Navigating Antitrust Issues in the Wake of COVID-19
As COVID-19 has become a global pandemic, nervous Americans are running to stores to stock up on food, toilet paper, hand sanitizers, disinfectant wipes and virus-killing sprays, leaving stores struggling to keep up with the ever-growing demand. Businesses and facilities that care for the sick, elderly and most vulnerable are worried about shortages of medical supplies and equipment that will remain in high demand as the virus continues to spread. At the same time as Americans are stocking up, they are hunkering down and canceling travel and discretionary purchases and services, driving down demand, or leaving an oversupply in other industries. The COVID-19 crisis has wreaked havoc on business and quickly upended typical supply and demand. In the wake of this crisis, businesses can face increased antitrust risk as they struggle to continue operations, and they can expect federal and state authorities to be paying close attention.
In response to the COVID-19 crisis, the U.S. Department of Justice (Department) recently announced[1] its intention to hold accountable anyone who violates the antitrust laws in connection with the manufacturing, distribution or sale of public health products such as face masks, respirators and diagnostics. The Department reiterated that any individual or company that fixes prices or rigs bids on items for personal health protection such as sterile gloves and face masks could face criminal prosecution. Attorney General William Barr said, “The Department of Justice stands ready to make sure that bad actors do not take advantage of emergency response efforts, healthcare providers, or the American people during this crucial time,” and “I am committed to ensuring that the [D]epartment’s resources are available to combat any wrongdoing and protect the public.” The Department referred to the Antitrust Division’s newly created Procurement Collusion Strike Force (PCSF), which will be on high alert for collusive practices in the sale of such products to federal, state and local agencies. The recently announced PCSF is described as focusing on deterring, detecting, investigating and prosecuting antitrust crimes such as bid-rigging conspiracies and related fraudulent schemes, which undermine competition in government procurement, grant and program funding.[2] The Department has actively enforced the antitrust laws in response to previous natural disasters[3] and financial crises,[4] and we can expect similar scrutiny and enforcement from the Antitrust Division in the wake of the COVID-19 crisis.
As businesses face unprecedented challenges to continue operations during the COVID-19 crisis, here are areas of possible antitrust risk to watch for and tips for avoiding being deemed one of the “bad actors” the Attorney General has committed to prosecute.
While there is no federal price-gouging law, individual states do have laws by which they can trigger protections against price gouging. New Jersey, among other states, and New York City have already taken measures to ensure those protections go into effect. In New Jersey, for example, Gov. Phil Murphy declared a formal state of emergency,[5] which triggers additional consumer safeguards that are embedded in state law, including an explicit ban against the increasing of prices by more than 10% compared to what the price of the same product was “immediately prior to the state of emergency.”[6] The only exception to the strict price control is if an increase is caused by “additional costs imposed by the seller’s supplier or other costs of providing the good or service during the state of emergency.” If anyone tries to violate these restrictions, they are subject to fines of $10,000 for an initial offense and $20,000 for each subsequent offense. New York City recently declared face masks in short supply[7] to ensure there would be no price gouging. Under the Rules of the City of New York, the Commissioner of the Department of Consumer and Worker Protection can declare certain items temporarily in short supply during “extraordinary circumstances,” which ensures that stores are prohibited from increasing prices in excess of normal market fluctuations. The declaration remains in effect for 30 days, unless it is terminated or extended.[8] In Nassau County, New York, the Office of Consumer Affairs has already fined two businesses $5,000[9] each for price gouging for protective masks. The New York attorney general sent cease and desist letters to a hardware store in Manhattan and a grocery store in Queens[10] for excessive prices on hand sanitizer and disinfectant. One hardware store was charging customers $79.99 for 1,200 mL of hand sanitizer, while the grocery store was charging customers $14.99 for a 19-ounce bottle of disinfectant spray.
The Pennsylvania attorney general, after setting up a dedicated hotline for price gouging information, has received over 1,000 tips from the public since the hotline’s creation in the wake of the pandemic.[11] We can expect to see more states enforcing these laws.
As companies struggle to set pricing under these difficult circumstances, it may be enticing to discuss pricing with competitors, but such “benchmarking” or “information exchanges” about future pricing may walk too close a line to price fixing.
Businesses facing high or low demand can avoid running afoul of price-fixing or price-gouging laws if they:
With the dawn of the Procurement Collusion Task Force in the wake of the COVID-19 outbreak, the Department is working with its partners, including the Department of Defense Office of Inspector General, the Federal Bureau of Investigation, the General Services Administration Office of Inspector General, and the Office of the Inspector General, in order to gather information on fraud and collusion between competitors. The Antitrust Division of the Department provides extensive training for public procurement officials who will likely be on the lookout for such types of bid rigging and fraud in the wake of a public health crisis like COVID-19.
Businesses can avoid running afoul of bid-rigging laws if they:
Businesses can avoid running afoul of violating market allocation prohibitions if they:
The federal antitrust laws attempt to protect consumers from illegal activity while remaining flexible and resilient enough to encourage beneficial collaborations. In these trying times, beneficial collaborations and joint ventures can benefit consumers by enabling businesses to bring goods or services to market faster or at lower cost and potentially make products or services available that would otherwise be unavailable to consumers. While the agencies have provided some guidance in this area,[14] the line between procompetitive collaborations and illegal collaborations can be tricky to navigate and requires the assistance of experienced antitrust counsel.
Businesses looking to avoid antitrust risk during the COVID-19 crisis should:
Authorship Credit: Ann O’Brien, Jeanne-Michele Mariani
[1] U.S. Department of Justice, “Justice Department Cautions Business Community Against Violating Antitrust Laws in the Manufacturing, Distribution, and Sale of Public Health Products,” (March 9, 2020) available at:https://www.justice.gov/opa/pr/justice-department-cautions-business-community-against-violating-antitrust-laws-manufacturing
[2] U.S. Department of Justice, “Justice Department Announces Procurement Collusion Strike Force,” (November 5, 2019) available at: https://www.justice.gov/opa/pr/justice-department-announces-procurement-collusion-strike-force-coordinated-national-response
[3] U.S. Department of Justice, “Disaster Recovery,” available at: https://www.justice.gov/atr/disaster-recovery#conduct
[4] U.S. Department of Justice, “Economic Recovery,” available at: https://www.justice.gov/atr/economic-recovery
[5] Edwin Torres, “New Jersey Declares State of Emergency to Curb Price Gouging,” NewsRoom (March 11, 2020) N. J. Spotlight (Pg. Unavail. Online), available at: Westlaw.com 2020 WLNR 7173389
[6] Id.
[7] Jeff Greenbaum, “NYC Department of Consumer Affairs Issues Price Gouging Declaration,” NewsRoom (March 11, 2020 Mondaq) available at: Westlaw.com, 2020 WLNR 7232712
[8] Id.
[9] Candice Ferrette, “Nassau Fines Businesses for Price Gouging on Masks,” (March 10, 2020) available at: https://www.newsday.com/long-island/politics/coronavirus-price-gouging-nassau-manhattan-1.42739060
[10] Id.
[11] Office of the Attorney General, “UPDATE: AG Price Gouging Complaints Surpasses 1,000 Tips,” Office of the Pennsylvania Attorney General, (March 17, 2020) available at: https://www.attorneygeneral.gov/taking-action/updates/update-ag-price-gouging-complaints-surpasses-1000-tips/
[12] U.S. Department of Justice, “Red Flags of Collusion,” (March 18, 2020) available at: https://www.justice.gov/atr/red-flags-collusion
[13] See 48 CFR § 52.203-2 (Certificate of Independent Price Determination) available at: https://www.law.cornell.edu/cfr/text/48/52.203-2
[14] Federal Trade Commission and U.S. Department of Justice, “Antitrust Guidelines for Collaborations Among Competitors,” (April 2011) available at: https://www.ftc.gov/sites/default/files/documents/public_events/joint-venture-hearings-antitrust-guidelines-collaboration-among-competitors/ftcdojguidelines-2.pdf
[15] U.S. Department of Justice, “Business Reviews,” (March 18, 2020) available at: https://www.justice.gov/atr/business-reviews
[16] Federal Trade Commission, “Advisory Opinions,” (March 18, 2020) available at: https://www.ftc.gov/policy/advisory-opinions
[17] On March 24, the Antitrust Division and the FTC announced expedited review procedures and provided guidance for collaborations of businesses working to protect the health and safety of Americans during the COVID-19 pandemic. U.S. Department of Justice and Federal Trade Commission, “Joint Antitrust Statement Regarding COVID-19,” (March 24, 2020) available at: https://www.justice.gov/atr/joint-antitrust-statement-regarding-covid-19
In response to the COVID-19 crisis, the U.S. Department of Justice (Department) recently announced[1] its intention to hold accountable anyone who violates the antitrust laws in connection with the manufacturing, distribution or sale of public health products such as face masks, respirators and diagnostics. The Department reiterated that any individual or company that fixes prices or rigs bids on items for personal health protection such as sterile gloves and face masks could face criminal prosecution. Attorney General William Barr said, “The Department of Justice stands ready to make sure that bad actors do not take advantage of emergency response efforts, healthcare providers, or the American people during this crucial time,” and “I am committed to ensuring that the [D]epartment’s resources are available to combat any wrongdoing and protect the public.” The Department referred to the Antitrust Division’s newly created Procurement Collusion Strike Force (PCSF), which will be on high alert for collusive practices in the sale of such products to federal, state and local agencies. The recently announced PCSF is described as focusing on deterring, detecting, investigating and prosecuting antitrust crimes such as bid-rigging conspiracies and related fraudulent schemes, which undermine competition in government procurement, grant and program funding.[2] The Department has actively enforced the antitrust laws in response to previous natural disasters[3] and financial crises,[4] and we can expect similar scrutiny and enforcement from the Antitrust Division in the wake of the COVID-19 crisis.
As businesses face unprecedented challenges to continue operations during the COVID-19 crisis, here are areas of possible antitrust risk to watch for and tips for avoiding being deemed one of the “bad actors” the Attorney General has committed to prosecute.
Price Gouging, Price Fixing and COVID-19
As we see prices of hand sanitizer, masks, gloves and medical supplies skyrocket, the internet is filled with allegations of price gouging and even price fixing. Economists recognize that in such a crisis the laws of supply and demand would predict a price spike on items in high demand and short supply. Generally, companies are free to price their goods and services as they see fit if those decisions are made independently. Agreements among two or more horizontal competitors about what prices to charge are considered price fixing, and companies and individuals can be prosecuted criminally under federal antitrust laws and some state antitrust laws for such conduct. Price fixing can take many forms, including agreements among competitors to fix components of price such as emergency surcharges or agreements to eliminate discounts.While there is no federal price-gouging law, individual states do have laws by which they can trigger protections against price gouging. New Jersey, among other states, and New York City have already taken measures to ensure those protections go into effect. In New Jersey, for example, Gov. Phil Murphy declared a formal state of emergency,[5] which triggers additional consumer safeguards that are embedded in state law, including an explicit ban against the increasing of prices by more than 10% compared to what the price of the same product was “immediately prior to the state of emergency.”[6] The only exception to the strict price control is if an increase is caused by “additional costs imposed by the seller’s supplier or other costs of providing the good or service during the state of emergency.” If anyone tries to violate these restrictions, they are subject to fines of $10,000 for an initial offense and $20,000 for each subsequent offense. New York City recently declared face masks in short supply[7] to ensure there would be no price gouging. Under the Rules of the City of New York, the Commissioner of the Department of Consumer and Worker Protection can declare certain items temporarily in short supply during “extraordinary circumstances,” which ensures that stores are prohibited from increasing prices in excess of normal market fluctuations. The declaration remains in effect for 30 days, unless it is terminated or extended.[8] In Nassau County, New York, the Office of Consumer Affairs has already fined two businesses $5,000[9] each for price gouging for protective masks. The New York attorney general sent cease and desist letters to a hardware store in Manhattan and a grocery store in Queens[10] for excessive prices on hand sanitizer and disinfectant. One hardware store was charging customers $79.99 for 1,200 mL of hand sanitizer, while the grocery store was charging customers $14.99 for a 19-ounce bottle of disinfectant spray.
The Pennsylvania attorney general, after setting up a dedicated hotline for price gouging information, has received over 1,000 tips from the public since the hotline’s creation in the wake of the pandemic.[11] We can expect to see more states enforcing these laws.
As companies struggle to set pricing under these difficult circumstances, it may be enticing to discuss pricing with competitors, but such “benchmarking” or “information exchanges” about future pricing may walk too close a line to price fixing.
Businesses facing high or low demand can avoid running afoul of price-fixing or price-gouging laws if they:
- Make independent pricing determinations
- Do not discuss with competitors any intention to charge emergency or other surcharges or eliminate discounts
- Avoid “benchmarking” or discussing future pricing (maximum or minimum) with competitors
- Seek counsel regarding applicable price-gouging laws
Bid Rigging and COVID-19
As companies try to respond to demand for products needed in response to COVID-19, such as public health and safety products, there may be too much or too little business to allow bidding on every available contract. Bid rigging occurs when competitors agree in advance who will win a public or private contract. Companies and individuals can be prosecuted criminally for bid rigging under federal antitrust laws and some state laws. Bid rigging can take many forms, including agreements to rotate winners (you take this one, we will take the next one) and may involve providing a “complementary” bid not intended to win the contract.With the dawn of the Procurement Collusion Task Force in the wake of the COVID-19 outbreak, the Department is working with its partners, including the Department of Defense Office of Inspector General, the Federal Bureau of Investigation, the General Services Administration Office of Inspector General, and the Office of the Inspector General, in order to gather information on fraud and collusion between competitors. The Antitrust Division of the Department provides extensive training for public procurement officials who will likely be on the lookout for such types of bid rigging and fraud in the wake of a public health crisis like COVID-19.
Businesses can avoid running afoul of bid-rigging laws if they:
- Decide independently which contracts to bid on
- Avoid discussing intentions to bid or not bid with competitors
- Bid to win and determine bid prices independently and avoid providing high or low numbers not intended to win a bid
Market Allocation and COVID-19
If demand for food or public health and safety products or services are high, businesses may be approached by competitors to split up the market by geographic area or customers to ensure adequate supply. Competitors may tell others to stay in their territory or “footprint” or “backyard.” On the flip side, when demand is low, competitors might agree to stay in their own territories or only serve their existing customers to split up the dwindling market share rather than face costly competition. Market allocation schemes are agreements among competitors to divide markets among themselves. Agreements to allocate or suppress supply of products or reduce output can also be viewed as illegal market allocation agreements. Companies and individuals can be prosecuted criminally for market allocation agreements under federal antitrust laws and some state laws.Businesses can avoid running afoul of violating market allocation prohibitions if they:
- Decide independently what customers and markets to serve
- Avoid discussions of territories, areas or specific customers with competitors
- Do not agree with competitors to limit areas of service or customers served, or agree on amount of supply or output, even in response to emergency situations
Avoid Being a Victim of Collusion
Businesses may also find themselves facing short supply and higher prices for products or services they need. To avoid being the victim of anticompetitive collusion, businesses can:- Get multiple bids and quotes for products or services
- Be aware of suspicious patterns in bidding or pricing that indicate competitors might be acting together rather than competing for business; look for red flags of collusion as described by the Department of Justice[12]
- Consider requiring a statement of “non-collusion” or “independent price determination” as is often required for public procurement[13]
What Businesses Can Do to Reduce Antitrust Risk During the COVID-19 Crisis
As discussed above, during a public health crisis, there may be increased pressure to get vital products, materials or services to market, and cooperation with competitors might seem like a quick way to address supply chain issues and accomplish these important goals. Sometimes there is even governmental or public pressure to get these vital items to market. Conversely, dwindling demand might also make it enticing to work with competitors to coordinate bids, allocate markets, or agree with competitors to reduce service or output. In the U.S., however, there is no antitrust exemption for public health emergencies.The federal antitrust laws attempt to protect consumers from illegal activity while remaining flexible and resilient enough to encourage beneficial collaborations. In these trying times, beneficial collaborations and joint ventures can benefit consumers by enabling businesses to bring goods or services to market faster or at lower cost and potentially make products or services available that would otherwise be unavailable to consumers. While the agencies have provided some guidance in this area,[14] the line between procompetitive collaborations and illegal collaborations can be tricky to navigate and requires the assistance of experienced antitrust counsel.
Businesses looking to avoid antitrust risk during the COVID-19 crisis should:
- Make independent business decisions tailored to market demands
- Avoid sharing competitively sensitive information like future pricing or bid intentions with competitors
- Enhance antitrust compliance – Desperate times often call for desperate measures, and antitrust collusion is often born of business desperation, so it is an important time for companies to ensure they have effective antitrust compliance programs, reporting and audit functions in place
- Consider seeking a business review of potential competitor collaborations – The Antitrust Division offers business review letters as a way for businesses to receive guidance regarding proposed conduct,[15] and the Federal Trade Commission has provided advisory opinions[16] to determine how the Division may respond to proposed joint ventures or other business conduct[17]
- Seek legal advice regarding competitor coordination and collaborations necessitated by COVID-19
* * * *
As your business confronts the challenges of COVID-19, BakerHostetler is here to help. We are continuing to develop and publish information about this fast-changing environment and have developed an online resource to help address and answer legal questions, available here.Authorship Credit: Ann O’Brien, Jeanne-Michele Mariani
[1] U.S. Department of Justice, “Justice Department Cautions Business Community Against Violating Antitrust Laws in the Manufacturing, Distribution, and Sale of Public Health Products,” (March 9, 2020) available at:https://www.justice.gov/opa/pr/justice-department-cautions-business-community-against-violating-antitrust-laws-manufacturing
[2] U.S. Department of Justice, “Justice Department Announces Procurement Collusion Strike Force,” (November 5, 2019) available at: https://www.justice.gov/opa/pr/justice-department-announces-procurement-collusion-strike-force-coordinated-national-response
[3] U.S. Department of Justice, “Disaster Recovery,” available at: https://www.justice.gov/atr/disaster-recovery#conduct
[4] U.S. Department of Justice, “Economic Recovery,” available at: https://www.justice.gov/atr/economic-recovery
[5] Edwin Torres, “New Jersey Declares State of Emergency to Curb Price Gouging,” NewsRoom (March 11, 2020) N. J. Spotlight (Pg. Unavail. Online), available at: Westlaw.com 2020 WLNR 7173389
[6] Id.
[7] Jeff Greenbaum, “NYC Department of Consumer Affairs Issues Price Gouging Declaration,” NewsRoom (March 11, 2020 Mondaq) available at: Westlaw.com, 2020 WLNR 7232712
[8] Id.
[9] Candice Ferrette, “Nassau Fines Businesses for Price Gouging on Masks,” (March 10, 2020) available at: https://www.newsday.com/long-island/politics/coronavirus-price-gouging-nassau-manhattan-1.42739060
[10] Id.
[11] Office of the Attorney General, “UPDATE: AG Price Gouging Complaints Surpasses 1,000 Tips,” Office of the Pennsylvania Attorney General, (March 17, 2020) available at: https://www.attorneygeneral.gov/taking-action/updates/update-ag-price-gouging-complaints-surpasses-1000-tips/
[12] U.S. Department of Justice, “Red Flags of Collusion,” (March 18, 2020) available at: https://www.justice.gov/atr/red-flags-collusion
[13] See 48 CFR § 52.203-2 (Certificate of Independent Price Determination) available at: https://www.law.cornell.edu/cfr/text/48/52.203-2
[14] Federal Trade Commission and U.S. Department of Justice, “Antitrust Guidelines for Collaborations Among Competitors,” (April 2011) available at: https://www.ftc.gov/sites/default/files/documents/public_events/joint-venture-hearings-antitrust-guidelines-collaboration-among-competitors/ftcdojguidelines-2.pdf
[15] U.S. Department of Justice, “Business Reviews,” (March 18, 2020) available at: https://www.justice.gov/atr/business-reviews
[16] Federal Trade Commission, “Advisory Opinions,” (March 18, 2020) available at: https://www.ftc.gov/policy/advisory-opinions
[17] On March 24, the Antitrust Division and the FTC announced expedited review procedures and provided guidance for collaborations of businesses working to protect the health and safety of Americans during the COVID-19 pandemic. U.S. Department of Justice and Federal Trade Commission, “Joint Antitrust Statement Regarding COVID-19,” (March 24, 2020) available at: https://www.justice.gov/atr/joint-antitrust-statement-regarding-covid-19
Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.
No comments:
Post a Comment