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In Todd v. Exxon Corp., [FOOTNOTE 1]the 2nd U.S. Circuit Court of Appeals reinstated a class action antitrust suit based on an allegedly illegal exchange of information among a group of competitors. The suit alleges that 14 major oil producers, including Exxon, Mobil and Texaco, [FOOTNOTE 2]violated the antitrust laws by regularly exchanging information relating to compensation paid to managerial, professional and technical (MPT) workers. The plaintiff alleges that the information exchange depressed the salaries of those workers. [FOOTNOTE 3]What is especially noteworthy is that the suit was reinstated by the Court of Appeals despite the absence of allegations that the defendants participated in an illegal conspiracy in violation of � 1 of the Sherman Act. [FOOTNOTE 4] In late 2000, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the U.S. District Court for the Southern District of New York dismissed plaintiff Roberta Todd’s complaint in its entirety for failure to state a claim. [FOOTNOTE 5]However, the 2nd Circuit vacated that decision and sent the case back to the district court. In doing so, the 2nd Circuit reaffirmed the tenet that information-sharing among competitors, apart from any illegal agreement to fix prices, can nevertheless violate the Sherman Act [FOOTNOTE 6]under certain circumstances. [FOOTNOTE 7]This holding can have important consequences when counseling firms regarding their interaction with competitors. Special attention also must be given to information exchanges in the context of due diligence with respect to proposed acquisition transactions. INFORMATION EXCHANGE Information Exchange as an Independent Basis of Liability. Section 1 of the Sherman Act prohibits contracts, combinations and conspiracies in restraint of trade. [FOOTNOTE 8]It is well-settled law that agreements to fix prices are per se illegal under � 1. [FOOTNOTE 9]As the Toddcourt correctly observed, if the plaintiff could allege that the defendants actually formed an agreement to fix salaries of their MPT workers, the per se rule would likely apply. Furthermore, even in the absence of so-called “smoking gun” evidence of an agreement to fix prices, such an agreement may be inferred on the basis of conscious parallelism, where circumstantial evidence and other “plus” factors make it fair to presume that competitors have formed an illegal agreement. [FOOTNOTE 10]One plus factor that can help support an inference of a price-fixing conspiracy is where the defendants have been found to be exchanging information, which can serve as a facilitating device that ultimately leads to price stabilization. [FOOTNOTE 11] There is a related but analytically different kind of claim arising from information exchanges that may be brought under � 1 of the Sherman Act. Under this theory, the antitrust violation lies in the information exchange itself — “as opposed to merely using the information exchange as evidence upon which to infer a price-fixing agreement.” [FOOTNOTE 12]The exchange of information in this context is not per se unlawful, but rather is evaluated under the rule of reason standard. [FOOTNOTE 13] Until the U.S. Supreme Court’s decision in United States v. Container Corporation of America, [FOOTNOTE 14]the mere exchange of price information was not generally believed to be a violation of � 1 even if the exchange had the inevitable effect of stabilizing prices. Before Container Corp., it was believed that a violation could only be shown if the plaintiff proved that the purpose of the information exchange was to effect or facilitate a price-fixing agreement. [FOOTNOTE 15] Container Corp. made it clear that it was unnecessary to show an unlawful purpose for the sharing of the information — only that the exchange had the unlawful effect of “chilling the vigor of price competition.” [FOOTNOTE 16]The Court in Container Corp. found that the data exchanged in that case had caused a stabilization of prices and thus had an anticompetitive effect on the market for corrugated containers. [FOOTNOTE 17] The Court in Container Corp. appeared to leave unsettled the question of whether the exchange of price information was per se unlawful or properly judged under the rule of reason. [FOOTNOTE 18]But the Supreme Court resolved this confusion six years later, stating that “the dissemination of price information is not itself a per se violation of the Sherman Act.” [FOOTNOTE 19]Then, in United States v. United States Gypsum Co., the Court explained why a rule of reason analysis was appropriate for information exchange cases: “The exchange of price data and other information among competitors does not invariably have anticompetitive effects; indeed, such practices can in certain circumstances increase economic efficiency and render markets more, rather than less, competitive.” [FOOTNOTE 20]The GypsumCourt added that in determining whether an information exchange has had procompetitive or anticompetitive effects, courts should consider a number of factors, including the structure of the industry involved and the nature of the information exchanged. [FOOTNOTE 21] ‘TODD V. EXXON CORP.’ The Todddecision is important because of the Court’s exhaustive rule of reason analysis that sheds light on what factors can give rise to a viable information exchange claim under � 1 of the Sherman Act. Perhaps the most interesting portion of the opinion is the 2nd Circuit’s discussion of two very important factors in any information exchange scenari (1) the structure of the market involved; and (2) the nature of the information exchanged. In general, exchanges of information are more troublesome if they take place within a market that is “susceptible to the exercise of market power through tacit coordination.” [FOOTNOTE 22]The district court in Toddexplained that susceptible markets “tend to be highly concentrated.” [FOOTNOTE 23]On appeal, the 2nd Circuit, accepting the plaintiff’s definition of the market, i.e., the market for the “services of experienced, salaried, non-union, managerial, professional and technical (MPT) employees in the oil and petrochemical industry” in the continental U.S., found that the defendants had a “substantial market share” of 80 to 90 percent. [FOOTNOTE 24] The district court had found that because there are 14 defendants in the case, this was not considered a concentrated market. [FOOTNOTE 25]The 2nd Circuit disagreed and pointed to Container Corp., noting that despite the fact that there were 18 firms controlling 90 percent of the market in that case, the Supreme Court nevertheless found that market to be sufficiently concentrated to support the finding of a � 1 violation. [FOOTNOTE 26]The Toddcourt noted that the number of oil companies controlling the market and the total market share held by those firms was nearly identical to the figures in Container Corp. — and concluded that the market was sufficiently concentrated to allow the plaintiff’s case to go forward. The 2nd Circuit added that because market concentration is part of a rule of reason inquiry that also emphasizes the nature of the information exchanged, “we do not think that fourteen companies sharing an 80-90 percent market share is so unconcentrated as to warrant a Rule 12(b)(6) dismissal where the nature of the exchanges appears anticompetitive.” [FOOTNOTE 27] NATURE OF INFORMATION This point ties into the second important factor that is crucial in an information-exchange scenari The nature of the information exchanged — including its timing, specificity and how widely it is disseminated. The timing of the information is always very important. Exchanges of current price information have “the greatest potential for generating anti-competitive effect” and have consistently been found to be violative of the Sherman Act. [FOOTNOTE 28]Conversely, the exchange of past price data is preferable, since this data has less potential to affect future prices and facilitate price conspiracies. [FOOTNOTE 29]Finally, exchanges of future price information are considered “especially anticompetitive.” [FOOTNOTE 30]In this regard, the Toddcourt viewed with suspicion the fact that the oil company defendants exchanged current data on employee salaries and, also, regularly exchanged information relating to current and future increases in their salary budgets. [FOOTNOTE 31] It is also important whether the information exchanged is specific or presented in the aggregate. It can be seen as potentially anticompetitive where the information identifies particular parties. Such detailed exchanges can be used more easily to monitor a tacit agreement to restrain trade. [FOOTNOTE 32]It is preferable that the information be aggregated in the form of industry averages or cumulative firm data. At their meetings, the Todddefendants allegedly shared “company-specific information,” such that “all participants learn where each other participant is going with its salary budget for the upcoming year.” [FOOTNOTE 33] Another factor in evaluating an information exchange is whether the information is also made publicly available. In fact, “public dissemination is a primary way for data exchange to realize its procompetitive potential.” [FOOTNOTE 34]In a traditional oligopoly, access to information may allow buyers to more easily compare products, thus making the market more efficient and minimizing any anti-competitive effects of the information exchange. Therefore, a data exchange is more likely to survive scrutiny if the information is made public. [FOOTNOTE 35]In Todd, the information exchanged by the companies was neither disclosed to the public nor to the very employees whose salaries were the subject of the exchange. [FOOTNOTE 36] IMPLICATIONS Although the 2nd Circuit appeared to imply at times that the plaintiff will have to carry a heavy burden ultimately to prove her case, [FOOTNOTE 37]its decision in Toddserves as a blunt reminder that the exchange of price information may give rise to � 1 liability, even without any express or implied evidence of a conspiracy. Obviously, this has implications for firms that have paid little attention to ordinary course information exchanges with their competitors. Toddalso has ramifications in the merger field, where companies in the process of a transaction may begin exchanging confidential information about each other’s businesses in contemplation of that transaction. For many years, federal antitrust regulators have stated their belief that pre-merger information exchanges among actual and potential competitors may run afoul of the antitrust laws. Regulators believe these violations can occur regardless of whether the merger raises issues under � 7 of the Clayton Act [FOOTNOTE 38]or whether the merging companies have coordinated their competitive behavior prior to the closing. [FOOTNOTE 39]The Federal Trade Commission (FTC) has indicated its concern that competitively sensitive information exchanged during transaction negotiations could be used unlawfully to fix prices or otherwise manipulate the market, [FOOTNOTE 40]and the Antitrust Division of the Department of Justice has generally subscribed to the views on information exchanges expressed by the FTC. [FOOTNOTE 41]In fact, one former director of the FTC’s Bureau of Competition even said that absent special circumstances, companies sharing information prior to the closing of transactions could itself be violative of the Hart-Scott-Rodino Act. [FOOTNOTE 42] Thus, this may be a propitious time for firms to review their information exchange guide lines, as there are valuable lessons to be learned from the 2nd Circuit’s Toddopinion. Neal R. Stoll and Shepard Goldfein are partners at Skadden, Arps, Slate, Meagher & Flom. Jeffrey Beyer, an associate of the firm, assisted in the preparation of this article. ::::FOOTNOTES:::: FN1 See Todd v. Exxon Corp. [2001-2 Trade Cas. (CCH)] 73,518], No. 01-7091, 2001 U.S. App. LEXIS 26962 (2d Cir. Dec. 20, 2001). FN2Because the suit was originally filed in 1997, before the merger of Exxon and Mobil in 1999, the two companies are separately listed defendants. FN3 See2001 U.S. App. LEXIS 26962 at *3. FN4 See id. at *15. FN5 See Todd v. Exxon Corp., 126 F.Supp.2d 321, 328 (S.D.N.Y. 2000). FN1=6 See15 U.S.C. �� 1-7 (1997). FN7 See2001 U.S. App. LEXIS 26962 at *12. FN8 See15 U.S.C. � 1 (1997). FN9 See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 212-24 (1940). FN10 See, e.g., Interstate Circuit, Inc. v. United States, 306 U.S. 208, 226-7 (1939). FN11 See2001 U.S. App LEXIS 26962 at *12. FN12 See id. FN13 See United States v. United States Gypsum Co., 438 U.S. 422, 441 n.16 (1978). FN14 SeeTimothy F. Haley, “Antitrust Risks Resulting From the Exchange of Wage and Benefit Information,” Corporate Counseling Report, ABA Section of Antitrust Law (Spring 1995) (citing United States v. Container Corporation of America, 393 U.S. 333 (1969)). FN15 See id. FN16 See393 U.S. 333 at 337. FN17 See id. FN18 See2001 U.S. App LEXIS 26962 at *14. FN19 See United States v. Citizens & Southern National Bank, 422 U.S. 86, 113 (1975). FN20 See438 U.S. 422 at 441 n.16. FN21 See id. FN22 See Todd, 126 F.Supp.2d. at 326 ( citing Battipaglia v. N.Y. State Liquor Auth., 745 F.2d 166, 174-5 (2d Cir. 1984)). FN23 See id. FN24 See2001 U.S. App LEXIS 26962 at *15. FN25 See Todd, 126 F.Supp. at 327. Under the Justice Department Merger Guide lines, the District Court found, a market where 14 firms control 80 to 90 percent of the market is not considered concentrated. FN26 See2001 U.S. App LEXIS 26962 at *43 (citing Container Corp., 393 U.S. at 334-8). FN27 See id. at FN28 See Gypsum, 438 U.S. at 441 n.16. FN29 See2001 U.S. App LEXIS 26962 at *53. FN30 See, e.g., American Column & Lumber Co. v. United States, 257 US 377 at 398- 9 (1921). FN31 See2001 U.S. App LEXIS 26962 at *54-5. FN32 See Container Corp., 393 U.S. at 334-8. FN33 See2001 U.S. App LEXIS 26962 at *57. FN34 See id. FN35 See, e.g., Maple Flooring Manufacturers Assn. v. United States, 268 US 563, 573-4 (1925). FN36 See2001 U.S. App LEXIS 26962 at *58. FN37 See, e.g., 2001 U.S. App LEXIS 26962 at *63 (“Plaintiff will have to make a substantial presentation of evidence to support her claim that salaries would have been higher without the information exchange,” but whether defendants’ conduct had the effect of lowering Exxon’s salaries is question of fact that cannot be resolved on motion to dismiss.) FN38 See15 U.S.C. � 18 (1997). FN39 SeeIlene Knable Gotta and Michael B. Miller, “Information Sharing in the Pre-Merger Context: How to Avoid Antitrust Liability,” 45 No. 6 Practical Lawyer 23, at 24 (Sept. 1999). FN40A former Bureau of Competition Director has cautioned acquiring firms against running the acquired firm prior to the expiration of the Hart-Scott-Rodino waiting period. See Remarks of Jeffrey I. Zuckerman before the Annual Spring Meeting, ABA Section on Antitrust Law (Mar. 23, 1988). FN41 SeeRemarks of Stephen C. Sunshine before the Annual Spring Meeting, ABA Section of Antitrust Law (April 7, 1994) (Former Deputy Assistant Attorney General cautioning that passing must under Section 7 of the Clayton Act does not insulate companies from the application of Section 1 for pre-merger conduct. FN42 SeeRemarks of William J. Baer before the Annual Spring Meeting, ABA Section of Antitrust Law (April 2, 1998).

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