Sacrificing Workers on the Competition Altar

September 4, 2007 2:04 PM by S.M. Oliva | Other posts by S.M. Oliva | Comments (1)

The recent Whole Foods victory over the Federal Trade Commission may obscure the harsh truth that when antitrust regulators challenge a merger, the companies involved usually surrender, not fight. Among the "routine" merger reviews is Jarden Corporation's acquisition of K2 Inc. Both companies produce fishing line, and the FTC feared that outright consolidation would deprive consumers of adequate competition in this vital industry.

The FTC's "consent order" with Jarden and K2 forces the companies to divest (sell to an FTC-approved buyer) four brands of fishing line products because, in the FTC's view, the market will fail otherwise:

Entry into the market for monofilament fishing line that would be sufficient to deter or counteract the anticipated competitive effects of the proposed transaction is unlikely to occur in the next two to three years. Although obtaining a source of supply for monofilament line does not constitute a significant barrier to entry, the need to develop brand equity, distribution, infrastructure, and a marketing presence for the brand poses a significant barrier to de novo entry and to entry by participants in adjacent markets. The relatively limited sales opportunities in the monofilament fishing line market make it unlikely that a new entrant could justify the investment required to develop and market a new fishing line brand.

The Proposed Acquisition raises significant competitive concerns in the U.S. market for
monofilament fishing line. Pure Fishing’s sales account for a substantial share of the
monofilament market. Shakespeare is Pure Fishing’s most significant competitor. Consumers have benefitted from competition between Shakespeare and Pure Fishing on pricing, promotional, spending, and product innovations. Thus, unremedied, the Proposed Acquisition likely would cause anticompetitive harm by enabling Jarden to profit by raising the prices of its monofilament fishing line unilaterally, as well as reducing its incentives to innovate and develop new monofilament fishing line products.

What caught my attention about this order is the detailed procedures imposed by the FTC regarding current K2 and Jarden employees. In order to establish a new competitor by fiat, the FTC reasoned it was necessary to ensure the buyer it approved had access not just to physical plant, but also to "key employees." To that end, the FTC order requires Jarden to make its employees--including confidential personnel files--available to the new acquirer for up to one year. During that time, Jarden may not enforce any employment contract that would prevent an employee from jumping to the FTC-backed firm. Here's the operative paragraph:

[D]uring the Employee Access Period, [Jarden shall] not interfere with the hiring or employing by the Commission-approved Acquirer of Divestiture Assets Key Employees, and remove any impediments within the control of Respondents that may deter these employees from accepting employment with the Commission-approved Acquirer, including, but not limited to, any noncompete or nondisclosure provisions of employment or other contracts with Respondents that would affect the ability or incentive of those individuals to be employed by the Commission-approved Acquirer. In addition, Respondents shall not make any counteroffer to a Divestiture Assets Key Employee who receives a written offer of employment from the Commission-approved Acquirer; (Italics added.)

So in order to "protect" competition for the benefit of fishing line consumers, the FTC is openly restraining competition among employees of the fishing line producers. An employee who receives an offer from the new firm cannot, by the FTC's order, use that offer to negotiate a better deal to stay at Jarden. This violates the rights of the employees, who are not parties to the FTC's proceedings and thus received no due process.

From a privacy standpoint, it's also disturbing that the FTC-approved buyer will have what appears to be unrestricted access to Jarden's confidential personnel files as the new firm decides which employees it wants to poach. Again, the employees are entitled to no due process, because the FTC's mission to "protect competition" trumps all other concerns.

Frankly, if you accept the FTC's authority to issue this order, then you must also concede that the Commission could outright order people to work for any company in the name of "protecting competition." The FTC can even dictate salaries and other terms and conditions, since according to the Jarden order, existing employment contracts are unenforceable.