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NAW News

Legal Update

- October 2013

FTC Challenges Competitors’ Exchange of Sensitive Business Information

A mere discussion about pricing with a competitor may violate the Federal Trade Commission Act’s prohibition against “unfair methods of competition,” even if the exchange does not result in price fixing or cause any actual harm to competition. (Federal Trade Commission v. Bosley, No. 121-0184). The Commission has authority to issue a complaint when it has reason to believe the Act has been or is being violated.

In this case the FTC charged Bosley – the nation’s largest manager of hair restoration procedures – with an illegal exchange of competitively sensitive, nonpublic information about its business practices directly with a competitor, Hair Club, Inc. The exchanges over a four year period were reciprocal and included product price floors and discounts, future product offerings, plans for business expansion/contraction and current business operational performance. These exchanges occurred directly between the CEOs of the two rival firms. Bosley also allegedly shared such information with other unnamed competitors.

The FTC identified three plausible risks to competition associated with sharing this kind of information:

  • a discussion of competitively sensitive prices, output, or strategy may mutate into a conspiracy to restrict competition, 
     
  • an information exchange may facilitate coordination among rivals that harms competition, even in the absence of any explicit agreement regarding future conduct, and
     
  • knowledge of a competitor’s plans reduces uncertainty and enables rivals to restrict their own competitive efforts, even in the absence of actual coordination.

Without admitting liability, Bosley agreed to an FTC consent order that (1) required the company to cease all direct or indirect exchanges of “sensitive information” with any competitor or soliciting sensitive information from a competitor; (2) mandated the company to maintain a formal antitrust compliance program for 20 years; and (3) provided the FTC with access to its U.S. facilities, records and employees with five days’ notice. The order defined “sensitive information” to include nonpublic information relating to pricing, costs, revenues, profits, margins, output, business plans, marketing, advertising, promotion or research and development. The order contains a number of permitted exchanges, including ordinary and customary communications with vendors and independent contractors, and ordinary participation in trade associations.

While the exchange of such information is certainly not advisable, the FTC did not allege that Bosley engaged in an open invitation to collude and fix prices similar to earlier cases. This indicates that the FTC will expand and use its enforcement authority to halt information sharing between competitors despite the lack of harm to competition or an unequivocal invitation to collude.

 

New York High Court Upholds Law Compelling Remote Internet Sellers to Collect Tax on New York Sales

In 2008, New York was the first state to amend its sales tax law to include a “click-through nexus provision,” which basically deems an out-of-state Internet seller to be soliciting sales in New York (and thus required to collect and remit the state sales tax on sales to New York customers) if: (1) a New York resident representative refers potential customers to the Internet seller by a link on the resident’s website or otherwise; and (2) the resident receives a commission from the Internet seller on sales resulting from buyers following the link. This presumption can be rebutted if the resident representative’s contract with the Internet seller prohibited any sales solicitation in the state and, in fact, no such activity occurred. Following New York, click-through nexus laws have been enacted in Arkansas, California, Connecticut, Georgia, Illinois, North Carolina and Rhode Island.

The New York law provides that an out-of-state seller “…shall be presumed to be soliciting business [in New York] through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller.” The purpose of this law is clear—to require this remote Internet seller to collect sales tax on sales made to New York residents and remit the tax to New York.

Shortly after passage, Amazon.com and Overstock.com challenged the law on constitutional grounds. On March 28, 2013, the New York Court of Appeals, the state’s highest court, ruled that the law is constitutional on its face, with one justice dissenting. (Amazon.com and Overstock.com v. New York State Department of Taxation and Finance). The law does not violate the Commerce Clause because the taxpayers have a sufficient presence (nexus) in New York because “economic activities are performed in New York by the seller’s employees or on its behalf.” The court found that the New York website owners affiliated with the sellers were in effect an in-state sales force that satisfied the Commerce Clause minimum in-state presence requirement, as articulated by the U.S. Supreme Court in Quill v. North Dakota (1992). Of note is the court’s statement that “no one disputes that a substantial nexus would be lacking if New York residents were merely engaged to post passive advertisements on their websites,” as opposed to the Internet seller paying these residents to actively solicit business in the state.

The court also rejected the taxpayers’ argument that the law violates the Due Process Clause. In-state presence is not required for due process. Rather, the focus is whether the seller has purposely directed its activities toward the forum state and whether, based on those activities, it is reasonable to require the seller to collect taxes for that state. The taxpayers’ use of a “brigade” of affiliated New York-based websites to solicit sales and be compensated with a commission on such sales satisfied the due process test, according to the court.

Overstock.com is considering an appeal to the U.S. Supreme Court, noting in its public statement that an Illinois state trial court has ruled that a similar Illinois law violates the Commerce Clause and conflicts with the Supreme Court’s decision in Quill v. North Dakota. That ruling is on appeal.