3 June 2009
A recent lawsuit highlights the antitrust risks posed when executives of public companies are pressed to answer questions raised by stock analysts during public calls or meetings to discuss company earnings. While, as a general matter, few cases are brought based on statements made in analyst calls, companies should be aware of these risks and advise executives accordingly.
In Avery et al. v. Delta Air Lines Inc. et al., No. 1:09-cv-1391 (N.D. Ga. Compl. Filed May 22, 2009), a plaintiff seeking to represent a class of airline passengers brought suit against Delta and AirTran, two companies that compete to provide flights in and out of Atlanta, Georgia, alleging that the airlines had conspired to set baggage handling fees. The plaintiffs claimed that AirTran invited Delta to collude through the following exchange between an AirTran executive and a stock analyst during a telephone conference on October 23, 2008:
[Analyst Question]: First check bag fee, you don’t have one, do you and will you?
[Response from AirTran Executive]: Good question. Let me tell you what we’ve done on the first bag fee. We have the appropriate programming in place to initiate a first bag fee and at this point we have elected not to do it, primarily because our largest competitor in Atlanta where we have 60% of our flights hasn’t done it, and I think we don’t think we want to be in a position to be out there alone with a competitor who we compete on has two-thirds of our nonstop flights and probably 80% to 90% of our revenue is not doing the same thing. So I’m not saying we won’t do it, but at this point, I think we prefer to be a follower in a situation rather than a leader right now.
[Analyst Question]: But if they were, you would consider, it’s not a matter of fact..
[Response from AirTran Executive]: We would strongly consider it, yes.
The plaintiffs alleged that (i) Delta communicated its acceptance of AirTran’s invitation by instituting a baggage handling fee shortly after the October conference call and (ii) AirTran accordingly implemented its own baggage-handling fee. Shortly after instituting the fee, Delta issued a press release indicating that it was simply adopting the baggage handling fee policy of Northwest Airlines, which Delta had recently acquired. The plaintiffs characterized Delta’s justification as nothing more than a pretext for the price fixing agreement.
The Avery suit underscores what could be an emerging area for scrutiny by the class action plaintiffs’ bar. In Bell Atlantic Corp. et al. v. Twombly et al., 550 US 544, 127 S. Ct. 1955 (2007), and more recently in Ashcroft et al. v. Iqbal et al., 129 S.Ct. 1937 (May 18, 2009), the Supreme Court established that, in order to survive a motion to dismiss, plaintiffs must plead more than parallel conduct and conclusory allegations of collusion. As a result, the plaintiffs’ bar may scour publicly available analyst calls to find indications of collusion to overcome this demanding pleadings standard.
Antitrust enforcement agencies are also likely to use statements from analyst calls as evidence to build their cases. The government has only brought one action premised on an analyst call, In re Valassis Corp., File No. 051 0008 (Analysis to Aid Public Comment F.T.C. Mar. 14, 2006) which resulted in a consent decree. According to the FTC’s allegations, the Valassis executives (knowing that Valassis’ only competitor was listening) told analysts that it would “abandon its 50 percent market share goal,” “aggressively defend its existing customers [through reducing price],” and then, as of a specified date, “observe a floor price of $6.00 per page and $3.90 per half page.” Id. at 2. The executives also stated that Valassis “would monitor [its competitor’s] response to this invitation, looking for ‘concrete evidence’ of reciprocity in ‘short order.’” Id at 3. Although the FTC did not conclude that there was an actual price-fixing agreement between Valassis and its competitor, it nonetheless condemned the statement as an unlawful “invitation to collude.”
While the specificity of the statements in Valassis distinguish it from the statements in Avery and many of the statements made in analyst calls, plaintiffs will nonetheless seek to use these statements to bolster allegations of collusion and protect against attacks under Twombly and Ashcroft. This will often create a dilemma for companies seeking to comply with both the letter and, more importantly, the spirit of securities disclosure requirements,which, for example make disclosure mandatory for material losses, risks, or changes in business strategy.
When an analyst asks a question, there is a strong inclination among executives to answer it honestly and completely, both as a matter of compliance and investor relations. However, companies implementing antitrust compliance policies to avoid aggressive class action plaintiffs will urge executives to limit responses on analyst calls. The challenge comes in where to draw the line.
In general, the riskiest statements or responses to analyst questions are those that discuss future prices or output levels or that appear to communicate with competitors rather than customers or investors. To avert risk, companies should consider the following best practices when answering questions on analyst calls:
- Limit the answer to the question asked. Going beyond the question posed gives plaintiffs a greater opportunity to argue that the statement was unnecessary.
- Avoid speculation. It is best not to guess about whether a price increase will stick or about how competitors may respond.
- Focus on your own company. Any justification offered for a press increase should be based on the company’s own costs, capacity and customer demand — not those of “the industry.” It is best not to presume to speak for the industry or speculate about how a competitor might respond.
- Don’t be afraid to limit an answer. Sometimes, it is better to limit an answer. If an executive is asked “Are you going to take a price increase in California after Labor Day and by how much?” the best answer may be: “I cannot comment on specific price moves before they are announced to our customers but can tell you that we will take whatever steps are necessary to assure both our competitiveness and our profitability.”
If you have any questions about any of the issues raised in this client alert, please do not hesitate to contact
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