April 1, 2002

Subject: The Internet & Antitrust Laws

Managers need to make informed decisions about what they and their competitors and business partners can and can't do under the antitrust laws. Courts and enforcement agencies are beginning to deal with new issues created by the Internet. The legal roadmap is not drawn yet. This memorandum covers some antitrust issues that are likely to be important.

PRICES

It is illegal for competitors to fix prices on the Internet or anywhere else. The scope of information that can be exchanged via Internet may create dangerous situations. For example, if competitors give price information to one another, it can lead the government to suspect price-fixing even if they do not actually agree on prices.

It is also illegal for a manufacturer to fix resale prices by a distributor. You may need to structure your deals to guard against an appearance that this is happening. If you use your web site to sell products of another company, you need to consider how prices are set.

The rule against fixing resale prices can be a challenge when a company is adjusting its distribution structure. Suppose a manufacturer has a system of traditional distributors. The manufacturer wants to allow a dealer to make Internet sales. Traditional distributors may feel threatened that the Internet dealer will have lower costs and can sell below their prices. The manufacturer's responses are limited by the law. The manufacturer cannot promise that the Internet dealer will maintain current prices, because that would be illegal resale price maintenance. Under some circumstances, the manufacturer may reserve Internet distribution to itself, and prohibit dealers from Internet selling. The manufacturer might terminate the Internet dealer. The manufacturer cannot ask the Internet dealer to keep prices up.

BOYCOTTS

Suppose one dealer begins to sell on the Internet at low prices. Can the others demand that the manufacturer cut off that dealer? Usually not. In most circumstances, this would be an illegal boycott. For example, when a car dealer offered low prices for cars by Internet, a group of dealers confronted the manufacturer and demanded it reduce its allocation of cars to the Internet dealer. The result was an FTC suit against the other dealers.

STRATEGIC ALLIANCES & JOINT VENTURES

The Internet world is interdependent. You may consider strategic alliances and other partnerships. Even this raises some antitrust concerns.

Integration
A joint effort is more likely to be lawful if it integrates participant activities in a way that is economically meaningful. This might include working together on research, joining complementary intellectual property or different distribution facilities. Where a joint effort involves integration, it is more likely to be seen as pro-competitive and lawful. Where it does not involve integration, it may be seen as an attempt to allocate markets or exclude competition.

Prices
Competitors cannot agree on prices unless the agreement is reasonably necessary for them to offer a joint product or service as part of a bona fide joint venture.

Market Power
A joint initiative may be illegal if it ties together any of the selling, buying, innovative or production power of too great a part of the market. FTC and DOJ Guidelines say that most often a joint venture is not too big if it involves 20% or less of the relevant market.

Exclusion
A joint venture may be illegal if it controls an essential input like pooled intellectual property or an essential output like distribution facilities that prevents others from entering the market and competing.

EXCLUSIVE CONTRACTS

Companies often seek an exclusivity provision to make sure the other side will devote resources to the initiative. Most of these are lawful. Some are illegal because they lock up too much of the market or do not have a suitable defense. When planning an exclusive arrangement, consider:

• The economic justification for the exclusivity clause.
• Will the exclusive arrangement enhance competition or foreclose competitors from an important percentage of the available supply or outlet capacity?
• How is the relevant input or output defined? Do you have a large share now or will you have a large share if this succeeds?
• What can you do if the deal becomes illegal in the future?

PLANNING MERGERS AND ACQUISITIONS

Almost every Internet company is a candidate to be bought or sold at some point in its life cycle. Most transactions clear antitrust review without trouble, but some deals get intensive antitrust investigations. Develop habits that will help you when the time comes. Think carefully about why a particular deal is being proposed, and how it may look to antitrust enforcers. Do not make exaggerated statements. The government will see the documents about the plans for your deal.

EMERGING ISSUES

Antitrust enforcers are now analyzing the antitrust issues raised by B2B exchanges. B2B arrangements may be positive or negative from an antitrust perspective. The exchange could reduce the administrative cost of supplier contracting, leading to enhanced price competition. The exchange could standardize terms, set supply prices by market power instead of competition or foreclose the development of a competing exchange. The ultimate question is whether, on balance, the exchange will enhance or restrain competition. The answer is likely to turn on the individual facts. In April 2000, the FTC and the DOJ issued general guidelines about cooperation among competitors. The FTC has conducted hearings on Internet exchanges, but decided it was too early to issue specific guidelines. If an Internet exchange venture is important to your company, you should stay on top of these developments.