Washington D.C. Unfair Internal Transactions: An Overview

In the U.S. legal system, a "related party" or "affiliate" refers to an individual or entity with a close association with a company. This can include directors, executives, significant shareholders, and subsidiary companies. Transactions between these related parties are often subject to a higher level of scrutiny due to the potential for conflicts of interest. Regulators closely examine these dealings to ensure they are conducted at arm's length and do not unfairly benefit the insiders at the expense of the company or the market.

A "corporate group" is a collection of companies under common ownership or control, which is the primary setting where unfair internal transactions can occur. While such structures can create efficiencies, they also present opportunities for anticompetitive coordination. The legal framework seeks to prevent a parent company from unfairly using its control over subsidiaries to disadvantage independent competitors or other stakeholders. Therefore, transactions within the group must be carefully managed to avoid any appearance of impropriety or market manipulation.

Unfair pricing practices are prohibited to prevent large corporate groups from gaining an unfair advantage. The Robinson-Patman Act, an amendment to the Clayton Act, specifically prohibits price discrimination. A seller cannot charge different prices to different purchasers for the same commodity if it substantially lessens competition. This ensures that smaller retailers are not driven out of business by larger, more powerful rivals receiving preferential pricing.

Corporate self-dealing occurs when a person in a position of authority uses their influence to engage in a transaction that benefits them personally at the company's expense. This is considered a breach of their fiduciary duty to the company and its shareholders. While not strictly an antitrust issue, self-dealing is a key aspect of unfair internal transactions because it can distort the company's decision-making and lead to inefficient, non-market-based outcomes.

Certain anti-competitive acts, such as price-fixing and market allocation, are considered so inherently harmful to competition that they are deemed illegal "per se," without any need to prove their negative effects. This means the act itself is sufficient proof of a violation. In contrast, most other practices are judged under the "rule of reason," which requires a detailed analysis of the practice's actual or likely effect on competition. Under this rule, courts weigh the pro-competitive benefits against the anti-competitive harms to determine the net impact on the market.

The central question in any antitrust violation is whether the transaction or act harms competition. Factors considered include the size of the transaction, the market share of the companies involved, the duration of the practice, and the overall effect on market structure. The goal is to determine if the act creates a dangerous probability of monopolization or a substantial lessening of competition. A thorough market analysis is essential for regulators and courts to make an informed decision.

Violations of federal antitrust laws can lead to severe consequences. The government can impose large fines, and individuals involved can face criminal charges, including imprisonment. Additionally, those harmed by the violation, such as competitors or consumers, can bring civil lawsuits to recover treble damages, which is three times the amount of the actual harm suffered.

Beyond fines and prison sentences, courts can order various remedies to correct the anti-competitive harm. These can include mandatory divestiture of assets, requiring a company to sell off certain parts of its business to restore competition, or cease-and-desist orders to stop the illegal conduct. In cases of corporate self-dealing, a court may order the breaching party to "disgorge" or give back any profits they gained from the improper transaction, ensuring that no benefit is derived from the illegal activity.