FEATURE STORY
Beware of Unfair Business Practices
While large corporations like AT&T and Bell Telephone have been accused of unfair business practices, did you know that small businesses can also be held to the same standards? As a business owner do you even know what those standards are?
One of the most famous laws regarding fair business practices and trusts was the Sherman Antitrust Act. Established in 1890 in order to prevent a series of illegal business practices including monopolies and illegal trade, the Sherman legislation was the first step to prevent business monopolies and encourage fair trade and competition, especially where business trusts are concerned. The Clayton Act of 1914 further extended the rights of businesses to sue offending parties and led to further changes in how companies operated.
What are trusts and how do they work?
A trust is a contract where one party entrusts property to a second business party. The second entity then uses the property to benefit the first party. Traditionally the second entity consists of a board of directors who oversees the management and operation of the trust and issues financial benefits in the form of ‘trust certificates’ back to the primary entity. During the late 1800’s Standard Oil Company of Ohio, American Tobacco Company and several other large industrial companies began consolidating multiple businesses under one trust to create controlling conglomerates that could then price fix and ‘monopolize’ entire industries at the detriment of the consumer. The initial intent of the Sherman laws was not to prohibit monopolies; rather it was to prevent artificial inflation of pricing by restriction of trade or supply. Once signed into law, Sherman remained unused for several decades and was then tested by President Taft and followed by additional legislation that would allow parties to sue offending businesses for damages pertaining to antitrust legislation (Clayton Act of 1914).
Why are antitrust laws so important to small business?
Small business is the backbone of the U.S. economy. There are approximately 23 million small businesses in the U.S. generating nearly 23 billion dollars in annual sales. Without competition, small business would quickly be quashed by big business and the economy would crash. Today’s antitrust laws help to protect consumers and entrepreneurs alike. According to a recent report by Adam M. Golodner, Chief of Staff for the Antitrust Division of the U.S. Department of Justice to the Small Business Administration, “the [Department of Justice] Division obtained over $1.1 billion of court-awarded criminal fines from global criminal cartel price fixers…these cartels were taking money out of the pockets of U.S. businesses and consumers.” In today’s ever-increasing global economy, small business plays a pivotal role in that market via Internet based businesses, technology and other leading edge industries. “According to SBA statistics,” continues Golodner, “small businesses represent over 96% of all individual U.S. exporters of goods and services, and account for over 29% of the value of all U.S. exports.” It is critical that small business understand and comply with antitrust laws in order to remain competitive in today’s market.
There are two primary areas of concern for small business antitrust laws, price fixing and monopolies.
Price Fixing
Even in small business there are opportunities to dominate a niche market that can pose risks associated with agreeing to or discussing price fixing. Are you a small business that bids on contracting jobs in local, state or federal arenas? Are you a member of a small contingent of niche entrepreneurs? If you answered yes, then you need to become knowledgeable about antitrust laws and how they could affect your business. For example, a local plumbing company coordinating pricing on services or products with competitors during a bid process can be construed as price fixing. Small business needs to be increasingly cautious on how these conversations with competitors can be interpreted in the marketplace. Establishment of ‘good ol’ boy’ clubs where contractors take turns providing alternately high and low bids on a pool of jobs in order to ‘spread the work around’ are also illegal and can result in criminal charges.
A word of caution – keep Microsoft’s recent public trials in mind and remember that even in jest, those e-mails about competitors can come back to haunt you later. Make it a company policy never to discuss the competition, pricing, or contracts publicly or via email. Review company policies on handling RFPs and bidding along with sensitive documents on at least a yearly basis. Look for any phrasing that could be misinterpreted or unclear. Focus especially on any language that could be embarrassing, over-reaching, or an outright gross hyperbole.
Monopolies
There’s more than just total market domination included in the definition of a monopoly. A small business cannot ‘tie’ offers by forcing consumers to buy two products when they only wish to purchase one. Tying is an indication of monopolization and can be a red flag for the Department of Justice in your state to begin looking into unfair business practices.
Other areas of monopoly include any practices that unduly restrict competition including predatory pricing, improper refusal to deal, and total market domination. Consider the situation after Hurricane Katrina in New Orleans. As residents began returning to the area and started to rebuild, a long list of complaints against greedy contractors who had super-inflated bids ran rampant. These types of predatory price gauging are exactly what antitrust legislation works to prevent. Several states now have approved contractor lists which all contractors in hurricane affected areas must apply to and be in good standing with before they can be hired to perform repair or construction work in the region. This of course, sets another series of issues into motion because there is far more work than there are contractors available.
Boycotting
Small businesses in like industries gathering together to ‘boycott’ a specific vendor or supplier in order to coerce them to pay higher pricing can be accused of antitrust violations. Historically these types of boycotts have been used to prevent a business from entering the market or to push a business out of a marketplace where competitors have a perceived ‘lock’ on the industry. Recently physicians in Virginia were accused of causing a boycott of a managed care organization preventing from opening a competing health care facility in their area.
Mergers and Acquisitions
The Federal Trade Commission (FTC) was created to review antitrust complaints and more importantly review potential mergers and acquisitions of businesses before they become violators of antitrust laws. Small businesses being bought or merged into larger corporations and small businesses joining with other small businesses to create larger corporations are all fair game for FTC review.
There are two primary types of mergers, horizontal and vertical.
Horizontal mergers are those mergers between competing companies like AT&T and World Com. In the horizontal merger scenario, one company will offer to purchase a second, often leaving large parts of service areas with only one remaining service provider. This enables them to raise rates and charge the consumer higher than usual costs than if a competitor was still in business in that region.
Vertical mergers occur in buyer-seller relationships. For example, a manufacturer may merge with a supplier thereby gaining a foothold in both the product market as well as in the control of supply costs. This scenario makes it difficult for competitors to gain a foothold in the market because their primary competition owns not only the supplier chain needed to make their product, but also controls the market place with a vast percentage of market share.
No matter what type of small business you own, it’s important to have a basic understanding of unfair business practices and laws that apply. If you’re unsure if your business is in compliance, talk with the Small Business Administration, speak with a Fiducial Advisor by calling 866-FIDUCIAL, or visit the web site at www.Fiducial.com.
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