Invitations to Collude Invite Big Trouble

On Thursday February 26^th I enjoyed a day long Symposium on Section 5 of the Federal Trade Commission Act hosted by BakerHostetler and organized and moderated by my friend and former colleague Carl Hittinger. The conference focused on the history of Section 5, its current scope and where it may be headed. There was particular discussion about whether the FTC should have guidelines to explain and limit the application of Section 5.

While I found the entire conference interesting, of particular interest to me was the discussion of “invitation to collude” cases, which is a way of saying to a competitor “Would you like to form a cartel with me?” Section 5 broadly prohibits “[un]fair methods of competition” and “unfair or deceptive acts or practices.” One way Section 5 has been used by the FTC has been to charge invitations to collude cases.

An invitation to collude case can arise when one competitor (or a group of competitors) reaches out to another competitor to invite the competitor to agree to fix prices. An invitation to collude investigation/case arises usually when there is some specificity in the offer—much like contract analysis. General grousing about prices in an industry, while extremely foolish and may draw an investigation, is not likely to result in a formal charge. And, in US v. Foley, 598 F. 2d 1343 (4^th Cir. 1979) a realtor hosted a dinner for seven other realtors and announced he didn’t care what others did, he was raising his commission. Some discussion ensued from which a jury concluded that an agreement has been reached. The realtors were indicted and convicted.

One example of the type of “invitation to collude” case that the FTC has brought was against two barcode resellers where the principals of two companies invited a third competitor to collude. The FTC complaints charged that on August 4, 2013, an executive of Instant reached out to a competitor, Nationwide, and proposed that the two companies, along with a third barcode seller, “Competitor A,” together raise their prices. The Instant executive then allegedly then sent a similar email invitation to Competitor A. The next day, Nationwide forwarded Instant’s message to Competitor A, asking for its thoughts on the proposal. Without agreement from Competitor A, Nationwide and Instant did not take action to raise prices, but allegedly continued to discuss by email a possible price-fixing scheme for barcodes, conditioned on the participation of Competitor A. Competitor A never responded to any email nor did it agree to participate in the proposed scheme.

In a public statement the FTC said: “The Commission charged Instant and Nationwide with inviting an agreement to raise prices in violation of Section 5 of the FTC Act. The FTC has not alleged, however, that the invitations to collude resulted in an agreement on price or other terms of competition. Because under some circumstances, an agreement on price or other terms or an invitation to collude could potentially constitute criminal conduct, the FTC routinely refers such cases to the Department of Justice to investigate.”

In fact, the Department of Justice has prosecuted “invitations to collude” criminally as attempted wire frauds. United States v. Ames Sintering, 927 F. 2d 232 (6^th Cir. 1990)(bid rigging attempt); United States v. Critical Industries, Crim. No. 90-00318 (D. N.J. July 24, 1990), 6 Trade Reg. Rep. (CCH) ¶45,090 (Case 3722A) (price-fixing attempt). In these cases, the person seeking to fix prices/rig bids reached out to a competitor who then recorded conversations for the FBI. Criminal fraud charges followed.

It is not clear why the FTC has brought some invitation to collude case criminally while the Antitrust Division has brought such cases criminally. There are relatively few invitation to collude cases brought so it is not possible to draw conclusions. But, the strength/weakness of the evidence is a significant factor. The amount of commerce involved also is a factor in the decision. And if a competitor makes a collusive proposal in person, there may be no mail or wire use to support a criminal fraud charge.

The “Why is this case civil?’ question can also come up where an invitation to collude is accepted; i.e. there is an actual agreement to fix prices. An FTC case I found curious was the case against Blue Rhino and AmeriGas. The FTC alleged that the companies secretly agreed and illegally coordinated on reducing the amount of propane in their tanks sold to a key customer. In 2008, Blue Rhino and AmeriGas planned to implement a price increase by reducing the amount of propane in their exchange tanks from 17 pounds to 15 pounds, without a corresponding reduction in the wholesale price. This was not an invitation to collude case. The invitation was accepted and the agreement led to a 13% price increase. The conspiracy was carried out at the highest level of the two companies over a period of months.

The FTC’s administrative complaint alleged, among other things:

The key to implementing the price increase was forcing Walmart, the largest customer, to accept it. The FTC’s administrative complaint states that:

Faced with resistance from Walmart, Blue Rhino and AmeriGas colluded by secretly agreeing that neither would deviate from their proposal to reduce the fill level to Walmart. They worked together to take the steps necessary to push Walmart to promptly accept the fill reduction.
On or about July 10, 2008, and continuing for three months thereafter, sales executives from the two Respondents communicated repeatedly by telephone and email to apprise each other of the status of their discussions with Walmart and to encourage each other to hold firm to convince Walmart to accept the reduction in fill.
This concerted action had the purpose and effect of raising the effective wholesale prices at which Blue Rhino and AmeriGas sold propane exchange tanks to Walmart, as well as to other customers in the United States.
This reduction in fill level was in effect a 13% increase in the price of the propane.

At the symposium I asked FTC Commissioner Deborah L. Feinstein why this case was brought civilly as an FTC administrative action instead of as a criminal case by the Antitrust Division. Commissioner Feinstein understandably was not at liberty to discuss details of the case and could only say that the FTC would not have brought the case civilly if the Division had wanted to charge it criminally. I can only speculate why the case was a civil case. One possibility is that the evidence was not strong enough for a criminal case–proof beyond a reasonable doubt. Or, the evidence may have come voluntarily from the defendants in return for an agreement to bring a civil action. Just speculation though.

It is important to remember that an FTC investigation for either an invitation to collude or an actual agreement to fix prices, can, at any time when the facts warrant, be referred to the Antitrust Division for criminal prosecution.

Thanks for reading.

PS. The FTC investigates a wide variety of consumer fraud. In any FTC investigation, a civil investigation may be referred to an appropriate criminal prosecution office whenever the facts warrant.