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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Transcript:

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...