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When Marketing and When Marketing and Antitrust CollideAntitrust Collide

When Marketing and When Marketing and Antitrust CollideAntitrust Collide

Darren Bush, Ph.D.Darren Bush, Ph.D.(Now) Associate Professor (Now) Associate Professor

of Lawof LawUniversity of Houston Law University of Houston Law

CenterCenter

Copyright © 2004 by Darren Bush

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Statutory ProvisionsStatutory Provisions

• Section 1 of the Sherman Act: “Every contract, combination. . . or conspiracy in restraint of trade or commerce . . . is declared to be illegal.”

• Section 2 of the Sherman Act: prohibits monopolization, attempts to monopolize, and conspiracies to monopolize.

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Statutory Provisions (cont’d)Statutory Provisions (cont’d)

• Section 7 of the Clayton Act: bars stock or asset acquisitions where the “effect of such acquisition may be to substantially to lessen competition, or tend to create a monopoly.”

• Section 5 of FTC Act: prohibits unfair methods of competition

• Section 2(a) of the Clayton Act: price discrimination

• Section 3 of the Clayton Act: tying, exclusive dealing (commodities only)

• And state laws vary

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Why Antitrust Law is Problematic Why Antitrust Law is Problematic for Managersfor Managers

• Apart from “no-brainer” conduct that is typically criminal in nature (bid rigging, for example), whether or not conduct violates antitrust laws depends on a multitude of factors, some of which are not in the control of managers.

• Actions taken by your competitor may be legal. But your firm may be liable if you take the same action.

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Example 1: The Good CitizenExample 1: The Good Citizen

• University of Wisconsin President gathers local tavern owners together. He asks the tavern owners to do something about the amount of drinking on and around campus. The tavern owners announce that they have agreed to eliminate “happy hour” to reduce the level of alcohol consumption.

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Example 1: Promotion of the Example 1: Promotion of the Common GoodCommon Good

• The tavern owners have just agreed to set a new, higher price.

• The naked fixing of prices is a per se illegal violation of Section 1 of the Sherman Act.

• Because it is a per se violation, the “noble cause” will not be heard by the judge.

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Example 2: Abuse of Point of Example 2: Abuse of Point of Sale, In Store AdvertisingSale, In Store Advertising

• Conwood Co., L.P. v. United States Tobacco Co., LLP, 290 F.3d 768 (6th Cir. 2002)

• Companies sell moist snuff (e.g., Skoal, Copenhagen, Kodiak, Cougar)

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BackgroundBackground

• Moist snuff industry started in 1822 by USTC’s former incarnation, Duke Trust

• Duke possessed 100% market share• 1911- Judicial decree broke up Duke into:

Conwood, Swisher, and USTC• Until 1970s, Swisher and Conwood stuck to dry

snuff • USTC’s moist snuff market share declines from

100% in late 1970s to 77% in 2000.• Conwood and Swisher introduce “price value”

snuff—half priced brands

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The Importance of POS Advertising The Importance of POS Advertising in Moist Snuffin Moist Snuff

• Racks dispense cans > header card provides advertisingheader card provides advertising

• Header cards important> other types of advertising restrictedother types of advertising restricted

• cannot advertise on TV, radiocannot advertise on TV, radio• billboard restrictions may applybillboard restrictions may apply

• Limited number of consumers (7% of population, almost all male) > rack is “greatest opportunity” to reach rack is “greatest opportunity” to reach

customerscustomers

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Category Management/Exclusive Category Management/Exclusive RacksRacks

• Some stores had exclusive racks to display all moist snuff choices—USTC awarded exclusive racks, including for Wal-Mart

• Category management: retailers review sales data, allocate rack space based upon consumer demand

• No store has category manager devoted exclusively to moist snuff

• Moist snuff very profitable on linear foot basis

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Category Management (cont’d)Category Management (cont’d)

• Since no store has category manager for moist snuff, responsibility delegated

• Manufacturers have more data than retailers

• USTC becomes category manager for moist snuff in many stores

• Conwood sees it market share decline (12% in 1997 to 6.5% in 2000 in Wal-Mart)

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Documentary EvidenceDocumentary Evidence

• Misleading information to retailers about how competitor’s products were faring

• Every 10% increase in USTC facings led to $.07 increase in moist snuff prices

• Availability of moist snuff options declined

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Documentary Evidence of Predatory Documentary Evidence of Predatory ConductConduct

• “It is imperative that we continue with this Category Management action plan to eliminate competitive products.”

• “[W]e control the merchandising and the POS placements, which will make the consumer awareness of price differential difficult….”

• “Our objective with exclusive vending rights with this and other chains is to control expanded competitive distribution and competitive POS….”

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Documentary evidence (cont’d)Documentary evidence (cont’d)

• "With arrogance and grace, I have taken a personal vendetta against the Conwood Reps. in my areas. I am devoting an extra effort toward eliminating as many laggard Conwood brands at retail as possible ... Since I am offering a cash counter payment for exclusive UST vending on our 2908 displays, I am giving Kodiak ... [a Conwood brand] one facing....”

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Documentary Evidence (cont’d)Documentary Evidence (cont’d)

• “Even though Conwood does not like the fact that we sometimes house their product in our vending, I have encountered more and more retailers that are surprised when I include the comp products. I feel it is better for them to be lost in our vending th[a]n to have their own and no point of sale on vendor.”

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Documentary Evidence (cont’d)Documentary Evidence (cont’d)

• “Our objective is to control the smokeless home, . . .provide facings for competitive, control facings and positioning, and make our presence larger via P.O.S.”

• “…objective with exclusive vending rights with this and other chains is to control expanded competitive distribution and competitive POS Department. . .We will continue to focus on merchandising rights to . . .inhibit competitive growth (to the best of our ability).”

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CAPCAP

• Consumer alliance program—entailed retailers to receive .3% discount for> Providing USTC with sales dataProviding USTC with sales data> Participating in USTC national Participating in USTC national

sales programssales programs> Giving best placement to USTC Giving best placement to USTC

racks where competitive racks racks where competitive racks were presentwere present

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CAP EffectCAP Effect

• “CAP has become a great incentive in securing space for our vendors and for the elimination of competition products.”

• 37,000 retailers signed up for CAP program, accounting for 80% of all USTC moist snuff sales

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Court’s conclusionCourt’s conclusion

• At trial, jury awarded damages

• On appeal, court concluded in part that misuse of category manager position and exclusive rack agreements were part of predatory conduct monopolization

• Not merely “isolated tortious activity”

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Example 3: Pricing by a multi-product firm in competition with

single-product firms

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Example 3: A Sticky SituationExample 3: A Sticky Situation

A multi-product firm competes with single-product firms: 3M’s Scotch brand tape has over 90% of the market.

LePage’s sells “private label” tape with the retailer’s name on it.

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Consumer TrendsConsumer Trends

• Shift to private label tape> Growth of office superstores and Growth of office superstores and

mass merchandisersmass merchandisers> 3M commences sale of “second 3M commences sale of “second

brand” tapebrand” tape

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3M’s Bundled Rebates3M’s Bundled Rebates

• Executive Growth Fund and Partnership Growth Fund

• Rebates to induce customers to eliminate or reduce purchases from LePage’s

• Not volume discounts• Discounts conditioned on purchases of

other 3M product lines (health care, home care, home improvement, stationery products, retail auto, and leisure time)

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Bundled Rebates (cont’d)Bundled Rebates (cont’d)

• Rebate size a function of number of product lines in which targets met

• If failed to meet target in any one product, would lose rebate in all categories

• Rebates were not modest> KMART – $962,287 in 1997KMART – $962,287 in 1997> Wal-Mart – $1.5MMWal-Mart – $1.5MM

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Effect on Transparent Tape MarketEffect on Transparent Tape Market

• In order not to forego maximum rebate, had to buy 3M tape. To not do so would have cost> Sam’s Club -- $264,000Sam’s Club -- $264,000> KMART--$450,000KMART--$450,000

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Court’s ConclusionCourt’s Conclusion

• Lower court—jury awards damages

• Court on appeal concludes that such bundling, even if above cost, may exclude equally efficient rivals from offering product (tape).

• Exploitation of monopoly power by 3M.

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Exclusive DealingExclusive Dealing

• 3M entered exclusive contracts with some customers

• In addition, LePage’s claimed 3M made payments to many large customers in order to achieve that status.

• Court says evidence of predatory conduct under Section 2 of the Sherman Act and upholds jury’s finding that it violates Section 1 of the Sherman Act and Section 3 of the Clayton Act.

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Legitimate Business Justification?Legitimate Business Justification?

• Evidence suggested that 3M only entered private label transparent tape market to kill it.

• “I don’t want private label 3M products to be successful in our office supply business, its distribution or our consumers/end users.” –3M Executive

• Court upholds jury’s finding that no legitimate business justification

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Consequences of Violating the Consequences of Violating the Antitrust LawsAntitrust Laws

Consequences of Violating the Consequences of Violating the Antitrust LawsAntitrust Laws

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Potential Corporate and Personal Potential Corporate and Personal LiabilityLiability

• Criminal Sanctions• Divestiture• Injunctive Relief• Treble Damages for Private plaintiffs and

“gangpiling”(prima facie effect of government victory in court)

• Regulation of Corporate Conduct via consent decree for period of five to ten years

• Bad press• Increased scrutiny of future activities

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ConclusionsConclusions

• A firm’s share of the market has an impact on the types of marketing/ pricing practices in which the firm may engage.

• Marketing practices can serve as the foundation of anticompetitive conduct (Conwood/Microsoft)

• Discounts not based upon volume are risky where firm is leveraging monopoly power (LePage’s)

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Conclusions (cont’d)Conclusions (cont’d)

• Firms need to worry not only about coordinated conduct with competitors, but unilateral pricing and marketing actions

• An ounce of prevention… Corporate compliance programs, including yearly staff training, antitrust counsel oversight, and internal audits