WASHINGTON (07/05/2000) - The U.S. Federal Trade Commission (FTC) made it clear last week that it's still learning about business-to-business e-commerce exchanges - and that it's in no hurry to regulate the fledgling online markets.
But during a two-day workshop on B-to-B exchanges here, FTC officials and legal experts also made it clear that the exchanges will run afoul of antitrust laws if they become industry cartels that fix prices and exclude newcomers.
"The promise of huge efficiencies [from B-to-B] is certainly tantalizing. On the other hand, I can't help but wonder if there might be a serpent in the garden of efficiencies," namely anticompetitive activities such as price signaling, collusion and freezing out competitors, said FTC Commissioner Sheila F. Anthony.
The FTC already has opened a preliminary inquiry into the Covisint exchange being developed by the Big Three automakers, and other federal agencies are investigating the airline industry's proposed Orbitz.com online ticketing venture and a business-to-business marketplace planned by six large meat processors. But so far, no antitrust charges have been filed in any of those cases.
Legal experts at the FTC workshop said the keys to avoiding antitrust problems are to make sure access to a Web exchange is open, so that members are free to come and go, and to keep the prices and trade secrets of all participants confidential. They said exchanges should have firewalls - both electronic and procedural partitions - to keep competitors from learning one another's prices in electronic catalogs, bids and auctions.
MetalSite LP, a Pittsburgh-based metals market formed nearly two years ago, already has extensive controls and audits intended to keep it out of antitrust trouble. Plus, every employee must sign an antitrust agreement and take a class on antitrust issues, said Patrick Stewart, MetalSite's president and CEO.
But Stewart said he's worried that new exchanges are "forming so quickly that they're blowing by the basics of running a business."
Lawyers who have been counseling the new exchanges said their founders are usually aware at the outset of the need to avoid antitrust problems. But when salespeople from an exchange's member companies start discussing how prices will be displayed on the Web pages, "collusion is certainly possible" unless an antitrust counsel intervenes, said Joel M. Mitnick, a partner at Brown & Wood LLP in New York.
As a general rule, information sharing among rival suppliers is a red flag for antitrust enforcers if the information involves prices, costs or strategic plans. One concern is price signaling, a practice in which competitors display the price hikes or discounts they plan to make in the future in an attempt to get other industry players to go along.
For example, in the 1993 case of U.S. vs. Airline Tariff Publishing Co., the government charged that airlines were signaling future price increases - and punishing discounters - via an online database. The defendant airlines agreed to a consent decree that prohibited price signaling.
Another way to stay out of antitrust lawsuits is to identify which industry players will be hurt by an exchange and minimize the pain they're likely to feel, said Roxann E. Henry, a partner at the Washington law firm Howrey Simon Arnold & White LLP.
As FTC Commissioner Thomas B. Leary put it, B-to-B exchanges will create winners and losers, and "when there are losers out there, there will be litigation."
The FTC should also be concerned about whether the inevitable shakeout and round of mergers among competing B-to-B exchanges will result in having just one online marketplace in each vertical industry, said Steven C. Salop, professor of economics and law at the Georgetown University Law Center in Washington. "Once one gets a monopoly, that monopoly will be very hard to dislodge," he said.
FTC officials hinted that they'd like to see competition among multiple exchanges in each industry, with participants free to switch among them. "The key will be [interoperability] standards so that customers can communicate with multiple exchanges," said Tim Stojka, chairman and CEO of Chicago-based Commerx Inc., which runs multiple industrial exchanges.