Companies at all levels of the food and beverage supply chain have long been the focus of antitrust investigations and litigation, and the COVID-19 pandemic and economic downturn that followed exacerbated this focus. As consumers and businesses face supply chain issues and cost increases, allegations of price fixing or price gouging have arisen, and concerns about consolidation have grown. All of this has proven to be a recipe for antitrust scrutiny which is now playing out in the form of agency investigation and public and private antitrust litigation.
President Biden’s July 2021 Executive Order on Promoting Competition in the American Economy directed a wide-ranging, whole-of-government focus on promoting competition, especially in certain industries including food and agriculture. Following that broad mandate, on January 3, 2022, the Attorney General and Secretary of Agriculture expressed their shared commitment to enforcing federal competition laws that protect farmers, ranchers, and other agricultural producers and growers from unfair and anticompetitive practices. In addition, USDA committed to reporting or referring potential violations of the Packers and Stockyards Act to the Justice Department to better enable its Antitrust Division to pursue meritorious competition-related cases and to allow the agencies to collaborate on issues of mutual interest.
Given the federal government’s recommitment to pursuing anticompetitive conduct in the food and adjacent industries, companies in this space should update their knowledge of antitrust principles and risks. This article provides an update regarding the legal framework governing antitrust risks and sets forth hypothetical situations that may trigger antitrust scrutiny. It will also explore how experienced counsel can help guide companies to avoid the kinds of conduct and collaboration that may give rise to antitrust risk.
Antitrust Framework in the United States
The Sherman Act, codified in 15 U.S.C. §§ 1 to 7, is the federal antitrust law prohibiting unreasonable restraints of trade: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” Public antitrust investigations, enforcement, and private litigation alleging violation of Section 1 of the Sherman Antitrust Act are serious risks given the possible severe penalties (criminal penalties up to the greater of $100 million or three times the gain or loss for corporations, up to $1 million and 10 years in jail for individuals, and possible treble damages in private civil actions).
Agreements among competitors to fix prices or output, rig bids, or share or divide markets by allocating customers, suppliers, territories, or lines of commerce are considered per se violations of Section 1 of the Sherman Antitrust Act and may be prosecuted criminally or civilly. Per se agreements among horizontal competitors to allocate markets, fix prices or rig bids are considered to be illegal, without inquiring into their claimed business purposes, anticompetitive harms, procompetitive benefits, or overall competitive effects. Indeed, the mere existence of the agreement not to compete constitutes the violation of the Sherman Act, even if it is not implemented. These so-called hard-core cartel agreements can be prosecuted criminally by the DOJ charging both individuals and companies and can also lead to private treble-damage and class civil suits.
Risk Areas & Risk Management
Industry Collaborations
Collaborations can occur between a variety of actors, including between companies, companies and academia, companies and government agencies (public-private partnerships) or by formation of consortia and trade associations.
Collaborations involving companies alone often include the interaction of either direct or indirect competitors, which can raise concerns under Sections 1 and 2 of the Sherman Act involving conspiracies and/or conspiracies to monopolize.
On the other hand, consortia and trade association activities are often pro-competitive or competitively neutral. For instance, efficiency enhancing collaborations are unlikely to have a anticompetitive effect where the parties do not have market power in any potentially relevant market. The framing of the relevant market considers both (i) the product, including any differentiation in the characteristics, quality, end use, or sales channel, and (ii) geography, including national, regional, and global markets. Where the collaboration involves R&D, the analysis will also look at technology based on the IP and other development resources that each party brings to the collaboration. Practically speaking, an arrangement should not be deemed to have an anticompetitive effect where the parties have a combined market share of less than 25% in any putative market and at least 4 other strong competitors remain outside the collaboration. Thus, participation in such collaborations (or collaborative activities), standing alone, is insufficient to evidence the existence of a conspiracy or illicit coordination. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 567 n.12 (2007).
However, dealings among competitors that would violate the law are not shielded simply because they are conducted through a trade association or consortium. Where challenged, participation in these groups and activities is a significant fact from which a trier of fact can infer a conspiracy exists. E.g., In re Processed Egg Prod. Antitrust Litig., 2019 WL 5656101, *6 (E.D. Pa. Oct. 31, 2019) (“Common membership, meeting attendance, and ‘adoption of the trade groups’ suggestions’ can . . . evidence ‘an opportunity to conspire’ that the conspirator can then act upon to establish the common agreement.”).
Because consortia and trade associations within the food and beverage industry are a magnet for antitrust scrutiny, it is recommended that companies consult with competition counsel before entering a consortium that their competitors or peers may likewise be considering. This is an area with quite a bit of nuance, and an entire article can be written about this alone.
Use Of Online Pricing Tools
Online price and supply aggregation tools can be used by companies for benchmarking purposes. However, antitrust lines can be crossed by using these tools and identifying those lines can be difficult. The following hypothetical highlights the issues:
Hypothetical: Your company has been using public sources of industry historic pricing data to help price your product for years; it is helpful but takes a lot of staff time to track the information and some information is not publicly available for months. One day a salesperson from InstaPrice offers you a software tool that would allow you to “instantly” see prices across your industry, including the ones that had previously taken you months to access. What questions should you ask to avoid antitrust issues?
Antitrust Analysis: This scenario raises a lot of questions. For instance, how was the pricing data collected? Who is contributing pricing data? What data will you have to contribute? Is the data anonymized, or can you see if competitors are providing data? Is it historical pricing data? If so, how old is it? Are there any guidelines, policies, or expectations about following any suggested pricing level?
Typically, historical, anonymized data used for benchmarking purposes does not present antitrust risk. However, internet-based platforms and indexes that consolidate current, or “real time” pricing information are riskier. This is especially true if the data is not anonymized or if it can be easily identified as specific competitor data, because this data can facilitate tacit collusion. In fact, the food industry’s utilization of online tools that compile information on pricing and supply across a market have formed the basis of price-fixing lawsuits in the poultry and meat processing industries.
However, even use of anonymized data on a common platform or index can raise the suspicions of public enforcers and private litigants as possibly facilitating or providing an opportunity to collude on prices. Therefore, participation in or utilization of programs such as the hypothetical software from InstaPrice should be carefully considered. Any pressure from the data aggregation provider or users of the same platform to follow market pricing should raise antitrust alarm bells as this could be viewed by antitrust officials as an invitation to collude or potentially a price-fixing agreement unless noisily objected to. This is because silence in response to such an invitation can be inadvertently taken by officials as an agreement.
Competitor Collaborations
Sometimes competitors need to collaborate, and these collaborations can be procompetitive. Competitor collaborations that do not involve price-fixing, bid-rigging and market-allocation agreements considered per se violations of the Sherman Act are analyzed under the rule of reason which weighs the procompetitive benefit against the anticipative harm to determine overall competitive effect. This balancing can be nuanced, so collaborations need to be analyzed carefully.
Hypothetical: You just read the latest childhood obesity study that links an ingredient called VANZ, which is used to fortify and stabilize your ice cream products, as contributing to childhood obesity. Then your phone rings and it’s your counterpart at your biggest competitor, Company ZCAT. She immediately raises the study and proposes you join together to do something about it. She says Company ZCAT is going to invest in developing a healthier and more sustainably produced, natural alternative stabilizer instead of using VANZ in their ice cream products and ultimately plans to be VANZ free by 2033. Will your company join to do the same? There are several benefits to consider: it’s better for children’s health, the environment and you can do a big press conference in Washington, D.C. with Company ZCAT’s Head of R&D next week where you publicly announce your “informal” shared commitment to this effort. And, as it happens you are both planning to independently raise your price to cover the substantial R&D investment and costs of the naturally derived alternative ingredient used to stabilize ice cream products. While this may sound like an all-around win, could this informal arrangement be problematic under the antitrust laws?
Analysis: Just because something is good for public health, or the environment does not make it exempt from the antitrust laws. So, washing the health benefits and green sheen aside, this issue needs to be analyzed like any other antitrust issue. If you agree to this plan, have you reached an informal agreement to raise prices that could be considered an illegal, even criminal, price-fixing agreement with a competitor? You don’t want to risk that, so you must be sure that further discussions are in the presence of counsel and commercial decisions are made unilaterally. A joint investment in VANZ alternatives conducted by an independent third-party research organization is a better collaboration to explore.
Hypothetical: Your company is having challenges in securing sufficient amounts of a plant-based ingredient in North America. Presently, the plants are mostly grown and processed in Asia and then imported. An executive at a competitor has asked you if there is any interest in collaborating on agricultural research and development (R&D) activities in North America to generate new varieties with improved yield, nutritional profiles and enhanced functional properties in food and beverage applications. This collaboration could bring products to market faster and joint-production arrangements could expand overall output; however, each company will contribute its own knowhow and will market to end users, and sell the output independently. There is also interest on your part to collaborate on developing sustainable manufacturing processes. While this “efficiency enhancing” collaboration may sound like an all-around win, could this agreement be problematic under the antitrust laws?
Analysis: Here, both collaboration arrangements are intended to reduce reliance on overseas sources by bringing together complementary businesses to expand their agricultural R&D capabilities and in turn increase the supply of plant-based ingredients in North America. The parties could also highlight that the collaboration potentially improves sustainability practices. Overall, the antitrust risk associated with the envisaged collaboration seems reasonable because the overall project is capacity enhancing, the parties will generally be retaining separate commercial activities, such as joint purchasing activities which may be subject to closer scrutiny, and the parties’ market shares will remain limited compared to other market players. That said, safeguards should be implemented for exchange of competitively sensitive information, which is non-public, forward-looking, current or recent (less than 12 months) information that would influence decision-making if shared among competitors. Also, your company should be mindful to (i) ensure appropriate firewalls are in place, and (ii) buttoning up potential merger control filings for the formation of any entities. Also, any manufacturing facility should be operated as a joint offtake with each party marketing the output independently.
Practical Considerations and Takeaways to Avoid Violating Antitrust Laws
Antitrust enforcers remain acutely focused on the food and beverage industry. Businesses within, and adjacent to, the industry need to be aware of the potential antitrust consequences of their conduct, and should consider the following to avoid inadvertently running afoul of antitrust laws:
- Companies should always carefully document the reasons for, and background to, their envisioned collaboration. For example, for any discussions with competitors, preparing an agenda with topics to be discussed and after the meeting circulating a short summary of the output for such meetings is advisable. This is important given that competition authorities rely on internal company documents as evidence to build their cases.
- In advance of meetings between competitors, representatives of each company should circulate an agenda, ideally include lawyers to remind participants to comply with antitrust rules throughout the collaboration and limit dissemination of confidential information to legal counsel and/or no more than a few representatives of each company who have a need to know the information.
- Develop and implement an effective antitrust compliance program with updated policies in place, with regular training of key employees and antitrust counseling available, so that employees are aware of antitrust risks to limit potential violations.
- Ensure that the company’s decision to entertain any initiative is made unilaterally without regard to competitors’ or peers’ actions. Further, any initiatives or commitments a company joins should be narrowly tailored to only that which is necessary to achieve procompetitive benefits.
- When deciding to form a purpose-driven collaboration, the implementation must be subject to standard compliance conditions, such as an assessment of antitrust risk prepared by legal counsel of each company and, potentially, any mandatory merger control notification and clearance. Consider if the collaboration will have independent marketing activities or will all output be captive and supplied to the parties to commercialize separately? Are there any restrictions on how / where / to whom / at what price the parties can sell the output?
- Consider what competitively sensitive information each party will have access to as a result of the collaboration. Competitors should consult counsel before sharing pricing or other sensitive information, such as, future pricing or supply amounts (even if done in a virtual environment). This is because the sharing could be viewed as facilitating collusion or as a vehicle for tacit collusion on price or output.
- Always set prices and submit bids independently. If prices need to be raised due to increased costs or supply issues, be aware of state price-gouging laws.
Furthermore, to minimize the risk of antitrust scrutiny, it is important for competitors participating in collaborations to independently perform downstream production processing operations, marketing and selling of joint offtake from a manufacturing plant, and to avoid geographic or end use restrictions. Also, it should be made clear in agreements that each party is free to continue its independent R&D activities outside the scope of the collaboration without any non-compete or non-solicit terms. Lastly, it is important for parties to retain independent intellectual property (IP) rights over their existing (background) technology. And any jointly developed IP during the term of the collaboration will be held as jointly owned IP by each of the parties, and subject to licensing of pre-existing IP where appropriate to ensure the parties have freedom to operate.
Ann O’Brien and Abby Meyer are partners at Sheppard Mullin; Sara D. Vinarov is global legal head of IP and innovation at Tate & Lyle.
