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Can I Pay My Competition to Shut Down? (Co-authored with Todd Goodwin)

Posted in Noncompete Agreements, Operating a Business

             In these tough times, lots of businesses have been closing. In fact, for the fist time in our many years of practice, we’re hearing clients tell us that there is not enough business for both them and their direct competition – that if things continue as they are, they will both go out of business. In fact, they’ve become somewhat friends talking about it. Then the idea comes to one of them: could I pay my competition something to get them to shut down? The answer generally lies in the federal antitrust

laws under the Sherman Antitrust Act, Clayton Antitrust Act, Robinson-Patman Act, and Hart-Scott-Rodino Antitrust Improvement Act and the respective adaptations that the various states have made of those laws. There may be other laws that apply as well, such as state unfair competition laws. The term “antitrust” laws is a bit misleading because it really doesn’t specifically deal with “trusts” per se anymore, but is more concerned with and more commonly known as "competition law.”  The purpose of the laws was to avoid and break up monopolies and cartels which obviously hampered competition. Today, along with the other above mentioned acts, the laws are used more broadly to regulate unfair competition.

                Without going into the many intricacies and specifics of the above federal statutes governing antitrust law in the United States, in general, the Sherman Act states:

                Section 1:            “Every 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. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.” See 15 U.S.C. Sec. 1

                Section 2:            “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony [. . .]” See U.S.C. Sec. 2

                Subsequently, Congress passed other laws to help regulate anti-competitive conduct such as (i) the Clayton Antitrust Act which forbids additional actions that were outside of the scope of the Sherman Act, such as exclusive dealing arrangements, tying arrangements, mergers and acquisitions that substantially reduce market competition and price discrimination between purchasers if it tends to create a monopoly, and (ii) the Robinson-Patman Act which prohibits anticompetitive practices where manufacturers used price discrimination against distributors who were on the same footing.

                There are two basic categories of violations of the Sherman Act, 1) per se violations and 2) violations under the rule of reason. Discussion of the specifics of these categories as well as the above legislation is beyond the scope of this blog article, and involves much further careful analysis. Note that Wisconsin has adopted the federal antitrust laws in Wis. Stats. Section 133 et seq. However,  state statutes are subject to federal pre-emption when in conflict with the above federal laws.

                So the question arises: can one pay one’s competition to shut down? The answer is: “ certainly not directly in contravention of the antitrust laws or other potential laws governing the issue.” But are there other ways to achieve a similar result without violating any laws?

                Consider these thoughts:

                1.            Buy the competition out; then close it yourself.

                2.            Buy the competitor’s debt and control the competition.

                3.            Buy the competition’s lease and control the competition.

                4.            Buy the competition’s supplier and control the competition.

Pros and Cons

                Each of the above methods of avoiding the effects of the antitrust laws have a specific cost as well as certain risks and benefits. Buying the competition has a cost. Of course, if business is down, the cost may never be lower. There may be certain future costs that can’t be avoided: debts with personal guarantees, such as bank loans and leases. No one will sell without assuring that these will be eliminated. At least these costs can be calculated. There is also a risk that the public, especially the customer base, may see the future lack of competition as “your doing “ and may boycott your business or shift their business elsewhere in protest . Let’s call that “protest risk.” The big benefit is that you increase market share. You also avoid offering products or services at prices at which you cannot make a profit. This method is fairly safe legally and only really large businesses need U.S. Department of Labor approval to consummate such transactions (the “legal risk”).

                The other ideas involve increased legal risk and share the potential of protest risk. However, oftentimes these provide the only feasible way to eliminate  competition. Doing so, should be done with caution, as the penalties of violation of the antitrust laws are severe and as stated above may involve criminal prosecution. A carefully thought out plan should always be reviewed by legal counsel.

                Obviously, this involves complicated legal strategy, and if you or a client of yours finds themselves in such a situation, consider contacting us, since we have had considerable experience with such issues and can help to reduce risk and maximize benefits.