In the first installment of our two-part series, international trade lawyers, Mike Lowell and Justin Angotti, and antitrust lawyers, Ed Schwartz and Michaela Westrup, team up to explore the antitrust risks that companies face related to tariffs. They discuss key themes and issues facing companies operating in the U.S. and Europe, and provide insights on what might be coming down the track on tariffs.
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Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges, and topics of interest from Reed Smith litigation, regulatory, and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Mike: Hey, everyone. Welcome back to Trading Straits. I'm Mike Lowell, an international trade partner here at Reed Smith. We know companies are grappling with how best to respond to tariffs, and considering price and supply chain adjustments are often part of that process. With antitrust enforcers scrutinizing competitor conduct, partnering with our antitrust and competition team to chair a two-part series where we'll be discussing the practical impact of recent developments and key priorities for in-house counsel. For our first episode, we are going to explore the various antitrust risks that companies face related to tariffs and briefly touch on what might be coming down the track on tariffs. I'm joined by Justin Angotti from our trade team, Ed Schwartz and Michaela Westrup from our antitrust competition team. Ed, Michaela, Justin, would you all like to introduce yourself?
Ed: Yeah, sure. Thank you, Mike. This is Ed Schwartz. I'm an antitrust and litigation partner based in the Reed Smith, Washington, D.C. And New York offices, and a pleasure to be speaking with everyone today.
Michaela: Great. Hi, everyone. My name is Michaela Westrup. I'm an antitrust partner in Reed Smith's European group. I'm heading the German office, and the focus of my work is actually dealing with cartels and advising companies on compliance issues in this regard.
Justin: And hey, everyone, my name is Justin Angotti, an attorney here in D.C. And one of the leaders of our tariff practice.
Mike: Well, thanks all. Let's jump right into it. Michaela, can you explain the principal antitrust risks that companies face when responding to tariffs?
Michaela: Yes, of course. Well, when companies are confronted with new tariffs, whether those are imposed by the U or the U.S. Or any other jurisdiction, they will face just increased costs effectively and must therefore decide how to respond. The principal antitrust risk I see is where companies would discuss or coordinate their responses with competitors and this includes any agreement or informal understanding or concerted practice about whether, how or when to pass on tariff costs to customers. The European Commission, which is the main enforcement agency in antitrust in the European Union. Treats any such coordination as serious infringement, on par actually with classic price fixing and cartels. The reason is that tariffs, as any other surcharges or input costs, are an integral component of the final price that has to be paid by the customer. And if competitors agree on how to handle those costs, they effectively eliminate independent pricing decisions, which is a restriction of competition, and that deprives the customers of the benefits of the competitive market. So the bottom line is here that any coordination with competitors on how to respond to tariffs or the introduction of surcharges is highly risky and likely be considered an antitrust infringement under the EU antitrust laws.
Mike: That's really interesting. Under what circumstances would EU antitrust law be applicable?
Michaela: Yeah, that's a good question because we're talking about mainly U.S. Tariffs here, so you'd be questioning that. The applicability of EU antitrust law, including the ban of cartel or anti-competitive agreements, is governed by the so-called effects doctrine, which means that it's not the geographic origin of the cost over which undertakings may cartelize, but what matters is where that agreement or coordination takes effect, and if it's within the European Economic Area, the EA. And competition would there be affected, EU antitrust law would be applicable. So it's effectively in situations where a coordination on the handling of the tariffs or surcharges that affects the pricing or market behavior within the EA would take place, for example, if European companies would agree to uniformly pass on U.S. Import tariffs to their customers in the EU. and this restricts competition in the internal market and that would fall at odds with EU antitrust laws. And the same as the case where agreements are concluded on the introduction amount or timing of any surcharges that are part of the final price in the E. Even if the undertakings do not align on the effective price but just the underlying costs. And even if those costs are external, like foreign tariffs, for example. Any coordination that impacts the market pricing in the EA would be covered. So I will add that an infringement would still only occur in cases where companies have some discretion on how to respond or pass on or include into the price the surcharge or tariff. If companies can't independently decide that, be it for regular reasons, for example, if the law asks them to pass on certain costs to customers, there's no competitive discretion and therefore competition wouldn't be impaired by any such agreement.
Mike: Ed, can I pull you in to talk a little bit about the view from what's the United States?
Ed: Yeah, sure, Mike. So the U.S. enforcement risks are real and very substantial. So, you know, I think as most of the listeners know that the risks arise under Sherman Act Section 1, which broadly prohibits all agreements in restraint of trade. And that's the statutory provision under which price-fixing conspiracies are prosecuted, under which private claims are brought. Typically, the Department of Justice enforces Section 1 against those who are engaged in a cartel or price-fixing conspiracy criminally, criminal investigation, indictments, and that is a very real risk that companies face. And there's a good chance that any such conspiracy is going to come out. The DOJ's leniency program, while somewhat hampered by some policy decisions is still effective. And so, you know, cartels, particularly large cartels, global cartels, they tend to come out and trigger investigations by the DOJ. I think it's also important to bear in mind, Mike, that particularly with respect to consumer products, the agencies, including the DOJ, can be quick to open an investigation into possible price inclusion. Even when market factors and independent decision-making can readily explain price increases across a market. One recent example is the DOJ Antitrust Division's investigation into possible coordination of egg prices following the avian flu outbreak. There's every reason to believe, in my mind, that price increases resulted completely from market factors. But the DOJ opened an investigation anyway. We see that every time retail gasoline prices go up, the FTC investigates a collusion at the bump. You know, it's a political action, honestly. So that's from the government prosecution side. And then you've got potential class actions. And once the existence of an investigation or even before an investigation becomes public, we see the plaintiff's lawyers swoop in and file class actions against those suspected of price fixing. And these class actions are extremely expensive to defend. And the consequences can be devastating. I'll just cite one example of where we saw market factors. Changes in a market, impact suppliers in a market similarly, resulting in not just U.S., but global enforcement actions and class actions. And that was the fuel surcharges that were imposed by air cargo carriers and ultimately other industries in the early 2000s led to there was coordination, led to DOJ criminal investigations. Other investigations around the world, class actions. It was a massive, massive set of investigation and cases for those in the industry who coordinated to deal with. Just one more thing that I'll mention, Mike, and that is that the U.S. Agencies are very, very aware of the risks of coordination arising from the imposition of tariffs in the U.S. We saw FTC Chair Andrew Ferguson make a statement after it became clear that companies were going to be facing sizable tariffs, in which he said that the FTC will be watching closely to make sure American companies are vigorously competing and the tariffs should not be interpreted as a green light for price fixing or other unlawful behavior. And a representative of the DOJ Antitrust Division made a similar comment. So the risks are real and the potential consequences are severe.
Mike: That's really interesting. Just unpacking that a little bit and inviting Michaela also to jump in. Have there been any antitrust agencies in Europe or in the U.S. That have previously challenged company conduct in response to tariffs or other trade regulation activity?
Michaela: So, in the EU, I'm not aware of any cases relating to tariffs directly, but what I can say is the EU Commission has, in many cases, made it very clear that any coordination of any cost component, irrespective of what it actually is, is a very severe competition infringement. And there have been heavy fines in almost every sector in the past. Just a few examples, there's the Windows Fittings Cartel of 2012, where nine producers of window mountings were fined about 86 million euros for operating a price cartel, including on surcharges passed on for raw material costs that has arisen. And that affected the buyers across the European Union and the EA. Similarly, in the truck cartel in 2016. Leading truck manufacturers colluded for 14 years on truck pricing and on passing on the cost of compliance with the stricter emission rules. The Commission has there imposed a record fine of $2.9 billion in total, and this shows the infringement that has taken place about surcharges stemming from regulatory changes. Regulatory changes in particular often bring about antitrust infringements and it should be really tear-capped. There should be care taken where tariffs are introduced that companies don't fall into those traps. Finally, a case I want to mention is the Eric Carvel case, dealt with by the European Commission in 2017. They actually dropped the case twice, once seven years before, and then it was sort of taken apart by the courts. They actually brought the same case, but fixed the pitfalls and actually were able to sort of establish the same infringements that they have alleged in their initial decision. In that case, it was notably large-scale coordinated agreement involving 21 air carriers on colluding, on the introduction, and the amount of fuel and security surcharges. And it was fined a total of ultimately $750 million, which sort of reflects the global scale of the cartel and the level of collusion. As Ed has mentioned before, that's not the end of the story in Europe either. So in addition to the risk for fines, you will have the risk for follow-up damage claims. And those oftentimes are even more costly than the fines imposed by the regulators. Even where companies apply for leniency, which should potentially get rid of the fine altogether, there's still that damage claim thing that is a very serious antitrust risk throughout Europe. The cases I've mentioned, only really a very small selection of cases in this area, and it's only at the EU level there's many other cases brought by the local competition agencies of the European member states. So irrespective of whether those cases would be brought as a cartel case or based on an alleged anti-competitive information exchange case, companies should be very, very careful and seek legal guidance before engaging in any discussion with competitors about how to handle tariffs.
Ed: Yeah, so Mike, you know, with respect to prior enforcement actions against companies for price fixing resulting from the imposition of tariffs, we don't have a prior example, which can probably be explained by the fact that, you know, we're now in a tariff environment that we haven't seen since, you know, I defer to you and Justin on this, but as I understand it, since 1909. So we're in kind of a new economic climate here and what companies are having to deal with. But we do You have an example of an enforcement action, actually a private enforcement action in the nature of a price-fixing class action case filed against companies who were accused of price-fixing in response to the imposition of anti-dumping duties. This resulted from a 2021 Department of Commerce action in which the agency imposed duties suppliers of Malaysian rubber thread. And as a result of that, the company Malaysian rubber thread suppliers were allegedly conspired to all raised prices at the same time in roughly the same amounts. And that triggered a class action filed in the United States. The suppliers were ultimately found to be liable and they were able to get the judgment overturned by the Fourth Circuit. But nonetheless, the plaintiff's lawyer somehow found out about the collusion and brought an action. I don't know why there wasn't DOJ investigation, but in any event, there was a private action. But nonetheless, I think the lack of DOJ action in response to collusion resulting from tariffs, I think that can be explained mostly from the fact that we're just in a new era here.
Mike: And obviously, in an era where most of our listeners are going to have antitrust compliance programs in place, and many of those programs may be effective in most cases, are there still practical risks even if they have a compliance program in place?
Ed: In my mind, there are. And I think the risks are twofold. One, look, you know, we all know that when companies enter under severe economic pressure, that there can be temptations for even rogue employees to cut corners. And that is not infrequently how price fixing conspiracies start. It doesn't start from the top. It starts from someone below the top. And so that can happen. But then, as I also mentioned, Mike you know, even improper communications, the sharing of non-public pricing information, that can be powerful evidence if it comes out and sufficient to trigger an investigation and even liability. And on that point, let me just mention that in the United States, the DOJ or private plaintiffs don't need evidence of an express or direct evidence of an express agreement to fix prices. The DOJ or private plaintiffs can get to a jury on a price-fixing case with evidence of parallel conduct, an incentive to collude, an opportunity to collude, and anything that looks like improper communication. So I think it's really critical for companies to really manage their communications with competitors, which are often done for purely legitimate reasons, but that's how improper communications sometimes arise. So I think managing those communications is critical because the risks are there, even for companies who haven't actually colluded.
Mike: Thanks, Ed. And just as we close out the program, I want to bring in Justin, principal architect for our popular tariff tracker and really always has his eye on the ball in terms of everything tariff related. Justin, can you give us a sense of what we have coming down the pike in the coming months?
Justin: Sure, Mike. I think it's really three things. First, I think we will see sometime later this year a decision from the United States Supreme Court on whether the fentanyl and reciprocal tariffs imposed by President Trump under IEEPA were lawfully imposed, and then what the consequence of that means for importers. Second, I think we're going to continue to see the administration use Section 232, sort of the product-specific tariffs that have already been imposed on aluminum and steel and copper, and expand those to additional industries and products. And the last is continued fluctuation. It seemingly tariffs have settled for the moment, but there are two things that I think will really drive changes in the coming months. The first is the administration continues to negotiate with countries around the world. And so countries with country-specific reciprocal tariff rates may see those rates lowered as they reach trade deals with the U.S. And the second is an example we see from countries like India and Brazil, where the United States is now using tariffs as another foreign policy tool in reacting to what are perceived to be national security threats to the United States, much like we have with secondary sanctions threats. And so as the world and the geopolitical sphere continues to evolve, folks need to continue to watch how the US uses tariffs and reacting to that. And as you mentioned, we're tracking all of that on our tariff tracker Monday through Friday. And so you can always check there for the latest.
Mike: Thanks, Justin. That's really helpful. And I think it demonstrates that the risks that Ed and Michaela have been talking about are going to continue to be and potentially get even increased in severity over the coming months and the balance of the year. I want to thank you very much, Justin, and thank you, Ed and Michaela, for today's episode and all of our listeners for tuning in. For part two of this session, we're going to bring in additional members of our trade and antitrust and competition team to continue the discussion of practical steps that companies can take to mitigate antitrust risks when responding to tariffs. And we hope you can join us. Thank you.
Outro: Trading straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's energy and natural resources or transportation practices please email tradingstraits@reedsmith.com. You can find our podcasts on podcast streaming platforms reedsmith.com and our social media accounts at Reed Smith LLP.
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