Is Agreeing To Stop Production Or Manufacturing Illegal Horizontal Collusion?

COVID-19 has disrupted manufacturers’ operations. Many manufacturers have shut down based on independent assessments of risk; others have done so only when required by government orders. Still others may be uncomfortable closing unless and until they know their competitors are doing the same. As the pressures to close doors in response to health risks mount, competitors might be tempted to agree on terms for closures.

Stopping production and closing a business or factory without coordinating with competitors is not in itself a violation of the antitrust laws. But doing so based on agreements with competitors about closures may be unlawful.

Under normal conditions, actual collaboration may constitute per se illegal anticompetitive conduct if it is deemed a horizontal (i.e., competitor-to-competitor) agreement to reduce production or output. The Federal Trade Commission has characterized agreements to reduce output or production as “just as illegal as direct price fixing, because reducing the supply of a product or service drives up its price.”

Whether an agreement is deemed per se illegal can affect private plaintiffs’ (or the government’s) burden of proof in asserting an antitrust claim. Indeed, if agreements between competitors to close in light of COVID-19 pressures are deemed per se illegal, then courts might not ask whether the agreement had an anticompetitive effect (i.e., raised prices for consumers or impeded competition) at all.

Theoretically, plaintiffs who (rightly) claim a per se violation may still need to prove (i) that they are the proper parties to bring the suit, (ii) that the per se illegal agreement exists, and (iii) that the anticompetitive conduct caused them to suffer an antitrust injury. If they can do that, they may be eligible to recover three times their actual damages under the federal antitrust laws.

Practically, of course, plaintiffs will only be able to recover three times the amount of damages they can prove—and that amount needs to be substantial enough to justify the cost of litigation. If illegal coordinated closures shut down manufacturing for a short time, prices might increase only by a small amount, making law suits by individual plaintiffs uneconomical. In that respect, antitrust class actions can provide a way to aggregate consumer claims—permitting large groups of private plaintiffs with small amounts of damages to combine their claims into a single, more valuable, case.

It remains to be seen whether coordinated production closures or price hikes will take place in the wake of COVID-19. And even if prices do increase, it still might be difficult to tell whether that increase is attributable to a coordinated closure as opposed to other factors. Indeed, government interventions and the unprecedented disruption caused by the virus itself might make it more challenging than usual to discern whether any ultimate changes in price are attributable to anticompetitive conduct. That may introduce substantial additional complexities into the already-complex world of antitrust litigation.

Either way, agencies like the FTC and Department of Justice may still be on the lookout for agreements to reduce output—and they might choose to prosecute such agreements regardless.