When Marketing Practices Raise Antitrust Concerns

Many common marketing activities are coming under greater scrutiny from regulators, lawyers and scholars. Companies are scrambling to figure out how that will affect competition.

Antitrust laws can give managers a sobering dose of reality — even managers who believe they are obeying the laws. These days, most business-people know better than to sit down with competitors to fix prices or divide markets, and most are alert to the perils of pricing below cost until competitors fail. However, when considering core marketing issues such as distribution policy, line extensions or joint marketing agreements, or even when trying to enhance the company’s “good citizen” image, they may not realize the growing likelihood of violating antitrust laws. They are especially likely to do so when their brands hold dominant market shares.

The issue is particularly sensitive in the United States, where longtime federal statutes such as the Sherman Antitrust Act are being interpreted with economic rigor. But it applies outside the United States as well; for instance, the European Union’s directives are taking a harder line with antitrust interpretations. For the purposes of this article, we will refer only to U.S. situations.

While marketing practices received increased antitrust scrutiny beginning in the late 1990s,1 a series of events in the early 2000s has reinvigorated the legal thinking regarding marketing concerns and antitrust. There is little debate that the new emphasis is due to significant changes in business practices concerning promotion, sales and distribution. The retail sector’s category management is one example: There has been a shift from each supplier having its own retailer relationship for management and stocking of its products to a practice in which the retailer may entrust one supplier with operation of an entire category of merchandise. What has spurred business interest is a series of challenges to the changed practices leading to verdicts with substantial damages awarded, most notably theConwood case (discussed below) and its billion-dollar verdict.2 Federal antitrust enforcement officials, in particular the U.S. Federal Trade Commission, have begun to scrutinize retail practices such as category management and slotting allowances.3 Academics have also renewed their interest in the topic, in large part spurred by the cases mentioned above.4 In sum, as the marketing world has changed, antitrust lawyers, scholars, enforcement officials and especially competitors affected by these changes have scrambled to understand how the new practices affect competition.<

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References

1. For example, the FTC challenged Toys “R” Us’s practice of threatening not to sell the products of toy vendors that sold the same products to discount warehouses. In other words, Toys “R” Us wanted to be the exclusive retailer of new and exciting toys. See 126 F.T.C. 415 (1978), aff’d,Toys “R” Us Inc. v. Federal Trade Commission, 221 F. 3d 928 (7th Cir. 2000). See also R. Steiner, “Category Management — A Pervasive, New Vertical/Horizontal Format,” Antitrust 15, no. 2 (2001): 77–81.

2. D. Balto, “Ten Developments in the Antitrust Treatment of Category,” chap. 6 in “Course Handbook, 44th Annual Advanced Antitrust Seminar: Distribution & Marketing” (New York: Practising Law Institute, 2005).

3. See FTC, “Report on the Federal Trade Commission Workshop on Slotting Allowances and Other Marketing Practices in the Grocery Industry,” February, 2001, www.ftc.gov/bc/slotting/.

4. See, e.g., M.L. Kovner and C.R. Kass, “Monopolies Take a Hit: Be Careful With Smaller Competitors or They May Come Back to Haunt You,” Marketing Management (September–October 2003): 48–50; D. Desrochers, G. Gundlach and A. Foer, “Analysis of Antitrust Challenges to Category Captain Arrangments,” Journal of Public Policy & Marketing 22 (fall 2003): 201–215; R. Steiner, “Category Management — A Pervasive, New Vertical/Horizontal Format,” Antitrust 15, no. 2 (2001): 77–81; K. Glazer, B. Henry, and J. Jacobson, “Antitrust Implications of Category Management: Resolving the Horizontal/Vertical Characterization Debate,” Antitrust Source (July 2004), www.abanet.org/antitrust/source/july04.html.

5. Certain types of agreements almost always increase price or restrict output, such as agreements to bid-rig, divide markets, etc. For those types of conduct, the “courts conclusively presume such agreements, once identified, to be illegal, without inquiring into their claimed business purposes, anticompetitive harms, pro-competitive benefits, or overall competitive effects.” See FTC and U.S. Department of Justice, “Antitrust Guidelines for Collaborations Among Competitors,” April 2000, www.ftc.gov/os/2000/04/index.htm#7, 3.

6. Section 2 of the Sherman Act, which forbids monopolization, attempts to monopolize and conspiracies to monopolize, appears to be divided along this analytical regime. See M.B. Roszkowski and R. Brubaker, “Attempted Monopolization: Reuniting a Doctrine Divorced From Its Criminal Law Roots and the Policy of the Sherman Act,” Marquette Law Review 73 (1990): 355–420.

7. The more egregious the conduct, the easier it likely will be to persuade courts to go with narrow market definitions. One way is to suggest that the defendant’s conduct is often an indicator of the market intended to be monopolized or restrained. The more egregious the conduct, the better the indication that the defendant considers the product or geographic area a “market” that can be monopolized or restrained.

8. The antitrust enforcement agencies use the Herfindahl-Hirschman Index to determine market concentration. The HHI is the sum of the squared shares that each market participant possesses in the identified relevant market. See Department of Justice and the FTC, “Horizontal Merger Guidelines” (Washington, D.C.: FTC, 1992), Section 1.5.

9. An example from an antitrust course is helpful. In Industry X, suppose there are five equally sized companies, each controlling 20% of the market. 202 + 202 + 202 + 202 + 202 = 2,000 HHI. In Industry Y, suppose there is one company with 60% of the market, and the rest are relatively small. 602 + 102 + 52 + 52 + 52 + 52 + 52 + 52 = 3,850 HHI. A traditional measure of concentration (the four-company concentration ratio known as “CR4”) would indicate that the first market is equally as troublesome as the second (CR4 would equal 80 in both). The HHI, however, indicates that the second market is far more troublesome.

10. One other recent example includes Nestlé SA’s 2001 acquisition of Ralston Purina Co.

11. D. Desrocher, G. Gundlach and A. Foer, “Analysis of Antitrust Challenges to Category Captain Arrangments,” Journal of Public Policy & Marketing 22 (fall 2003): 201–215.

12.Conwood Co. v. United States Tobacco Co., 290 F. 3d 768 (6th Cir. 2002).

13.Conwood Co. v. United States Tobacco Co., 774.

14.Conwood Co. v. United States Tobacco Co., 773.

15.Conwood Co. v. United States Tobacco Co., 785.

16.Conwood Co. v. United States Tobacco Co., 773.

17.Conwood Co. v. United States Tobacco Co., 537 U.S. 1148 (2003).

18.LePage’s Inc. v. 3M Co., 324 F. 3d 141 (3d. Cir. 2003).

19. Sam’s Club stood to gain $264,000 and Kmart Corp. stood to gain $450,000.LePage’s Inc. v. 3M Co., 154.

20.LePage’s Inc. v. 3M Co., 164.

21. A company with monopoly power that prices below incremental cost with a dangerous probability of recouping its investment in below-cost prices may be liable under Section 2 of the Sherman Act. SeeBrooke Group Ltd. v. Brown & Williamson Tobacco Corp., 113 Sup. Ct. 2578 (1993). However, plaintiffs typically do not meet with success on such a theory.

22. Section 3 of the Clayton Act, Title 15, prohibits in part leases, sales or contracts for commodities where the contract may “substantially lessen competition” or “tend to create a monopoly.” Exclusive dealing arrangements may potentially fall into this category.

23. FTC and U.S. Department of Justice, “Antitrust Guidelines for Collaborations Among Competitors,” in J. Flynn, H. First, and D. Bush, “Antitrust: Statutes, Treaties, Regulations, Guidelines, Policies,” 2005–2006 ed. (New York: Foundation Press, 2004), 136.

24.Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).

25.Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 608–609.

26.Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 606 n.34.

27.Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 124 Sup. Ct. 872, 879 (2004).

28.Verizon Communications Inc. v. Law Offices of Curtis V. Trinko LLP, 872.

29. See D. Balto, “Standard Setting in a Network Economy” (presentation at Cutting Edge Antitrust Law Seminars International, New York, Feb. 17, 2000); see also C.E. Handler and J. Brew, “The Application of Antitrust Rules to Standards in the Information Industries — Anomaly or Necessity?” Computer Lawyer 1, no. 11 (1997): 14.

30. SeeIn the matter of Union Oil Company of California, Docket No. 9305, www.ftc.gov/os/2003/03/unocalcmp.htm.

31. Ibid.

32. See Dell Computer Corp., 121 FTC 616 (1996).

33. Ibid.

34. R. Foley, “Price-Fixing Suit Against Bars Dismissed. 24 Bars Were Not Conspiring in Banning Weekend Drink Specials, Judge Rules,” St. Paul Pioneer Press (Minnesota), Apr. 8, 2005, p. B2.

35.U.S. v. Topco Associates, 405 U.S. 596, 610 (1972).

36. B. Gelb, “Why Rich Brands Get Richer, and What to Do About It,” Business Horizons 35 (September–October 1992): 43–46.

37. Author’s interview with Richard Mullineaux, Shell USA (retired), Sept. 19, 2004.

38. M.L. Kovner and C.R. Kass, “Monopolies Take a Hit: Be Careful With Smaller Competitors or They May Come Back to Haunt You,”Marketing Management (September–October 2003): 48–50.