The following is the second in a series of guest posts by David Balto about the FTC’s McWane case.
Two modest offices on the first floor of the FTC building are occupied by the FTC Administrative Law Judge and his staff. Of all of the agencies with an ALJ, the FTC’s operation must be the smallest. The ALJ handles only a handful of trials each year. In the past, the FTC ALJ operation has gathered little to no attention. But in recent years, with renewed focus on administrative litigation and tight litigation deadlines, FTC administrative litigation has become a rocket docket of sorts.
But there is renewed attention for another reason. As I have written elsewhere the FTC is on a 19-year streak of always finding violations in its administrative litigation. In many instances that has required it to reverse an ALJ. When the Commission reverses on the law, that is not exceptional. But in those cases where the Commission has taken a different view of the facts, there is far greater controversy. Although the Commission does analyze the facts de novo, the ALJ has conducted the trial, listened to the testimony, watched the witnesses and is in the best position to assess credibility and determine the facts. The Commission’s differing view of the facts in cases such as Rambus and Schering led appellate courts to treat the FTC decision with extreme skepticism. If the FTC is going to second guess the ALJ’s factual findings, which are based on his first-hand observation of the witnesses and review of the documents, why do we have ALJs?
This post addresses that issue by looking at the factual findings of the ALJ in the McWane case (for an introduction of the McWane case please see my previous post). The ALJ in the McWane case wrote an extensive 235 pages of factual findings. In the interest of brevity, I will only be discussing the collusion findings. My goal is to illustrate how difficult it will be to reverse some of these findings, and if reversed, the problems it will likely present on appeal.
To understand the FTC’s collusion claims it is important to first understand how fittings are priced. Fitting prices start with published list prices. No one buys off published prices. The suppliers publish regional multipliers that provide discounts off the published list price. The ALJ found that “[d]istributors prefer that [f]ittings suppliers like McWane, Sigma, and Star have identical list prices because it is easier for [d]istributors to compare the suppliers’ multipliers and discounts to determine net prices.” Suppliers also have a variety of mechanisms to discount prices below the multiplier price in order to compete for bids. Chief among these is the project price, which is a discounted price for an entire project or job or for a single order. It is easy for competitors to find out each other’s list prices and multipliers from their customers which are often large and aggressive buyers who bargain down prices. However, discounts beyond the multipliers are often hidden and hard to discover by competitors.
The ALJ found the fittings market to be an oligopoly. McWane, Sigma, and Star are constantly looking for, and reacting to, changes in each other’s pricing. Much of this competitive information was received through customers and it was known that any letter sent to a customer would end up in the hands of a competitor. The ALJ found that while “[c]ustomer letters served to communicate to competitors, as well as customers[,]”the “substantial evidence” showed that the parties priced independently at all times and McWane routinely priced below its competitors.
Beginning in 2007, “the [f]ittings industry experienced a period of declining demand, increased price competition resulting in price erosion, and increased costs.” The ALJ found that during this period McWane’s main concern was to increase sales volume in order to reduce excess inventory and keep its foundries open. The ALJ also found that McWane’s net pricing was not keeping up with cost inflation. The cost of doing business overseas, primarily in China, was also increasing, which impacted all fittings suppliers equally. Every supplier was looking to increase pricing but the suppliers were also aware that any increase would have to be followed to stick.
McWane used these conditions to allegedly come up with a strategy, which later became the basis for the FTC’s complaint, to “narrow the range between the published price and actual prices and thereby give his competitors less ‘headroom,’ within which Star and Sigma could maneuver to undercut McWane on price.” Instead of following Star and Sigma on their very large list price increases, McWane kept its list prices steady and raised some its multipliers, but to a much lower amount than Sigma and Star’s list price increases. McWane also announced an intention to stop project pricing through customer letters, according to the FTC. Project pricing hides the real prices of fittings. McWane’s goal was to make prices more transparent so that it could better compete on price but “McWane knew internally that in order to meet its objectives of increasing volume and share, it would have to Project Price.”
The FTC also had a problem with the beginning of a fittings trade group called DIFRA. The FTC’s claim was that DIFRA allowed the fittings companies to share sensitive competitive data. McWane, Star and Sigma would report “tons-shipped data” to DIFRA for their fittings sales. The ALJ found that the data gathered by DIFRA’s accountants “did not distinguish between Domestic Fittings and non-domestic Fittings” and “did not include or reveal any sales Prices.” The ALJ also found that “no DIFRA member was permitted to review the tons-shipped data of any other member; the reports revealed only the aggregate total tons-shipped during the relevant reporting period.” This DIFRA data was used by each supplier to determine their market share in order to plan future business strategies.
The FTC believed that McWane’s strategy, DIFRA, and other activities were collusive actions to stabilize and raise prices. The FTC saw the alleged elimination of project pricing and sharing of aggregated volume data as mechanisms to enforce a cartel and prevent cheating. However, the ALJ did not find these activities to amount to anticompetitive behavior – there was no smoking gun that turned these activities with procompetitive justifications into an antitrust violation. The data DIFRA provided had procompetitive uses including an instance where it “helped McWane decide, in June 2008, to choose the low end of the 8% to 12% range of multiplier increases” because the report showed McWane was “continuing to lose market share.” The ALJ also found that the data did not suggest a reduction in job pricing. The expert in the trial, which the ALJ found “offered credible and persuasive expert opinion, based on actual prices,” found “no economic evidence that the price changes in January or June of 2008 were coordinated, or that there was an agreement to reduce job pricing as would be reflected in a decrease in price variance; that there was economic evidence that contradicted a conclusion that prices were raised anticompetitively in the Fittings market; and that the pattern of sales and inventory contradicts the notion of quantity withholding, as would be needed to effect a price increase.” The ALJ also found that McWane’s witness “credibly testified that McWane’s goal going into 2008 was primarily to increase volume, rather than price,” and that “[t]he decline in McWane’s pricing (F. 940), given the rise in input costs (F. 951), is inconsistent with a conspiracy and consistent with independent pricing behavior.”
The ALJ ultimately found that the government’s collusion claims amounted to nothing more than “weak” “unsupported speculation” and that its “daisy chain of assumptions fails to support or justify an evidentiary inference of any unlawful agreement involving McWane.” The FTC will have trouble overcoming these findings if it chooses to overturn the ALJ’s dismissal of the collusion claims. For the Commissioners to do so would essentially be making different credibility assessments than the ALJ, even though they weren’t present for the trial. If these ALJ findings are so easily overturned it would bring into question why an ALJ is needed in the first place.