On April 3, the European Commission ("EC") published its long-awaited "White Paper" or policy proposals to increase the number of private antitrust damages actions in the EU.  The White Paper sets out suggestions for concrete measures "to help victims of EU competition law infringements to get compensation for the harm they have suffered".  The EC's proposals are the result of extensive consultation and are in response to criticisms that there is a lack of effective redress for European businesses and consumers who have suffered from alleged antitrust injury.  The EC is keen to encourage a culture of private litigation in the EU but wants to avoid the excesses of US-style class actions.

After a period of public consultation ending in mid-July, the EC will take a definite view and draft a legislative proposal which will be subject to approval by the individual Member States, and also, possibly by the European Parliament.  The EU's legislative process is complicated, and there are a number of legal procedures the EC could choose to follow in order to implement its proposals.  Whatever legislative procedure is adopted, these remedies are at least 2  or possibly 3 years away from becoming effective. Below is a summary of the EC's key proposals:

Damages -  The EC recommends a system of single damages and not multiple damages.  The single damages will cover not only actual loss due to the alleged anticompetitive conduct but also the loss of profit resulting from it, for example, a reduction in sales.  Claimants will also have a right to interest payments.  Importantly, the EC raises the possibility of limiting the civil liability of amnesty applicants against "claims by his direct and indirect contractual partners" - this proposal is subject to further discussions.

Collective Redress -  The EC wants to avoid "class actions run by law firms for an unidentified number of claimants" and has suggested a combination of two complementary mechanisms of collective redress - (1) opt-in collective actions in which claimants expressly decide to combine their individual claims for harm they suffered into one single action, and (2) representative actions which are brought on behalf of the "identifiable victims" by qualified entities, such as consumer associations, state bodies or trade associations.  Individual Member States could either designate those qualified entities in advance or certify them on an ad hoc basis for a particular antitrust infringement.  These two types of actions are meant to complement each other to "avoid excessive litigation".

Discovery - The White Paper proposes a minimum standard of access to evidence in all Member States: all alleged victims of antitrust infringements should be able to ask the court to oblige the defendants to "reveal those pieces of evidence in its possession which are essential for the victims to prove their case for damages".  However, such disclosure will be subject to strict conditions and under the control of a judge.  For example, the claimant must have presented reasonably available facts to show plausible grounds for a case, the disclosure of the requested evidence must be truly necessary and proportionate, etc.  The EC does not want a situation "where defendants settle merely to avoid the heavy costs that excessive wide-ranging discovery can create".  Importantly, the EC also recommends specific protection of Corporate Statements by Leniency Applicants even when disclosure is ordered by a court.

Passing-On Defense / Indirect Claims - The EC wants to avoid defendants having to compensate both direct customers and final consumers for the same alleged illegal overcharge.  Therefore, the EC proposes that defendants "should be entitled to invoke the passing-on defense" against purchasers who may have passed on the overcharge to their own customers.  However, the EC proposals will make it easier for indirect purchasers to bring claims because they "should be able to rely on the rebuttable presumption that the illegal overcharge was passed on to them in its entirety".

Empowering Courts to derogate from normal cost rules -  The current costs associated with antitrust damages actions and Member States' cost allocation rules such as the "loser pays" principle have been a major disincentive to bring private claims in the EU.  The EC, therefore, encourages (i) Member States to design procedural rules fostering settlements as a way to reduce costs; (ii) to set court fees at a level so that they are not a disproportionate disincentive to antitrust damages claims; and (iii) give national courts the possibility of issuing cost orders derogating, in certain justified cases, from the normal cost rules, "preferably upfront in the proceedings".  Such cost orders would guarantee that the claimant, even if unsuccessful, "would not have to bear all costs incurred by the other party".

The EC has scaled back from its earlier more ambitious and radical announcements.  There will be no treble damages and no opt-out class actions - two best known features which characterize the US system.  However, there are concerns about the exact definition of "identifiable victims" who can bring representative actions, and the method of calculating antitrust damages which will be the topic of further guidance by the EC in the coming months.

Authored by:

Neil Ray

415.774.3269

nray@sheppardmullin.com

Satellite radio is a fairly recent phenomena.  Unlike the usual AM/FM radio, satellite radio offers hundreds of commercial free channels.  It includes niche music formats (e.g. 60s music), out of market sporting events, and exclusive programming such as Howard Stern or Oprah & Friends.  Thus, in February 2007, when the only two satellite radio providers, Sirius Satellite Radio ("Sirius") and XM Satellite Radio Holdings ("XM"), announced their plan to merge, the anticompetitive signs went up.  Leading politicians and consumer groups urged the antitrust enforces to take action to halt the merger.

After investigating the competitive aspects of the Sirius-XM merger for over a year however, the Department of Justice Antitrust Division ("DOJ") announced on March 24, 2008 that it would not oppose the merger and closed its investigation.  In doing so, the DOJ issued a lengthy closing statement explaining the reasons for its decision.  It cautioned that the decision is fact-specific and readers should not draw overly broad conclusions from it as to how the Division is likely to analyze other mergers.  The Closing Statement however, clearly reflects the Division's intent and policy of analyzing mergers in terms of market realities rather than simplistic market share data.

The Closing Statement began by stating that the key issue is whether the XM-Sirius merger would enable the merged entity to profitably increase prices to consumers.  It then identified several reasons why that was unlikely to occur.

First, it found that XM and Sirius did not compete with each other for either existing customers or for new subscribers through the new car channel.  Existing customers are locked in to either XM or Sirius when they make their initial selection, the two systems are not interoperable, and the switching costs too great.  Virtually all new car manufacturers had negotiated long term (lasting through 2012) sole source contracts with either XM or Sirius.

Second, as to new customers who sign up for service through the mass market retail channel, the DOJ found that other sources of audio entertainment were a sufficient substitute for satellite radio if the merged entity raised prices.  These alternatives include traditional AM/FM radio, HD radio, and MP3 (iPods) players.  The DOJ expressly stated that "evidence developed in the investigation did not support defining a market limited to two satellite radio firms."

Third, the DOJ cited the likely evolution of technology as an important factor as mitigating any anticompetitive effects of the merger.  It stated new technologies, such as mobile broadband devices, would likely be competitive alternatives in the future and thus restrain any attempt by the merged entity to raise prices or otherwise engage in anticompetitive activities.

Fourth, the DOJ stated the merger would result in efficiencies, such as the consolidation of development, production and distribution efforts on a single line of radios thereby eliminating duplicative costs and achieve economics of scale.  The DOJ concluded that "these efficiencies alone would be sufficient to undermine an inference of competitive harm."

Despite the DOJ disclaimers, the Closing Statement does provide useful guidance for future mergers.  Perhaps most important, it reflects a policy of analyzing the anti-competitive effects of a merger on a qualitative, not quantitative, basis.  It would have been simple for the DOJ to state, as have some courts and enforcers, that the unique aspects of satellite radio make it a separate market and then nix a merger between the only two companies in that market.  Instead, the DOJ focused on switching costs, long term contracts, and alternative technologies to conclude the merger would not negatively impact either old or new customers.  The Closing Statement also shows the importance of efficiencies in DOJ merger analysis even where, as here, "[i]t was not possible to estimate the magnitude of the efficiencies with precision due to the lack of evidentiary support provided by XM and Sirius."  Finally, the length of the investigation itself, over a year after the Second Request was issued (April 12, 2007) shows that the DOJ carefully evaluated the competing claims before reaching the decision to close the investigation.  All these factors, and perhaps other language in the Closing Statement, provide useful guidance on future transactions.

Authored by:

Carlton A. Varner

213.617.4146

cvarner@sheppardmullin.com

The Anti-monopoly Law of China (“AML”) will come into effect soon and accompany the approaching Beijing Olympics.  As preparation for this highly significant law , the Implementation Rules of AML (“Implementing Rule”) have been extensively discussed within the anti-monopoly authorities.  These Implementation Rules will be an essential part for implementing and enforcing the AML.  In particular, Implementing Rules are expected to clearly define some vague clauses of AML.  Among these vague clauses, the right to file the private anti-monopoly litigation has received substantial attention from many leading multi-national companies in various industries.

1. Article 50 of AML

Article 50 of AML states that “The undertakings that violate the provisions of this Law and cause damage to others shall bear civil liability.”  This clause clearly opens the window for private civil lawsuits against monopolistic conduct in China under the AML.  As a direct interpretation to the wording, once a company’s business activity is deemed as “monopolistic activity” which violates the AML, and the harmed party has evidence of actual damages or loss, such harmed party should have the right to sue the company under the AML.

As the AML is deemed as more substantive rather than procedural in the nature, it  does not  define many important procedural issues relating to private action, including who has standing or is otherwise permitted to file a private anti-monopoly lawsuit.

2. Right to Sue of Consumers and Competitors

In absence of clear guidance by AML, any individual and legal entity is allowed to file lawsuit according the Civil Procedure Law.  Applying such rule to the anti-monopoly lawsuit, consumers are undoubtedly granted the right to sue multi-national companies, which has been confirmed by most key legislators and judges.  A leading legislator commented in an antitrust conference held in Beijing early this year that the implementation of individual consumers will be one of the most important goals of implementing AML.

However, it is questionable whether competitors, regardless registered inbound or outbound, will have the right to sue multi-national companies in China under the cause of action for monopolistic activities.  In many countries, competitors are  often  the party harmed by a company with a dominant position in an industry and therefore, do have standing to sue.  It is also true, however, that competitor standing to sue sometimes results in abusive and expensive litigation which may not promote competition at all. The United States, for example, imposes limits on competitor standing through the antitrust injury requirement coupled with the oft-stated mantra that the antitrust laws protect competition, not competitors.

3. Current Debate of Legislators

In fact, there was an debate within the legislation departments before the issuance of  the AML. The Standing Committee of National People’s Congress was concerned the risks that anti-monopoly litigation could be abused by companies in attacking state owned enterprises or growing private owned companies.  In previous drafts of the AML before the final version, the “party with interest” is entitled to file lawsuit under AML.  As discussed in various conferences before the issuance of the AML, such “party with interest” did include competitors and authorized standing to sue for competitors under the AML.  However, such term was changed in the final version of AML.  From such approach, it is a clear signal that the AML is considered as substantive law instead of procedural law, and  leaves the issue of competitor standing for judicial interpretation by Supreme Court.

According to various sources,, the legislative members of AML concluded that it should initially close the window for competitor standing.  Further, according to the legislation rules, the Supreme Court has the power to define procedural matters under any law, including the AML.  At the present time, Supreme Court has not yet issued any  interpretation or otherwise provided guidance on this issue.

4. Comment

In the current system of Chinese courts, the jurisdiction over any anti-monopoly case might eventually be set as intermediate court level.  However, due to the existence of local protection and difference of professional capacity of judges in different geographic areas, it is still risky that abuse of anti-monopoly litigation by certain local competitors might greatly impact not only state owned enterprises,  but foreign companies as well.  For example, if competitor standing is permitted, it is possible that some companies may file separate anti-monopoly lawsuits in different provinces at different time points against the same company.. The AML should be very cautious in granting the right to sue to competitors, and perhaps withhold entirely until the potential procedural abuses are resolved, and the scope of the AML itself is more established.

Authored by:

Michael X.Y. Zhang

86.21.2321.6000

mzhang@sheppardmullin.com

On March 4, 2008, a federal district court in San Jose, CA, refused to dismiss an antitrust class action complaint against eBay, the online auction company, brought by online auction participants seeking to represent a class of all eBay auction sellers and a subclass of all auction sellers on eBay who accept PayPal as the method of online payment.  See In re Ebay Seller Antitrust Litigation, No. 07-1882 N.D. Cal., No. C 07-01882 JF (RS) (2008).  As a result, the class action plaintiffs can pursue claims of abuse of monopoly power and monopoly maintenance claims.  However, the class action plaintiffs’ claim that eBay engaged in an illegal tying arrangement has been dismissed.

Background

In 2002, eBay purchased the PayPal online payment service.  In the lawsuit, plaintiffs allege that eBay engaged in anticompetitive behavior through, among other things, eBay's controls over its payment methods, elimination of  buyer-protection for non-PayPal transactions, and requirement that sellers who would otherwise accept only money transfers accept credit card payments.  Plaintiffs also allege, that prior to eBay's acquisition of PayPal, eBay engaged in anticompetitive activity through its acquisition of two of PayPal's competitors and implementation of anticompetitive policies, including entering into agreements with AOL, Yahoo, and Google which purportedly eliminate competition by, inter alia, preventing potential competition and creating territorial market divisions. Plaintiffs also allege that eBay's exclusive marketing of PayPal and exclusion of competitor person-to-person online payment systems constitutes an illegal tying arrangement under the antitrust laws.

Based on the foregoing allegations, plaintiffs allege that eBay violated Sections 1 and 2 of the Sherman Act and Sections 1620 and 17200 of the California Business & Professional Code, and assert claims for: (1) abuse of monopoly power and monopoly maintenance for online auctions; (2) attempted monopolization of the market for online auctions; (3) abuse of monopoly power and monopoly maintenance in the market for person-to-person online payment systems; (4) attempted monopolization of the market for person-to-person online payment systems; (5) per se unreasonable tying; (6) unlawful trust, combination, or conspiracy in restraint of trade and commerce; and (7) unfair business practices.  On June 8, 2007 eBay moved to dismiss the bulk of the class action claims.

The Court's Decision

Monopolization

eBay moved to dismiss plaintiffs’ monopolization and attempted monopolization claims on the grounds that plaintiffs do not plead the existence of interchangeable alternatives to both eBay and PayPal and, therefore, failed to plead an identifiable relevant market.  However, the court stated that plaintiffs do not allege that eBay’s product alone constituted the relevant market, and have satisfied the elements of a prima facie case of anticompetitive behavior.  In addition, while the court noted that plaintiffs' market theory "may be implausible as a theoretical matter," the court noted that there has not yet been any discovery and plaintiffs are entitled to the opportunity to develop their claims.

eBay also moved to dismiss plaintiffs’ monopolization and attempted monopolization claims on the grounds that plaintiffs failed to identify any exclusionary or anticompetitive conduct arising from eBay’s acquisition of PayPal and online payment policies.  The court rejected eBay's argument and held that plaintiffs' allegation –– that eBay’s acquisition of PayPal and related policies are anticompetitive because it prevents online auction competitors from breaking into the online auction market–– satisfy the initial pleading requirements.

As a result, the court denied eBay’s motion to dismiss and plaintiffs can pursue abuse of monopoly power and monopoly maintenance claims.

Antitrust Injury

eBay also sought dismissal of plaintiffs’ claims on the grounds that plaintiffs failed to plead an antitrust injury, arguing that plaintiffs did not identify any consumers other than the named plaintiffs who were harmed by the alleged anticompetitive conduct.  The court rejected eBay's argument as misplaced because the requirement that a complaining competitor must show harm to consumers does not apply when the complaining plaintiff is himself a consumer.  Thus, the court ruled that plaintiffs adequately pled an antitrust injury.

Illegal Tying

Next, eBay moved to dismiss plaintiffs’ allegation that eBay’s online payment policies support a claim of an illegal tying arrangement.  Relying on Ninth Circuit case law that  requires an allegation of tying to include a claim of “pernicious effect on competition and lack . . . of any redeeming virtue,” Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958), the court held that plaintiffs failed to sufficiently allege that any tying arrangement actually caused harm to online auction market competitors.

Unfair Competition

Noting that California's unfair competition laws define unfair competition broadly, the court concluded that plaintiffs adequately pled claims for abuse of monopoly power and monopoly maintenance and, therefore, adequately pled a predicate claim.

Authored by:

Daniel L. Brown

212.332.3879

dbrown@sheppardmullin.com

On March 12, the UK's House of Lords (HoL) allowed an appeal by Ian Norris, former chief executive of the Morgan Crucible Group, against a decision of the High Court which had held that dishonest price-fixing is capable of amounting to the English common law offence of conspiracy to defraud and so is an extradition offence. The HoL remitted the case to a district judge to assess whether it would be proportional to grant an extradition request in relation to the secondary offences regarding Mr. Norris' alleged obstruction of the US criminal investigation into the cartel.  The HoL held that in order for an offence to be committed, aggravating factors such as dishonesty, misrepresentation, fraud or violence must also be present and noted that there had never been a successful prosecution for being a party to, or giving effect to, a price-fixing agreement without the presence of such aggravating features.  The HoL also considered the history of legislation dealing with agreements in restraint of trade.  It considered that, historically, cartel agreements were not, of themselves, necessarily considered to act against the public interest.  Although participation in a cartel could, in some cases, be penalized by civil remedies, it could not give rise to criminal sanctions.  The HoL considered that the system of regulation whereby restrictive agreements were registrable appeared to have represented a regulatory, non-criminal code to deal with cartel agreements.  It was, therefore, unlikely that Parliament could have intended that there should be an extra-statutory system involving criminal sanctions running alongside the regulatory system.  However, the HoL disagreed with Mr. Norris's arguments that these offences were not extradition offences under the Extradition Act because it was not an offence under English law for him to conspire to obstruct a criminal investigation into price-fixing being carried out by a grand jury in Pennsylvania.  The HoL held that price-fixing could have been combined with other elements that may have led to various offences, such as fraud.  The exact outcome of an investigation could not have been determined when it was in progress. The fact that the investigation resulted in a charge of price-fixing alone was no reason to hold that it would not have been an offence under English law to obstruct the progress of an equivalent investigation by the appropriate body in the UK.

On March 28, in an opening speech to the Spring Meeting of the ABA's Antitrust Section, EC Competition Commissioner Neelie Kroes rejected US perceptions that European competition policies are anti-business. She argued that, although they have a different historical background, EU and US competition policies share the same goal of achieving competitive markets.  She also highlighted some EU policy innovations, including the White Paper on private damages actions which the Commission will publish during April 2008.  She explained the context of the EU and the development of EU competition policy, which has sought to merge 27 different economies, on a consensual basis within a comparatively short time scale.  The complications arising from the nature of the EU does not mean that the Commission is anti-business or that its cases are decided on anything other than their merits.  Commissioner Kroes considers that the EU and US systems are actually very similar.  She stated that although they may not "tread the same path at the same pace", they are "heading in the same direction".  She described how the EU and US have similar starting points and are working towards the same goal: competitive markets as a basis for prosperity. She added that both jurisdictions believe that competition, not competition policy, makes markets work and regulation should not be excessive.

On March 11, the European Commission announced that it has decided under Article 8(1) of the EC Merger Regulation to approve the proposed acquisition of the online advertising technology company DoubleClick, by Google.  In November 2007, the EC opened an in-depth investigation into the merger.  It was concerned that the merger could raise competition concerns in the markets for intermediation and ad serving in online.  The EC's investigation found that Google and DoubleClick were not exerting major competitive constraints on each other's activities and could not be considered as competitors at the moment.  Even if DoubleClick could become an effective competitor in online intermediation services, the Commission considered that it was likely that other competitors would exert sufficient competitive pressure following the merger. The Commission, therefore, considered that the elimination of DoubleClick as a potential competitor would not have an adverse impact on competition in the online intermediation advertising services market.

On March 11, the Japanese government authorities decided to submit a draft amendment to the Anti-monopoly Act to the Diet. The key points of the draft amendment are (i) the range of conduct for which the JFTC may impose surcharges will be extended to include, inter alia, misrepresentations, exclusionary types of private monopolizations and abuses of superior bargaining positions, and (ii) certain aspects of the current notification system for merger reviews will be revised, including the pre-notification system for share acquisitions.

On March 18, the European Commission announced that it is to conduct a joint research project with the US Department of Transportation (DOT) into transatlantic air services.  The project will consider the growth of airline alliances, and their effect on competition.  It will also look at the possible changes in the role of airline alliances following the EU-US Air Transport Agreement which was agreed in draft in March 2007 and is expected to be applied from the end of March 2008, pending ratification.  The Commission states that the agreement is expected to enhance competition by allowing EU or US airlines to serve any routes between Europe and the US, and calls for the Commission and the DOT to develop a common understanding of trends in the airline industry in order to promote compatible approaches on competition issues.  It is intended that the project will allow the Commission and DOT to cooperate more effectively based on a common understanding of competition in transatlantic markets and inform public discussions on the future of air transport.

The New Zealand High Court recently imposed penalties against a number of defendants involved in an alleged cartel in the wood preservative chemicals industry.  These chemicals are used by millers, timber treatment operators and in wood product businesses.  The NZ Commerce Commission alleged that two corporations together with their senior executives were parties to an overarching understanding that they would maintain market share, avoid unrestrained competition, and keep prices above their competitive level.  They alleged that price information was shared which resulted in uniform and simultaneous price rises, agreements to avoid direct price competition in bids for, or sales to, specific customers or agreeing to non-competitive bids for supply to ensure buyers remained purchasers from existing suppliers.  It was also alleged that following the attempted entry of a new competitor into the market, the two companies' executives also agreed to restrict the supply of chemicals and blending services to the new entrant and implemented that understanding including by exerting commercial pressure on suppliers not to meet the new company's orders.  Section 27 of the NZ Commerce Act 1986 prohibits contracts, arrangements or understandings that have the purpose, or have or are likely to have the effect, of substantially lessening competition in a market.  Under Section 80 of the Act, an individual who breaches Section 27 can be liable to a pecuniary penalty not exceeding NZ$500,000, and in the case of a body corporate, the greater of NZ$10,000,000 or three times the value of any commercial gain resulting from the contravention, or if the commercial gain cannot be readily ascertained, 10% of the turnover of the body corporate and all of its interconnected bodies corporate.

In two decisions on February 28 and March 14, the Norwegian Competition Authority (NCA) imposed fines of NOK1.6 million (approximately €200,000) and NOK1.3 million (approximately €162,500) respectively on two chemical for their alleged infringement of the Norwegian Competition Act. The two companies are competitors in the market for technical acetic acid which is used in the fishing industry and in the oil and gas industry.  They were alleged to have participated in illegal market-sharing and collaboration.  In its assessment of the fines, the NCA emphasized that market-sharing is one of the most serious infringements of the Norwegian Competition Act and that the alleged infringements occurred in a market with few operators.  The two particular companies together handled approximately all the technical acetic acid that is distributed/sold in the Norwegian market.

The Head of the Russian Federal Antimonopoly Service (FAS), Igor Artemyev, warned that the FAS will seek higher penalties for breaches of antimonopoly legislation.  Changes in the method of calculating penalties could lead to fines increasing two fold.  At present, penalties (within the 1-15% range) have generally been set at about 3-5% of turnover.  Under the new proposals, average fines would be between 7-8% of turnover.  Accordingly, Igor Artemeyev has warned that fines for anti-competitive behavior could double.  He has also warned that the period for companies to become accustomed to the penalties that can be imposed under Russian anti-monopoly law has now expired.  The fact that the law has been breached for the first time will no longer be an attenuating circumstance.  In addition, the FAS intends in the coming months to provide for an extension of the limitation period for imposing fines for anti-competitive behavior (if the damage caused exceeds RBL 1 million) from five to six years.

On March 26, the Netherlands Competition Authority (NMa) stated that it would like to receive any concrete complaints and signals which internet entrepreneurs have (such as sales prices compulsorily imposed by manufacturers and discriminating conditions for internet shops), substantiated by as many background documents as possible (letters, e-mails, telephone notes). The NMa will then be able to assess whether these complaints provide sufficient ground for an inquiry.  The NMa is looking for internet retailers that wish to complain that manufacturers force them to charge higher sales prices for the products that they sell following a survey of internet retailers by the Dutch distant selling organization, Nederlandse Thuiswinkel Organisatie (NTO), which showed that manufacturers are trying to prescribe the prices for internet retailers so that they are required to set higher prices than ordinary shops.

Authored by:

Neil Ray

415.774.3269

nray@sheppardmullin.com