F. COMMON ANTI-TRUST VIOLATIONS

Serious anti-trust overtones are present in many selling situations. For example, companies sometimes refuse to deal with a particular customer; distributors may be cut off from receiving future deliveries of product; salespeople may call a customer to verify a price; the list of examples is endless.

Unfortunately, anti-trust laws are complex, and management and staff often do not receive any preventive legal advice or guidelines. As a result, they do not know what types of conduct and speech are forbidden. Few people realize that individuals, including managers, field salespeople and company officers, may be personally liable for failing to act within the law. Penalties for such violations are severe: corporate officers have been subjected to criminal prosecution and punishment under the Sherman Act, even though they were acting for their corporation. Also, a corporate officer called before a grand jury investigating an anti-trust violation may be liable for damages in a private anti-trust action as well.

In any anti-trust action, protracted investigation and litigation inevitably are a heavy drain on a company's financial and personal resources, regardless of whether the employer ultimately wins or loses. Such suits typically last up to five years and require thousands of hours from operating personnel in preparing the defense and giving testimony, even for minor violations. For example, the Federal Trade Commission (FTC) is empowered to impose cease and desist orders and injunctions for common illegal practices. These hearings are mandatory once charges have been brought, so that even if the charges are eventually dropped, companies spend enormous amounts of time, paying heavy legal fees and enduring aggravation defending themselves at these proceedings. If the charges are proven, bad publicity ensues, not to mention civil liability up to $10,000 per day if the orders are subsequently violated.

A violation of the anti-trust and trade regulation laws by an employer results from the practices and internal policies of its managers, officers and sales personnel. The Federal Trade Commis- sion Act declares unlawful "unfair methods of competition" and "unfair or deceptive acts or practices."

The definition of a violation is often subject to interpretation. However, under Section Five of the Act, practices concerning orders, goods, terms of sale, business descriptions, product descriptions, customer coercion and secret rebates must be carefully monitored.

Another common area of anti-trust violations involves "refusal- to-deal" situations. The Sherman Act prohibits "contracts, combin- ations, and conspiracies" in restraint of trade. The primary objective of this law is the preservation of competition. A determining factor in considering the legality of any business conduct is its competitive impact. Business conduct in the form of an unreasonable restraint of trade or an unfair method of competition that has, or probably will have, an adverse effect on competition is illegal. Anti-trust problems can arise in the initial selection of customers as well as in the refusal to deal with a current or former customer, by say, cancelling a distributorship, adjusting a selling policy to favor one customer over another, or not renewing a franchise. Since these practices abound in the marketplace, a customer cut off from a favorable source of supply is likely to quickly file a complaint alleging a violation.

Any decision not to do business with an existing customer must be made by the company alone without discussions or consultations with the customer or any other party, particularly competing customers or distributors. The Sherman Act is violated when a group of competitors agrees not to deal with a certain party, or to deal only on certain terms. Even in the absence of an actual agreement among companies, substantially identical conduct among competitors may violate Section One of this law. This is sometimes referred to as "conscious parallelism."

Counsel Comment #67: To avoid any appearance of impropriety and minimize a company's exposure in this area, a sales executive must be able to prove that a decision not to sell to a particular party was arrived at independently based on valid business reasons. The following strategies are recommended:

1. Retain all correspondence and memorandums concerning cus- tomer accounts, particularly where bills are outstanding.
2. If a customer's order is refused, state the reasons in a letter to the customer and a private memo for the files.
3. Document your independence in reaching such a decision through the use of minutes of corporate meetings that cite facts evidencing a lack of discussion with the customer's competitors.
4. When dropping a dealer or distributor, advise field sales staff and reps never to discuss the decision with the dealer's competitors (or anyone else) before, during, or after the termination.
5. If you are contemplating a change in the terms of a contract with a customer in response to rumors circulating in the industry, confer with counsel to make certain that your company is not engaging in conscious parallelism or a group boycott.
6. If you do drop a customer, do not ask a competing dealer or distributor to buy more goods from you because you have recently terminated the competition. In addition, do not promise to terminate anyone's competitor on the basis of a promise to purchase more goods.
7. When terminating a customer, do not try to soften the blow by offering off-the-cuff excuses. Know what you are going to say ahead of time without offering formal reasons for the move, unless you have no choice. Then, be sure the reason you give is legally sufficient.

Some companies are also exposed to anti-trust violations by espousing combination sales and tie-in policies, which may unwit- tingly violate Section Three of the Clayton Act. A tie-in arrangement typically requires the buyer to purchase two or more products. For example, a salesperson says, "Look, I know you only want to buy our B-10 model. But if you want it, you'll have to purchase six B-14's also. Otherwise, no deal." This foregoes the purchaser's ability and right of freedom in the marketplace.

TIP: Sales staff should never force a customer to purchase more of a product, or buy another product it does not need, as a condition to obtain a license, loan, another product or benefit. If this occurs, your company may have to respond to charges filed by the Justice Department or your local state attorney general's office aggravation you can do without.

Another concern involves price discrimination. Price discrimin- ation typically occurs in two ways through arrangements with competitors or through relations between customers and distributors. With respect to relations with competitors, it is unlawful per se to make any of the following arrangements, directly or indirectly, with competitors: "To agree to fix prices, stabilize prices, agree to a formula to determine prices, or enter into any agreement which may even have a remote or indirect effect on prices."

Examples of this include agreements to do the following:

• Divide or allocate markets, territories, or customers;

• Rig bids or submit bids knowing they will be unacceptable;

• Charge a maximum price;

• Limit production, set quotas, or discontinue a product;

• Boycott third parties;

• Depress the prices of raw materials with other raw materials purchasers;

• Establish uniform discounts or credit terms or eliminate discounts;

• Establish a system for determining delivered prices or a specific method of quoting prices.

TIP: These examples were all taken from actual cases where competitors were found to have committed per se anti-trust violations. As per se violations, they could not be defended or justified in any way, even though an employee's intentions may have been honorable, and even though the conduct was considered an industry-wide practice. Companies should also note that in many of these cases, the court did not have to prove the existence of a written agreement to find a conspiracy to manipulate price. Any understanding, whether oral or written, formal or informal, that gives the parties a basis for expecting that a business practice or decision adopted by one would be followed or unopposed by the other, is sufficient to incur the wrath of anti-trust enforcers. One court stated, "A knowing wink can mean more than words." And even if an employee attempts to regulate prices with a competitor, and that attempt fails, the employee is still liable for violating the law.

With respect to relations with customers and distributors, under the Clayton Act, a seller may not charge one customer a higher price, or offer more favorable terms when the two customers should be treated equally, except in certain limited situations. All customers and distributors should be treated as equally as possible so as to not stifle competition by giving one unfair advantage over the other. Customer pricing, therefore, is not just a matter of individual price negotiation; anti-trust laws require that it be a carefully organized and documented business policy.

The law also covers discrimination in terms of sale other than price. Discrimination in terms of sale may permit favored customers to purchase at terms different from other customers giving an adver- tising or freight allowance, cash discount, free merchandise, equip- ment, or a bonus to one customer and not another. This frequently occurs when employees and sales staff aggressively pursue accounts.

Counsel Comment #68: The giving of favored terms to certain similar customers and not others may violate anti-trust laws. Thus, employees should be instructed to quote different prices, terms, and other incentives only after approval from management has been obtained, never before.

Many of these prohibitions are, however, subject to a number of exceptions. Although all customers theoretically should be charged the same prices, the law does recognize situations in which customers are not entitled to the same price or in which one customer should be charged a lower price than another. A price differential or different terms of sale can be defended on either of the following grounds:

• If the price differential was given in good faith to meet (not beat) a price offered by a competitor; or

• If the price differential is based upon a cost saving reflecting a difference in the cost of manufacture, sale or delivery resulting from differing methods or quantities in which products are sold or delivered.

Counsel Comment #69: Companies should establish proper accounting methods to reflect such cost variances. If you are establishing affirmative pricing policies or granting advertising and promotional allowances and services, be sure your accounting methods and procedures reflect cost differences that permit you to reduce prices or terms of sale to selected customers. This can be done by maintaining a variety of records kept in the ordinary course of business that document and reflect company policies or reveal the nature of a business transaction or decision. For example, records of rejected orders and the reasons therefor may dispel the inference of a boycott. Cost accounting records may provide a defense to a price discrimination charge. Pricing records may refute a charge that prices were fixed by agreement rather than independently. Prices quoted to customers may afford to a seller the good faith meeting-of-competition defense to a price discrimination charge. Notices of promotional allowance plans may also show that such plans were made available to all customers, not just certain ones.