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NAW News

Legal Update

- January 2016

Distributors and Common Supplier Liable for Illegal Boycott of Competing Start-up Distributor

Is it lawful for two distributors to carry out a plan to contact their mutual suppliers with a threat to withhold their future purchases from the supplier unless the supplier agrees to refuse to sell a newly-formed distributor in the same market area? No, was the answer in a recent antitrust case, where the jury concluded the distributors “conspired to persuade, induce, or coerce any steel mill not to sell” product to the new market entrant. (MM Steel, LP v. JSW Steel (USA) Inc., et al., 5th Cir. 2015).

Also caught up in this antitrust conspiracy was JSW Steel, a steel supplier who, the jury found, “knowingly joined” the distributors’ scheme and refused to sell product to the plaintiff, MM Steel. After 24 months in business, MM closed its doors but did prevail in its antitrust lawsuit after a six week jury trial, recovering an astounding $52 million in damages for lost future profits, which was trebled to over $150 million.

Background:

In September 2011, two longtime salesmen departed their Gulf Coast steel distribution firm and started their own distributorship – MM Steel – in direct competition with their former firm and another local distributor. The two established distributors were not pleased with having MM as a new market entrant. They met and formed an agreement to coerce and induce their steel suppliers not to sell product to MM, or else the suppliers would lose the distributors’ business. The group boycott plan succeeded in convincing several suppliers to refuse to sell MM.

Before ceasing operations, MM sued the distributors and several steel suppliers in federal district court, alleging all defendants engaged in an illegal group boycott under the Sherman antitrust law, to deprive MM of product to re-sell. Following the jury verdict for MM, all defendants appealed but MM settled with the distributor-defendants, leaving JSW and Nucor as the remaining parties.

On appeal, JSW did not challenge the existence of the distributors’ conspiracy against MM – but they did argue there was no evidence to support the jury’s finding that JSW knowingly joined the conspiracy. The appeals court disagreed, noting the following events:

  • August 2, 2011 - JSW signs a one-year supply agreement with MM, with stated monthly purchases, and also extends credit to MM.
     
  • September 8, 2011 – Distributor #1 and Distributor #2 executives first meet and form conspiracy to coerce mills not to supply MM.
     
  • September 19, 2011 – Distributor #1 meets with JSW and says JSW has a choice to make: do business with us or with MM.
     
  • October 4, 2011 – Distributor #2 meets with JSW and threatens to cease buying from JSW if JSW sells to MM.
     
  • October 20, 2011 – JSW reverses course, and informs MM that it would not be selling to MM going forward, acknowledging “the gravity of its decision.” In making this decision, JSW risked a breach of contract claim for terminating its one-year supply agreement with MM.

The court noted that a manufacturer generally has a right to deal, or refuse to deal, with whomever it likes – however, a company’s refusal to sell must be an independent business decision, not one made in concert with competitors or customers. While evidence of mere complaints from a distributor to a manufacturer about a competing distributor would not be sufficient evidence to establish a conspiracy, or that a manufacturer joined a conspiracy, evidence that a manufacturer responded to a distributor’s actual threat can show concerted action by the manufacturer that is not independent conduct. The demarcation between a complaint and a threat is oftentimes unclear but, as this case illustrates, it can be of great legal importance when the threat succeeds in blocking a supply source.

In contrast, the verdict against Nucor was reversed. The evidence showed that Nucor’s decision not to sell MM was based on Nucor’s own independent business decision. The appeals court cited these events:

  • September 1, 2011 – MM leaves Nucor’s executive a voicemail announcing formation of MM and desire to buy from Nucor. Nucor executive immediately emails reassurance to its longstanding distributor-customer that Nucor had no intent to add distribution. Nucor cited its “incumbency practice” whereby Nucor remains loyal to established customers in order to maintain Nucor’s existing supply chain.
     
  • September 2, 2011 – MM makes contact with three Nucor employees and each employee declines to quote or discuss potential sales to MM.
     
  • September 8, 2011 – Distributor #1 and Distributor #2 first meet and form the conspiracy to coerce mills to refuse sales to MM.

Nucor declined to sell MM several days before the formation of the conspiracy. Therefore Nucor could not possibly have joined a conspiracy that had not yet been formed. Further, its conduct was consistent with its internal incumbency practice of supporting its established distribution network, evidencing that Nucor made an independent business decision. Therefore, the appeals court set aside the verdict against Nucor.


Examples of Employee Handbook Rules and Social Media Policies the NLRB Has Deemed Unlawful

The National Labor Relations Board general counsel prepared a guidance report that discusses specific types of employee handbook rules and social media policies that can have a “chilling effect on employee’s Section 7 rights,” and are therefore illegal. Section 7 of the National Labor Relations Act gives employees the right to discuss or criticize management and their wages, hours, management and working conditions. The report (GC 15-05) may be viewed at: http://www.nlrb.gov/reports-guidance/general-counsel-memos, and it gives examples of lawful and unlawful rules. Several rules deemed to be in violation of the National Labor Relations Act are summarized below, along with the NLRB’s reasoning for its decision.

Note that the National Labor Relations Act applies to employers – whether or not your employees are represented by a union.

Confidentiality:

  • “[I]f something is not public information, you must not share it.”

NLRB Comment: Because the rule directly above bans discussion of all non-public information, we concluded that employees would reasonably understand it to encompass such non-public information as employee wages, benefits, and other terms and conditions of employment.

Criticism of Employer:

  • “Be respectful to the company, other employees, customers, partners, and competitors.”
     
  • “Be respectful of others and the Company.”

NLRB Comment: We found the above rules unlawfully overbroad since employees reasonably would construe them to ban protected criticism or protests regarding their supervisors, management, or the employer in general.

Co-Workers:

  • Do not make “insulting, embarrassing, hurtful or abusive comments about other company employees online”, and “avoid the use of offensive, derogatory, or prejudicial comments.”

NLRB Comment: Because debate about unionization and other protected concerted activity is often contentious and controversial, employees would reasonably read a rule that bans “offensive,” “derogatory,” “insulting,” or “embarrassing” comments as limiting their ability to honestly discuss such subjects. These terms also would reasonably be construed to limit protected criticism of supervisors and managers since they are also “company employees.”

Third-Party Communications:

  • “If you are contacted by any government agency you should contact the Law Department immediately for assistance.”

NLRB Comment: This rule is unlawfully overbroad because employees reasonably would read it to limit protected communications with government agencies (e.g., NLRB). Although we recognize an employer’s right to present its own position regarding the subject of a government inquiry, this rule contains a broader restriction. Employees would reasonably believe that they may not speak to a government agency without management approval, or even provide information in response to a Board investigation.

Company Trademarks and Logos:

  • “Company logos and trademarks may not be used without written consent…”

NLRB Comment: We found the above rule unlawful because it contains broad restrictions that employees would reasonably read to ban fair use of the employer’s intellectual property in the course of protected concerted activity. A company’s name and logo will usually be protected by intellectual property laws, but employees have a right to use the name and logo on picket signs, leaflets, and other protest material.

Use of Recording Devices:

  • “No employee shall use any recording device including but not limited to, audio, video, or digital for the purpose of recording any [Employer] employee or [Employer] operation…”

NLRB Comment: We found this rule unlawful because employees would reasonably construe it to preclude, among other things, documentation of unfair labor practices, which is an essential part of the recognized right under Section 7 to utilize the Board’s processes.

Leaving Work:

  • “Failure to report to your scheduled shift for more than three consecutive days without prior authorization or ‘walking off the job’ during a scheduled shift” is prohibited.
     
  • “Walking off the job…” is prohibited

NLRB Comment: We found the above rules were unlawful because they contain broad prohibitions on walking off the job, which reasonably would be read to include protected strikes and walkouts.


Conclusion:

The new reality is that the NLRB can now pluck a sentence - or a phrase - out of a comprehensive employee handbook or workplace policy and declare that the offending text violates the National Labor Relations Act. Note that none of the above-cited statements expressly prohibits or limits an employee from discussing or exercising the worker’s Section 7 rights. Instead, the agency condemns these statements because, in the agency’s opinion, the text could reasonably be understood by a worker to limit the free exercise of his or her Section 7 rights.

NLRB scrutiny of an employee handbook is usually commenced by an employee complaint. If the handbook is deemed deficient, the employer is charged with an unfair labor practice and must take corrective action, including posting a Notice of Violation in the workplace of that details the violation and the remedial measures taken.