10 June 2010
A new Federal Trade Commission (FTC) consent agreement illustrates why executives must avoid statements that might “signal” competitors to adopt particular pricing strategies.
On June 9, 2010, the FTC entered into a settlement with U-Haul International, a truck rental business, over allegations that U-Haul invited its closest competitor, Budget, to collude to increase prices.
The complaint is based on an “invitation-to-collude” theory: where one company signals to a competitor that it is willing to stop competing on price, but where the competitor refuses the offer, resulting in no effect on competition. Despite the lack of competitive harm, the FTC justifies bringing such cases under the Federal Trade Commission Act in order to prevent future harm to competition. The FTC continues to express a desire to pursue these cases in the future.
According to the complaint, U-Haul’s CEO perceived that competition from Budget was forcing U-Haul to lower its prices. In response, he invited Budget to collude through a combination of private approaches and public statements.
U-Haul’s alleged private strategy was two-fold. U-Haul raised its rates and contacted Budget through employees and franchisees to encourage a similar increase. If Budget did not comply, U-Haul lowered its prices below Budget’s and informed Budget of the reduction.
U-Haul’s public strategy involved the use of earnings conference calls—which were monitored by Budget. The Complaint alleges that the earnings call informed Budget that U-Haul would raise rates and maintain them so long as Budget stayed within 3-5 percent of U-Haul’s price and refrained from price cutting to gain market share.
The proposed settlement order has a 20 year duration, it prohibits collusion or invitations to collude and includes provisions regarding compliance.
Avoiding a claim based on an invitation to collude can be challenging. Most invitations to collude consist of nothing more than words, and it is often difficult to disprove that an unfortunate choice of language was nothing more than that. In addition, executives often are counseled that the securities laws encourage disclosure, particularly when making disclosures to investors and analysts. Therefore, if an analyst or an investor asks a question in a public forum, an executive’s instincts may be to answer the question directly and completely, even if such an honest answer could reveal sensitive, competition-related information.
To avoid the potential exposure, executives can take these steps:
- In private documents, avoid inflammatory language and speculation that may suggest an intention to signal competitors.
- Discourage direct contact between company employees and employees of competitors.
- In public statements, avoid directly discussing price and output, volunteering information beyond what is necessary to meet company needs, and speaking about specific competitors.
For more information about the types of statements likely to lead to an invitation-to-collude suit, or any other matter raised in this Legal Update, please contact
at +1 212 506 2530.
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