If your company has a loyal customer or longtime employee, you feel betrayed when a competitor swoops in to try to “steal them.”
If you are the Miami Heat, you probably don’t like that the Cleveland Cavaliers are trying to hire your best player, LeBron James. Of course, a few years ago, the Heat signed James from Cleveland. (On a side note, this Minnesota Timberwolves fan wonders whether a LeBron James move to Cleveland will lead to a Kevin Love trade for Number 1 draft pick, Andrew Wiggins).
Update: LeBron James is indeed “coming home” to Cleveland.
I just started watching Breaking Bad. (I know, what took me so long?). Anyway, it is apparent in the early episodes that drug cartels shovel heavy resources into extinguishing competition. They certainly don’t seem too happy about this Heisenberg fellow coming in to outcompete them with a superior product. Perhaps in a later season, “Better Call Saul” will help Walter White file a Sherman Act, Section 2 Antitrust lawsuit against some of these monopolists that are restraining him from competing in certain geographic markets?
The bottom line is that as great as competition is—for almost everyone—it isn’t always enjoyable to those that must compete.
It is much easier to complacently offer the same product or service for a highly-profitable price than to constantly refine your wares and cut prices to attract and keep customers.
Perhaps a couple major ski equipment manufacturers were thinking along those lines if we are to believe the FTC’s allegations that ended in settlements approved today?
In May, the FTC filed antitrust complaints—under Section 5 of the FTC Act—against two international ski equipment manufacturers: (1) Marker Völkl from Switzerland; and (2) Tecnica Group, SpA. from Italy. These companies competed with each other for the endorsements of world-class ski athletes. In exchange, the athlete receives money, support services, free or discounted equipment, and often travel expenses. These agreements were typically short and could be renewed.
At a certain point, according to the FTC’s complaints, the companies tired of competing with each other for the skiers’ endorsements. So they entered an agreement not to solicit, recruit, or contract with a ski athlete who previously endorsed the others’ equipment. That way, when a contract expired, the companies wouldn’t end up in a bidding war with each other for the skier.
This apparently worked so well that the companies extended their friendship arrangement to each other’s employees as well.
The FTC filed a complaint and the companies entered an agreement with the FTC that they wouldn’t do it anymore. The FTC ordered them to start competing again. The ski companies also agreed that, until July 3, 2034, the FTC can look at their books and interview officers, directors, and employees with little limitation to make sure that they aren’t violating the antitrust laws.
So why am I telling you this?
Almost everyone knows that price-fixing is a problem under the antitrust laws. It isn’t hard to counsel someone not to fix prices. That’s easy. It doesn’t mean it doesn’t happen. But it rarely happens accidentally.
Market allocation, by contrast, can and does happen “innocently.” But that doesn’t mean it isn’t a per se antitrust violation, which is serious, and can carry criminal penalties. These violations happen because we are human and competition sometimes seems … distasteful.
Remember how the Music Teachers National Association (MTNA) outlawed their members from going after each other’s piano students? The kindly music teachers are not the image of a per se antitrust violation. But this was the prototypical per se antitrust violation.
Competition often invokes hard sales, the stealing customers or employees, and the upending of business relationships. This may not feel comfortable in a polite society, where being adversarial can be downright rude. And competition is, at its core, adversarial. Sometimes that conflict is in your face (calling the competitor’s customers) and sometimes it’s not (just lowering your listed prices). But conflict underlies competition.
Because the conflict, particularly the conflict that feels adversarial, is uncomfortable, even stressful, it isn’t surprising that companies that compete will agree to not compete. The competitors and their employees are in the same industry and often know one another socially.
These agreements are rarely so blatant that they form a clear written contract. They are typically understandings, with their own rules and enforcement mechanisms. But they are ways around competing for customers; and that is a per se antitrust violation.
And don’t forget, not competing is very profitable. If you don’t have to compete for particular customers, you don’t have to improve your product or cut your price nearly as often.
So if you are competing and don’t like it, be careful about working with your competitor to find ways around it. You might instead find yourself facing an FTC or Department of Justice investigation, with the threat of jail, financial ruin, or decades of government oversight at the end. Probably better to just compete.
Joint Ventures and Licensing Agreements
As a separate point, the FTC did clarify in its papers that there is a limited exception to agreements not to compete. I point it out because this exception comes up a lot in joint ventures and intellectual property licensing agreements, for example. Sometimes two competitors will enter into a contract with a strongly-procompetitive purpose, like a licensing agreement for intellectual property. If a restraint on competition within the agreement is “ancillary” to the larger agreement, the restraint may, depending upon the circumstances, survive antitrust scrutiny.
Importantly, you always want an antitrust lawyer to review such an agreement because you are playing with fire. If you find yourself in this situation, please feel free to call me.