The FTC Industry Probe: What to Expect

So says a law professor at a leading university in the Midwest who studies and teaches about the Federal Trade Commission (FTC) and antitrust/anti-competition issues. The professor, who requested anonymity, said that the FTC is often suspicious of trade groups because organizations like that can be fertile ground for antitrust violations and historically they have at times been found guilty of wrong-doing.

He also warned against thinking that the FTC�s recent action against the music products industry is merely going to be an inconvenient, costly wild-goose chase: �They only start handing out subpoenas if they have an above average likelihood of winning.�

And it also isn�t comforting to know that the lead lawyer for the FTC whose signature is on the subpoenas, William L. Lanning, has a record for successfully prosecuting other industries for their Minimum Advertised Price (MAP) policy, or that he was part of an investigation that led to the largest fine handed down in FTC history.

On Mar. 7, 2007 the FTC launched a far-reaching investigation into the musical products industry, focusing largely on MAP policies. Many large and mid-sized American-based suppliers, as well as trade organizations such as NAMM, the Guitar & Accessories Marketing Association (GAMA), the National Association of School Music Dealers (NASMD) among others have received subpoenas to turn over voluminous records dating back to Jan. 1 1999. According to reliable sources, the FTC is also particularly interested in information relating to a NAMM-sponsored �town meeting� on MAP policies staged during the 2006 NAMM Summer Session in Austin, Texas.

The FTC is asking for all kinds of material, from post-NAMM show reports, copies of supplier guides, trade magazine articles, and asking people to recall conversations about pricing information taking place at long-ago trade shows and trade group meetings � in the words of one executive, �it�s a massive fishing expedition.�

But it�s a deadly serious one.

It�s the FTC�s antitrust arm, the Bureau of Competition, that is doing the investigating. They are responsible for seeking out businesses that try to restrain competition in anyway including monopolistic practices, attempts to monopolize, and conspiracies in restraint of trade. The Bureau first investigates alleged wrongdoing and they must find sufficient reasons to do so before recommending the Commission take formal action and open a case.

Antitrust laws are enforced by both this Bureau of the FTC and the Antitrust Division of the Department of Justice (DOJ). They consult with each other before opening a case to make sure they aren�t duplicating efforts, and if you have to be investigated, it�s understood that the FTC�s Bureau is the �nicer� of the two.

NAMM�s counsel on this case is Steve S. Chidester of Luce, Forward, Hamilton, & Scripps. A partner in the firm based out of their Carmel Valley/Del Mar, Calif. Office, Chidester has represented tax-exempt organizations in civil and probate court and before state Attorneys General.

How Did This Even Start?
FTC personnel are not allowed to speak about the specifics of an ongoing case, and the disclaimer �all these responses are general and not related to any investigation,� preceded every answer during recent interviews by MMR.

�There can be a lot of triggers that cause the FTC to investigate something,� says Mitchell Katz, FTC public affairs specialist. �There can be a number of consumer complaints, or a judgment on the amount of consumer harm being done.�

�One of the common ways is that we have these various consumer databases that are easily searchable,� adds Richard Gold, FTC attorney general counsel. �So we can see patterns or trends of certain consumer complaints. But also, it can be as simple as a staff person reading the right article in some offbeat publication, or being at the right place and hearing something unusual.�

In other cases it could be a competitor complaining to their congressional representative. Sometimes a consumer�s outcry can cause the FTC to at least look into something. Last year�s big sudden spike in gas prices had consumers up in arms shouting �conspiracy,� for example. But the FTC quickly figured out that other factors attributed to the spike, and deemed it a case when there was smoke and no fire.

Sometimes the reason for the launch of an investigation is strictly political. Like similar government agencies, the FTC has to trek up to Capitol Hill once a year, hat in hand, and prove them selves worthy for funding. Dennis Kucinich (D-Ohio) was upset that a chain bought up an independent grocery store in his district. Because of his committee chair position, he was able to hold a hearing about anticompetitive practices in supermarkets. Most experts agreed that there was absolutely nothing unusual about the deal, yet Kucinich was able to turn up some heat on the issue and the FTC had to go through the motions of an investigation because he was the new chairman of the House Oversight Committee.

There can be several reasons why the FTC would ultimately decide not to pursue a case. They could take a complaint seriously, something that looks suspicious, but after a little digging see that there is nothing there. Or, they are pretty sure something is there, but aren�t confident they could get the evidence to proceed.

The current investigation into the music products industry is like any other FTC investigation and there is a chance that they are �wasting people�s time, but in general they are making more right calls than wrong calls,� the law professor comments. �They wouldn�t get to this stage unless they thought there was something out there. From their perspective, someone is a victim, or the competitive process is a victim, and they are telling themselves internally that there is potential to find bad conduct here.�

There are three ways for this investigation to end:

• Case Closed. At any point, the FTC can simply and quietly close the case. They will do this when they see a lack of wrongdoing to cut their losses when they realize they won�t be able to find the evidence of wrongdoing they need to proceed.
• Consent Agreement. Evidence of wrongdoing is uncovered, and a cease and desist order is given and/or an agreement is reached to change the harmful or illegal practices. This is mostly done when the alleged wrongdoing is in a �gray area� and/or deemed not particularly harmful to consumers and/or the industry/company in question proves good-faith lack of knowledge or misunderstanding of the law(s) and voluntarily changes their policy accordingly.
• Litigation. There�s solid proof that the industry/companies have conspired to undertake antitrust, anti-competition policies that have hurt consumers and competitors and have benefited from it. The industry/companies still dispute the FTC�s position, and multiple appearances in court ensue. If found guilty, court-ordered changes in policy and often fines are imposed on the accused parties.

The biggest fine ever imposed was on ChoicePoint, a provider of identification and credential verification services for business and government, for data breach — $10 million. William Lanning was the lead lawyer in that case.

All FTC Investigations Are �Successful�
Katz stressed that all  FTC investigations are, in a sense, �successful.� Even if halfway through the investigation they decide to quietly close the case, the commission has successfully done its job. He said numbers aren�t available as to the percentage of cases that end up being closed, with a consent order, or in litigation, but �the FTC getting a successful resolution of an issue is very high.�

When the investigation does yield wrongdoing, �we�re looking for some kind of resolution that will work to the benefit of consumers in any kind of case.�

None would say exactly how many FTC personnel are assigned to this case but Gold says: �It�s safe to say it�s more than one person. Something this complicated will require up to five attorneys, plus economists and paralegals.�

And at what cost for the businesses involved?

�In general we try to make it as easy as possible for companies to comply. We lay out as carefully as we can what we�re looking to get. We�re not trying to put a new burden on any company or industry, but our job is to protect consumers and to do that we need to get the information we ask for and evaluate it.�

�One critical factor [in the cost] is how forthcoming companies are in cooperating,� says Geoffrey Oliver, FTC assistant director, Anticompetitive Practices.

Oliver is listed on the subpoena as one of the lawyers working on the music products industry case.

�We have legal power to enforce subpoenas, but whenever possible we seek to work out mutually accepted deadlines, and we�re willing to extend deadlines when there are just reasons. We do not impose undue burdens on companies if they are forthcoming and help us move the case along to its proper conclusion whatever it may be.� So again: the more cooperation, the faster it goes; the faster it goes, the less expense.

He adds that companies that comply with at least some of the request for information while asking for a deadline extension are more likely to get an extension.

As to how long these cases can take, he states, �It depends on how complicated they are, how many parties are involved, and if there are a lot of third parties,� Gold says. �If they are looking at a whole industry, naturally it�s going to take significantly more time.�

�It would be rare to complete something in a month, but it can take anywhere to several months to a couple of years.� adds Oliver. �Investigations vary depending on the nature of conduct. Some focus on individual companies, and others focus on a number of companies.� If the suspected offensive have been going on a number of years, then data needs to be gathered going back far enough to be able to draw conclusions about it. In 2002 Rambus, Inc., a company that supplies interfaces for video game consoles and graphic workstations, was charged with violating federal antitrust laws by deliberately engaging in a pattern of anticompetitive acts and practices that served to deceive an industry-wide standard-setting organization, resulting in being unfair to the consumer. The FTC required extensive information going back to the early 1990s.

�The Rambus case involved allegations of unlawful monopolization in the computer tech market. I raise this as an example of a case where the conduct in question took place between 1991 and 1996, but the results of it didn�t become apparent until 2000, and didn�t affect the market until after that.�

In 2004, a judge dismissed the complaint against Rambus. Three more years of motions on both sides and multiple visits to courts ensued before Rambus was found liable for wrongdoing in a higher court.

Somewhat closer to home, in 2000 the FTC reached settlement agreements with Universal Music and Video Distribution, Sony Corp. of America, Time-Warner Inc., EMI Music Distribution, and Bertelsmann Music Group (BMG), the five largest distributors of recorded music, over their MAP policy. The FTC had alleged the companies� advertising practices were illegal and induced retailers into charging consumers higher prices for CDs, and allowed distributors to raise their own prices. In that case, the FTC required these companies, which had a total combined market share of 85% of all compact disks sold in the U.S., to discontinue MAP programs completely for seven years.

�The FTC estimates that U.S. consumers may have paid as much as $480 million more than they should have for CDs because of these policies,� said then FTC chairman Robert Pitofsky in May 2000. �These settlements will eliminate these polices and should help restore much-needed competition to the retail market, consisting of $15 billion in annual sales. Today�s news should be sweet music to the ears of all CD purchasers.�

Katz also sited a 2003 case involving The Three Tenors. The FTC convicted PolyGram, Decca, and Universal of conspiring to increase the profits for a single album of the famous opera trio Jose Carreras, Domingo, and Luciano Pavarotti. The FTC found that the companies illegally reduced discounts on previously released Three Tenor recordings as the new one was released. �That case was MAP-related and went all the way to the appellate court.� (An FTC watchdog group, The Center for the Advancement of Capitalism, put this case as number three on their �Top Ten� list of �truly surreal� antitrust cases of 2003 writing, �[The record companies], according to the FTC, denied Americans their God-given constitutional right to pay less than $20 for a recording of three men hitting high notes in a soccer stadium.�)

What�s Ahead
Early closing, Consent Agreement, Litigation.  Oliver says. �Any of those are possible. I don�t think we can say with any likelihood how a case like this will end. Some investigations will make an initial investigation and then close early on, but once subpoenas are issued, that usually signals that they are beyond the initial investigation.�

Not surprisingly, a company or industry can feel �picked on� when it is targeted for an FTC investigation. �They probably all do!� laughs Gold. �Sometimes, though, the people involved just aren�t aware that we had a rule in a certain area. We had a case with the funeral home industry in which they didn�t understand an aspect of the franchise rules,� and thus all parties realized there was no criminal intent and a quick agreement was reached with no fines assessed.

There is a theory being floated that since MAP is used with other, bigger, more complex industries, the FTC indeed selected the music products industry to �make an example� of them and scare the larger industries into line. If there are several industries doing something illegal, and the FTC has success with the smaller fish, the lawyers for the bigger industries sit up and take notice. They quickly send memos out suggestion to those big companies to retool their policies accordingly �and to do it immediately.

But bottom line, the FTC selects their case on their ability to win rather than the size or even magnitude of the alleged offense.

Expect to hear little to no real updates from Washington, the experts agree: �The only time we make any public comment on any case is if law enforcement action is involved,� Katz said flatly.

As to what happens when the FTC launches such a labor-intensive and expensive time-consumer investigation and come up completely empty-handed? Gold laughs again: �Let me put it this way: I can�t ever remember when the FTC said it was sorry!� Not surprisingly there is no compensation awarded when there is no wrongdoing found despite the accused having spent a lot of time and money spent assembling the documents paying the lawyers.