United States: Recent Federal Trade Commission Complaints Highlight Risks Of Exclusive Supply Or Distribution Agreements And Information Sharing Among Competitors

Last Updated: March 7 2012
Article by Vincent C. van Panhuys

Originally published in Antitrust News & Notes February 2012

Recent Federal Trade Commission (FTC) complaints against a swimming pool products distributor and, separately, three ductile iron pipe fittings (DIPF) suppliers highlight the FTC's appetite to challenge supply and distribution practices using its Section 5 authority. The FTC actions call for caution in contracting for companies with large market shares.

Moreover, the FTC investigations and complaints in DIPF highlight the risks of information sharing in highly concentrated industries, even through third parties such as trade associations. The consent decree on information sharing against DIPF suppliers that settled with the commission is more restrictive than the safe harbor provision of the 1996 DOJ/FTC Health Care Guidelines, which antitrust lawyers have traditionally relied on in counseling clients on information exchanges and benchmarking with competitors.

In addition to the cost of an FTC investigation and potential remedies imposed by the agency, companies for which conduct is challenged by the FTC face the risk of civil litigation. For example, on the heels of the FTC complaint, Pool Corporation (PoolCorp), the swimming pool distributor, was sued by purchasers of pool supplies seeking treble damages in multiple class-action lawsuits in multiple jurisdictions including Florida, California, and Louisiana. The allegations in these suits typically mirror those made by the FTC in its public administrative complaint.

Ductile Iron Pipe Fittings

In January, the FTC brought an administrative complaint against three of the largest U.S. suppliers of ductile iron pipe fittings, which are used in municipal water systems, alleging they violated Section 5 of the FTC Act that prohibits entities from engaging in deceptive or unfair commercial practices. The FTC alleged that in 2008, McWane Inc., Sigma Corporation, and Star Pipe improperly exchanged competitively sensitive information through a trade association and changed their business practices to make it easier to collude (for example, by limiting the discretion of regional sales personnel to offer price discounts).

The FTC further alleged that in 2009, the "Buy American" provisions imbedded in the Federal stimulus program gave McWane an effective monopoly as the only U.S. producer of DIPF. The FTC alleged that at this point, McWane and Sigma signed an improper distribution agreement that kept Sigma from producing in the U.S. and competing with McWane, and in return gave Sigma distribution rights on McWane products. Moreover, the FTC alleged that as part of the distribution agreement, Sigma agreed to adopt exclusive dealing provisions similar to those McWane had adopted in order to keep competitors, including Star, out of the domestic DIPF market. The complaint alleged that Sigma had no legitimate business justification for entering into the distribution agreement with McWane.

McWane is challenging the administrative complaint and is scheduled for an administrative hearing at the FTC beginning in September. In a statement on the company website, McWane's president vowed to "fight this unjustified complaint with every resource at our command" and suggested the FTC investigation was the result of complaints by foreign competitors. The adjudication against Star was withdrawn last week for the purpose of considering a consent agreement (the details of which are not yet public). And, Sigma signed a consent agreement in January in which it did not admit guilt, but agreed to refrain from the types of practices the FTC alleged. The proposed order requires Sigma to refrain from fixing prices, dividing markets, or inviting others to do so. In addition, the order imposes significant restrictions on Sigma's ability to share competitively sensitive information. For 20 years, Sigma may not exchange competitively sensitive information that is more than six months old, may only exchange such information in a highly aggregated form, and may exchange such information no more than twice per year. If the industry remains highly concentrated, the proposed order completely prohibits Sigma from sharing competitively sensitive information related to price, cost, or unit cost during this 20-year period.

One of the four FTC commissioners, Commissioner Rosch, dissented in part with respect to the exclusive dealing allegations in the DIPF actions which he believed were not based on unlawful conduct. Moreover, Commissioner Rosch disagreed with the allegations against Star, which he stated seemed "much less culpable" than those of McWane or Sigma.

Swimming Pool Product Distributor

In January, the nation's largest pool products distributor, PoolCorp finalized its settlement of Section 5 allegations with the FTC. In November, the FTC alleged that PoolCorp had impeded new distributors from entering the distribution business by signing exclusive agreements with pool product manufacturers. The FTC had concluded that PoolCorp's market share exceeded 80 percent in some areas and accounted for 30 - 50 percent of most pool supply manufacturers' sales, making it by far their largest customer. The commission concluded that PoolCorp abused its clout to prevent manufacturers from selling to distributors trying to enter the market. The settlement agreement prohibits PoolCorp from (1) conditioning a manufacturer's purchase or sale of pool products or participation in PoolCorp's preferred vendor program, on the intended or actual sale to another distributor; (2) pressuring a manufacturer to limit its sales to another distributor; or (3) discriminating against a manufacturer for selling to another distributor. The settlement also requires PoolCorp to implement an antitrust compliance program.

Commissioner Rosch dissented to the exclusive dealing allegations against PoolCorp, because the FTC has "not been able to identify any harm to consumers or competition as a result of the actions of PoolCorp," and recommended that the commission drop its complaint. Commissioner Rosch emphasized that the FTC had not alleged any harm to incumbent distributors, only new ones, but noted that "no entrants were actually excluded." He emphasized that entrants and other distributors maintained access to multiple manufacturers despite PoolCorp's exclusive contracts with certain manufacturers and noted that the barrier to entry for new distributors was low.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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