On November 21, 2011, the Federal Trade Commission (“FTC”) settled allegations of violations of Section 5 of the Federal Trade Commission Act, 15 U.S.C. 45 (“FTC Act”) against Pool Corporation (“PoolCorp”). PoolCorp and the FTC reached a proposed consent agreement resolving charges that PoolCorp used exclusionary acts and practices to maintain its monopoly power in the pool product distribution market in violation of Section 5.
The Pool Product Industry
This case involves the wholesale distribution of pool products in the swimming pool industry, which had an estimated value of $3 billion in 2010. Manufacturers depend on distributors to sell the products, while distributors allow manufacturers to operate their factories year-round by purchasing large quantities of pool products throughout the year, despite the seasonal nature of the pool industry. In turn, distributors extend credit and provide quick delivery of pool products to thousands of retailers, most of which are “mom-and-pop” businesses that don't have the resources to purchase directly from manufacturers. There are about 100 manufacturers of pool products but only three major manufacturers produce the full range of pool products. These three manufacturers collectively occupy over 50% of sales. To be successful, it is critical that a distributor sell the products of at least one of these three major manufacturers. PoolCorp is the world's largest distributor of pool products used in the construction, renovation, repair, service, and maintenance of residential and commercial swimming pools. The FTC concluded that PoolCorp's market share exceeded 80% in some areas and that Pool Corp accounted for 30% to 50% of most pool supply manufacturers' sales, making it by far their largest customer. The FTC alleged that PoolCorp, therefore, has substantial market power (the power to exclude competition).
PoolCorp's Alleged Conduct
The FTC's administrative complaint contends that in 2002, PoolCorp acquired and eliminated it's only competition in the Baton Rouge, Louisiana area. The FTC alleged that PoolCorp abused its market power by using the clout derived from this market power to prevent its suppliers from selling pool supplies to distributors that were trying to enter the market. In 2003, a new competing distributor emerged in the Baton Rouge area. PoolCorp allegedly responded by notifying all major manufacturers that it would stop dealing with any manufacturer that sold products to the new distributor. Furthermore, the FTC asserts that it threatened to terminate purchase and sales not only in Baton Rouge, but across the country. Such a threat posed significant enough of a loss to be catastrophic to even major manufacturers, a risk that could not be offset by a new entrant. As a result, the three most critical manufacturers refused to deal with the new entrant, which subsequently went out of business in 2005. PoolCorp allegedly used similar exclusionary practices in other local markets with the purpose of excluding new rivals and maintaining its monopoly power in local markets.
According to the FTC, by implementing an exclusionary policy that threatened manufacturers with contract termination if they also supplied new distributors, PoolCorp foreclosed new distributors from obtaining pool products from manufacturers that represented over 70% of all pool product sales, thus impeding market entry by new distributors. The FTC alleged the following anticompetitive effects: (1) increased prices and reduced output of pool products; (2) impeded PoolCorp's rivals from entering or expanding their sales in the wholesale distribution market; and (3) reduced the choice of suppliers available to retailers.
The proposed Order contained in the Consent Agreement prohibits PoolCorp from: (1) conditioning PoolCorp's sale or purchase of pool products, or a manufacturer's membership in PoolCorp's preferred vendor program on the manufacturer's refusal to sell products to any other distributor other than PoolCorp; (2) pressuring manufacturers to refrain from or limit their sales to other distributors; and (3) discriminating or retaliating against a manufacturer for selling or intending to sell pool products to other distributors.
Statements of Commissioners
The Commission vote approving the settlement and consent order was 3-1 with a dissenting statement issued from Commissioner J. Thomas Rosch. The approving Commissioners concluded that PoolCorp had monopoly power in many local distribution markets and that PoolCorp's threats to pool product manufacturers that it would no longer distribute their products if a manufacturer sold to a new distributor was harmful to competition. Consequently, suppliers/manufacturers, despite their preference to maintain a broad distribution network declined to add distributors because they feared retribution from PoolCorp. This strategy significantly increased a new entrant's costs of obtaining pool products. Furthermore, such actions to foreclose new entrants from conducting their pool product distribution business had no legitimate justification, and the Commissioners assessed consumer harm because new entrants were prevented from providing a competitive restraint to PoolCorp's monopoly prices, and were prevented from providing high quality service to retailers, so ultimately, consumers had fewer choices and were forced to pay higher prices for pool products.
Commissioner Rosch argues that there was insufficient evidence that an antitrust violation occurred and that the alleged threats to manufacturers from PoolCorp were not even successful. In his estimation, the evidence showed that PoolCorp's demands were not honored by manufacturers, who instead, made unilateral decisions not to supply new entrants for legitimate reasons (i.e., the new distributor was not desirable to the supplier because it did not have adequate facilities, a successful operational history, or favorable credit history). Rosch argues against entering a consent decree due to lack of evidence establishing causation between PoolCorp's alleged threats and action taken by manufacturers, coupled with legitimate and plausible explanations for manufacturer decisions not to sell to new distributors. He also argues that no de novo entrants were actually excluded, and that there was no evidence of anticompetitive effects or consumer injury (such as price increases or service degradation), thus accepting a consent decree would not be in the public interest.
Despite the dissent, this case is noteworthy because it provides more insight into the way the Commission applies Section 5 of the FTC Act. Section 5 is broader and more encompassing than the Sherman or Clayton Acts, and is meant to cover conduct violating the spirit of the antitrust laws. The settlement agreement is important because the use of Section 5 signals that the FTC is becoming more enforcement oriented and is willing to extend beyond the antitrust laws despite the past twenty years or so of court precedent which has narrowed private antitrust enforcement. The settlement agreement indicates that the Commission will continue to actively consider whether it may be appropriate to exercise its full Congressional authority under Section 5. This means that cases like PoolCorp, which might not have enough evidence to successfully litigate under the Sherman Act or, are still likely to be enforced by the FTC under a broader unfair competition law. Accordingly, the willingness of the FTC to bring cases under Section 5 means that antitrust advice based solely on the Sherman Act are no longer sufficient because the FTC may investigate and take action against conduct that may not violate the Sherman Act. As the PoolCorp case demonstrates, the FTC's expansive view of Section 5 requires companies with significant market power to review their antitrust compliance programs. Companies should be aware that using their market clout to exclude rivals from the market place could lead to unwanted government investigations. Although many exclusive supply agreements may be legal, when favorable terms negotiated with a supplier foreclose the buyer's rivals from competing, especially when the buyer has market power, there is a risk of government investigations and litigation. Therefore, companies in these situations should seek experienced legal counsel.