> Cartels Update: U.S. FTC Investigates Alleged Iron Pipe Fittings Cartel – Trade Association Used as a Conduit for Information Exchanges and Monitoring | COMPETITION LAW

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On January 4, 2012, the U.S. Federal Trade Commission (“FTC”) announced that it filed complaints against three of the largest U.S. suppliers of ductile iron pipe fittings for an alleged price-fixing cartel.

The FTC is also alleging that parties used a trade association (the Ductile Iron Fittings Research Association) to exchange information and monitor adherence to the cartel agreement.

See: FTC Action Protects Competition in Market for Iron Pipe Fittings Used in Municipal Water Systems

In making the announcement, the FTC said:

“The complaints allege a broad range of collusive and exclusionary conduct calculated to raise the price of ductile iron pipe fittings, an essential component of the nation’s water infrastructure. … The FTC will act aggressively to protect cash-strapped municipalities and the consumers they serve from anticompetitive conduct.

Ductile iron pipe fittings, known as DIPF, are used by municipal water systems to change the diameter and direction of pipelines carrying drinking and wastewater, and are sold by suppliers such as McWane, Star, and Sigma through specialty wholesale distributors. McWane and its largest competitors in the DIPF market, Sigma and Star, all sell imported DIPF. In addition, McWane was the only domestic producer of a full line of small and medium-sized DIPF until Star entered the market for U.S.-made DIPF in 2009.

The FTC alleges that beginning in 2008, McWane, Sigma, and Star participated in an illegal conspiracy to fix the price at which imported DIPF are sold in the United States.

According to the FTC, McWane invited Sigma and Star to collude with it beginning in early 2008, when it communicated to Sigma and Star a plan to raise and fix prices for imported DIPF. The FTC alleges that Sigma and Star accepted McWane’s invitation to collude and, to further the conspiracy, each raised its prices for imported DIPF in January 2008 and again in June 2008. Between June 2008 and January 2009, according to the FTC, the three firms exchanged information documenting the volume of their monthly sales through a trade association called the Ductile Iron Fittings Research Association (DIFRA), and each company used this information to monitor whether the other co-conspirators were adhering to the terms of their collusive arrangement.

In Canada, section 45 of the Competition Act makes it a criminal offence for actual or potential competitors to fix prices, divide markets (e.g., geographic markets or customers) or restrict output.  The potential penalties for non-compliance with section 45 include fines of up to $25 million (per count), imprisonment for up to 14 years, or both.

In addition, “information exchanges” (i.e., the exchange of competitively sensitive information) is one of the primary risk areas for trade and professional associations, which may include the exchange of information relating to current/future pricing, market shares, costs, customers, current/future business plans and strategic plans and markets.

This is because, when shared with competitors, competitively sensitive information can lead to either the formation of an anti-competitive agreement (e.g., a price-fixing agreement) or support the inference of an anti-competitive agreement (e.g., the exchange of pricing information followed by a stabilization of price can indicate that an agreement contravening the Competition Act exists).

Based on the potential risk, associations should adopt basic compliance guidelines for information exchanges between members (e.g., in relation to benchmarking, research, lobbying or other joint activities among members).

Some other practical steps associations can take to reduce potential competition law risk include:

Adopt and maintain an effective compliance program.  According to the Competition Bureau, an effective compliance program “plays a crucial role for trade associations.”  Some of the benefits of a compliance program include reducing the risk of violating the Competition Act, reducing the costs of investigations and proceedings and potentially mitigating penalties.

Options for associations range from formal compliance programs encompassing all association activities to compliance guidelines for key activities (e.g., meetings, information exchanges and specific initiatives such as benchmarking, research and development initiatives and joint negotiations).

Adopt agendas and minutes for all association meetings.  Associations should prepare written agendas and keep minutes for all meetings.  Discussions at meetings should also stay within the boundaries of legitimate agenda items and discussions (or exchanges) of competitively sensitive information should be avoided.  These include discussions of pricing, costs, individual customers, markets, business or strategic plans and related “competitively sensitive” topics.

While the exchange of competitively sensitive information itself cannot violate the criminal conspiracy provisions of the Competition Act (section 45, although may now fall within the scope of the new civil agreement provision of the Act, section 90.1), discussions or exchanges of competitively sensitive information between competitors is considered to be a potentially high risk area given that they can be used as evidence by the Bureau, a court or private plaintiff to infer the existence of an agreement that may violate section 45.

Adopt and follow conduct of meeting guidelines.  One of the most practical steps a trade or professional association can take to reduce potential competition law risk is to adopt and strictly follow conduct of meeting guidelines.  Such guidelines commonly include restrictions on the exchange of competitively sensitive information (of the types discussed above) and on discussions of topics that may lead to conspiracy risk under section 45 of the Competition Act (e.g., discussions relating to pricing, markets, concerted refusals to deal or limiting production or supply of goods or services – in large part, discussions around the three categories of offences under section 45: price-fixing, market division/allocation and output restriction agreements).

Such guidelines also commonly include guidance on steps to take if inappropriate discussions or activities arise during association board, committee, task force or other meetings or events.

Perform periodic compliance audits.  Having a compliance program or policy in place that is not followed can, in some circumstances, be more harmful than not having a program or policy at all (particularly if association staff understand the competition law guidelines and elect not to follow them).  As such, a practical way for associations to monitor compliance with compliance programs and policies is to conduct periodic audits.  These can be performed on an association wide, activity-specific or spot basis.

Competition law compliance orientations for new association executives and staff.  Another practical step that associations can take to ensure competition law compliance is to conduct compliance orientations for new board and executive members.  In this regard, the Competition Bureau’s view in its Corporate Compliance Programs Bulletin is that “senior management’s clear and unequivocal support is the foundation of a credible and effective corporate compliance program.”  The Bureau in general views senior management support as one of five key elements of an effective compliance program.

Obtain legal advice for key association initiatives.  Many associations do not have the budget for extensive legal advice or compliance for every aspect of association activities.  Recognizing that, it is prudent for associations to obtain advice for key activities and initiatives – these may include specific projects, such as benchmarking, research or joint member initiatives (e.g., joint marketing, purchasing or negotiations with significant purchasers).

Avoid informal or “off the record” meetings.  Association leadership should discourage informal or “off the record” meetings between members, particularly on the “fringes” of association meetings or using association facilities.

This is not to say that members of an association cannot meet informally for social purposes, but in a number of past association cases members either met informally, or in several cases actually established “sham” associations, to form and maintain criminal cartel arrangements.

Association members should also be aware that merely because a meeting is held “off the record” or in camera (i.e., not reflected in association meeting minutes) does not mean that discussions during such meetings, or the fact of the meeting itself, cannot be used as evidence of alleged anti-competitive conduct.

Generally review all association activities through a “competition lens”.  Finally, it is useful for association executives and personnel to review association initiatives and activities generally through a “competition lens”.

For example, if particular association activities may result in higher prices, less quality or choice, make it more difficult for particular members or competitors to compete, or will generally reduce competition, such activities may be more likely to raise competition law concerns (or at minimum mean that legal advice should be sought).

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