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I am late in joining this thread and will add only a few observations to supplement the many good comments already here:

1. Competitor collusion and express agreements to restrict the freedom of each to compete (i.e., horizontal contractual dealings) do indeed expose the colluding parties to potentially serious liabilities under the Sherman and FTC Acts. If that is what is going on here, then Mr. Arrington has fired a major warning shot to those involved asking, in effect, "are you insane to let yourselves get caught up in this sort of activity?"

2. The irony here is that competitors are completely free to have contacts with one another, to discuss industry problems, and even to work on solutions for how best to handle such problems, provided that such contacts aren't made for an anti-competitive purpose. This is how trade associations work, among other things, and angel investors can and do meet all the time to discuss common issues and problems. Such benign meetings and contacts are very different from colluding to restrict their ability to compete freely in the marketplace through agreements to suppress valuations, etc.

3. Parallel action by competitors is in itself normally quite harmless and does not subject them to liabilities (for example, the fact that angel investors tend to use common sets of investment documents, tend as a group to dislike convertible notes, etc.). Companies having nothing to complain about legally from the fact that a particular angel investor happens to engage in practices in common with others in the industry that founders happen not to like. All this changes, though, if the competitors (i.e., the angel investors) have engaged in suspicious activities such as secret meetings among themselves to discuss overt ways to limit competition, etc.

4. Nothing under the law stops any one of these angel investors from deciding as a business matter to form a new fund along with others of such investors and to engage through that fund as a competitor in the venture financing industry. In such case, the investors are no longer competitors and have simply combined forces to compete as a different entity in the industry. If, however, the parties effectively remain competitors and simply form a jointly controlled venture whose aim is to serve as a vehicle by which they might collude in suppressing competition, that vehicle would be unlawful.

Putting all this together, the normal give and take among the myriad angel investors in the Valley and elsewhere is lawful and beyond reproach, even when they do meet to discuss problems. Meetings in a smoke-filled room as part of concerted efforts to restrict normal competitive activities by the participants, on the other hand, are almost blatantly illegal on the face of it and especially so when the participants are among the most prominent players in the industry.

It may well be that some or most of these participants hadn't really realized that they were moving from the benign to the illegal in participating in such meetings over time, and this is where it seems that Mr. Arrington is doing a good turn for them by calling them out before they do something that is irretrievably wrong. Just speculating on this last point but that is how the tone of the piece strikes me.




I am very appreciative that you spend your time sharing here when you could be elsewhere, in six minute increments.

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"3. Parallel action by competitors is in itself normally quite harmless and does not subject them to liabilities."

Not sure what your sources are, but courts have ruled that parallel action can be sufficient evidence of conspiracy under Section 2 of the Sherman Act. See e.g. American Tobacco v. United States (1946), available here:

http://supreme.vlex.com/vid/american-tobacco-v-united-states...

The Supreme Court wrote:

"[The conspiracy's] existence was established, not through the presentation of a formal written agreement, but through the evidence of widespread and effective conduct on the part of petitioners in relation to their existing or potential competitors."

If I remember correctly from my anti-trust class last year, the American Tobacco precedent still stands. You don't need written or audio evidence to get a conviction; anti-competitive behavior in the marketplace is sufficient.

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Concerted action can take as many forms as human imagination and ingenuity permit and does not require a formal agreement. And parallel action, coupled with other evidence of collusion (e.g., secret meetings or other suspicious conduct) can be the basis of an antitrust violation.

That said, normally, the mere fact of parallel action is not problematic unless there is more to show suspicious activities. The venture financing industry has many customs and patterns of long-standing, and its participants will happen to conform to them for a variety of reasons having nothing to do with collusion aimed at suppressing competition.

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So essentially the red flag here is the secret meeting, right? That is, if they had acted in exactly the same way but openly, with a contract and a trade association and so on, this would not be illegal?

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My impression is that the Supreme Court's significantly pared that back in further cases. Copperweld Corp. v. Independence Tube (1984) held that parallel action was inconclusive evidence of antitrust violations, though it could serve as circumstantial evidence. In Bell Atlantic v. Twombly (2007), the Court quoted that approvingly, and held that an allegation of parallel action, without a further plausible allegation of a conspiracy to engage in the parallel action consciously, wasn't even enough to state an antitrust claim sufficient to survive immediate dismissal, let alone prevail.

I'm hardly a legal expert, but I do recall some law-prof bloggers around 2007 claiming that it was confirmation that the parallel-action-suggests-conspiracy rule was dead and buried, even if not explicitly overturned.

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I find this somewhat dubious; I wasn't there, but if I was one of those guys, I'm not sure I'd continue the "evil meeting" after Michael stumbled in uninvited. If he came after the meeting ended, why weren't they all "just about to leave."

Having said that, I'm sorry if my confusion gives a way my ignorance of the subject, but are these angels selling anything to a marketplace? I thought angels invested their money. If that's the case, aren't they colluding to the terms of their buying, as a group? Or at least to loosely manage the terms of buying? If that is illegal, why does it apply to angel investing but not, say, Groupon? What I don't understand is what is their "price" that they are colluding to "fix"? I thought antitrust was for the collusion for the price asked, not price willing to pay.

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Interesting questions... IANAL, but I imagine they're colluding to bring down the valuations of startups, therefore essentially fixing the "price" of their money, to be paid for in startup equity.

If I, and others, say your company is worth a million dollars, then I'm fixing the price of my $500,000 at 50% of your company.

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IANAL(E), but this scenario would seem to be more of a concern if startups in Silicon valley got together over dinner to deny deals that didn't offer similar terms and prices in dollars for securities of all startups represented at said dinner simultaneously.

As for angels fixing the "price of their money" I don't understand how antitrust applies to this anymore than it would to, say, how LIBOR is determined.

If antitrust applies to colluding on the dollar amount to be paid OUT instead of price asked for money coming in, then if I start a boycott of something (colluding to pay $0) am I guilty of violating antitrust laws?

As I understand it (not much, I admit), antitrust applies to goods and services, not cost of money. If antitrust applied to cost of money, the Federal Reserve would not exist since it's basically an extension of the member banks that make up its institutional board of directors (not board of governers). All they do is get together and fix the price of money to be printed and lent out to member banks.

Also, this whole "I stumbled in on a secret meeting of powerful men conspiring to start a revolution" thing is somewhat suspect; throughout history this gambit, if it actually happened that way, is usually either desperate grab at 15 minutes of fame (which seems unlikely given Michael's popularity), an attempt to gain instant credibility on some esoteric but useful new subject ("I was the only outsider privvy to what happened there, so you can trust me") or, unfortunately, a cynical move feigned by the men in the room to inspire hasty and possibly faulty reactionary stances by the supposed target of their "envy".

I could be wrong though. I just can't believe guys who are careful enough to get to such a position in life would all simultaneously get so careless. On the same day. In the same place.

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I don't know if care has a lot to do with it. A lot of these folks got successful by taking risks without deep consideration of the consequences (for better or worse). That's why they pay lawyers to tell them when they're pushing the boundaries too much, but in this case the lawyers obviously weren't in on the proceedings.

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> if I start a boycott of something (colluding to pay $0)

http://j.mp/dividedby0

(Unless of course you actually get them to give it to you for nothing, which is generally not the point of a boycott…)

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Think of the stock market. That's certainly a marketplace. It's made up of investors seeking to earn a return on their money by investing in companies. Think of the illegalities involved in collusion to manipulate the stock market. Now think of Silicon Valley as a less formal/regulated stock market...

With Groupon nobody is asked to not buy or otherwise participate in the market unless done through Groupon. Instead, it's like a grocery store co-op; members pool their money to get more buying power. This doesn't mean they agree to refrain from shopping elsewhere, as that would be collusion/conspiring to produce a market effect. IANAL

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If I have an investing club and we come to define an investment approach, say, what stocks we like and what we think they should be valued at, are we colluding to price fix the market? If I think a company is over priced and I am in charge of executing trades for my investing club, whose members unanimously agreed not to buy the stock in question until it fell down say, $20 more in price - are we colluding? Yes. Colluding to price fix? No. We're simply colluding not to participate in the buy side. That may or may not lead to sellers slowly changing their asking price. But that's a two-way street. I don't see the illegality according to anti-trust. Now if every major instututional house/hedge/mutual/pension fund that owned that stock got together and colluded to refuse to SELL us any stock until we agreed to their higher price, that I understand is illegal. They are fixing the price literally. But I don't see how us refusing to participate in a transaction on the buy side is illegal whether we have 5 members or 5 million.

Saying that the angels are colluding to price fix buys into Michael's assertion that "together, the men in that room account for nearly 100% of all angel deals". That means that their "deals" are the commodity in question, and they are free to do as they wish. If it's their money, then it's hard to make the claim that their money is the market. There's certainly more money in the world than theirs.

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"Look, you and I both know your company is worth $50 million. But I only want to pay $10 million, and I've already worked out a deal with my competitors so they won't bid any more than that either. We own the market for investment, so you can take it or your company can die for lack of funding."

You don't see a problem with this kind of artificial market manipulation? This is no longer a market; it short circuits true capitalism and only serves to siphon gains from the seller (in this case, the company's founders) to the buyer, who will turn around and effectively try to resell (or otherwise exit) the company for profit.

Everyone seems to be convinced that price fixing only applies to sellers. That's wrong. It firmly applies to both selling and buying. It's fundamentally about market manipulation; taking steps to undermine the economy of the system for direct personal gain. That kind of behavior destroys wealth and erodes confidence in the marketplace.

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I'm ignorant enough to have the same question in my mind.

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Grellas, what's your take on this Quora comment? In a nutshell, it's not illegal for collusion on the buy side, only the sell side:

Tarun Nimmagadda, Mutual Mobile Co-Founder, COO

http://www.quora.com/Who-are-the-Super-Angels-that-Michael-A...

"The article was a fun read, but it is a false claim that this is illegal. Collusion, price fixing, and dividing markets is only illegal on the selling side. Think about how people and groups are able to band together for purchasing power and special treatment when buying goods/services. Its not illegal.

Worth noting thought that if this price manipulation happened in relation to a company with over a 100 investors, SEC regulations would begin to apply and this behavior would be illegal"

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That comment was made out of ignorance. Antitrust laws are by no means limited to sellers only.

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Interesting, thanks.

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"Collusion, price fixing, and dividing markets is only illegal on the selling side."

IANAL, but didn't Standard Oil got broken up largely for being a monopsony? In fact the first two complaints from the DoJ were about sell-side issues:

"Rebates, preferences, and other discriminatory practices in favor of the combination by railroad companies; restraint and monopolization by control of pipe lines, and unfair practices against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competition, such as local price cutting at the points where necessary to suppress competition; [and] espionage of the business of competitors, the operation of bogus independent companies, and payment of rebates on oil, with the like intent."

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I know this was pointed at grellas, but I think this is a misunderstanding when we look at price fixing and collusion. The illegality of collusion is secretly forming agreements to benefit competitors at the expense of other parties. Words like defraud can succinctly help you understand whether it is illegal or not when looking at these agreements.

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Comment value multiplier for LEGAL issues on HN:

Hacker with an opinion about what the law should be: 0

Law student: 0

Harvard Law student: 0

Experienced practicing lawyer, but not in that specialty or venue: 0

Experienced practicing lawyer in that specialty in that State or Federal venue: 1 to -1 (depending on what benefits his client base)

I am the State or Federal Prosecutor who decides which cases to pursue or not: 1000

then multiply by

I am not fully informed of all the Facts: 0

So far this includes everyone, including me.

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Grellas, would there have to be evidence that the participants were acting anti-competitively, or is being in the room enough? Arrington says that a few of the folks there were uncomfortable with what was going on, and were maybe there just to see what was happening.

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Assuming the meeting had an illegal purpose (which is a major assumption at this point), one might infer that anyone present was complicit in that illegal purpose. In my view, that by itself would not normally be enough to subject someone to liability, especially if the participant disclaims affiliation with the group and thereafter does not act in concert with it.

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The only observation I've read is that several angels in a bar didn't want to talk to Mike Arrington about why they were meeting. New fund, maybe. Shared problems about Silicon Valley deal flow and seed price inflation, likely.

Collusion is a bit of a jump, and suggests far more market power than a roomful of angels can have over state, regional, national, or global startup macro pricing trends.

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The Wikipedia summary of Section 1 of the Sherman Act is a decent read: http://en.wikipedia.org/wiki/Sherman_Antitrust_Act#Violation...

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Does it matter if the participants have monopoly power over the market? I have a hard time believing Arrington's claim that "ten or so" angels control "nearly 100% of early stage startup deals in Silicon Valley". If they control lets say only 50% of this market would it still be illegal collusion?

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It is not required that the participants have monopoly power for them to transgress the law on this point. I agree with you that the "nearly 100% of the early stage deals in Silicon Valley" statement is wildly overstated but this should not affect the fundamental legal analysis here.

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