On April 8, 2013, the Federal Trade Commission (FTC) released a proposed complaint and Consent Order against Bosley, Inc. and its corporate parents (jointly “Bosley”), barring Bosley from exchanging “competitively sensitive, nonpublic information about its business practices” with competitors, including, in particular, HC (USA), Inc., known as Hair Club.^[1]  The complaint alleges that for at least the past four years, the Chief Executive Officers of Bosley and Hair Club directly and repeatedly exchanged detailed nonpublic information about their companies’ future product offerings, minimum prices and discounts, future expansion and contraction plans, and other business intentions.^[2] According to the complaint, Bosley also exchanged similar information with other competitors.^[3]

The FTC complaint concludes that Bosley’s conduct “had the purpose, tendency and capacity to facilitate coordination and served no legitimate business purpose.”^[4] Accordingly, the conduct allegedly constituted an “unfair method of competition” in violation of Section 5 of the FTC Act, even though no actual agreement with any competitor was alleged.^[5] The absence of such a claim means that the FTC, which has exclusive authority to enforce the FTC Act, was not claiming conspiratorial conduct in violation of Section 1 of the Sherman Act, which likely would have given rise to private antitrust treble damage actions (however, it would not be surprising if such suits nevertheless follow).

The newsworthy aspect of the FTC’s suit is that it is rare when the FTC does not challenge anticompetitive conduct by competitors without alleging that the horizontal conduct fell short of violating the Sherman Act. In fact, the only such actions brought in the past 30 years were the consent orders issued simultaneously 13 years ago against five recorded music companies challenged for enforcing parallel minimum advertised price (MAP) policies against their customers.^[6] An interesting aspect of the action against Bosley is that the information about the competitive exchanges was reportedly obtained by the FTC during the investigation of Bosley’s proposed acquisition of Hair Club, which was in the process of being closed without action by the Commission.^[7]

BACKGROUND: FTC HORIZONTAL ENFORCEMENT POLICIES

It is well established that the FTC’s “unfair method of competition” authority under Section 5 of the FTC Act authorizes the FTC to challenge anticompetitive practices which, while not constituting actual violations of the Sherman or Clayton Acts, are counter to the spirit or policy of those laws, or constitute incipient violations of those statutes, and therefore allows the FTC to supplement and bolster the traditional federal antitrust laws. Typically, under this authority, the FTC has been permitted by the courts to challenge practices that have effects similar to violations of the Sherman or Clayton Act, but do not violate one of those statutes because of some statutory technicality.^[8] Additionally, the courts have authorized the FTC to challenge conduct that may develop into such violations if left alone—incipient antitrust violations.^[9] In the early 1980s, a few appellate courts thought the FTC had improperly tried to extend this authority too far. This was particularly evident in decisions by two courts of appeals involving FTC suits challenging conduct by competitors charged with allegedly anticompetitive conduct that fell short of agreement.

First, in the 1980 Boise Cascade case, relying on its authority under Section 5 of the FTC Act to proscribe “incipient” antitrust violations, the FTC had ruled that the parallel adoption of an artificial pricing formula by members of the concentrated plywood industry violated Section 5 even absent a specific agreement. The Ninth Circuit disagreed, declaring that without evidence of collusion, the Commission lacked authority to find a violation of the FTC Act based solely on a rebuttable presumption of an anticompetitive effect.^[10]

Then, in 1984, the Second Circuit set aside an FTC order in the Ethyl “price signaling” case after the Commission had found that Section 5 prohibited unilateral conduct in an oligopolistic industry that had a significant adverse effect on competition by stabilizing prices among the companies. The appellate court declared that even in an oligopoly, parallel anticompetitive conduct was not an unfair method of competition under Section 5 unless the Commission established some indicia of oppressiveness, such as evidence of anticompetitive intent,” or “the absence of an independent legitimate business reason” for the challenged conduct.”^[11]

After these losses, the FTC retreated and returned to a more traditional mode of analysis, avoiding what appellate courts might consider an over-expansive interpretation of its Section 5 authority in cases involving horizontal conduct. With the exception of the recorded music consent orders in 2000 noted above, it seemed to be limiting its “unfair methods of competition” authority in this area to cases involving invitations to collude or attempted price fixing involving unambiguous overtures to collude with a rival.^[12] Then the Bosley case came along.

THE BOSLEY CONSENT ORDER

The proposed Consent Order in the Bosley case would require it : (1) not to communicate competitively sensitive, nonpublic information with any competitor; (2)not to request, encourage or facilitate communication of competitively sensitive information from any competitor; and (3) to institute an antitrust compliance program to assure ongoing compliance with the proposed order.^[13] Providing guidance to the respondent, as well as to interested observers, the proposed order defines “competitively sensitive, nonpublic information” as information such as “nonpublic information relating to pricing or pricing strategies, costs, revenues, profits, margins, output, business or strategic plans, marketing, advertising, promotion, or research and development.”^[14] This would not include information communicated publicly to customers or investors through widely accessible methods such as websites, analyst conference calls and press releases, and information required by the federal securities laws.^[15] The proposed order also provides guidance as to the kinds of nonpublic information that can actually be exchanged with a competitor, by allowing such an exchange that is “reasonably related to a ‘lawful’ joint venture or as part of legally supervised due diligence for a potential transaction, and reasonably necessary to achieve the procompetitive benefits of such a relationship,”^[16] something that may not have been present in the Commission’s assessment of Bosley’s activities leading up to the Hair Club transaction, and at least for a number of years earlier.  The Bosley proposed consent order has been placed in the FTC’s public record to solicit comments from interested parties. After that, the Commission will determine whether to finalize the order as proposed or as modified as a result of public comments.

ANALYSIS

The proposed Bosley Consent Order was entered unanimously by the current four-member Commission (a fifth seat is awaiting Presidential nomination). This is of particular interest, because there has been disagreement among

Commissioners in the past few years about the extent of the Commission’s Section 5 authority in cases involving alleged anticompetitive conduct by allegedly dominant companies in the technology and health sectors.^[17] Most recently, it has been reported that newly confirmed Republican Commissioner Wright has said that he intends to issue his own proposed formal policy statement on the issue, and new Chair Edith Ramirez, a Democratic appointee, declared that she supported the case-by-case approach the FTC has taken to date to limit the extent of its authority, stressing that the bulk of the unfair methods of competition enforcement will continue to stay close to Sherman and Clayton Act requirements.^[18] An effort to carefully limit the extent of the Commission’s authority appears to be present in the Bosley complaint, because the Commission evidently took heed of the Second Circuit’s admonishments in the Ethyl case discussed above by stressing that: (1) the challenged anticompetitive conduct involved in the Bosley case could “mutate” into an actual conspiracy because it facilitated coordination and reduced uncertainty about a rival’s future prices and strategic plans; and (2) the exchanges at issue served no legitimate purpose.

While the proposed Bosley Consent Order is not yet final, the Commission also used this opportunity to provide potentially valuable guidance to the antitrust community, both as to competitive information exchanges that risk FTC action as well as the kinds of nonpublic competitive information exchanges that should usually be free from challenge, particularly information that can be exchanged as part of legally supervised due diligence related to a lawful joint venture or a potential merger or acquisition.

_{[1] Complaint, Decision and Order, In the Matter of Bosley, Inc., Aderans American Holdings, Inc., & Aderans Co., Ltd., FTC File No. 121-01854 Apr. 7, 2013 (hereinafter, “Compl,” and “Order”).}

_{[2] Compl. ¶¶ 12, 13.}

_{[3] Id. ¶16.}

_{[4] Id. ¶14.}

_{[5] 15 U.S.C. §45.}

_{[6] In the Matter of Sony Music Distrib., Inc., et. al., 5 Trade Reg. Rep. (CCH) ¶24,746 (FTC 2000) (Consent Orders). In 2009, the Commission issued a consent order against the National Ass’n of Music Merchants, settling a complaint claiming—without any allegation of an agreement-- that a trade association engaged in an unfair method of competition by allegedly encouraging the exchange of competitive information among its retailer members at trade association meetings during a three-year period, thereby facilitating possible conspiratorial conduct. However, no action was brought against any of the members. See In the Matter of National Ass’n of Music Merchants, Inc., FTC Dkt. No. C-4255 (Decision and Order, Apr. 8, 2009).}

_{[7] Part I.C. of the proposed order declares that after the acquisition of Hair Care, the term “Aderans” in the Order includes that company. The acquisition closed a few days after issuance of the complaint and order. See Aderans Co., Ltd., Notice of Completed Acquisition of Shares in U.S. Company by Aderans Group Company (Apr. 10, 2013).}

_{[8] See, e.g., FTC v. Brown Shoe Co., 384 Y.S. 316 (1966); Atlantic Ref. Co. v. FTC, 381 U.S. 357 (1965); Grand Union Co. v. FTC, 300 F.2d 92 (2d Cir. 1962).}

_{[9] See e.g., FTC v. Texxaco, Inc., 393 U.S. 223, 229 (1968); FTC v. Motion Picture Adver. Serv. Co., 344 U.S. 392, 394-95.}

_{[10] Boise Cascade Corp. v. FTC, 637 F.2d 573, 581-82 (9th Cir. 1980).}

_{[11] 11 E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128, 139-40 (2d Cir. 1984).}

_{[12] See, e.g., In the Matter of Valassis Communications, Inc., 2006 WL 13667833 (FTC 2006)(Consent Order); In the Matter of Precision Molding Co., 122}

_{F.T.C. 628 (1996) (Consent Order); In the Matter of YKK (U.S.A.)., Inc., 116 F.T.C. 628 (1993 (Consent Order).}

_{[13] Order Parts II & III.}

_{[14] Id, Part I.J.}

_{[15] Id.}

_{[16] Id., Part II.}

_{[17] See, e.g., FTC v. Cephalon, 551 F. Supp.2d 21(D.D.C. 2008); Intel Corp., 2010 FTC LEXIS 82 (2010) (Decision & Order); Negotiated Data Soluti9ons LLC,, 2008 FTC LEXIS 120 (2008)(Decision & Order);}

_{[18] See Section 5 Cases Offer Best Guidance, FTC Chief Says Portfolio, Inc., Law 360, Apr. 15, 2013.}