In Schering-Plough Corp. v. Federal Trade Commission, 2005 U.S. App. LEXIS 3811, (11th. Cir. 2005), the Eleventh Circuit addressed the antitrust implications of settlements of patent suits in the context of the Hatch-Waxman regulatory regime that involve payments from the patent holder to the alleged infringer. Under the Hatch-Waxman Act, a generic drug manufacturer may be approved to market its generic drug without expensive and time-consuming safety studies if its drug is the bioequivalent of a pioneer drug that is already approved for marketing. In order to receive this approval, the generic manufacturer must certify that the relevant patents on the brand name drug are either invalid or will not be infringed by the generic drug. The pioneer manufacturer is then notified of the generic's desire to enter the market; if the pioneer manufacturer sues for patent infringement within forty-five days of receiving notice, Hatch-Waxman imposes a thirty month stay on FDA approval of the generic.

In this case, Schering-Plough ("Schering"), manufactured and marketed a pioneer drug on which it had a patent (the "'743 patent"). Upsher and ESI manufactured generic versions of the drug and each certified that either Schering's patent was invalid or that its drug did not infringe it. Schering promptly filed patent infringement suits against both companies. Prior to trial in either suit, Schering reached a separate settlement with each company. Neither settlement fit the conventional mold of "reverse" payments by the patent holder to the generics to stay off the market. Rather, in each case Schering agreed that the generics could enter the market well in advance of the expiration of the '743 patent - nearly six years ahead in the case of Usher and three years in the case of ESI - and then paid them for exclusive licenses on other products and, in ESI's case, for its attorney fees. Specifically, based on internal and independent valuations of its profitability, Schering paid Upsher $60 million for a license for Niacor, a cholesterol-reducing drug. In negotiating with Upsher, Schering expressly and adamantly proclaimed that it would not pay Upsher for the purpose of keeping them off the market. In the case of ESI, at the suggestion and with the approval of the judge in the case, Schering paid ESI $5 million for attorney fees, $15 million to license other products from ESI, and agreed to pay ESI $10 million if its generic version was approved by a certain date. In both cases, the settlement agreements terminated the patent infringement litigation between the parties.

The FTC filed a complaint alleging that these agreements violated the FTC Act and the Sherman Act. An FTC Administrative Law Judge found the agreements to be lawful settlements of patent infringement suits. On appeal the full Commission held the agreements violated the FTC Act and the Sherman Act. Applying a rule of reason analysis, the Commission concluded that Schering's payments to generics were not "legitimate consideration" for licenses, that they were in fact part of a quid pro quo to delay entry dates, and that the agreements harmed competition and consumers as a result. According to the Eleventh Circuit's interpretation of the Commission decision, the Commission essentially "prohibited settlements under which the generic receives anything of value and agrees to defer its own research, development, production or sales activities."

In his opinion for the Eleventh Circuit, Judge Peter Fay, reviewing the Commission decision under a substantial evidence standard, first noted the Eleventh Circuit's recent holding in Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294 (11th Cir. 2003), that while payments made to an alleged infringer as part of a patent litigation settlement are anticompetitive in the context of patent litigation, the anticompetitive effect may be no broader than the patent's power to exclude. As such, Valley Drug dictates that the proper analysis of antitrust liability requires an examination of: (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects. By contrast, both the Commission and the ALJ approached the agreement under a more traditional rule of reason analysis. Judge Fay thus concluded that the Commission's approach was inconsistent with the binding precedent of Valley Drug and ill-suited to analysis of Schering's agreements because of the inherent exclusionary nature of patents. According to Judge Fay, the Commission "clearly made its decision before it considered any contrary conclusion."

Judge Fay proceeded to apply the Valley Drug approach to Schering's agreements. He first noted that patents are presumed valid, that patents are the power to exclude others, that there was no dispute that the '743 patent enabled Schering to exclude infringing products from the market, and that the FTC acknowledged that it could not prove that the generic manufacturers could have entered the market prior to the expiration of Schering's '743 patent. Thus, Judge Fay concluded that Schering was in possession of valid patent that had the potential to keep infringing drugs off the market until its expiration on September 5, 2006.

The opinion next considered the scope of the agreements at issue. With respect to the Upsher agreement, Judge Fay concluded that there was not substantial evidence to support the Commission's conclusion that the license agreement was a sham. Rather, the evidence, which included independent expert testimony, showed that $60 million was "fair value" for the license, even though a product similar to Niacor, contrary to the predictions of market analysts, ultimately performed poorly when marketed by another company. The Eleventh Circuit thus found that the Commission's conclusion that Schering's license agreement with Upsher was a sham was "not supported by law or logic." With respect to the ESI settlement, Judge Fay remarked that the Commission's opinion ignored the strength of the underlying patent suit, that the agreed upon date of entry for ESI reasonably reflected the strength of Schering's case, and that the Commission's ruling is inconsistent with the general policy of encouraging settlements.

The Eleventh Circuit next considered the overall anticompetitive effects of Schering's agreements. Citing California Dental Ass'n v. FTC, 526 U.S. 756 (1999), the Eleventh Circuit noted that an antitrust plaintiff must show that a restraint of trade has actual anticompetitive effects. Patent settlement agreements are recognized as generally efficiency-enhancing agreements. They avert a number of private and public costs and decrease the uncertainty that may surround a drug manufacturer's ability to develop and market drugs in the "caustic environment" of patent litigation, thereby increasing the incentive to innovate. The Commission failed to consider the exclusionary power of the '743 patent. As Fay noted, as long as the settlement and entry date are within the scope of the patent and represent a reasonable compromise based on the strength of the patent, then the actual anticompetitive effects do not amount to an illegal restraint of trade. Given the exclusionary power of patents, settlement payments to delay generic entry may be a reasonable, efficiency-enhancing method of resolving patent infringement litigation.

As Judge Fay further explained, payments from a patent holder to an alleged infringer are a natural consequence of the Hatch-Waxman regime. Since Hatch-Waxman grants generic manufacturers standing to challenge the validity of a patent without incurring the cost of entry or risking damages from possible infringement, potential infringers have considerably more leverage than they would in the usual case. In the present case, the Eleventh Circuit concluded that the agreements, which allowed generic entry prior to the expiration of the '743 patent, fell well within the protections of the '743 patent and were therefore not illegal.

In sum, the Eleventh Circuit found the license payments from Schering to Upsher and ESI to be legitimate and bona fide and not simply shams to delay generic entry. There was no indication that Upsher and ESI's products could have entered the market prior to the expiration date of the patent, and the settlement agreements stipulated to entry prior to the expiration of the patent. Finally, settlements of litigation are favored generally and patent settlements within the scope of the patent at issue are favored particularly since they may enhance efficiency and spur innovation.

Authored by:
Carlton A. Varner
213-617-4146
cvarner@sheppardmullin.com

and

Anik Banerjee
213-617-4124
abanerjee@sheppardmullin.com

In a reversal of the dismissal of the Department of Justice Antitrust Division (DOJ) complaint, alleging violations of Section 1 and 2 of the Sherman Act and Section 3 of the Clayton Act, the Court of Appeals for the Third Circuit found Dentsply International Inc. ("Dentsply") guilty of illegal monopoly power maintenance. DOJ opted not to appeal adverse district court rulings on the Sherman Act Section 1 and the Clayton Act Section 3 claims. The court remanded for the entry of the injunctive relief prayed for.

In United States v. Dentsply International Inc., No. 03-4097 (3d Cir.), decided February 24, 2005, the court held that Dentsply was unlawfully maintaining its monopoly position in a market described as "prefabricated artificial teeth in the United States." The district court had held that while Dentsply held a market share position of 75% - 80% for over ten years, and was 15 times larger than its next closest competitor, it had nevertheless not exercised market power in the relevant market. The district court found that while Dentsply had imposed exclusive dealing arrangements, referred to as "Dealer Criterion 6", which required dealers to agree not to handle competing lines of artificial teeth, competing manufacturers had ample opportunities to sell directly to the dental labs, with whom the dealers also dealt¹. Because of the ability of competing manufacturers to substitute into direct selling channels of distribution, Dentsply would be unable to exercise market power.

The Third Circuit, however, ruled that Dentsply indeed had monopoly power in a relevant market consisting of the total sales of artificial teeth to dental laboratories and dental dealers combined. It had clearly expressed plans to maintain this power, and had been able to do so by preventing entry into "gateway" dealers by precluding Dentsply dealers from adding new competitive tooth lines that could constrain Dentsply's pricing abilities. The court did agree with the district court, however that the use of "Dealer Criterion 6" was pretextual, exclusionary, and not business justified. The court found many similarities between the case and Le Page's, Inc. v. 3-M, 324 F.3d 141 (3dCir. 2003).

By prohibiting its dealers from adding competitive lines of artificial teeth, Dentsply was able to deny transaction cost efficiencies to its substantially smaller rivals that could be derived from dealing through dental dealers. The impermeability of Dentsply's 75% - 80% market share, from 1993 to the present, was evidence of monopoly power maintenance, and the creation of artificially imposed barriers to efficient scale entry by its smaller competitors.

The court also noted that Dentsply was able to successfully impose a series of price increases within the market without fear of not being followed by its smaller competitors. Thus, it had effectively imposed a price umbrella on the market. As the Third Circuit noted, Dentsply has "effectively choked off the market for artificial teeth, leaving only a small sliver for competitors"². The district court "erred when it minimized that situation and focused on a theoretical feasibility of success through direct access to the dental labs."³ It also noted that because of advances in dental medicine, the prefabricated artificial tooth market had little or no growth potential. Thus, the static nature of market share maintenance was an imposing element of Dentsply's ability to shape the market to its liking.⁴

The decision suggests that it is a workable strategy for a monopolist to maintain the status quo, without eliminating all competition from rivals, and that it may engage in supra-competitive, although not profit maximizing pricing, by keeping its smaller competitors in their place through market discipline exercised through exclusive dealing contracts.⁵ Finally, the Third Circuit dismisses the district court's reliance on dicta in Tampa Electric Co. v. Nashville Coal Co.,⁶ that DOJ must fail in its Sherman Act Section 2 case, where there was no liability under the stricter standard of Sherman Act Section 1 and Clayton Act Section 3. The court rejected this proposition, as a matter of law. The court stated that different theories may be presented to establish a cause of action. A refusal to accept one theory does not rule out others. The court stated: "Here, DOJ can obtain all the relief to which it is entitled under [Section 2]"⁷ and has opted not to appeal the adverse rulings as to DOJ's Sherman Act Section 1 and Clayton Act Section 2 claim.

A good argument can be made that the market dynamics discussed by the court in finding monopoly power maintenance, under Section 2, would also support a finding of violations of the Sherman l and Clayton 3 claims. These factors would seemingly support a finding that Dentsply's course of conduct would "flunk" the rule of reason. These factors include the relative disparity of the historic shares of the competing manufacturers of artificial teeth, the impermeability of the defendant's share over an extended period, the effects of exclusivity clauses in denying access to "gateway" dealers, necessary to develop minimum sufficient scale for expansion. This should be so, notwithstanding the "at will" nature of the exclusive dealing clauses.⁸ They were as impermeable as the incumbent market share. This is also consistent with the district court finding that "Dealer Criterion 6" was pretextual, exclusionary, and not business justified. The Third Circuit remanded the case to the District Court for the District of Delaware with directions to grant the injunctive relief requested by the DOJ.

1. Dentsply did business under "at-will arrangements with 23 dealers. While there were 16,000 dental labs, sales through the Dentsply dealer network accounted for 75%-80% on a revenue basis, and 67% on a unit basis. Slip Opinion at 4-6.
2. Slip Opinion at 32.
3. Id.
4. "This case does not involve a dynamic, volatile market like that in Microsoft, 253 F.3d at 70 . . . " Id.
5. Slip Opinion, at 8, 15, 17, 19, 20.
6. 365 U.S. 320 (1961).
7. Slip Opinion at 34.
8. Again, the district court itself found that "Dealer Criterion 6" was pretextual, and without justification. Slip Opinion at 25.

Authored by:
Don T. Hibner, Jr.
213-617-4115
dhibner@sheppardmullin.com

It has been almost one year since the world of European antitrust enforcement was radically reformed. The new EU antitrust regime is characterized by more proactive enforcement, increased co-operation, and better priority setting. The changes resulted from the efforts of former European Competition Commissioner, Mario Monti, whose commitment to antitrust reform ensured that all the necessary regulatory instruments were in place by May 1, 2004. While no firm conclusions can be drawn because the reference period is relatively short (and, some powers have yet to be exercised, or have not had any reported outcome), what follows is a short overview of the enforcement of the new EU competition rules during the past eleven months.

The first apparent success has been the creation of a network between all national competition authorities who, together with national courts, have the power alongside the European Commission, to apply EU competition rules. Enforcement is no longer dependent on the European Commission alone. Eleven cartel decisions have been taken under Article 81 since May 1, 2004. Five were taken by national authorities, and six were taken by the Commission. There have been nine Article 82 decisions, eight taken by national authorities, and just one by the Commission. This is a clear increase of enforcement of European competition rules, and they demonstrate a clear focus on the most serious antitrust violations.

National judges who have increased jurisdiction over competition matters, have also improved their cooperation, and antitrust knowledge. Many have participated in networking activities organized by, for example, the Association of European Competition Law Judges and, the Presidents of European Supreme Courts. There are also an increasing number of judges are taking up the antitrust training on offer to support the European modernization process. It is estimated that over 700 judges will receive European competition law training from projects co-financed by the European Commission during the next twelve months.

Decentralization has provided for an unprecedented degree of co-operation and exchange between national competition authorities who now meet in both formal working groups, and informal meetings. They discuss antitrust law and economics, as well as problems in individual sectors. Such cooperation within the network is paying dividends in terms of determining which national authorities are better placed to take on particular cases. For example, following complaints from customers suggesting that a cartel was operating in the flat glass sector., the respective national competition authorities met, and concluded that the case was appropriate for Commission action, resulting in "dawn raids" two months ago. The action of the Commission, and that of a Member State competition authority have also complemented each other, for example, in the simultaneous handling of complaints against Deutsche Post by both the Commission, and the German Bundeskartellamt for violations of European, and national law respectively.

Looking beyond individual cases, modernization has produced increasing coherence in the policies and practices of EU competition authorities. National competition laws are increasingly becoming aligned with EU competition law. Member States are leaving behind their notification systems and leniency programs are now in place in 17 Member States. Furthermore, the Commission is engaged in an exchange of views on draft decisions bringing about a convergence in the application of Articles 81 and 82.

In her recent speeches, Ms. Kroes, has ruled out any further major European antitrust reform, but has stated that she will take certain measures to actively promote good competitive practice. First, the Commission will conduct antitrust investigations of markets which are key to the EU's overall competitiveness, such as the financial services and energy sectors, where competition does not appear to be functioning as well as it might. Second, the Commission will systematically examine the impact of proposed new EU legislation on the level of competitiveness. The aim is to gauge the competitive impact of proposed legislative measures and to ensure that they do not undermine the interests of European consumers or the growth of the European economy. Finally, the Commission will also attempt to change the general perception of the competition rules. Ms. Kroes believes that is important to explain in general terms how competition policy make a real difference to the lives of EU consumers, for example, by spurring innovation so that people can buy better goods and better services, lowering prices so that people can make their money go further, and strengthening the economy so that EU citizens can have better, more secure jobs.

The Commission will also establish a new Directorate devoted exclusively to cartel enforcement. The Directorate will bring together the resources, the people, and the investigative and procedural expertise, needed for effective action against cartels. The creation of this new Directorate is a concrete expression of the zero tolerance policy the European Commission is committed to implement in the face of this serious type of anticompetitive practice.

Finally, the Commission has recognized that there have been only a very limited number of successful damages awards for breaches of EU competition law in the last forty years. This failure to resort to the courts means that the comprehensive enforcement of the competition rules is not yet complete, and the victims of anticompetitive activity are not being compensated for their losses. The Commission is, therefore, committed to presenting a Green Paper by the end of the year which will set out various options for improving the current system of private enforcement.

While much has been achieved since May 1, 2004, we can expect to see the wider implications of the reforms over the next five years. We will then be able to better assess whether Ms. Kroes is accurate in her prediction of a virtuous circle of more and better enforcement. The challenge will be to make sure that the new antitrust regime is used as effectively and efficiently as possible, leading to increased innovation and competitiveness throughout the Europe Union.

Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com

The United States Supreme Court has granted certiorari in a Robinson-Patman Act ("RPA") case. In Reeder-Simco GMC, Inc. v. Volvo GM Heavy Truck Corp., 374 F.3d 701 (8th Cir. 2004), cert. granted, 73 U.S.LW. 3402, 3524 (2005), a divided panel of the Eighth Circuit had affirmed a jury verdict for the plaintiff on an RPA claim. Plaintiff truck dealer, a reseller of Volvo trucks, asserted that it had lost bids to non-Volvo competitors for the sale of trucks because Volvo had refused to provide plaintiff with price concessions that would have enabled plaintiff to bid successfully.

Trucks are frequently not manufactured until after a retail customer has solicited bids from several dealers. Dealers, such as plaintiff, seek concessions from manufacturers below the initial wholesale price which then enables the dealer to offer lower prices to its retail customers when bidding. Plaintiff only purchased trucks in the event that its bid was successful. Plaintiff's claim was that Volvo gave other dealers more favorable concessions for bids than Volvo granted plaintiff.

Plaintiff claimed damages from unsuccessful bids against non-Volvo competitors; damages from successful bids against non-Volvo competitors because plaintiff would have made more money if it had received the same price concessions that "favored" Volvo dealers received for bids to different customers; damages for a bid in which neither plaintiff nor the "favored" Volvo dealer received the sale, and so neither made a related purchase from Volvo; and one case in which plaintiff and another Volvo dealer received identical price concessions from Volvo and the retail customer chose the other dealer. The retail customer then extracted another price reduction from the other dealer for which Volvo provided a further price concession. Plaintiff also produced evidence that Volvo considered plaintiff to be an underperforming dealer that Volvo intended to terminate.

The Eighth Circuit majority held that plaintiff stated an RPA claim despite the usual rule that an unsuccessful bidder is not a "purchaser" within the meaning of the RPA. Where plaintiff's bids were unsuccessful, it purchased no trucks. The RPA concerns price differentials "between different purchasers." 15 U.S.C. § 13(a). The majority also held that the RPA applied even though plaintiff as an allegedly "disfavored purchaser" did not lose sales, except in one instance, to any allegedly "favored purchaser" of Volvo trucks. Instead, plaintiff lost sales to dealers of non-Volvo trucks.

In its petition for certiorari, Volvo argued that a discriminatory offer to sell does not violate the RPA, and that the Eighth Circuit's decision conflicted with the "two-purchase rule" of a number of Circuits requiring that there be two consummated purchases, one by the favored and one by the disfavored buyer. Volvo also argued that the court's decision conflicted with those of other Circuits requiring that an RPA plaintiff in a secondary live case show that the price differential was likely to harm intrabrand competition by diverting sales or profits from the disfavored purchasers to the favored purchasers. In addition, Volvo asserted that an expansive interpretation of the RPA should be avoided in order to prevent the RPA from conflicting with the overall purposes of the antitrust laws.

Authored by:
Thomas D. Nevins
415-774-3284
tnevins@sheppardmullin.com

The Federal Trade Commission is on a campaign to reduce health care costs. One way to rein them in is to challenge consummated hospital mergers that, in the FTC's view, have resulted in dramatic price increases for patients, insurers, employers, and other payers.

Five years after the nonprofit Evanston Northwestern Healthcare Corp. acquired Highland Park Hospital in suburban Chicago, the FTC is seeking to undue the merger through an administrative trial. If the FTC prevails, challenges to consummated hospital mergers could become more common, and future hospital deals could receive more intense scrutiny.

ALLEGING HIGHER PRICES

Evanston Northwestern acquired Highland Park Hospital in January 2000. As a result, the company's Evanston and Glenbrook hospitals, both located in Cook County, Ill., were combined with Highland Park, which was the closest hospital to the north and located in Lake County. As part of the deal, the Highland Park Independent Physician Group was combined with the Evanston Northwestern Healthcare Medical Group.

The combined group thereafter negotiated prices not only for physicians employed by it but also for several hundred independent practitioners previously affiliated with Highland Park but not part of the Evanston medical group.

The FTC's complaint alleges that following the merger, Evanston Northwestern was able to charge significantly higher prices to health insurers, thus leading to higher costs for the purchasers of health insurance and the consumers of hospital services.

The complaint further alleges that the Evanston Northwestern medical group engaged in illegal price fixing among competing physicians and groups since the independent doctors were never financially or clinically integrated with Evanston Northwestern or the Evanston medical group.

In furtherance of this scheme, Evanston Northwestern allegedly has offered hospital and physician services to payers as a package and has threatened to terminate those payers' contracts if they do not agree to the terms. The price-fixing claim is the subject of a proposed consent agreement tendered to the presiding judge on Jan. 18, but, consistent with FTC rules, not yet filed on the public record.

In July 2004, the FTC and the Justice Department issued a report entitled "Improving Health Care: A Dose of Competition." The report leaves little doubt that such post-consummation challenges to mergers are likely to be a continuing feature of the federal antitrust agencies' approach to the health care industry.

In addition to affirming continued scrutiny of hospital mergers by the two agencies, the report states that emphasis will be placed on the proper definition of the relevant geographic market for the hospital's services and that the agencies would continue to use the "hypothetical monopolist" test reflected in their 1992 joint Horizontal Merger Guidelines. That test seeks to determine how many locations at which a hypothetical monopoly supplier could impose a small, but significant and nontransitory, price increase.

With respect to product markets, the July 2004 report notes the agencies' traditional practice of analyzing hospital product markets as a broad array of acute, inpatient medical conditions. It calls for continued examination of whether smaller markets may exist within that cluster, and it even suggests that other product definitions might be warranted.

BEYOND MARKET DEFINITIONS

Not surprisingly, market definitions have been a primary battleground as the Evanston case has proceeded through the pretrial stages. The company's trial brief contends that the FTC cannot meet its burden of defining and proving the relevant product or geographic markets.

In response, the agency asserts that market definition is only a "tool" used to predict the competitive effects of a proposed merger. Since this case has been brought following the consummation of the merger, the FTC argues that elaborate market definitions are no longer necessary.

The agency also contends that past hospital merger cases improperly defined the relevant product and geographic markets. Indeed, defining relevant product markets has been difficult in the past because of the multiplicity of services provided by hospitals, the difference in medical treatment needs, and third-party coverage. Among other things, the FTC asserts that those cases did not consider adequately the role of managed care in defining geographic markets.

Managed care organizations affect market analysis substantially, for they negotiate prices on behalf of their subscribers across a wide geographic area embracing a multitude of health care providers. A given provider's ability to make price increases stick is therefore more constrained.

That being said, the heart of the FTC's case is the evidence of price increases that were actually imposed following the merger.

Evanston Northwestern contends that evidence of price increases alone is, as a matter of law, insufficient to demonstrate competitive harm. In addition, it argues that those price increases were occasioned by forces other than an increase in market power caused by the merger, including, among other things, measurable improvements in quality of care.

The FTC counters that its expert testimony will confirm that the price increases were a direct consequence of the exercise of enhanced market power. As for the impact of quality improvements on price, the agency argues both that such improvements did not occur and that, even if they did, they would not constitute a cognizable defense as a matter of law.

ODDS ON THE FTC

By bringing this case to an administrative trial, the FTC is reinvigorating its enforcement efforts on hospital consolidation after the two antitrust agencies lost a combined seven consecutive hospital merger cases in the 1990s. In all those cases, the antitrust agencies challenged the hospital mergers before closing.

Particularly in cases involving nonprofit hospitals, federal district judges seemed willing to accept arguments that these mergers would not lead to higher prices because nonprofits do not have the same incentive to increase prices as for-profit hospitals. Whereas the antitrust agencies contended that nonprofit hospitals had a clear incentive to use their acquired market power to increase revenue — so that they could spend more on salaries and other operating expenses — the judges seemed to view nonprofit hospitals as members of the community with charitable goals.

This time around, the odds favor the FTC — for two reasons.

First, the FTC has the home-field advantage by bringing the case before an administrative law judge instead of in federal district court in the defendant's hometown. Just as in sports, this gives the FTC a better chance of victory.

If the administrative law judge rules in favor of the FTC, an appeal of the ruling goes to the full five-member commission. Presumably, the commission, having voted to issue the complaint in the first place, would more than likely affirm a favorable ruling by the judge as long as the decision is properly supported by the facts and the law.

If the agency affirmed, any further appeals would have to be made to a federal circuit court, which would apply a deferential rational basis/substantial evidence standard of review.

Second, the FTC has the benefit of a mountain of actual data and evidence indicating that prices have, in fact, increased significantly since the Evanston Northwestern merger. In the typical merger case, by contrast, the antitrust agencies do not yet have evidence of post-merger conduct, and the presentation of proof inevitably contains a substantial element of prediction.

Given the advantages that the FTC has in bringing the Evanston Northwestern case in front of the administrative law judge, the outcome of this case is extremely important to the agency and to hospital systems around the United States. The case provides the FTC with an opportunity to create strong precedent for challenging consummated hospital deals in the future, as well as pre-consummated hospital deals.

If the FTC prevails in this litigation, it could send a signal to large hospital systems that even consummated mergers and acquisitions, both profit and nonprofit, can face more difficult antitrust challenges.

POST-MERGER SCRUTINY

Whether or not it wins the Evanston Northwestern case, the FTC will surely continue to be very selective about which future hospital mergers to challenge. To stay off the agency's radar screen, hospital systems should keep in mind the following considerations:

First, a merged hospital system cannot assume that the FTC will not investigate a closed deal. The agency is clearly willing to conduct a post-closing analysis to determine whether an investigation should be opened and a challenge launched. A post-closing attack is more likely if there were no more than three hospital systems in a specific geographic area before the merger. As in the Evanston Northwestern case, the relevant geographic and product markets will remain hot issues for dispute.

Second, the FTC learns about problematic hospital mergers by monitoring local news articles and customer complaints. If post-merger price increases to managed-care payers, traditional third-party insurers, and employers are substantially greater than those in the past, payers will likely complain to the FTC — which could initiate a lengthy and burdensome investigation and possibly a forced divestiture of a hospital. This means that health care providers should be less aggressive in seeking anti-competitive rate increases, and they should enter into competitive negotiations with managed-care payers and employers.

Third, merged hospital systems should significantly integrate their operations and achieve actual efficiencies. The FTC is less likely to break up such entities. In the end, a merger that results in real cost savings and better patient service is its own best legal defense.

Authored by

Mark E. Nagle
202-218-0014
mnagle@sheppardmullin.com

and

Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com

• On March 31, the Department of Justice's Antitrust Division filed a lawsuit against the Kentucky Real Estate Commission for limiting competition among real estate brokers in the state of Kentucky. The Kentucky Real Estate Commission's regulations prohibit Kentucky real estate brokers and sales associates from offering cash rebates or refunds, or a free home inspection, or other inducements to attract customers. The Antitrust Division believes the regulations violate Section 1 of the Sherman Act and that the prohibitions clearly lessen competition. The Division does not believe that the state action doctrine applies because it only provides immunity from federal antitrust liability for the actions of entities like the Kentucky Real Estate Commission when there is a clearly articulated state policy to displace competition and the state actively supervises the conduct. Because Kentucky has neither articulated a policy to displace competition nor supervised the conduct at issue, the Division filed a complaint alleging a per se violation of the antitrust laws that inflicts higher prices on Kentucky consumers even though the regulations were adopted by a state-created entity like the Kentucky Real Estate Commission.

• On March 28, Eastman Kodak Company announced that it received a second request from the Department of Justice for information concerning the company's proposed acquisition of image-management software developer Creo Incorporated.

• On March 21, the Antitrust Division entered into a settlement agreement with two hospitals in southern West Virginia--Bluefield Regional Medical Center, Inc. ("BRMC") and Princeton Community Hospital Association, Inc. ("PCH") to terminate their alleged illegal agreements that allocated cancer services to PCH and cardiac-surgery services to BRMC. According to the complaint, BRMC, PCH, and St. Luke's Hospital, a hospital owned by PCH, are the only general acute-care hospitals in Mercer County, West Virginia. On January 30, 2003, BRMC and PCH entered into two agreements in which BRMC agreed not to offer most cancer services and PCH agreed not to offer cardiac-surgery services in six West Virginia counties and three Virginia counties. BRMC and PCH subsequently made joint filings with the state of West Virginia to request certificates of need ("CON") for BRMC to provide cardiac-surgery services and for PCH to provide cancer services. A CON is a permit required to enter certain areas of the health care market. Generally, the applicant must demonstrate to a state authority that there is an unmet need for its services. BRMC and PCH had been head-to-head competitors in cancer services and potential competitors in cardiac-surgery services. The complaint alleges that the agreements effectively allocated markets for cancer and cardiac-surgery services and restrained competition to the detriment of consumers. The Division stated in its competitive impact statement that the state action doctrine does not apply nor does the fact that a CON was filed shield the BRMC-PCH agreements from federal antitrust review. Therefore, the consent decree annuls the agreements and prohibits BRMC and PCH from entering into any agreement that allocates any cancer or cardiac-surgery service, market, or territory.

• On March 16, the Antitrust Division announced that it closed its money transfer services investigation, which examined whether Western Union's exclusive contracts (i.e., they prohibit the retail agents from offering competing money transfer services during the term of the contract) with its retail agents are harming competition in either the domestic or international money transfer services markets, or in the domestic emergency bill-payment services market. To support a claim that Western Union's practices violate the antitrust laws, it would have to be shown that Western Union's exclusive contracts have foreclosed competitors from a substantial share of potential agents, and further that such practices have had an anticompetitive effect, such as increased prices in the money transfer market. In early 2004, the Division began collecting and analyzing information about Western Union's contracting practices and the effects of those practices in the money transfer and emergency bill payment industries. The Division interviewed representatives of Western Union and numerous third parties, reviewed a substantial number of documents, and engaged in empirical analyses of money transfer and bill payment data obtained from Western Union and third parties. The Division's investigation found that competition for money transfer and emergency bill payment services has increased in recent years. While the Division stated that it continues to have serious concerns regarding the lack of vigorous price competition in certain U.S. foreign country 'corridors' and will monitor the international money transfer services market, the Division has determined that competition in such markets is often more directly influenced by corridor-specific conditions such as market size, local regulation, and the nature of the local financial infrastructure, than by Western Union's contracting practices. Therefore, the Division decided to close its investigation into the money transfer services industry.

• On March 1, two Cleveland scrap metal companies (M. Weingold & Co. and Harry Rock & Associates Inc.), their owner, Jack Weingold, and an employee, Loren Margolis, pleaded guilty to conspiring to allocate suppliers and rig bids for scrap metal. All of the defendants had been indicted previously but through the plea agreement they avoided a trial and agreed to help with the ongoing investigation. The indictment charged all of the defendants with participating in two separate conspiracies in Northeast Ohio, one beginning at least as early as December 1993 and continuing at least until October 1999, and the other beginning as early as December 1993 and continuing to at least until November 1999 to allocate suppliers and rig bids for scrap metal. The plea agreement with Jack Weingold, M. Weingold & Co., and Harry Rock & Associates Inc. recommends that Jack Weingold be imprisoned for 13 months and pay a $700,000 criminal fine. M. Weingold & Co. and Harry Rock & Associates Inc. have agreed to pay criminal fines of $5.65 million each, for a total of $11.3 million. The plea agreement with Loren Margolis recommends that he pay $700,000 and serve a term of imprisonment between 10 and 12 months. All of the plea agreements are subject to court approval.

Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com

• On March 29, the Commission received a petition to reopen and modify the final decision and order in the 2003 transaction concerning Nestlé Holdings Inc., File No. 021-0174, Docket No. C-4082, regarding Nestlé's acquisition of Dreyer's Grand Ice Cream Holdings, Inc. According to their filing, the respondents have petitioned the FTC on behalf of CoolBrands International, Inc., and its subsidiary Integrated Brands, Inc., the Commission-approved divestiture buyer in this proceeding. Through the confidential petition, the respondents have requested that the Commission reopen and modify the final order to extend portions of the Transitions Services Agreement for an additional 12 months.

  Comments on the petition may be submitted for 30 days, until April 26, 2005. The companies have requested expedited Commission consideration of the petition and a waiver of the public comment period, which, if granted, could result in an earlier decision.

• On March 29, the Commission approved the issuance of a final consent order in the matter concerning Cemex, S.A. de C.V. and RMC Group PLC, and the issuance of a letter to the commenter of record. The vote approving the final order was 4-0-1, with Chairman Deborah P. Majoras recorded as recused.

• On March 22, Magellan Midstream Partners, L.P. ("Magellan") filed a petition withdrawing its request that the Commission approve the proposed divestiture of certain assets recently acquired from Shell Oil Company ("Shell"). Under the terms of the FTC's consent order concerning Magellan's acquisition of pipeline and terminal assets from Shell, Magellan is required to divest a gasoline terminal in Oklahoma City, Oklahoma. Through this application, Magellan is withdrawing its request for approval to divest the former Shell Oklahoma City Terminal to SemFuel, L.P.

• At the request of Virginia State Delegate Harry Purkey, staff of the Federal Trade Commission's Office of Policy Planning, Bureau of Competition, and Bureau of Economics submitted a letter on March 14 commenting on three House Bills ("HB") that the Virginia Assembly considered during the legislative session: HB 2518, which would loosen current restrictions on competition between commercial and independent optometrists; and HB 160 and SB 272, which would further impair competition between these groups of eye care professionals. According to the staff, HB 2518 is likely to benefit consumers with lower prices and is unlikely to reduce the quality of eye care. By contrast, if enacted, HB 160 and SB 272 are likely to cause Virginia consumers to pay higher prices for eye examinations and optical goods, without providing any countervailing benefits in the form of higher-quality eye care.

  HB 160 and SB 272, which are identical, would amend the current Virginia law to include a prohibition on an optometrist working in any location that provides direct access to a commercial establishment. HB 2518, conversely, would ease current restrictions by eliminating the prohibitions on optometrists leasing from, and working in, a commercial establishment.

  The letter notes that empirical work by the FTC and others has found "that restrictions on commercial optometric practices tend to increase prices, but provide no improvement in the quality of eye care." Drawing on this research, the staff wrote that, "Although retaining some of the current law's restrictions on impediments to competition, HB 2518 would at least ease some of the restrictions on commercial optometric practice. HB 2518 is likely to benefit consumers with lower prices and is unlikely to reduce the quality of eye care."

  By contrast, HB 160 and SB 272 "would place further restrictions on the commercial practice of optometry," which may have the effect of requiring some commercial practices that comply with the current Virginia law to reconfigure their physical structures to prevent customers from having any "direct access" to the area of their store that sells optometric goods. These new restrictions, moreover, may fall disproportionately on wholesale club chains, which are low-cost sellers of optical goods. "Thus, HB 160 and SB 272 are likely to cause Virginia consumers to pay higher prices for eye examinations and optical goods without providing any countervailing benefits in the form of higher quality eye care."

  The Commission vote authorizing the staff to submit the letter to Virginia Delegate Harry Purkey was 5-0.

• In a comment submitted on March 11 to North Dakota State Senator Richard L. Brown at his request, staff of the Federal Trade Commission's Office of Policy Planning, Bureau of Economics, and Bureau of Competition stated that House Bill ("HB") 1332, which currently is pending in the legislature, might have the unintended consequences of increasing the price of pharmaceuticals within the state and ultimately decreasing the number of North Dakotans with insurance coverage for pharmaceuticals. In his letter, Senator Brown asked the FTC to examine the bill to determine "whether the proposed legislation is anticompetitive and will likely result in the increased cost of pharmaceutical care for consumers."

  According to the comment, HB 1332 would regulate PBM's contracts with pharmacies and prohibit certain drug substitutions. By prohibiting a PBM from discriminating "on the basis of copayments or days of supply" when contracting with pharmacies and requiring that "a contract must apply the same coinsurance, copayment, and deductible to covered drug prescriptions" to all pharmacies or pharmacists in a network, staff wrote, HB 1332 would prevent health plans from designing benefit plans to encourage participants to use network pharmacies that provide drugs to the plan at a lower cost than other network pharmacies. As a result, HB 1332 would cause both the consumers and health plans to miss out on the savings they could have shared by using the low-cost pharmacy. A potential secondary effect, staff wrote, is that low-cost pharmacies may lose the incentive to offer lower prices to plans under such a uniform copayment structure.

  The Comment also noted that HB 1332 may limit some drug substitutions to those that are "for medical reasons that benefit the covered individual." As a result, according to FTC staff, the bill would prevent a PBM from switching a prescription for one brand-name drug to a less-expensive equivalent with similar therapeutic effects, unless the switch was made for medical reasons. By making safe and price-reducing substitutions less common, the bill is likely to increase the price of drugs, leading to higher health insurance premiums and reductions in the availability of pharmaceutical insurance coverage. At the same time, according to the staff, because North Dakota law already requires physician approval before one branded drug may be switched for another, there already are safeguards in place to protect consumers from inappropriate substitutions.

  In concluding its comment, the staff wrote, "HB 1332 is likely to limit a PBM's ability to reduce the cost of prescription drugs, without providing consumers any additional protections. Any such cost increases are likely to undermine the ability of some consumers to obtain the pharmaceuticals and health insurance they need at a price they can afford. Accordingly, we would urge the North Dakota legislature not to adopt HB 1332."

  The Commission vote authorizing the staff to submit the comment to North Dakota State Senator Richard L. Brown was 5-0.

• On March 8, the Commission received a petition to reopen and set aside an existing consent order from Entergy-Koch, LLC ("EKLP"), in connection with FTC Docket No. C-3998. The order, dated January 31, 2001, establishes procedures for Entergy and EKLP to follow in connection with Entergy's procurement of natural gas transportation services to carry natural gas to any electric power generating facility or local natural gas distribution facility that uses, distributes, stores, or transports natural gas, and is owned, operated, or controlled by an Entergy subsidiary that is subject to a state regulator's rules governing the recovery cost of buying the relevant product. The Commission is seeking public comments on the companies' petition for 30 days, until April 5, 2005.

• On March 4, the FTC filed a motion in U.S. District Court for the District of Columbia, pursuant to Section 7A(g)(2) of the Clayton Act, 15 U.S.C. § 18a(g)(2), to require Blockbuster, Inc. to comply with the statutory rules of the Hart-Scott-Rodino Act (HSR). In its motion, the FTC asked the court to act before March 11, 2005, the date on which Blockbuster contends that it is free to consummate its acquisition of Hollywood Entertainment Corporation. The Commission's filing states that Blockbuster has not yet substantially complied with the Second Request because it provided insufficient and inaccurate pricing data. The HSR Act prohibits Blockbuster from proceeding with the acquisition until 30 days from the date it has substantially complied with the Second Request.

  On March 11, the U.S. District Court for the District of Columbia entered an order, signed and entered by Judge Ellen Segal Huvelle, which provides that pursuant to an agreement between the Federal Trade Commission and Blockbuster, Blockbuster will not acquire any interest in Hollywood before 11:59 p.m. on March 21, 2005. Shortly thereafter, Blockbuster abandoned its efforts to acquire Hollywood.

• Under a consent order announced by the FTC on March 2, Preferred Health Services, Inc. ("Preferred Health"), a physician-hospital organization consisting of more than 100 doctors and the Oconee Memorial Hospital in northwestern South Carolina, has been barred from collectively negotiating and fixing the prices it charges payors on behalf of its doctor members. Preferred Health is a physician-hospital organization made up of more than 100 doctors and Onconee Memorial Hospital. The organization does business in the Seneca, South Carolina area of northwestern South Carolina. Under its operating model, Preferred Health acts as a "contracting representative" for its physician members in negotiating with health plans, and as a "collective bargaining unit for the negotiation of managed care contracts."

  According to the FTC, Preferred Health acts as a "contracting representative" for its member doctors, developing pricing contracts that it then presents to health plans and other payors. Because the organization's doctors make up approximately 70 percent of the independently practicing physicians in and around Seneca, South Carolina, health plans must have access to many of its members to provide services for consumers. Accordingly, the FTC contends, the plans are forced to pay higher, collectively negotiated prices for health care services.

  The Commission's consent order remedies the illegal conduct alleged in the complaint by prohibiting Preferred Health from entering into or facilitating any agreement between or among any physicians: 1) to negotiate with payors on any physician's behalf; 2) to deal, or not to deal, or threaten not to deal with payors; 3) to designate the terms on which to deal with any payor; or 4) to refuse to deal individually with any payor, or to deal with any payor only through an arrangement involving Preferred Health. To reinforce these provisions, the order also bars Preferred Health from helping physicians exchange information regarding whether, or on which terms, to deal with a payor, and contains "fencing-in" relief that will be imposed for three years. This fencing-in relief prohibits Preferred Health from: 1) acting as an agent for any physicians in connection with health plan contracting; or 2) using an agent with respect to contracting.

• On March 1, the FTC announced it allowed Cytec Industries, Inc.'s ("Cytec") proposed $1.8 billion acquisition of the Surface Specialties Business of Belgium's UCB S.A. ("UCB"), provided Cytec divests UCB's Amino Resins Business to a Commission-approved buyer within six months. According to the FTC's complaint in this matter, for many years Cytec and UCB have been direct and substantial competitors in the market for amino resins, and absent the relief the consent order ensures, this competition would be lost and not easily replaced. The result, the FTC contends, would be higher prices for consumers in the markets for amino resins for industrial liquid coatings and adhesion promotion in rubber. Both Cytec and UCB manufacture and sell amino resins used for industrial liquid coatings and rubber adhesion promotion. The resins the companies make are used as cross-linking agents in thermoset surface coatings for a range of applications, including automotive coatings, coil coatings, can coatings, appliance coatings, and general maintenance coatings. Amino resins also are used, primarily in tires, to promote the adhesion of rubber to materials such as steel or fiber.

  The consent order remedies the alleged anticompetitive effects of the proposed transaction by requiring Cytec to divest the UCB Amino Resins Business to a Commission-approved acquirer within 180 days. The business to be divested includes two manufacturing facilities, in Massachusetts and Germany, where UCB makes amino resins, and also includes UCB's rights to obtain amino resins under an agreement between UCB and Solutia Canada, Inc. UCB's resins business also includes lines of certain additives and other products made at the Germany plant. In addition, Cytec is required to divest the patents and other intellectual property that UCB has used in its amino resins business, as well as other records related to the business. Cytec also must assign contracts related to the amino resin business and take all steps necessary to ensure that, until the divestiture is completed, the Amino Resins Business remains viable so the acquirer will be competitive in the post-merger environment.

Authored by:
Robert W. Doyle, Jr.
202-218-0030
rdoyle@sheppardmullin.com

• The Federal Trade Commission ("FTC" or "Commission") accepted two separate settlements on April 1 against companies that deceived Spanish-speaking consumers responding to ads for low-cost computer systems. The settlements are with California-based Unicyber Technology, Inc., and Florida-based Latin Shopping Network. In both cases, the FTC alleged that the defendants engaged in deceptive business practices that violated federal laws. The Unicyber defendants' ads attracted consumers with offers of guaranteed financing with no credit check. The Latin Shopping Network ads offered computers for cash. The settlements prohibit the defendants from misrepresenting any fact material to a consumer's decision to buy or accept computers or any other good or service. The Unicyber settlement requires the defendant to pay $100,000 in redress to consumers, to be added to the $400,000 already obtained from the corporate defendants. The Latin Shopping Network defendants must pay $45,000 in redress. The cases are part of the FTC's Hispanic Law Enforcement and Outreach Initiative - a comprehensive campaign started in early 2003 to identify and stop fraud targeting Spanish-speaking consumers in the United States. The ongoing campaign involves: 1) active monitoring of Spanish-language media and complaints received in Spanish; 2) aggressive law enforcement actions against marketers defrauding Spanish-speaking consumers; and, 3) extensive outreach to Spanish-speaking consumers to prevent fraud from occurring and encourage greater reporting of consumer fraud.

• FTC Chairman Deborah Platt Majoras appointed Lydia B. Parnes as Director of the Bureau of Consumer Protection ("BCP") on March 31. Parnes will lead the FTC's work to protect U.S. consumers from fraud and deception in the marketplace. Current BCP efforts include consumer protection law and trade regulation rule enforcement, individual company and industry investigations, administrative and federal court litigation, rulemaking proceedings, and consumer and business education. Under her leadership, the BCP has recommended a number of important law enforcement actions for Commission prosecution, including cutting-edge spam and spyware cases. Since she was named Acting Bureau Director by then-Chairman Timothy J. Muris last July, the FTC has filed 57 consumer protection actions in federal district court and obtained 67 judgments ordering the return of more than a quarter of a billion dollars in redress to consumers. Parnes joined the FTC in 1981 as an attorney advisor to former Chairman James C. Miller III.

• Three operations that scammed consumers out of more than one hundred million dollars by falsely promising easy debt relief settled FTC charges on March 30 that their business practices were illegal. According to the FTC, consumers' debt, interest rates, and penalties increased and some consumers were forced into bankruptcy. The companies and their principals will pay more than $6 million combined in consumer redress and are permanently barred from making deceptive claims about debt-related services. Two of the operations and their principals also are barred from engaging in abusive telemarketing practices, following FTC charges that they repeatedly called consumers on the National Do Not Call Registry. In May 2004, the FTC filed a complaint against a group of companies and individual defendants, fronted by the National Consumer Council ("NCC"), a purported nonprofit organization, which solicited customers through an aggressive telemarketing and direct mail advertising campaign that falsely promised free debt counseling. In fact, NCC's role in the scheme was simply to generate leads for the other defendants, who then charged consumers thousands of dollars in fees to enroll in their debt negotiation programs.

• The FTC announced on March 15 that AmeriDebt, Inc. will shut down its debt management operation as part of a settlement of FTC charges that it deceived consumers into paying at least $170 million in hidden fees. The FTC charged the company misrepresented that it was a nonprofit credit counseling organization, which would teach consumers how to manage their finances for no up-front fee. The settlement requires AmeriDebt to transfer all current clients' accounts to a third party and bars the company from participating in any aspect of the credit counseling business in the future. The settlement does not include the other defendants - the FTC's case against Andris Pukke, DebtWorks, and the relief defendant, Mrs. Pukke, will continue. In a complaint filed in November 2003, the FTC charged that AmeriDebt, Inc., DebtWorks, Inc., and Andris Pukke deceived consumers with claims that AmeriDebt was a nonprofit organization, which could help consumers get out of debt without an up-front fee. The FTC charged that, rather than operating for charitable purposes as advertised, AmeriDebt was funneling profits to affiliated for-profit entities, including DebtWorks and Andris Pukke. AmeriDebt deceived new clients into making a "voluntary contribution" to enroll in the program. AmeriDebt kept these initial "contributions" as fees without consumers' knowledge, rather than disbursing the money to consumers' creditors as promised. The complaint also charged that, despite promises to teach them how to manage their money to avoid future debt, the defendants simply enrolled all customers in debt management plans ("DMPs"). In the DMP, consumers made a single monthly payment to AmeriDebt for all their unsecured debts; the payment was then to be disbursed to the consumers' creditors.

• In a comment submitted March 14 to the Department of the Treasury's U.S. Mint, the staff of the FTC's BCP, Bureau of Economics, and Office of Policy Planning gave its support to the Mint's efforts to protect consumers and curb marketers who deceptively advertise collectible coins and medals. The staff supported a proposed rule to assess civil penalties against deceptive marketers who misuse words and symbols related to the U.S. Mint. The staff comment described the FTC's experience with advertising law and how this experience may assist the Mint in implementing the rule and determining whether advertisements create a false impression of association with the Mint. The comment also briefly outlined First Amendment commercial speech doctrine and its preference for disclosure over banning potentially misleading claims as a means of combating deception. The staff comment then presented the FTC's approach to reviewing advertising claims, explaining the Commission's emphasis on considering the "net impression" of the ads. The FTC's approach considers the context of such an advertising claim, including any qualification to the claim, which is consistent with the First Amendment principles intended to promote the free flow of truthful and non-misleading commercial speech. The comment also noted the FTC's support for conducting consumer research on the language and format of various disclaimers to determine whether they are effective in preventing deception.

Authored by:
Camelia Mazard
202-218-0028
cmazard@sheppardmullin.com

• On April 4, it was reported that Microsoft sent a letter accepting most of the European Commission's demands to satisfy its antitrust concerns, but asked for further dialog some matters regarding the licensing of its source code. Microsoft has accepted 20 out of the EU Commission's 26 demands, and says that it will work as quickly as possible to settle the remaining six. Following a dispute over the name of the Media-free version of Windows XP, and being threatened with fines for not cooperating to the EU's expectations, Microsoft announced that the product name will be Windows XP "N." One of the remaining stumbling blocks to full compliance is source code licensing. The Commission has raised concerns at the proposed fees, claiming that they are too expensive, and also voiced concerns that Microsoft is locking open-source projects out of the licensing program. A Microsoft spokesperson stated that this is an area that warrants further discussion with the Commission.

• On March 31, the Competition Commission of Singapore ("CCS") released draft guidelines as part of its preparation for Phase II implementation of the Competition Act 2004. The Guidelines indicate how the CCS will interpret, and give effect to the infringement provisions of the Act which comes into force in January 2006.

• On March 31, Intel announced that its Japanese subsidiary will accept the Recommendation from the Japan Fair Trade Commission ruling that it must eliminate discounts which allegedly prevented competitors from gaining access to the market. Intel released a press statement that it disagreed with the allegations contained in the Recommendation but that the cease and desist order would not prevent it from meeting the needs of its customers. The Japan's Fair Trade Commission had declared that certain of Intel's business practices were in violation of its Anti-Monopoly laws. The decision focused on rebates paid to five Japanese PC manufacturers which allegedly induced them to limit their chip purchases from rival manufacturers, obliging them to buy 90% or even 100% of their chip requirements from Intel. The European Commission cooperated with the FTC investigation, and has also been investigating Intel's business practices for the past three years.

• On March 29, the Korean Times reported that South Korea's Fair Trade Commission is expected to heavily fine the country's telecommunications service providers, including the fixed-line monopoly KT Corp., Hanaro Telecom Inc. and Dacom Corp, following evidence of alleged price-fixing in the supply of voice and data services.

• On March 29, the UK's Office of Fair Trading ("OFT") referred to the Competition Commission ("CC") the anticipated acquisition of the London Stock Exchange plc ("LSE") by either Deutsche Börse AG (DBAG) or Euronext N.V. ("Euronext"). The OFT decided that the test for reference was met in relation to the supply of on-exchange trading services for equities in the UK in both cases. In respect of DBAG's bid, additional concerns arose in relation to the supply of clearing services for equities trades in the UK. Sir John Vickers, OFT Chairman, said, "The proposed bids for the LSE come at a time of emerging competition in equities trading between the LSE, DBAG and Euronext. Although such competition has so far been episodic, it needs to be investigated whether either merger would lessen future competition in equities trading in the UK. The CC will also want to consider the effects of the mergers on competition in clearing services, particularly with the DBAG bid." Although DBAG and Euronext each proposed constructive undertakings instead of reference, the OFT considered that neither proposal was at this stage able to resolve all competition concerns in a sufficiently clear-cut manner. The CC must report by September 12, 2005.

• On March 28, it was reported that Ajit Patel and Kirta Pate, CEO and COO respectively of Goldshield Group, the drug supplier, were arrested in London on suspicion of fixing the price of generic drugs to the UK's National Health Service. In April 2002, the UK's Serious Fraud Office ("SFO") raided six companies involved in the supply of two blood thinning drugs: Goldshield, Regent-GM Laboratories, Ivax, Ranbaxy, Generics UK (a subsidiary of Merck) and Kent Pharmaceuticals. More than 200 officers raided 11 homes and 16 business addresses among the biggest ever carried out by the SFO. The SFO's investigation is continuing. All the above companies deny any illegal activity.

• On March 24, it was reported that Sendo, a cellular phone set manufacturer, had complained to the European Commission about Ericsson, which it alleges is in a cartel aimed at preventing new entrants to the European mobile handset market. Sendo stated that small/new companies are asked to pay excessive royalties to use GSM and GPRS technology, and the European Telecommunications Standards Institute, and its licensing regime is being misused "under the cloak of a cartel". Meanwhile, Ericsson has sued Sendo for infringement of its patents and is claiming monetary damages as well as an injunction against the continued sale and marketing of Sendo's mobile phones.

• On March 23, the German Cartel Office imposed fines totaling €130m on ten insurance companies for colluding to increase industrial insurance premiums on general insurance and liability policies. In particular, the insurers agreed not to make counter-offers for business from clients in industrial insurance, fire coverage, transport and building insurance. The cartel office concluded that the net effect of the premium increases reduced competition between the insurance companies to the detriment of their clients. The alleged abuses took place from 1999 through at least 2002. Ulf Boege, head of the country's Federal Cartel Office, stated that, "The executives of those companies in question have consciously violated the cartel law in order to bring to an end the intensive competition among insurers."

• On March 23, the Italian Competition Authority launched an investigation of Italian TV channels, RTI, Mediaset and Finivest in relation to an alleged distortion of competition concerning the acquisition of broadcasting rights of Italian soccer games. In particular, the Italian Competition Authority is concerned at the competitive effect of the signing-up of first negotiation and preemption rights of certain home matches of a number of large Italian soccer clubs at a time when a rival satellite channel's broadcast rights are about to expire. It was also reported that the Authority will examine the overall state of competition in the industry by investigating the role of the Italian Soccer Federation, the Italian national professional league, soccer clubs, and soccer players' agents.

• On March 18, the Sydney Morning Herald reported that the Australian Competition and Consumer Commission ("ACCC") had begun proceedings in federal court against three companies (Barton Mines Corporation, Barton International Incorporated and Barton International Australia) alleging an illegal market-sharing agreement for the purchasers of alluvial garnet. On the previous day, a federal court imposed fines totaling AU$23.3 million on 16 companies and individuals who owned and operated BP, Shell, Ampol/Caltex, Swift, Apco and Mobil branded stations in the town of Balarat for colluding to increase petrol prices in the Ballarat area between June 1999 and December 2000. The ACCC had first taken action back in 2001, alleging the group had regularly met to fix petrol prices, and then contacted outlets to put their plan into action. The fines imposed were a record for the petrol industry in Australia.

• On March 16, Argentina's government office for the protection of consumers' rights filed a complaint against Shell and Esso before the country's antitrust authority for alleged oligopoly abuse. SDC has requested severe sanctions against the multinational companies for alleged non-justified increases of petrol prices that the customers have recently been charging to customers.

• On March 16, the Greek government released legislation which will grant the country's Competition Commission wider powers. For example, it will be able to take direct action in the market, and will be empowered to issue regulatory rulings. The Commission will gain statutory status, and staffing levels will be raised from 80 to 150. The bill is expected to enacted with three months.

• On March 15, the European Commission confirmed that Microsoft and Time Warner had withdrawn their notification regarding their proposal to acquire joint control of ContentGuard due to Thomson's acquisition of a 33% interest in the company. The Commission had launched an in-depth investigation due to the concern that Microsoft may attempt to block competitors' access to ContentGuard's valuable Digital Rights Management patents. The Commission stated that following a substantial change in ContentGuard's Governing rules, and the entry of Thomson as a key shareholder, Microsoft would no longer have the ability to impose a licensing policy that would put its rivals in the Digital Rights Management market at a competitive disadvantage.

• On March 14, the Swedish government released proposals for a new law which will require companies found guilty of cartel activity to pay compensation to consumers as well as competitors. The law will also allow competition authorities to raid the company's executive private premises in addition to their offices.

• On March 10, European Competition Commissioner, Ms. Neelie Kroes, announced at the International Bar Association's European Competition Law Conference in Brussels, the Commission's intention to establish a new Directorate devoted exclusively to cartel enforcement. The Directorate will bring together the resources, the people, and the investigative and procedural expertise, needed for effective action against cartels. The creation of this new Directorate is a concrete expression of the zero tolerance policy the European Commission is committed to implement in the face of this serious type of anticompetitive practice. In the same speech, she announced that the Commission will conduct antitrust investigations of markets which are key to the EU's overall competitiveness, such as the financial services and energy sectors, where competition does not appear to be functioning as well as it might. The Commission will also present a Green Paper by the end of the year which will set out various options for improving the current system of private antitrust enforcement within the EU.

• On March 10, the Wall Street Journal reported that the Japanese Fair Trade Commission had received a complaint from Coach, the New York based luxury handbag group, alleging that LVHM, the leading luxury handbag manufacturer in Japan, has been using anticompetitive practices in the sale of handbags in department stores by threatening to withdraw its brand from stores that also stocked Coach bands.

Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com

• On March 30, Microsoft announced that it will accept the main changes demanded by the European Union's antitrust regulators and will remove its Media Player software from the Windows computer-operating system. Under the agreement, Microsoft also will offer a software package that allows consumers to restore the settings and other programs that were removed from the Media Player-free version. The European Commission had announced on March 24 it was rejecting Microsoft's proposal to limit an independent trustee's authority to monitor that company's compliance with European antitrust sanctions. A Microsoft spokesman said the Commission's demands about naming a "monitoring trustee" to referee technical questions were unclear. "The commission has been telling the [European Court of First Instance] in Luxembourg one thing about how the trustee will work and then telling Microsoft something different."

• March 29th was Internet Day at the Supreme Court, as the Court considers two cases that could have a profound effect on the future of the Internet. The first case, MGM v. Grokster, is about copyright law and whether file-sharing companies should be held liable for the copyright infringement of their users. The case is shaping into a fight over Hollywood's investment in artistic creation verses engineers' freedom to innovate. The second case, National Cable and Telecommunications Association v. Brand X Internet Services, is about the FCC's regulatory classification of high-speed Internet service over cable modems. The justices will decide whether such service should be dubbed a "telecommunications service" subject to rules governing telephone companies or a largely unregulated "information service." The cable industry urged the Supreme Court to uphold FCC rules designed to keep cable-modem service deregulated and free from old-style telephone-company access mandates. The Internet-service providers argued that they want mandated access to cable's high-speed platform to ensure that a network owner can not rob the Internet of innovation and competition by excluding rivals. The case will turn on whether or not the high court concludes that the FCC should enjoy the latitude to shape communications policy to conform with the deregulatory goals of Congress that were established in the Telecommunications Act of 1996. No constitutional issues are involved. The widespread availability of digital information over a common set of Internet protocols makes both cases about much more than just contributory copyright infringement or the decisions of the FCC. Both are about the architecture of the Internet and whether its interconnecting networks will remain open or allow industry forces to push them in a closed direction.

• It was reported on March 25 that AT&T's decision to merge with SBC Communications ("SBC") was driven by changes in technology and regulation, according to AT&T's CEO. AT&T Chairman and CEO David Dorman said that the new entity would lead to "healthy and sustainable competition" that benefits customers. His company's merger proposal, as well as the likelihood that MCI will be acquired by a regional Bell company besides SBC, means that "undoubtedly we are going to see more competition. . . . . These mergers will drive another level of competition in business services. It is necessary and inevitable to deal with the post-bubble meltdown we have seen" Dorman said at an American Enterprise Institute conference. The proposed merger between AT&T and SBC is pending before the Justice Department's antitrust division and at the FCC. Dorman said that because AT&T exited the consumer business in July, there is no need to impose antitrust conditions on the merger, including any rules that might require SBC to offer its competitors access to its digital subscriber lines to sell high-speed Internet service.

• It was announced on March 23 that Chile's Supreme Court approved the merger of local cable-television providers VTR and Metropolis, BNamericas.com reports. The move supports a decision the anti-monopoly tribunal TDLC made close to five months ago. TDLC's original approval of the merger included 11 restrictions but still disgruntled lawyers Bosco Martinez and Marcial Mora, who, on behalf of the Chilean consumers, argued that the approval is no different than the approval of a monopoly that is unconstitutional. The united companies would hold an 88 percent share of the nation's cable market. CristalChile Comunicaciones, which owns 50 percent of Metropolis Intercom, said the lawyers should not have been allowed to appeal because they were not part of the process and therefore should refrain from interfering.

Authored by
Gregg Mendenhall
202-218-0025
gmendenhall@sheppardmullin.com