October 14, 2008

Antitrust Pitfalls to Avoid: Dealing with Potential Insolvency of Key Trading Partner

Fred Houwen of Reed Smith recently wrote this in a firm alert:

In the current economic climate, businesses are likely to take a keen interest in the ability of their suppliers and customers to meet their obligations. This can extend beyond purely financial obligations to include the protection of critical links in the supply chain. A manufacturer may, for instance, be very dependent on one of its suppliers for a specialist part that cannot readily be obtained elsewhere, or a supplier may rely heavily on an intermediary to reach ultimate consumers.

In such circumstances, it may be tempting for businesses to confer with competitors exposed to the same risks by the potential insolvency of a common supplier, customer or other trading partner. Such discussions might typically arise in the context of a trade association meeting, or in more informal situations. Topics might include the possibility of taking coordinated action to prevent their common trading partner from going out of business.

It should be borne in mind, however, that the ordinary antitrust rules continue to apply in such situations. The disclosure to competitors of competitively sensitive information–such as trading terms with the troubled business, likely future orders, or the common agreement of future trading terms–is likely to be considered to be a serious breach of the antitrust rules, notwithstanding the context.

Companies may well be able to take steps to try to prevent their trading partners from becoming insolvent, on an individual basis, but should be particularly wary of getting too close to their competitors without first examining the antitrust implications. Deciding what course to take when faced with the potential insolvency of a trading partner is never straightforward. Antitrust concerns that may arise from contacts with competitors in this connection further complicate the issues. The safest course of action is therefore to seek legal advice at an early stage.