Price Fixing Among Competitors

By M. Brian McMahon

Competitors that engage in price ﬁxing face enormous risks. These risks include huge damages, ﬁnes and even jail time. Everyone knows that explicit agreements among competitors to charge the same price are considered price ﬁxing. But price ﬁxing is much broader. Price ﬁxing may be found even where there are no explicit agreements. Agreements to give the same credit terms, to purchase excess supplies to discuss future prices can all be forms of price ﬁxing. Because the penalties are so great, it is important to know what practices expose you to the risk of price ﬁxing lawsuits and when you might be the victim of price ﬁxing. The following discussion about price ﬁxing is brief and necessarily incomplete. Some actions to avoid are discussed at the end.

The Penalties For Price Fixing

The penalties for price fixing among competitors are severe. Federal law permits fines of up to $10 million for businesses and $350 thousand for individuals as well as imprisonment of up to 3 years for those found guilty of criminal violations. Civil penalties are also severe. Plaintiffs can receive triple the amount of damages they suffer plus all their attorneys fees. Two former executives of Archer Daniels Midland were sentenced to 36 months and 33 months respectively for a conspiracy to ﬁx prices and allocate sales in the lysine market worldwide. The auction house Sotheby’s agreed to pay a $45 million dollar criminal ﬁne for price ﬁxing with Christie’s, its chief competitor, on commissions charged to sellers at auctions. In addition, the two auction houses agreed to pay $512 million to settle a class action civil lawsuit arising out of the same conspiracy.

Courts do not allow justiﬁcations to price ﬁxing

No justiﬁcation is allowed for price ﬁxing among competitors. For example, defendants may not argue that the ﬁxed price was reasonable or that society would be better off because of the price ﬁx. In one case, some physicians agreed on prices they would charge health care providers. The Supreme Court ruled that they could not justify their price ﬁxing agreement on the ground that their actions promoted better health care.

Courts deﬁne agreements broadly

Obviously a written contract agreed to by competitors to ﬁx prices is illegal. But even if an agreement is too vague or incomplete to be a contract, it can still be illegal. If competitors agree on prices but declare that they are not legally bound and each party reserves the right to abandon the venture at will and without notice, the agreement would be illegal. A price ﬁxing agreement can be nothing more than an informal “gentlemen’s agreement.” Verbal acceptance of a proposal to ﬁx prices is not necessary. Performance of a requested act can complete the agreement and even initiation of the requested act can constitute an implied promise to complete it.

The following three examples show how liberal courts have been in ﬁnding agreements to ﬁx prices. In one case, in a meeting of competitors one said to the others “I don’t know about the rest of you, but I am going to charge $x for the cars that I am selling.” Others at the meeting make similar statements. None of them said they agreed with the ﬁrst speaker. All of them later charged $x for their cars. Even there was no explicit agreement; the court ruled that these facts are sufﬁcient to prove an agreement. In another case the court found a price ﬁx where competitors in a market with few competitors did no more than exchange information concerning prices they were charging individual customers. In a third case one competitor sent a letter to other competitors suggesting that they all adhere to a common course of action. Without stating to one another that they agreed to do so, all of the competitors began following the proposal. The court held that a conspiracy had been proved.

Courts interpret ﬁxing prices broadly

The simplest form of price ﬁxing involves agreements on speciﬁc prices. But price ﬁxing also includes agreements to maintain current prices, to stabilize prices and to peg prices to some standard (for example, agreements among banks to set home interest rates at a certain percentage over the prime rate). Agreements among competitors concerning the terms and conditions of sale that affect some aspect of prices such as commissions, discounts, freight charges, credit and payment terms are illegal.

Price ﬁxing may involve only an indirect effect on prices. For example, agreements to limit supplies, to allocate territories, to refrain from competitive bidding, or to exchange plans about future prices are all forms of price fixing. The following

agreements have been held to be price ﬁxing: an agreement among oil companies to buy up excess gasoline supplies in order to bolster prices, an agreement to limit the percentage of an expensive type of wheat to be used in manufacturing macaroni, an agreement to force suppliers to refuse to deal with a price discounter, and an agreement to submit sham bids.

Price fixing can be proved by inferences

Virtually any relevant evidence can be used to prove a conspiracy to fix prices. Although parallel prices are not by themselves sufﬁcient to prove a price ﬁxing conspiracy, they can be used together with other evidence to prove one. Courts refer to these other factors as “plus factors.” Plus factors include meetings, conversations and other opportunities to conspire, furtive behavior, information exchanges, sham bids, solicitations of agreement, refusals to bid when bidding would be advantageous, identical bids for non-standard projects, and other parallelism that is too close for coincidence.

Advice

Meetings: meetings with competitors should be kept to a minimum, held publicly and with a justifiable purpose. Hidden meetings with competitors with no satisfactory explanation of their purpose are suspect.

Price Discussions: price discussions and the exchange of information with competitors concerning prices and terms and conditions of sales should be avoided. Discussions with your competitors involving topics such as sales levels, profits, profits margins, costs, production capacity, market shares, and intent to bid or not bid can lead to inferences of price fixing.

Silence: Merely keeping silent in the presence of such discussions in not enough to insulate you from liability. You should withdraw from such discussions.

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