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Antitrust in this Internet era: more myths to dispel and realities to understand. (Business Credit Selected Topic).

Antitrust statutes haven't changed. Yet, the means by which most credit executives obtain and transmit credit information is changing on a daily basis. And, beyond the swap of trade references, some credit groups conduct their trade meetings electronically. Credit executives, today--more than ever--need to know what can or cannot be done, what can or cannot be discussed, when and how credit terms may be adjusted, and what is covered under the various antitrust statutes. This article will cover the oft-confused topics:

* What do the various "antitrust" statutes mean, and how do they differ?

* What constitutes "Restraint of Trade," "Unfair Competition" and "Conspiracy"?

* What credit information may be exchanged among business people, with specific emphasis on the transmission of electronic data?

* What special safeguards must be utilized in conducting a "credit exchange group" online?

STATUTES WHICH CONTROL ANTITRUST ACTIVITIES

The Sherman Antitrust Act of 1890 (15 U.S.C. [section][section] 1-7) prohibits contracts, combinations in form of trust or otherwise, conspiracies in restraint of trade in interstate commerce or with foreign nations and declares that any person who combines, contracts or conspires with another or others to restrain trade or commerce, shall be guilty of a felony. Further, any person who monopolizes or attempts to monopolize, or who combines, contracts or conspires with another or others to monopolize trade or commerce among the United States or with foreign nations, shall be guilty of a felony.

The Clayton Act of 1914 (15 U.S.C. [section][section] 12 - 27 and 29 U.S.C. [section] [section] 52 & 53) followed the Sherman Act and was created to "correct" defects in the Sherman Act. This statute prohibits acts which will reduce competition or create a monopoly. Congress passed the Clayton Act in order to promote competition through protection of viable, small, locally-owned businesses. Under the Clayton Act, it is unlawful to enter into (a) leases or sales on condition that lessee or purchaser shall not use or deal in the commodities of a competitor of the lessor or seller, (b) exclusive dealing arrangements and (c) tying leases and agreements.

The Robinson-Patman Act of 1936 was partially an amendment to the Clayton Act. The Robinson-Parman Act makes it unlawful for any person engaged in commerce to "discriminate in price between different purchasers of commodities of like grade and quality...where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line or commerce..." (15 U.S.C. [section] 13[a]) The Robinson-Patman Act is designed to prevent discriminatory practices adversely affecting free competitive enterprise, to preserve competition generally and to protect small businesses which are usually unable to buy in quantity against large competitors. It is equally unlawful for any person engaged in commerce "knowingly to induce or receive a discrimination in price which is prohibited by this section." (15 U.S.C. [section] 13[f])

Violations of 15 U.S.C. [section] 13(a) are subject to civil liability. However, Section 3 of the Robinson-Patman Act (15 U.S.C. [section] 13[a]) provides criminal liability for any person who discriminates through the use of discounts, rebates, allowances or advertising service charges, or by selling at unreasonably low prices to destroy competition or a competitor. This section, technically, is not an "antitrust" law.

The Federal Trade Commission Act of 1914 prohibits all "unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce." (15 U.S.C. [section] 45) The Federal Trade Commission Act is the broadest of all antitrust statutes. Its coverage includes acquisitions, mergers, monopolies, unfair trade practices, unfair arrangements between suppliers and dealers, deceptive sales approaches, discrimination in price, services or facilities. Its prohibitions cover false advertising of foods, drugs, devices and cosmetics and any other practice that is designed to deceive the public. Any practice which violates the Sherman Antitrust Act, the Clayton Act or the Robinson-Patman Act, or even fall short of an actual violation of those laws but is related to the types of practice which those laws prohibit, may constitute an unfair method of competition under the Federal Trade Commission Act.

Other lesser known antitrust statutes include:

The Antitrust Procedure and Penalties Act. This stature, codified in 1976, increased penalties for violation of The Sherman Antitrust Act.

The 1976 Antitrust Act gave the federal government new disclosure powers in antitrust litigation. This statute also permits a state Attorney General to sue for damages on behalf of a particular stare's citizens and requires companies of a certain size to file premerger notices.

State Antitrust Statutes--Almost every state has independent laws prohibiting monopolies, contracts, conspiracies and combinations in restraint of trade.

RESTRAINT OF TRADE, UNFAIR COMPETITION, CONSPIRACY (WHAT ARE THEY ANYWAY?)

This catchall phrase "Restraint of Trade" encompasses a wealth of legal issues. In defining "Restraint of Trade," the courts have determined that the activity which makes up the asserted restraint of trade must be found to be unreasonable "either because it fits within class of restraints that has been held to be per se unreasonable, or because it violates what has come to be known as rule of reason..." The test to ascertain what is reasonable is "whether restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition."

In understanding Restraint of Trade, it is essential to first understand what is meant by "combination" and/or "conspiracy." In determining when a combination or conspiracy exists, case law has established certain criteria. Critical components to finding that a combination and conspiracy exist are:

1. All members of combination must know of defendant's purpose to restrain trade.

2. At least two members of combination must benefit by restraint of trade and share a common purpose in restraining trade.

3. An agreement by two members of combination must actually restrain trade, as opposed to merely facilitating restraint.

4. At least two members of combination must intend to restrain trade.

Numerous cases have held that conspiracy is established where enough evidence is presented to a jury to prove that the players "had unity of purpose or common design and understanding or meeting of minds in unlawful arrangement."

Price Discrimination

There is no necessity for an agreement, combination, association or conspiracy for any person to be found liable for price discrimination.

In order for a violation to occur, the person accused of price discrimination must have engaged in at least two transactions, crossing state lines. Further, both of these sales must be for "use, consumption or resale" within the United States.

While the statute specifically states that it is unlawful for any person "to discriminate in price between different purchasers of commodities of like grade and quality..." or to knowingly grant or receive a benefit from such discrimination, the case law which has resulted from the statute has broadened the definition of price discrimination and the kinds of transactions which will be included in that definition.

The term "price discrimination" now includes the following types of business practices:

* A different price charged to different purchasers

The statute clearly states that a difference in price can only occur when the price difference results from differentials in the "cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such goods are sold." Further, price changes are allowable when they result from "changing conditions affecting the market for or the marketability of the goods concerned" (15 USC?? 13([a]).

* Differences in terms and conditions of sale

Granting one purchaser free freight while charging freight costs to another purchaser is discriminatory. Charging one price for goods "delivered" to a customer and charging the same price for goods "delivered f.o.b. terminal" has been found to be discriminatory.

* Preferential credit terms

Requiring one dealer to pay C.O.D. while granting another dealer credit terms can support a price discrimination claim. Likewise, granting different credit terms to similar customers can be found to be discriminatory pricing. However, any person is entitled to extend different terms to competing purchasers as long as the credit decision is made in a nondiscriminatory manner so that the same standards of credit worthiness are applied to all customers who compete with each other. For example, history of late payments and financial difficulties are sufficient business justification for denial of credit.

It is all too simple for credit executives to believe themselves to be immune from antitrust responsibilities. It was generally believed to be the sales department that would be culpable for antitrust activity. The courts believe differently. Through the years of case law, the courts have come to hold one doctrine to be true, time and time again. That doctrine is that CREDIT TERMS EQUALS PRICE.

EXCHANGE OF CREDIT INFORMATION AND THE ANTITRUST LAWS

A judicial precedent has been well established that the extension of credit and other terms of sale may come within the scope of antitrust laws. However, in numerous decisions, the courts have recognized the legitimate business interest in the exchange of credit information among business people. As early as 1925, the U.S. Supreme Court held:

The gathering and dissemination of information which will enable sellers to prevent a perpetration of fraud upon them, which information they are free to act upon or not as they choose, cannot be held to be an unlawful restraint upon commerce, even though, in the ordinary course of business, most sellers would act upon the information... We cannot regard the procuring and dissemination of information which tends to prevent the fraudulent securing of deliveries of merchandise... as an unlawful restraint of trade, even though such information be gathered by those who are engaged in the trade or business principally concerned...(Cement Manufacturer's Protective Association vs. United States, 268 U.S. 588, 603-604(1925).

More recently, in a 1976 case, the U.S. Court of Appeals for the Second Circuit in New York commented on the exchange of credit information by stating the following:

Unlike exchanges regarding prices which usually serve no purpose other than to suppress competition, and hence fall within the ban of the Sherman Act...the dissemination of information concerning the creditworthiness of customers aids sellers in gaining information necessary to protect themselves against fraudulent or insolvent customers... Given the legitimate function of such data, it is not a violation of the Sherman Act to exchange such information, provided that any action taken in reliance upon it is the result of each firm's independent judgment, and not of agreement (Michelman vs. Clark Schwebel Fiberglass Corp., 534 F.2d 1036[1976].)

The objectives and purposes of creditors exchanging credit information and, more importantly, NACM credit groups, are clearly within the scope of this lawful conduct. However, since members of credit groups or creditors who exchange information are generally in competition with one another, the exchange of other information, whether by group meetings or otherwise, appear to provide a ready opportunity for a claim of a violation of the antitrust laws. In a 1982 case, a private plaintiff unsuccessfully argued that attendance at an NACM credit group meeting constituted evidence of a conspiracy to fix prices. It is the responsibility of the creditors exchanging information and sponsoring NACM credit associations to be vigilant and alert to see that no such violations occur. It is very important that group meetings be held only under the auspices and with the presence of trained NACM personnel and, in many instances, outside counsel, to ensure that there is neither the perception nor the reality of a violation of the laws.

GUIDELINES FOR CREDIT ASSOCIATION MEETINGS

In order to protect against potential "antitrust" problems, credit executives should follow some basic rules when organizing, hosting or attending a meeting among fellow credit executives.

1. At the beginning of each meeting, an Antitrust Disclosure Statement should be read. A sample statement follows: Members should be reminded that the account discussions about to take place will be conducted in accordance with Federal Antitrust guidelines. Therefore, there can be no discussions of any prices, terms, company policies or credit lines. Remarks must be confined to present and completed transactions only, with no mention of any future plans of action. All of the information obtained from the Group is strictly confidential and may not be disclosed to anyone other than the members' own credit department.

2. An independent third party should be present. (This could be a paid staff representative.)

3. There should be a written agenda for all meetings.

4. There should be an adherence to that agenda.

5. Minutes of all meetings must be taken and kept. A set of guidelines for those minutes is annexed.

6. Records of each account discussed must be kept.

7. Credit executives should refrain from extemporaneous sessions, discussions or meetings outside the regularly scheduled sessions.

Non-Permissive Discussions and Activities

Credit Terms

You might be inclined to believe that knowing your competitor's credit terms will enable you to compete a little stronger, give slightly better terms to a customer, and thus gain some extra edge over your competitor. Since antitrust laws encourage competition, you might expect that this would be perfectly acceptable. It might be except for the reverse possibility.

a. You might find out your credit terms are too lenient and decide to tighten up your credit terms to improve your cash flow. This could result in your mutual customer being forced to pay sooner, or to pay more and result in harm to that customer.

b. You might casually mention that a particular customer is a good payor and you're considering extending credit terms to him. Your competitor suggests you need to hold the line otherwise he and other competitors will have a hard time matching those terms. You agree to leave your terms alone, thus depriving your customer of an extension of credit which he deserves. Did the two of you conspire, agree or collude to fix credit terms? The court might think so!

Permissive Discussions and Activities

You may always state factual information without further discussion.

Delinquent Account Reports

It is lawful to discuss an account which is delinquent or has been delinquent in the past. The safest practice is to:

a. Limit the information to past and completed transactions.

b. Do not discuss uniform action with any one or several of your competitors.

c. Do not discuss what you will do in the future with respect to prices, payment terms or discounts.

EXCHANGE OF CREDIT INFORMATION ELECTRONICALLY

While the transmission of credit information electronically can provide instant gratification as to what potential customer is or is not creditworthy, there is a continued risk when transmitting information electronically.

The most important bit of advice for credit grantors is to remember that electronic transmission has not changed the rules, but the use of electronic transmission makes it that much easier to establish a wrongdoing on the part of one or more credit grantors.

Precautions

1. Anything transmitted electronically can be recovered by an expert with the proper tools. Though it is easy to feel that a conversation is being had (and nothing more), electronic data continues to exist.

2. Consider putting a warning on your own electronic transmissions. The following language is one such possible warning:

This Credit Reference is provided at the request of __________ and is based upon information maintained in my files as a result of my company's experience with __________. No judgment or recommendation concerning credit decisions is given or implied by this information. The recipient must determine his/her own credit decision. The data contained in this report is for information purposes only

3. Consider a requirement that anyone requesting a credit reference from you must affirm that the information will be used only for determining creditworthiness and not to be shared. Suggested language might consist of the following:

The credit information you are about to view electronically is accurate information contained in my records and you are requesting it in order to determine the creditworthiness of __________. You may make one printed copy of this Electronic Information for your own use. You may not distribute, transmit or otherwise circulate the Electronic Information to anyone else.

If possible, have your information systems staff create a mechanism by which the requesting party must accede to your restriction prior to proceeding using the following phrase

I have read and understand this Use Agreement and agree to be bound by its terms.

ACCEPT CANCEL

There should be a lock mechanism that will disable anyone from proceeding without choosing to accept your restriction or cancel the request.

SUMMARY

Credit term changes

It is absolutely legal to alter a credit term to a particular customer provided the decision to make that change is based on factors such as credit record; review of customer's financial information; and your companys own position in the market.

Refusal to Deal With a Particular Supplier or Customer

The courts have held that a manufacturer has "the right to deal or refuse to deal with a particular distributor as long as it does so unilaterally." Other cases have found that a manufacturer generally has the right to independently decide with whom it wants to do business. Additionally, it is legal to "deal or refuse to deal...as long as it does so independently; unilateral refusal to deal does not constitute illegal contract, combination or conspiracy..."

Pricing

It is perfectly legitimate to adjust a price in order to meet the price being given by a competitor. If a customer tells you that the same goods can be acquired by one of your competitors for less money, it is sound business practice to allow you to compete for that sale.

It is not necessary to charge the same price to each one of your customers. A price difference is generally permitted if it is justified by other factors such as costs, volume, delivery schedule, or if a lower price is provided to one customer to meet the price of a competitor. Additionally, differences in prices caused by conditions not within your company's control are also permitted. These would include the sale due to a deterioration in perishable goods, distress sales, sales in the dissolution of a business or discontinuance of a particular portion of your business.

Record Keeping

The maintenance of good records including copies of memoranda and letters as well as records of conversations can be essential in defending an allegation of antitrust violations. The following documentation can be extremely helpful to you:

1. Suggested price lists to dealers with clear language that the prices are only recommendations.

2. Records of your justification for canceling non-performing dealers.

3. Credit reports on which you based a decision to restrict a credit line, cancel a credit line or not extend credit.

4. Records to substantiate the manner in which your competitor's lower price was brought to your attention, which caused you to change your price.

Wanda Borges, Esq. is a partner in the firm Borges Donovan LLC. She can be reached by calling 516/677-8200 or via e-mail at whorges1@aol.com.
COPYRIGHT 2002 National Association of Credit Management
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Author:Borges, Wanda
Publication:Business Credit
Geographic Code:1USA
Date:Nov 1, 2002
Words:3175
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