Talking to Your Competitors Can Be Risky

Talking to your competitors can be risky

Criminal Price-Fixing Conspiracy Convictions Highlight Dangers

Two recent guilty pleas announced by the U.S. Department of Justice’s Antitrust Division highlight an underappreciated area of serious legal liability – price coordination in violation of the Sherman Act.

On August 24, 2011,the Justice Department announcedthe guilty plea of Great Lakes Concrete, one of four Iowa companies that sell “ready-mix concrete” for construction projects and have plead guilty to reaching agreements regarding their respective price lists and project bids and then accepting payment for those sales at prices artificially increased due to collusion. The press releaseemphasizes the maximum fine that may be imposed for the conviction, which is the greater of $100 million, twice the gain derived from the crime or twice the loss suffered by the victims of the crime. In addition, the president of Great Lakes Concrete was sentenced to serve a year and a day in prison.

On August 31, 2011, the Justice Department announced a guilty plea by a California company, Sabry Lee (U.S.A.) Inc., in “a global conspiracy to fix the prices of aftermarket auto lights.”The company is the U.S. distributor for a Taiwan producer of the auto lights, which are most commonly installed in vehicles after collisions. The alleged conspiracy was apparently between several Taiwan based manufacturers of auto lights and their U.S. distributors, who “met and agreed to charge prices of aftermarket auto lights at certain predetermined levels” and “issued price announcements and price lists in accordance with the agreements reached, and collected and exchanged information on prices and sales of aftermarket auto lights for the purpose of monitoring and enforcing adherence to the agreed-upon prices.” Executives of two of the U.S. distributor companies have pled guilty to price-fixing charges, and the second ranking officer of one of the Taiwan manufacturers was arrested in the U.S. and has been indicted.

While the press release leads one to believe that the executives in these cases knowingly intended to fix prices at artificially high levels, it is quite possible that at least some of them were not completely aware of the legal implications of their conversations. However, any communications between competing companies concerning prices are legally risky.

The Takeaway: Business people should seek pricing intelligence from customers, service providers, or independent websites — but not from direct communications with their competitors. This is particularly true for industries in which formal competitive bidding is common or in which a relatively small number of companies make a large percentage of the total sales.

Beyond that basic rule, certain types of communications and collaborationsbetween competitors are permitted and even encouraged by U.S. antitrust law. Each situation needs to be analyzed based on the particular facts and reasons for your collaborative effort.

Non-Competition Covenants May Apply to Individual Franchise Owners, Even if They Never Agree to be Bound

In a recent case out of the Federal District for the Eastern District of Virginia, it was held that a franchise agreement’s non-competition covenant could be applied to an owner of a corporate franchisee who had not signed the franchise agreement or a personal guarantee of the franchisee’s obligations. The facts of the case make the outcome unsurprising, and highlight a rule of federal law that can serve as an important tool for franchisors facing similar situations.

 The case involved a short-lived Little Caesar’s pizza restaurant in Portsmouth, Virginia. Apparently in ongoing discussions with Little Caesar’s, an individual prospective franchisee, Ms. Ross, worked with her partner, Mr. Krever, to acquire a lease and begin building out the leased space to suit a Little Caesar’s franchise. Ms. Ross approached Little Caesar’s about Mr. Krever also becoming a party to the anticipated franchise agreement, but Little Caesar’s refused.

 Despite this refusal, Ms. Ross and Mr. Krever jointly formed Little Caesar’s VA, Inc., and Ms. Ross entered into a franchise agreement with Little Caesar’s on the corporation’s behalf. While the agreement contained provisions requiring all owners to be approved and to sign a personal guarantee, Little Caesar’s was never made aware of Mr. Krever’s ownership interest.

 The franchisee’s restaurant quickly failed and Mr. Krever took over operations, rebranding the restaurant as “Family Pizza Plus”, but continuing to use Little Caesar’s advertising and ingredients. Little Caesar’s sent a notice of default and termination to Ms. Ross, and sent multiple cease and desist notices to Mr. Krever, the unauthorized partner.

 Following Mr. Krever’s refusal to cease operations of Family Pizza Plus, Little Caesar’s sued the franchisee-entity and both owners in federal court. Among other things, the complaint sought injunctive relief to enforce the franchise agreement’s non-competition provisions against both Ms. Ross and Mr. Krever.

 The court awarded Little Caesar’s the relief sought. Despite never signing the franchise agreement or a personal guaranty, Mr. Krever was found to be subject to the franchise agreement’s non-competition provisions. The court cited two reasons for this result. First, Rule 65(d) of the Federal Rules of Civil Procedure grants federal courts the authority to issue injunctions against parties and their “officers, agents, servants, employees, and attorneys.” Second, the court held that the unauthorized partner should not be permitted to benefit from his own fraud and deception. According to the court, had Mr. Krever’s involvement been made known to Little Caesar’s, he would have been required to agree the franchise agreement’s non-competition provisions. The equities clearly favored Little Caesar’s in this case, and accordingly the court issued an order enjoining Mr. Krever from operating the Family Pizza Plus business at the former Little Caesar’s franchise location.

By: Jeffrey S. Fabian