What do Trade Creditors Need to Know


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Information on credit management and the federal antitrust laws.

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What do Trade Creditors Need to Know

  1. 1. NACM OREGON/CMA WEBINAR PRESENTATION CREDIT MANAGEMENT AND THE FEDERAL ANTITRUST LAWS November 12, 2009 9:00 – 10 a.m. Pacific Daylight Time Presented by: George J. “Jack” Cooper Lawyer and Partner Dunn Carney Allen Higgins & Tongue LLP 851 S.W. Sixth Avenue, Suite 1500 Portland, Oregon 97204 Telephone: (503) 306-5323 Facsimile: (503) 224-7324 E-Mail: [email_address]
  2. 2. INTRODUCTION <ul><li>The federal antitrust laws are probably the least understood of all the statutes regulating business conduct in the United States. While the intricacies of these laws can be challenging, the basic principles are relatively straightforward. This is particularly true in the context of credit management . </li></ul>
  3. 3. ANTITRUST POLICY <ul><li>The basic objectives of the antitrust laws are to preserve and promote healthy and efficient competitive markets, and to ensure that business decisions are made independently, without consultation or agreements between competitors. The laws are designed to maximize opportunities for private competition, to efficiently allocate resources, and to produce the highest quality product at the lowest possible price. </li></ul>
  4. 4. ANTITRUST POLICY <ul><li>“ The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive of the preservation of our democratic, political and social institutions. But even were that premise open to question, the policy equivocally laid down by the Act is competition.” Northern Pacific Railway v. United States , 356 U.S. 1, 4-5 (1958). </li></ul>
  5. 5. PRIMARY ANTITRUST STATUTES <ul><li>Sherman Act, Section 1: Prohibits contracts, combinations and conspiracies in restraint of trade. </li></ul><ul><li>Sherman Act, Section 2: Prohibits mono-polization, attempts to monopolize and conspiracies to monopolize. </li></ul><ul><li>Clayton Act: Prohibits exclusive dealing arrangements, tying arrangements and requirement contracts, where the effect may be to substantially lessen competition. </li></ul>
  6. 6. PRIMARY ANTITRUST STATUTES <ul><li>Robinson-Patman Act: Prohibits unlawful discrimination in prices between different purchasers in the sale of commodities, where such discrimination may lessen competition. </li></ul><ul><li>Federal Trade Commission Act, Section 5: Prohibits unfair methods of competition and unfair deceptive acts or practices. </li></ul>
  7. 7. ENFORCEMENT AND PENALTIES <ul><li>The antitrust laws are enforced by the Antitrust Division of the United States Department of Justice and the Federal Trade Commission, together with their state counterparts. </li></ul><ul><li>In addition, private parties have standing to sue to seek treble damages and attorney fees. </li></ul>
  8. 8. ENFORCEMENT AND PENALTIES <ul><li>The Sherman Act is both a civil and criminal statute. Criminal violations are felonies punishable by imprisonment of up to ten years, together with fines of up to $100 million for corporations and $1 million for individuals. </li></ul><ul><li>The federal antitrust laws will generally apply to conduct that takes place outside of the United States, if such activities have a “direct, substantial and reasonably foreseeable effect” on domestic commerce . </li></ul>
  9. 9. TYPES OF ACTIVITIES PROHIBITED BY THE ANTITRUST LAWS <ul><li>Price Fixing: Agreements by competing sellers to set prices by which goods or services are sold, or agreements by competing buyers to set prices for which goods or services are purchased. </li></ul><ul><ul><li>In 1980, the Supreme Court held that a conspiracy among competing wholesalers to standardize credit terms offered to a purchaser was “just as plainly anticompetitive as a direct agreement to raise prices:” </li></ul></ul><ul><ul><li>“ It is virtually self-evident that extending interest-free credit for a period of time is equivalent to giving a discount equal to the value of the use of the purchase price for that period of time. Thus, credit terms must be characterized as an inseparable part of the price. An agreement to terminate the practice of giving credit is thus tantamount to an agreement to eliminate discounts, and this falls squarely within the traditional per se rule against price fixing.” </li></ul></ul>
  10. 10. TYPES OF ACTIVITIES PROHIBITED BY THE ANTITRUST LAWS <ul><li>Bid-Rigging: Agreements to set or stabilize prices that will be offered to either buy or sell goods or services, often to government agencies. </li></ul><ul><li>Exchanges of Price Information: Agreements by which competitors share price information and data. This can be used as evidence of an illegal conspiracy to fix prices. </li></ul>
  11. 11. TYPES OF ACTIVITIES PROHIBITED BY THE ANTITRUST LAWS <ul><li>Group Boycotts: Agreements by which buyers or sellers agree not to buy or sell goods or services. </li></ul><ul><li>Dividing Territories/Customers: Agreements by which competitors allocate either customers or territories, in an attempt to lessen overall competition. </li></ul><ul><li>Resale Price Maintenance: Agreements by which a seller of goods restricts the downstream resale price of those goods. </li></ul>
  12. 12. TYPES OF ACTIVITIES PROHIBITED BY THE ANTITRUST LAWS <ul><li>Exclusive Dealing: Agreements where buyers and sellers agree to buy or sell goods or services only with each other, to the exclusion of other potential competitors. </li></ul><ul><li>Tying Arrangements: Agreements by a party to sell one product or service, but only on the condition that the buyer also purchases a different product or service. </li></ul><ul><li>Monopolization: Either unilateral or concerted activities designed to result in a monopolization of a relevant market. </li></ul><ul><li>Price Discrimination: Charging different prices to different purchasers where the effect will lessen competition. </li></ul>
  13. 13. ELEMENTS OF AN “AGREEMENT” <ul><li>Violations of the Sherman Act, Section 1, require proof of an agreement. </li></ul><ul><ul><li>“ The correct standard is that there must be evidence that tends to exclude the possibility of independent action by the [parties]. That is, there must be direct or circumstantial evidence that reasonably tends to prove that [the parties] had a conscious commitment to a common scheme designed to achieve an unlawful objective.” Monsanto Co. v. Spray-Rite Service Corp. , 465 U.S. 752 (1984) </li></ul></ul>
  14. 14. ELEMENTS OF AN “AGREEMENT” <ul><ul><li>Such agreements can be established either by direct or circumstantial evidence. </li></ul></ul><ul><ul><ul><li>Only rarely will there be direct evidence. </li></ul></ul></ul><ul><ul><ul><li>Proof is normally established by circumstantial evidence from which a jury could reasonably infer the existence of an agreement. </li></ul></ul></ul><ul><ul><ul><li>Agreements can be inferred based on patterns of uniform business conduct—”conscious parallelism” </li></ul></ul></ul><ul><ul><ul><li>Review potential opportunity and motive </li></ul></ul></ul><ul><ul><ul><li>Inferences from attendance at meetings, contacts with competitors, expense and telephone reports, e-mails </li></ul></ul></ul><ul><ul><li>“ A knowing wink can mean more than words.” </li></ul></ul>
  15. 15. UNILATERAL CONDUCT <ul><li>Unilateral conduct, or action by just one party, generally cannot form the basis for a violation of Section 1 of the Sherman Act. Businesses generally have the right to determine whether or not to do business with another party. With few exceptions, a company is free to unilaterally decide to no longer do business with another company. </li></ul>
  16. 16. STANDARDS OF LEGALITY <ul><li>If read literally, the Sherman Act, Section 1, would prohibit all agreements that might result in any “restraint of trade.” Over the years, the Supreme Court has fashioned several tests by which business conduct can be judged to determine whether an agreement might unreasonably restrict competition. </li></ul>
  17. 17. STANDARDS OF LEGALITY <ul><li>Per Se Violations </li></ul><ul><li>A decreasing number of serious and “horizontal” activities prohibited by the antitrust laws are considered by the courts to be per se violations. These types of business conduct are considered to be so serious and “pernicious” that they preclude any potential procompetitive effects. As a result, such conduct is presumed to be illegal. In the event that such conduct can be established, there will be no viable defenses permitted. </li></ul>
  18. 18. STANDARDS OF LEGALITY <ul><li>Examples of per se violations may include: </li></ul><ul><li>Price Fixing </li></ul><ul><li>Bid Rigging </li></ul><ul><li>Territorial/Customer Restrictions </li></ul><ul><li>Group Boycotts </li></ul><ul><li>Tying Arrangements </li></ul>
  19. 19. STANDARDS OF LEGALITY <ul><li>“ Rule of Reason” Analysis </li></ul><ul><ul><li>For those business activities not falling within the “per se” rule, antitrust legality depends upon whether the behavior is anticompetitive or procompetitive in nature. The infrastructure of the economic market and industry involved are usually determinative in this analysis. These are usually “vertical” restraints, where the arrangements are not between direct competitors. There is an increasing trend to judge conduct using a rule of reason analysis instead of labeling it as per se . </li></ul></ul>
  20. 20. “ Horizontal” vs. “Vertical” <ul><li>For purposes of antitrust analysis, courts often look at whether the restraint of trade is “horizontal” or “vertical” in nature. This can be particularly important in determining whether conduct is judged pursuant to per se analysis. </li></ul><ul><li>Generally, agreements between competitors, at the same level in the overall chain of distribution, will be considered “horizontal.” This would include, for example, agreements between manufacturers, between wholesale distributors, or between retailers. </li></ul>
  21. 21. “ Horizontal” vs. “Vertical” <ul><li>On the other hand, agreements between parties that are on different levels within the chain of distribution will generally be viewed as “vertical.” This can include agreements between a buyer and a seller, a manufacturer and a wholesaler, or a wholesaler and a retailer. </li></ul><ul><li>Generally, horizontal agreements will be viewed much more carefully, and are less likely to be judged under a “rule of reason” analysis. This is particularly true when price is involved. </li></ul><ul><li>“ Vertical” agreements will generally be judged under a more lenient “rule of reason” analysis, particularly when price is not an element of such an agreement. </li></ul>
  22. 22. PRICE DISCRIMINAITON (Robinson-Patman Act) <ul><li>The Robinson-Patman Act is undoubtedly the least understood of all the American antitrust laws. </li></ul><ul><li>Elements: </li></ul><ul><ul><li>Must involve some aspect of interstate commerce </li></ul></ul><ul><ul><li>Discrimination must arise out of at least two consummated and contemporaneous sales transactions. </li></ul></ul><ul><ul><li>Discrimination must be by the same seller in dealings with different purchasers </li></ul></ul>
  23. 23. PRICE DISCRIMINAITON (Robinson-Patman Act) <ul><li>Elements: </li></ul><ul><ul><li>Discriminating sales must involve “commodities” </li></ul></ul><ul><ul><li>Commodities must be of “like grade and quality” </li></ul></ul><ul><ul><li>There must be actual price discrimination </li></ul></ul>
  24. 24. PRICE DISCRIMINAITON (Robinson-Patman Act) <ul><li>Requirement of Competitive Injury </li></ul><ul><li>Even if there is price discrimination, certain conduct will be prohibited only if the impact of that discrimination may be substantially: </li></ul><ul><ul><li>To lessen competition in any line of commerce, or </li></ul></ul><ul><ul><li>To tend to create a monopoly, or </li></ul></ul><ul><ul><li>To injury, destroy or prevent competition with any person who grants or receives the benefit of the discrimination, or with customers of either of them </li></ul></ul>
  25. 25. PRICE DISCRIMINAITON (Robinson-Patman Act) <ul><li>The Robinson-Patman Act is a part of the Clayton Act, and as such an agreement between two or more parties is not required. However, note that the favored buyer can be liable, along with the seller, if price discrimination can be established. </li></ul>
  26. 26. EXCEPTONS TO ROBINSON-PATMAN <ul><li>“ Quantity Discount:” </li></ul><ul><li>It is permissible to charge different prices based upon the number of units sold and the internal cost efficiencies realized by manufacturing a larger number of units. </li></ul>
  27. 27. EXCEPTONS TO ROBINSON-PATMAN <ul><li>The “Meeting Competition” Defense: </li></ul><ul><li>If a seller can verify that a competitor is selling a product to an account at a lower price than the seller would normally be charging, then it is permissible for that seller to meet that price. Care must be taken to confirm the price in a manner not to inadvertently result in a price-fixing arrangement. </li></ul>
  28. 28. CAN DIFFERENT CREDIT TERMS RESULT IN PRICE DISCRIMINATION? <ul><li>The U.S. Supreme Court has ruled that credit terms are inseparable components of price. As such, at least in theory, a seller who imposes different credit terms on different buyers would be subject to the price discrimination restrictions of the Robinson-Patman Act. </li></ul>
  29. 29. CAN DIFFERENT CREDIT TERMS RESULT IN PRICE DISCRIMINATION? <ul><li>However, courts historically have been reluctant to interfere or “second guess” the judgment of credit professionals. There is a recognition that risk factors often control credit terms, and that issues such as financial strength, payment history, prior bankruptcies, etc., can all be important and subjective factors in this overall risk assessment. </li></ul>
  30. 30. CAN DIFFERENT CREDIT TERMS RESULT IN PRICE DISCRIMINATION <ul><li>In order to avoid an inference of price discrimination from different credit terms, consider categorizing accounts by risk, and then assigning credit terms accordingly. If done properly, all accounts with the same relative risk factor would have the same credit terms. </li></ul>
  31. 31. SPECIAL CONSIDERATIONS FOR CREDIT MANAGEMENT <ul><li>INDUSTRY CREDIT GROUPS: </li></ul><ul><li>The antitrust laws should encourage lawful participation in industry credit groups. These activities can result in more informed credit decisions, fewer bad debts, and ultimately lower prices for the end user or consumer. This is consistent with the overall goals of the antitrust laws. </li></ul>
  32. 32. SPECIAL CONSIDERATIONS FOR CREDIT MANAGEMENT <ul><li>INDUSTRY CREDIT GROUPS: </li></ul><ul><li>Courts have generally upheld the exchange of credit information, as long as all participants to such an exchange remain free to make independent and unilateral business decisions as to the extension of credit. </li></ul><ul><li>“ Decisions involving credit have always required and produced totally different results from those involving prices. It has long been held that the exchange of information between competitors regarding the creditworthiness of customers does not violate any provision of the federal antitrust laws.” </li></ul>
  33. 33. SPECIAL CONSIDERATIONS FOR CREDIT MANAGEMENT <ul><li>INDUSTRY CREDIT GROUPS </li></ul><ul><li>However, as most industry credit groups involve meetings of competitors, participants must be careful to avoid any inferences of conduct prohibited by antitrust laws </li></ul>
  34. 34. SPECIAL CONSIDERATIONS FOR CREDIT MANAGEMENT <ul><li>INDUSTRY CREDIT GROUP PRECAUTIONS </li></ul><ul><ul><ul><li>Avoid exchanging information relating to price or payment terms, to avoid any inference of price fixing or the unlawful exchange of price information </li></ul></ul></ul><ul><ul><ul><li>Only discuss past and completed credit transactions, to avoid any inference of a group boycott </li></ul></ul></ul>
  35. 35. SPECIAL CONSIDERATIONS FOR CREDIT MANAGEMENT <ul><li>INDUSTRY CREDIT GROUP PRECAUTIONS </li></ul><ul><ul><ul><li>Be careful when responding to credit inquiries, particularly as to price and payment term information </li></ul></ul></ul><ul><ul><ul><li>Follow these same guidelines outside of formal meetings </li></ul></ul></ul><ul><ul><ul><li>Do not share information obtained from industry group meetings outside of credit department </li></ul></ul></ul>
  36. 36. OVERALL BEST PRACTICES <ul><li>Avoid any discussions with competitors relating to price, customers or territories. </li></ul><ul><li>Be careful in restricting the ability of any downstream buyer to resell your product. </li></ul><ul><li>If bidding on a project or responding to an RFP, avoid any discussion with competitors or other potential bidders. </li></ul>
  37. 37. OVERALL BEST PRACTICES <ul><li>Be careful in preparing documents and e-mail correspondence, to avoid any appearance or inference of antitrust improprieties. </li></ul><ul><li>If you are concerned about any antitrust- related issue, let management know about it immediately. </li></ul>