Antitrust Law Basics: Understanding Section 1 of the Sherman Act

Antitrust law is a burning topic as we venture further into 2023. The current administration is taking a strong stance on competition law enforcement. This means in-house lawyers need to grasp the fundamentals of antitrust laws. Failing to comply can lead to costly government investigations or private litigation, and even executives facing jail time. That’s why in-house lawyers can add significant value by ensuring compliance with antitrust laws.

The Sherman Act: Foundation of Competition Law

The primary source of competition law regulation in the United States is the Sherman Act. Enforced by the Department of Justice, the Sherman Act is codified in 15 U.S.C. §§ 1 to 7. It prohibits unreasonable restraints of trade. Today, we’ll focus on Section 1 of the Sherman Act, which deals with agreements.

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.

At first glance, Section 1 seems to prohibit every commercial contract because all contracts restrict trade to some extent. Fortunately, courts have interpreted it to apply only to agreements that unreasonably impede competition. When analyzing agreements, courts follow two main standards: the per se standard and the rule of reason.

Analyzing Agreements: Per Se and Rule of Reason

Under the per se standard, certain types of agreements between competitors are considered inherently anticompetitive. No further analysis is needed; if you engage in such an agreement, you’re in trouble. On the other hand, the rule of reason applies to agreements that are not categorized as per se violations. Courts examine these agreements to determine if the benefits outweigh any harm to competition. They assess factors such as:

  • Intent and purpose behind the restriction
  • Competitive position of the defendant
  • Structure and conditions of the relevant market
  • The defendant’s objective justification for the restriction
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Most antitrust cases fall under the rule of reason, resulting in expensive and protracted legal battles between the parties. Let’s delve into some of the most problematic agreements.

Problematic Agreements: Per Se Violations

Agreements with competitors that fall under per se violations include:

  • Price fixing: Competitors agreeing to fix prices, regardless of whether their intention is to lower or raise prices.
  • Joint boycotts: Competitors joining forces to refuse business dealings with a specific entity.
  • Bid rigging: Colluding with competitors to manipulate a bidding process.
  • Dividing customers and/or markets between competitors: Competitors conspiring to divide customers or territories among themselves.

Problematic Agreements: Rule of Reason Analysis

Agreements with non-competitors undergo rule of reason analysis. Some examples include:

  • Tying: A vertical agreement where a company with market power requires customers to purchase additional products or prevents them from buying from competitors.
  • Resale price maintenance: Manufacturers attempting to control the price at which distributors can sell their products to consumers.
  • Exclusivity provisions: Requiring a party to deal exclusively with another.
  • Most Favored Nations (MFN) clauses: Stipulating that the other party cannot pay more to another party or sell at a different price.

Moreover, companies must steer clear of no poaching agreements that prevent them from hiring employees from competitors.

When it comes to the rule of reason, most agreements are written out just like regular commercial agreements. Per se violations are often undocumented, but they can be proven through circumstantial evidence. However, the evidence should provide something more than just uniform action by competitors. Courts look for additional factors called “plus factors,” which suggest collusion. These factors include:

  • Defendants acting against their individual economic interests
  • Meetings or conversations where collusion could occur
  • Motive to collude
  • Abrupt or unprecedented changes in behavior
  • Industry concentration with few competitors
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Antitrust Regulation and Trade Associations

Contrary to a common myth, antitrust regulation does apply to trade associations and joint ventures. Trade associations, where competitors gather to discuss business, pose significant risks. It’s crucial for employees involved with trade associations to know the ground rules. Joint ventures involving competitors also attract regulatory scrutiny.

In-house counsel must also be cautious about Section 1 of the Sherman Act during mergers or acquisitions involving competitors. Due diligence processes often involve sharing sensitive competitive data about the target company. Generally, sharing such information would be illegal. However, regulators understand that some level of due diligence is necessary. To address this, legal teams:

  • Minimize the data requested/provided
  • Rely on aggregated and older data rather than specific and forward-looking data
  • Implement strict confidentiality agreements and secure data rooms
  • Create a “clean team” consisting of individuals not involved in crucial aspects of the acquiring company’s operations to review the information

Section 1 of the Sherman Act still applies even after the merger or acquisition is announced but not yet approved. Although the two companies can engage in integration planning, they must not act as if the deal is already finalized. This means refraining from jointly reaching out to customers regarding contract terms or combining contract forms, among other actions. Violating these restrictions is known as “gun-jumping.”

Conclusion: Navigating Antitrust Law

Understanding antitrust laws, especially Section 1 of the Sherman Act, is critical. While this article covers the basics, it is important to note that antitrust law is intricate and fact-specific. In-house counsel fortunate enough to have access to Practical Law can benefit from a wide range of resources for educating themselves and their businesses on the intricacies of agreements and Section 1 of the Sherman Act.

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Author: Sterling Miller

Sterling Miller, a three-time General Counsel with nearly 25 years of in-house experience, is a trusted expert in the legal field. He has authored multiple books and runs the award-winning legal blog, “Ten Things You Need to Know as In-House Counsel.” As a sought-after speaker, Sterling regularly contributes to Thomson Reuters and provides consultation to legal departments while coaching in-house lawyers. He received his J.D. from Washington University in St. Louis.