Know the Line Between Collaboration and Collusion

It’s smart to have a good relationship with rival companies, but teaming up can cross into collusion if it affects fair competition

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Working together is a wonderful thing — except when it’s against the law.

Let’s say you have a great customer base on the north side of the interstate highway bisecting your county that gives you enough work to keep you busy.

There’s another drain cleaning outfit south of the interstate. They seem pretty busy, too, in their half of the county. You get along with each other well enough at your state trade association meetings. Maybe you’ve even gotten a call from them to help out one of their customers because they were so busy they couldn’t respond to one more emergency.

Imagine you run into the owner at an industry show. He invites you out to dinner and offers a suggestion: “I know you do good work, and you know I do good work. You’re busy, and I’m busy. And we probably both worry about some newcomer expanding into this county and poaching our customers. What do you say, how about we just make a gentleman’s agreement that you stick to the north side and I’ll stick to the south side?”

With that last sentence, the two of you are at risk for breaking the law.

Rules are rules

You might think only corporate giants need to worry about antitrust laws and other regulations that punish businesses for squelching competition. Not so. The specific laws might not be the same, but small businesses like yours are subject to laws against collusion and anti-competitive behavior just as much as big ones, says Peter Carstensen, a professor emeritus at the University of Wisconsin Law School, where he teaches antitrust law, is a senior fellow of the American Antitrust Institute, and has published widely on the law and business competition.

“Antitrust law applies to every business,” Carstensen says. “Almost every state has a state antitrust law that is roughly similar to the federal antitrust law. So if the feds don’t get you, the states will.”

While you might not get prison time, if you get caught, you could wind up with a felony conviction. And because big business is on the federal radar when it comes to anti-competitive shenanigans, states are more likely to keep their eye on small and midsize companies.

“Antitrust lawyers are not cheap,” he warns. “But secondly, it takes so much of the energy and mental attention of managers of a business if they get caught up in an antitrust case.” That’s energy and attention that you should be using to build and improve your business.

Keep competition alive

Why do these rules exist at all? Our economic system is founded on the idea that fair competition provides the best deal for consumers. So if competition isn’t fair, consumers suffer. And that’s when government steps in.

So when two or more independent businesses carve up a territory and agree not to compete, “that’s pretty much a hardcore violation,” Carstensen says.

And colluding over a territory isn’t the only way businesses — even small ones — can run afoul of antitrust laws. Agreements among competitors over how much they’ll charge for a service is another “straight-up no-no,” he says.

Who’s watching

It’s not always the customers who complain, either. Other competitors, if they figure out you’re up to something, will be just as ready to turn you in.

A number of years ago, Carstensen recalls, real-estate agents in a particular market got together and agreed to raise their commission rates.

Their plan didn’t get very far, though. “At least three of the brokers left the room and called the Justice Department,” he says.

Another form of collusion that sometimes crops up is when competitors cooperate to cut one of their number out.

For instance, suppose there are five businesses in the same industry in a particular region and they all use the same supplier. Then, for whatever reason, four of the five decide they want to force the fifth company out of business. (Let’s call the blackballed business XYZ Drains.)

So those four go to the supplier. “Stop selling to XYZ Drains,” they say. “If you don’t, the four of us will stop doing business with you.”

In a case similar to that example, Carstensen says, the supplier agreed and stopped selling to the target company. The blackballed company in turn sued the supplier and won damages.

Gray areas

Sometimes it’s hard to tell if industry infighting is a case of honest whistleblowing or a conspiracy to restrict competition.

If a group of businesses complains to a supplier about one of their competitors, they might genuinely want to sound the alarm about a bad apple. On the other hand, Carstensen says, “Many times people will infer there is an agreement among those guys to complain.”

The bottom line: If you have evidence that another business really is a bad actor, it’s your right, even your professional duty, to make sure that the appropriate authorities know.

But if you are trying to run someone else out of business and you gang up with other competitors to try to do that, you’re breaking the law. “You can’t agree to attack a competitor,” Carstensen says. “Those are things a business needs to watch out for whenever you’re interacting with another business: Why is this happening? Is this lawful?”

Recommending products

Another gray area can arise in supplier dealings.

Suppose your regional trade group hires an engineer from the local university to evaluate a series of alternative products — pipe lining technologies, for example.

The engineer produces a report and rates the various technologies for their effectiveness, ease of application or other criteria. The report is made available to the trade group, recommending some products and not others.

By itself, Carstensen says, that’s perfectly appropriate: Each member of the association can still choose which product to use.

“Where we get the problem is when they say, ‘We ought to standardize on something so we don’t confuse customers by giving them all these options.’ Now they’ve fenced out all the other suppliers. The customer is not given a choice.”

Drawing the line

That doesn’t mean competitors can’t cooperate at all. Trade associations like the WaterJet Technology Association represent the entire industry, providing training, serving as a voice for member businesses in dealings with the public and with government agencies, and promulgating best practices.

Other forms of cooperation are also permissible, so long as they don’t harm competition. For instance, if two or more competing companies agree to a joint venture so they can purchase their supplies in larger quantities at a lower price, that’s perfectly acceptable, Carstensen says.

The right way

By all means, cooperate when doing so doesn’t mean you’ll interfere with competition and when you’ll serve the interests of all your competitors as well as your customers and the community. Work through established, reputable trade groups.

Carstensen says agencies such as the Federal Trade Commission and the U.S. Department of Justice are often willing to advise business owners as to what arrangements will be viewed as legitimate and what ones look questionable. But, he warns, ask before you embark on any collaboration of that sort.

If you’re going to take that step, even if you don’t have any questions, consult with a lawyer versed in both state and federal laws that govern competitive business practices. That can be a challenge, he acknowledges; lawyers with antitrust experience don’t come cheap.

But if you have a regular business lawyer (and you really should), the state bar association should be able to direct him or her to an antitrust expert willing to do a one-time phone consultation at no charge.

That way you can be sure you don’t fall into the collusion trap.


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