Vol. 83, No. 12, December 2010
by Kevin J. O’Connor & Hannah L. Renfro
“In the modern world it cannot be denied that the activities of lawyers play an important part in commercial intercourse, and that anticompetitive activities by lawyers may exert a restraint on commerce.”1 This passage from the 1975 U.S. Supreme Court decision in Goldfarb v. Virginia State Bar leaves no doubt that the antitrust laws apply to attorneys and their legal practices.2
This means attorneys must exercise the same caution as any other businesspeople when discussing competitively sensitive information and should generally avoid discussing with each other the fees they charge for legal services. Likewise, the State Bar of Wisconsin must be diligent to prevent any of its activities or forums from encouraging or allowing anticompetitive conduct or even conduct that appears to be anticompetitive. The implications of failing to exercise an appropriate level of caution – for individuals and for an association – can be troublesome.
Recently, there has been much discussion among State Bar members about the State Bar’s electronic list (e-list) policies and how or whether discussion of legal fees on the e-lists might have antitrust implications. This article focuses on how antitrust law applies to attorneys, and in particular, to their communications with one another regarding prices of legal services. The article first provides an overview of antitrust laws applicable to conduct among competitors and then describes in more detail the law of price fixing and exchanges of information. Finally, the article lists several questions and answers to illustrate some of the legal boundaries, risks, and implications of exchanging information concerning prices.
This article is intended as only general antitrust guidance. It is not, of course, advice for a particular set of circumstances. Like so many areas of law, antitrust requires a detailed, fact-specific risk analysis.
Basic Antitrust Law Overview
Federal and state antitrust laws prohibit activities that restrict competition. Under section 1 of the Sherman Act, “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” The key element of a section 1 claim is an agreement that unreasonably restrains competition. For antitrust purposes, agreement is defined very broadly. There is no need to show an express written or oral agreement. An agreement can be inferred from the circumstances.
Agreements are evaluated under one of two tests under the antitrust laws: 1) the per se rule or 2) the rule of reason. Practices subject to the per se rule are considered to be so inherently damaging to competition, and thus to consumers, that they are deemed automatically unlawful without any showing of actual harm to competition. In contrast, the rule of reason balances the procompetitive benefits of an agreement with its anticompetitive harms. It considers all the circumstances surrounding the underlying practices.3
Unlawful restrictions are classified as being either horizontal agreements or vertical agreements. Horizontal agreements are between competitors, whereas vertical agreements are typically between “upstream” suppliers and “downstream” distributors or retailers. Horizontal agreements to fix prices, rig bids, allocate markets on a geographic or customer basis, boycott competitors, and so forth, are per se illegal because they virtually always affect competition adversely. On the other hand, vertical agreements – such as tying (that is, conditioning the sale of one item on the purchase of another item), retail or advertised price agreements, and territorial sales restrictions – are evaluated under the rule of reason.
Antitrust Penalties are Often Severe
The penalties for violating the antitrust laws are potentially very severe. Violation of the Sherman Act is a felony punishable by a prison sentence of up to 10 years and a fine of $1 million (if committed by an individual) or $10 million (if committed by a corporation). Employees and officers of corporations can be and are routinely sentenced to prison for committing antitrust violations. In 2009 alone, 27 individuals and 16 corporations were fined a total of $605,000 and $973,740,000, respectively, by the U.S. Department of Justice Antitrust Division.4 In addition, the agency imposed more than $17 million in restitution in criminal cases, and 53 individuals were sentenced for varying terms.5 Successful plaintiffs can recover three times their damages plus attorney fees.6
Price Fixing Among Competitors
The most problematic issue is price fixing, which covers any agreement that has the purpose or effect of raising, depressing, fixing, or stabilizing the price, or any element thereof, of a good or service. The essence of price fixing is tampering with what would otherwise be a competitive price structure for, in this context, legal services. Price fixing is considered to be one of the most serious forms of anticompetitive conduct because it almost always has adverse consequences for consumers. Because of these likely adverse effects, it is the agreement itself that is unlawful, even if actual proof of adverse effects is not made and even if the agreement is never specifically acted on. For example, if two building contractors agree to rig their bids on an upcoming state job, the agreement is actionable even if they never follow through in submitting their rigged bids. The submission of the sealed bids may constitute compelling corroborating evidence of the underlying agreement, but it is in fact not necessary to prove a charge of bid rigging.7 In essence, the per se rule is a rule of evidence: the only evidence admissible in a per se case regarding the allegedly illegal agreement is evidence probative of the existence or nonexistence of an agreement.
The range of evidence that could lead a court or an investigating prosecutor to conclude that an unlawful agreement has occurred is quite broad. In addition to direct evidence of competitors reaching an agreement, circumstantial evidence of an unlawful agreement is quite commonly used. For example, assume five businesspeople meet at a trade association meeting to discuss legitimate topics about their industry. Two of the five engage in an animated discussion about the poor state of pricing in the industry and vow to refrain from providing discounts for the foreseeable future. The other three participants say nothing but subsequently eliminate or reduce their own discounts. Has an agreement among the five occurred? Maybe. Will a prosecutor who is informed of this sequence of events be likely to conclude that she can successfully make the case that an unlawful agreement has been reached? Yes.8
Kevin O’Connor, Harvard 1976, is a shareholder at Godfrey & Kahn, Madison, and chairs the firm’s antitrust and trade regulation practice group. He practices in antitrust, trade regulation, and consumer litigation and counseling. He formerly served in the Wisconsin Department of Justice as the assistant attorney general in charge of antitrust enforcement.
Hannah L. Renfro, U.W. 2004, was formerly an associate at Godfrey & Kahn. She currently is the chief legal counsel of the Wisconsin Department of Commerce
Lawyers Reaching an Agreement. Because agreements are often proved by circumstantial evidence, lawyers should take great care in what they talk about with other lawyers, that is, their competitors. In this context, the price-fixing question comes into play when attorneys discuss the prices – defined broadly to include hourly rates, contingency fees, retainers, flat rates, discounts, or any other arrangement that affects or is related to the prices – charged for legal services. Discussions of prices might take place during a telephone or in-person conversation, through postings on a State Bar or local bar e-list, at meetings among many attorneys, or in email exchanges.
An agreement can actually be reached or be construed to have been reached under any number of circumstances. Moreover, if attorneys do enter into an agreement – formally or informally – it does not matter if the agreed-to price is reasonable or even beneficial to consumers.9 It is still unlawful.
In Goldfarb, the U.S. Supreme Court held that the recommended-minimum-price lists for common legal services created by a county bar association and enforced by the state bar association were per se illegal under the Sherman Act.10 The bar is comprised of competitors. When competitors agree with one another to charge a particular price for a particular service, that is price fixing.
An illustration of price fixing in the context of Internet communications is United States v. Airline Tariff Publishing Co., in which the Department of Justice sued several airlines for price fixing.11 The airline companies operated, through a joint venture, a computer system that collected and circulated the airlines’ fare information, which included actual and proposed fare changes.12 The evidence of an agreement was inferred from the circumstances, not from direct proof that the airlines articulated an agreement in writing. Those circumstances were that competitors engaged in frequent communications by posting and, at times, withdrawing prospective price increases through the computer system and that there did not appear to be any business justification for certain aspects of the system.13
Even in a situation in which an agreement cannot be inferred, a person or firm making an overture to a competitor through public or private channels that it is interested in coordinating prices or colluding in other ways could face an unfair-competition claim under section 5 of the Federal Trade Commission (FTC) Act. A long line of FTC cases has established that such “invitation to collude” cases are on the government’s radar screen, most recently in a case involving U-Haul International Inc.14
Fee Surveys among Competitors. Modern information technology allows for the rapid exchange and analysis of a wide variety of competitively sensitive information. For the most part, these exchanges can enhance competition. However, as noted above, exchanges of information among competitors can expose businesspeople to charges of violating antitrust laws. Determining what is and is not permissible can be difficult.
More formal exchanges of information, such as through fee surveys or other similar mechanisms, also may be problematic, depending on the context. Many markets provide very transparent pricing information (for example, gasoline stations post prices on external signs) and, hence, there is little need for competitors to exchange information to determine the prevailing, presumably competitive, prices. Other areas of commerce are less transparent. Attempts to determine with specificity the prices competitors are charging in less transparent markets (such as health care or legal services) could be deemed evidence supporting an inference that the competitors are attempting to or in fact have agreed to a particular price.
The U.S. Department of Justice and the FTC have provided at least one mechanism to help draw the line between lawful and unlawful exchanges in the context of health-care fee surveys. The agencies issued a set of guidelines on fee surveys, creating a “safety zone” in which competitors can, absent extraordinary circumstances, provide information on prices and review the resulting survey.15 To qualify for the safety zone, the data collection must be managed by a third party, not a competitor; the information provided must be at least three months old; the information must be aggregated based on information from at least five participants; and no individual participant can be identified. Conducting information exchanges in this manner would not be likely to raise an inference that prices or fees were set collusively. For example, the State Bar adheres to these guidelines in conducting its economics-of-practice surveys.
Antitrust laws are not designed to inhibit business but to foster and to protect the competition anchoring the U.S. economic system based on the principles of a free market. The key in antitrust compliance is the same with any compliance program – prevention. It is, of course, important to refrain from conduct that constitutes actual antitrust violations. It also is advisable to avoid conduct that could cause someone to infer, even perhaps incorrectly, that the antitrust laws have been violated. Even an antitrust investigation that does not lead to charges can be quite costly and inconvenient for those targeted by such an investigation. Even if not ultimately successful, an enforcement action brought by a state or federal agency or a civil action brought by a private plaintiff is likely to be extremely time-consuming and costly, and it can wreak havoc on a practice or an association. For these reasons, appearances matter. What may in reality be innocuous discussion between two attorneys about their hourly rates may appear to outsiders to be collusion. Whenever the topic of prices arises, attorneys should be mindful of the context and any antitrust risk.