B2B Exchanges Can Raise Antitrust Concerns.

Antitrust enforcers view the proliferation of B2B electronic marketplaces as a mixed blessing, as the ability to speed and expand the dissemination of information among participants creates the opportunity for both efficiency and collusion The challenge of antitrust law, and those who enforce it, is how to promote the former and inhibit the latter.

Agency concerns about the proper approach to antitrust analysis of B2Bs recently lead the Federal Trade Commission (FTC) to conduct a workshop on the subject, which resulted in a 70-page Staff Report. The FTC chairman's summary of critical findings from this workshop concluded that the antitrust concerns B2Bs may raise are not new and "B2Bs are amenable to traditional antitrust analysis."

This conclusion is unassailable as far as it goes. Antitrust law, which seeks principally to identify and eliminate unreasonable restraints of trade, is undoubtedly the most fluid body of law this side of the Constitution. Sometimes described as having a Constitutional sweep, antitrust law enables the courts to adapt it to a changing economy. This Constitutional sweep, however, offers little guidance to those who hope to comply with the law without unnecessarily relinquishing any competitive advantages they have created. The practical guidance comes instead from case law (which is slow to develop), commentary, and agency guidelines and pronouncements. The agencies have historically published specific guidelines for individual industries and will undoubtedly do so with B2Bs as they gain experience with them. Until then, the statement that B2Bs are "amenable to traditional antitrust analysis" will suffice as the prevailing guidance.

The FTC and others following a "traditional antitrust analysis" disclose no concern regarding legitimacy of the B2B concept, but significant concern over its potential for mischief. This should come as no surprise. The electronic marketplace allows participants, aligned both vertically (buyers and sellers) and horizontally (competitors), to exchange information in quantities and at speeds until recently unimaginable. The resulting effect may be similar to a group of competitors holding a permanent meeting, during which they can learn everything about each other's prices, plans and possibilities. While this information may be used to facilitate competition for the benefit of consumers, history and human nature suggest other outcomes are also possible.

The then-head of the Antitrust Division of the Department of Justice (DOJ) recently admonished: "While technology may change, human nature does not." His thought was perhaps meant to be read in the context of Adam Smith's 18th Century warning: "People of the same trade seldom meet together, even for merriment and diversion [and even in cyberspace], but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

The most frequently cited proof of the continuing truth of this conclusion in the world of electronic exchanges is the 1 consent judgment entered after the DOJ brought an antitrust action against the Airline Tariff Publishing Co. and six owner-participant airlines. The case alleged that the participants had used an electronic fare data collection and dissemination service to signal plans and agreements regarding airfares, in order to fix and stabilize prices among competing airlines. The judgment restricted the information shared through the exchange in ways calculated to make price signaling and related agreements impossible.

The potential for intentional mischief represents the most extreme risk created as B2Bs facilitate communications among competitors. It also represents the risk most easily controlled by participating competitors, i.e., just click no. Other antitrust concerns raised by B2B operations are unlikely to rise to the level of criminality (antitrust law provides both criminal and civil penalties), but they are also less susceptible to simple avoidance.

B2Bs that are controlled by their participants present a new iteration of the issues any collaboration of competitors faces. Most notable among these for antitrust purposes, are: (1) Is the B2B anti-competitive because of its size and likely market dominance? (2) Does it employ anti-competitive rules, which may represent unreasonable restraints of trade, e.g., exclusionary rules that might constitute a boycott of some competitors or prevent participants from frequenting competing exchanges? (3) Will the B2B facilitate collusion among competing participants, i.e., will the nature of the information and agreements which legitimately flow over the exchange lead to effects which "spill over" where they do not belong.

These issues are in turn interdependent The fewer exclusionary or restrictive rules and the less joint action conducted over the B2B the less its size will be an issue. A B2B that welcomes without limitation all who choose to participate, does not require sensitive information to be shared, and creates no joint action but functions only as a sort of electronic bazaar where vendors separately hawk their wares, could hardly be anti-competitive no matter what its size. This, however, is not an attractive business model for those seeking to create a competitive advantage.

B2Bs that employ a more integrated model wanting to create value for participants and exchange owners by limiting participants (or creating advantages for some over others), creating joint action (such as joint purchasing), or expanding the knowledge of participants about competitors or customers, confront a variety of traditional antitrust concerns. For example, the greater the market share of the B2B participants, the greater the risk. (The FTC/DOJ Competitor Collaboration Guidelines, however, offer a "safety zone" if the combined market shares do not exceed 20 percent of the relevant market.) In addition, the greater the restraints on participation outside the B2B, i.e., exclusivity arrangements which tie the participants to a given B2B and the less the B2B is able to interoperate with others (thereby reducing competition in the market for marketplaces) the more the risks are magnified.

As B2B participants evaluate aspects of their operations, the safest general rule to apply is: If the central business purpose is legitimate and the restraints adopted are only those necessary to achieve that purpose, the risks can be satisfactorily contained. Where the intent is to use the virtual meeting room to raise prices or otherwise conspire against the public, the enforcers will be watching.

Martin J. Thompson is a principal at Riordan & McKinzie, focusing on antitrust counseling and litigation for companies in a wide range of industries from high technology to franchising and food distribution to health care.