 50% market share because that is the point where competitors, customers, and government regulators can start to make your life difficult. Ironically, things your company did while it was “small” can turn into big problems once it gets “big.” To add to the misery, anti-trust lawsuits are very expensive to defend. And, if the court finds against you, the Sherman Act provides for the tripling of damages along with attorneys’ fees. And plaintiffs can seek injunctive relief which can, in some cases, be worse than having to pay damages.
Section 2 liability begins with your company having a “monopoly” in a “relevant market.” A “market” means all the products in a geographic region that compete (or could compete) with and are interchangeable with your products, i.e., if your product wasn’t available, where would customers in the region turn for a substitute? Those substitutes comprise the product market. From an anti-trust standpoint, you want there to be many substitutes because, if there are, you cannot be a monopolist.
Once there is a properly defined relevant market (product and geography), the next step is to determine whether any of the competitors in that market – including your company – have monopoly power. Monopoly power is the ability to exclude competition or raise prices and not have any competitive consequences. Anti-trust regulators define the latter as the ability to raise prices by 5% and keep them at that level without losing sales. Market share in the relevant market is also a test. If a company has over 70% market share, it is likely considered a monopolist. If the company has less than 50% market share, it probably is not. If the company has between 50% and 70% it falls into a grey zone.
Market share is not definitive, but it is indicative of monopoly power, especially if there are barriers to entry that keep competitors from entering the market.
There is a common misperception that having a monopoly is bad or illegal in and of itself. It’s not. It is perfectly legal in the US for a company to have a monopoly and charge the maximum amount the market will bear. If a company achieves a monopoly because of superior products or business acumen, or by historical accident, it is absolutely 100% fine. Where a monopolist gets in trouble is when it attempts to obtain or maintain a monopoly position through anticompetitive means (“exclusionary conduct”). Once your company obtains a monopoly, then there is a wide range of conduct that can raise antitrust risk if there is a willful acquisition or maintenance of a monopoly through exclusionary conduct. The problem is there are few bright lines for companies to follow as to what crosses the line. Here is a partial list of behaviors that can (but not always) cross the line if your company is a monopolist:
- Refusals to deal
- Use of Most Favored Nations (“MFN”) clauses
- Exclusive dealing contracts
- Loyalty discounts
- Denial of access to competitors
- Predatory pricing (pricing below costs)
- General “bad” behavior (also known as “cumulate acts” – where any one act alone would not be a violation but taken all together, they create a Section 2 “monopoly stew”).
Once your company crosses the 50% market share threshold in-house counsel must start thinking about whether the risk of problems is worth the benefit from these types of behavior as any one of them can land your company in big trouble.
To succeed with a Section 2 complaint, the plaintiff must have suffered an “antitrust injury” of the type protected by the Sherman Act. You can defend your alleged anti-competitive behavior if you have a pro-competitive or pro-business rationale. For example, you might stop doing business with a competitor because they are free-riding on your brand or technology to the detriment of your business. You have the right to defend your conduct. The court will look to see if your company is competing on the merits, in particular, whether you have a rational business purpose behind the challenged behavior. Your job as in-house counsel is to help ensure that the business is taking actions pursuant to a legitimate business need such as:
- Enhanced efficiency/lower costs
- Promotion of intra-brand competition
- Stopping “free riding”
- Higher quality customer service
- Increased output
- Better quality products and services
- Creation of new products and services
As a counselor to the business and as part of your antitrust compliance program, here are several things in-house counsel should consider doing once your company’s market share crosses over 50%:
- Don’t define markets. Be watchful over documents and emails prepared by your business colleagues that purport to define the market for your products.
- Cool the testosterone. It’s fun for the business folks to thump their chests and write about how the company will destroy its competitors, crush the competition, or jam a price increase down customers’ throats. All of these statements will show up as trial exhibits if your company is in the crosshairs of a Section 2 claim.
- Business justification. Listen closely when the business describes what it wants to do and why. Teach them to focus on the business reasons and drop language that may falsely imply other motives, motives that can be construed as “anti-competitive.”
- Keep your ears open. It’s rare that someone intentionally seeks to trip antitrust laws, but it is all too frequent that businesspeople (especially those less experienced) think and act on impulses designed to injure competitors. If those actions are exclusionary or predatory, you have a problem. So, always be on the lookout for proposals for the company to act “badly.”
If your company has over 50% market share, in-house counsel must start educating the business about the potential for heightened scrutiny and how business practices that were perfectly acceptable before now require more thought. Provide training to the business leaders on the scope of single-conduct Sherman Act Section 2 offenses.
Finally, be vigilant and keep your ears open to what your business colleagues are doing. It’s much easier to stop something early than it is to try to fix it when it’s too late.
If you have access to Practical Law, you already have a wealth of resources to help you avoid a Section 2 mess.
STERLING MILLER, HILGERS GRABEN PLLC
Sterling Miller is a three-time General Counsel who spent almost 25 years in-house. He has published five books and writes the award-winning legal blog, Ten Things You Need to Know as In-House Counsel. Sterling is a regular contributor to Thomson Reuters as well as a sought-after speaker. He regularly consults with legal departments and coaches in-house lawyers. Sterling received his J.D. from Washington University in St. Louis.