ANTITRUST COMPLIANCE MEMORANDUM To: Members of The X Consortium, Inc. From: The Board of Directors Date: November 16, 1993 ____________________________________________________ It is the express policy of The X Consortium, Inc. to require that all of its activities be conducted strictly in accordance with federal and state antitrust laws. Given that the Justice Department Antitrust Division has promised to enforce the antitrust laws more aggressively than at any time since the late 1970s, it is extremely important that all members of the Consortium be aware of the types of activities prohibited by the antitrust laws. This Antitrust Compliance Memorandum was prepared by The X Consortium's General Counsel, Lucash, Gesmer & Updegrove, to familiarize you with areas of the law that you should know about in order to maintain compliance with the antitrust laws. You should note that this Memorandum is a general guide only; it is not intended to be a complete and definitive statement of all aspects of the antitrust laws. Any specific questions relating to antitrust compliance not addressed in this Memorandum should be referred to General Counsel for The X Consortium or your own legal counsel who has responsibility for considering the antitrust implications of the business activities in question. The purpose of such a consultation is not so that counsel may impose his or her judgment on that of members of The X Consortium. Rather, it is intended to give counsel the opportunity to assess the permissibility of a practice in advance and to allow members to gain the advantage of counsel's advice. It goes almost without saying that any error may be very costly to the member and to The X Consortium. I. The Antitrust Laws Broadly stated, the basic objective of the antitrust laws is to preserve and promote competition and the free enterprise system. The antitrust laws are premised on the assumption that private enterprise and competition is the most efficient way to allocate resources, produce the necessary goods at the lowest possible price and assure that high quality products are produced. The antitrust laws require that business people make independent business decisions without consultation or agreement with competitors. The success of The X Consortium requires that free and open competition be adhered to as the policy of The X Consortium and that this policy be followed by all of The X Consortium's members. The X Consortium's insistence upon full compliance with the antitrust laws is based not solely on the desire to stay within the bounds of the law, but also on The X Consortium's conviction that the preservation of a free, competitive economy is essential to the welfare of the computer industry and The X Consortium. (a) Antitrust Laws Applicable to Activities of Associations The antitrust statutes of principal concern to companies and individuals that take part in trade association activities are Section 1 of the Sherman Act and Section 5 of the Federal Trade Commission ("FTC") Act. These laws make illegal all contracts, combinations, and conspiracies which are deemed to be in restraint of trade. Broadly speaking, the courts have interpreted these laws as prohibiting those contracts and combinations which have the effect of unreasonably restraining trade. A court will, therefore, examine all the facts and circumstances surrounding the conduct in question in order to ascertain whether the contract or combination is in violation of the law by restraining trade unreasonably. Many activities are, however, regarded as unreasonable by their very nature and are, therefore, considered illegal "per se." Companies and individuals are conclusively presumed to engage in these activities for no other purpose than to restrain trade. Practices within the per se category include agreements to fix prices, agreements to boycott competitors, suppliers or customers, agreements to allocate markets or limit production, and certain tie-in sales. A tie-in sale is one in which the customer is requested to purchase an unwanted item in order to purchase the product or service desired. The legality of activities of The X Consortium and its Members under the antitrust laws is determined by the application of standards no different from those used to determine the legality of the activities of other groups of persons or firms. Special problems do arise, however, from the facts that an association such as The X Consortium is, almost by definition, a combination of competitors, and the act of bringing these competitors together creates the means by which collusive action can be taken in violation of the antitrust laws. (b) Penalties for Violations The antitrust laws are enforced by the Antitrust Division of the Department of Justice and the Bureau of Competition of the Federal Trade Commission, as well as by private suits for treble damages instituted by persons or firms injured by antitrust violations. A conviction for violating an antitrust law may result in stiff fines for The X Consortium and its members, jail sentences for individuals who participated in the violation, and a court order disbanding The X Consortium or severely limiting its activities. At the present time, an individual (including an individual acting in his or her capacity as a corporate employee or officer) convicted of a criminal violation of the Sherman Act may be fined as much as $100,000 and imprisoned for up to three years. A corporation convicted of such a criminal offense may be fined as much as $1 million. A company or person found liable of an antitrust violation in a civil suit brought by a private plaintiff may be forced to pay up to three times the actual damages suffered by the plaintiff, as well as all of the plaintiff's costs of litigation and attorney's fees. The X Consortium has made a filing under the National Cooperative Research and Production Act of 1993 (formerly, the National Cooperative Research Act of 1984, or the "NCRA"). Assuming that this filing is accepted, certain of the penalties and liabilities for costs referred to above will be limited or voided by statute with respect to those activities of The X Consortium which fall within the scope of the Act. II. Detailed Discussion From a practical standpoint, X Consortium members should focus their greatest concern on the following principal antitrust problem areas. (a) Price-Fixing Experience shows that trade association members are most likely to violate, and the government is most likely to strictly enforce, the price-fixing prohibitions of the Sherman Act. Price fixing, as noted above, is illegal per se. Trade association meetings (including committee meetings) are convenient places for price-fixing discussions. Whenever competitors get together, it is natural for them to discuss common problems, and the discussion often turns to price. This is even more true at informal meetings before or after a trade association meeting, when members get together for a meal or a drink. To avoid the risk of liability, The X Consortium members should never discuss prices, pricing systems, or discounts, nor should The X Consortium ever be involved in members' pricing practices. Although a prohibition on even the discussion of pricing may appear severe (the antitrust laws prohibit only agreements on prices, not merely the discussion of them), it is a prudent policy, since it is in the best interests of the members to avoid even the appearance of impropriety. A formal agreement is not necessary for a finding of antitrust liability. Antitrust cases often are proven by circumstantial rather than direct evidence. Although there may be perfectly innocent explanations for business conduct, antitrust enforcement agencies, judges or juries may interpret contacts with competitors followed by similarity in conduct as circumstantial evidence of an "agreement." It is, therefore, of the utmost importance to avoid any contacts with competitors that might support an inference of agreement. That means a member's relations with competitors should always be conducted as if they were at all times in the public view. Members should be aware that the antitrust prohibition on price-fixing is extremely broad. The Sherman Act itself defines price-fixing as any "combination formed for the purpose and with the effect of raising, depressing, fixing, pegging or stabilizing prices." Competitors violate this law if they -- -> agree on the range within which purchases or sales may be made -> agree that prices charged or paid are to fall within any sort of formula -> agree to stop giving discounts -> agree to artificially increase or limit supply Because price-fixing is illegal per se, it is not a defense that the prices set are reasonable. Nor is it a defense that competitors fixed maximum prices, rather than minimum prices. Although the discussion thus far has focused on so-called "horizontal" price fixing -- that is, agreements among competitors selling the same or similar products -- it is also illegal to engage in "vertical" price fixing: an agreement to fix that price at which a purchaser will resell a product. Where there is a sale of a product for resale, the seller is permitted to suggest resale prices to customers, but any agreement, whether formal or informal, express or implied, must be avoided. (b) Agreements To Allocate Markets An agreement among members of a trade association to allocate markets or customers is, in and of itself, an antitrust violation. The antitrust laws expressly prohibit any understanding or agreement between competitors or members of an association involving division or allocation of geographic markets or customers, or an agreement to divide sales by product type. Even an informal agreement whereby one member agrees to stay out of another's territory will constitute a violation of the antitrust laws. (c) Concerted Refusals to Deal The last category of activities that members should be aware of is "concerted refusals to deal," more commonly known as boycotts. Members should be careful not to make agreements that in effect result in the exclusion of a competitor from a market or a competitive activity. For example, an agreement among two or more members of The X Consortium that they would no longer buy from (or sell to) supplier "A" might constitute such a boycott. To avoid this risk, members should avoid any discovery that involves the refusal to deal with a particular supplier or customer. (d) Miscellaneous Activities In addition to the above categories of conduct, there are areas of business behavior that are not per se legal or illegal, but must be judged based on a case-by-case basis. These include: -> joint purchasing -> certification of products (that is, that the product conforms to technical standards) -> sale of the same products at different prices to different purchasers (i.e., discriminatory pricing) -> restrictions on membership or expulsion of members for cause If the activities of The X Consortium begin to extend into these areas, the Board of Directors will consult with legal counsel to ensure that the proper guidelines are followed. Please feel free to call Andrew Updegrove at (617) 723-2770 with any questions regarding these matters.