Section 2 of the Sherman Act prohibits monopolization and attempted monopolization. Both offenses require a high degree of market power coupled with exclusionary conduct. Defining what constitutes exclusionary conduct, however, is one of the great conundrums of antitrust law since much legitimate competition is exclusionary in some sense. See generally Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 124 S. Ct. 872, 882-83 (2004). Therefore, courts have limited exclusionary conduct for Section 2 purposes to conduct which may otherwise violate the antitrust laws - - such as tying or exclusive dealing - - or other conduct when the alleged monopolist forgoes short-run benefits to reduce competition in the long run. Trinko, 124 S. Ct. at 879-80; Aspen Skiing v. Aspen Highlands Skiing Corp., 472 U.S. 585, 608 (1985).

Disparagement of a competitor's product has long been at the outer boundary of exclusionary conduct, and seldom sufficient by itself to establish a Section 2 violation. See Conwood Co. L.P. v. U.S. Tobacco Co., 290 F.3d. 768, 783-84 (6th Cir. 2002); Caldera v. Microsoft Corp., 87 F. Supp. 2d 1244, 1249 (D. Utah 1999). In Sanderson v. Culligan International Company, 2005 LEXIS 13969 (7th Cir. 2005), however, the Court went a step further and concluded that "commercial speech is not actionable under the antitrust laws." Id. at 9. This rather broad conclusion derived from a set of facts in which the defendant allegedly violated federal antitrust and trademark laws by asserting that plaintiff's "magnetic water conditioners" didn't work. After a brief review of the scientific literature, which raised some doubts about the efficacy of magnetic systems, Judge Easterbrook stated that he would nonetheless "indulge the assumption that adverse statements about Magnatek's products are calumnies." Id. at 4.

The Court then characterized plaintiff's claim as resting on the belief that antitrust laws forbid all unfair tactics, without regard to the likelihood that the adversary will achieve a monopoly at consumers' expense. This is simply not the case, said the Court, as antitrust laws favor competition of all kinds, whether or not some other producer thinks it is fair. Id. at 5-6. Much of competition is unfair and, while some laws condemn unfair tactics, . . ." the Sherman Act is not among those laws." Id. at 6.

False statements about a rival's products do not curtail output or raise prices, the main concerns of the Sherman Act. Rather, said the Court, they just set the stage for competition in a different venue - - the advertising market. Quoting from its prior opinion in Schacher v. American Academy of Ophthalmology, 870 F. 2d. 397, 399 (7th Cir. 1989), the Court stated:

Warfare among suppliers and their different products is competition. Antitrust law does not compel your competitor to praise your product or sponsor your work. To require cooperation and friendliness among rivals is to undercut the intellectual foundations of antitrust law.

The Court went on to distinguish American Society of Mechanical Engineers v. Hydrolevel Corp., 456 U.S. 556 (1982), where some producers persuaded an engineering society to write standards in a manner that only their products met the standards. The standards were later incorporated into building codes and similar legal mandates, thus effectively knocking the rivals' nonconforming products out of the market. Here, said the Court, magnetic devices were not excluded from the market. Defendant's successful effort to persuade a trade group to withhold its "Gold Seal" of approval from magnetic devices makes no difference, as "Gold Seal" is simply a marketing device, not a government requirement.

The Court then concluded by stating that commercial speech is not actionable and what producers say about each other in an effort to sway consumers is competition in action. While some other law may require truth in advertising " . . .the Sherman Act does not."

While Judge Easterbrook's opinion is, as usual, quite persuasive, it should be emphasized that there was little, if any, other exclusionary conduct in Sanderson which accompanied the product disparagement. In most Section 2 cases, disparagement is only one of several types of exclusionary conduct and defendant's conduct as a whole is analyzed to determine whether it is exclusionary. See, e.g. City of Mishikawa v. American Elec. Power Co., 616 F. 2d. 976, 986 (7th 1980). Likewise, disparaging statements about a rival or its products are sometimes relevant to show an intent to monopolize or otherwise illuminate the purpose of conduct that may be either exclusionary or just legitimate competition. Further, as the Sanderson Court itself conceded, such disparagement may be actionable under other laws. The bottom line is that Sanderson is an instructive opinion, but should not be viewed as giving companies cartè blanche to start bashing their competitors' products.

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

In Parker v. Brown, 317 U.S. 341, the Supreme Court held that states were immune from the federal antitrust laws. This doctrine, known as state action immunity, is based on the theory that states acting in their capacities as sovereigns should not be subject to the federal antitrust laws out of respect for federalism. As originally formulated in Parker, state action immunity only applied if the specific anticompetitive activity at issue was directed or compelled by the state. Subsequent cases have relaxed the requirements for the immunity to apply, however. In California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), the Court held that the challenged restraint should be a clearly articulated and affirmatively expressed state policy, actively supervised by the state, and that mere authorization by the state, as opposed to compulsion, constituted sufficient clear articulation. In Town of Hallie v. City of Eau Claive, 471 U.S. 34 (1985), the Court further expanded the scope of state action immunity holding that the anticompetitive activity need only be a "foreseeable result" of the state statute to satisfy the clear articulation requirement and that active supervision is not required if municipalities or other public entities are involved. In City of Columbia v. Omni Outdoor Advertising, 499 U.S. 365 (1991), the Court applied the foreseeable result standard to immunize restrictions on the construction of billboards imposed by a city, allegedly for the purpose of preserving the monopoly position of an incumbent, based on the state's grant of zoning authority to the city. The Court reasoned that zoning laws inherently involve the displacement of competition and, as such, harm to competition was a foreseeable result of the state's grant of zoning authority to the city. Thus, although lower courts have varied somewhat in how they have interpreted these precedents, there appears to have been a distinct trend since Parker to expand the scope of state action immunity by finding clear articulation in broad or general grants of authority to act by states.

The Sixth Circuit has recently issued an opinion consistent with this trend. In Jackson, Tenn., Hospital Co. v. West Tennessee Healthcare Inc., No. 04-5387 (6th Cir. July 11, 2005), a private hospital in Tennessee brought suit against a public Tennessee state hospital district and various other entities with which the hospital district contracted, alleging that they engaged in anticompetitive acts in order to monopolize the local health care market in violation of the antitrust laws. The anticompetitive acts alleged by the plaintiff hospital included exclusive contracting with doctors and insurance companies, acquiring real estate around the plaintiff hospital to block its expansion, charging prices that were too low or too high, acquiring other healthcare providers, and illegally bundling its services. In response, the defendant public hospital district argued that its acts were protected by state action immunity.

The Court first noted that the hospital district was created by the Tennessee legislature, that it is a political subdivision of the state, and the very broad nature of the powers granted to these public entities by the state. The state statute governing hospital districts grants them powers such as incurring debt, owning and operating subsidiaries, setting fees to be charged to patients, and acquiring or improving real property. The statute further provides that hospital authorities shall "[h]ave and exercise all powers necessary or convenient to effect any or all of the purposes for which" they were created. Finally, and crucially for the Court's opinion, the statute also states that a hospital district "may exercise such powers regardless of the competitive consequences thereof."

Citing Town of Hallie¸ the Court stated that, as a political subdivision of the state, the hospital district's acts would be protected by state action immunity if they were undertaken pursuant to a clearly articulated state policy. Quoting City of Columbia, the court also noted that "'[i]t is enough…if suppression of competition is the foreseeable result of what the state authorizes." Applying these principles, the Sixth Circuit concluded that the hospital district acted pursuant to the clearly articulated policy contained in the statute governing hospital districts. In the Court's view, the statutory language clearly demonstrated that "the Tennessee legislature invested [hospital districts] with very broad powers to ensure their continued viability; authorized them to exercise many powers, such as contracting for services and acquiring property, that could easily lead to anticompetitive consequences; and then specifically stated that such activities could be undertaken without regard to the effects of such activity on competition." Thus, the hospital's acts were immunized not only because anticompetitive consequences were a foreseeable result of the broad powers granted to hospital districts, but also because the statute explicitly instructs hospital districts to exercise those powers regardless of such consequences. Especially in light of the authorization to act "regardless of the competitive consequences," concluded the Court, the state of Tennessee had clearly expressed a policy authorizing hospital districts to displace competition.

The plaintiff, citing sections from the Tennessee Constitution and Tennessee Code, argued that the Tennessee legislature in fact intended to promote competition in the healthcare market and favors competition generally. The plaintiff also pointed out that the statement of purpose in the Acts amending the hospital district statute to allow the hospital districts to have such broad powers expressed a desire to enable hospitals to compete with private hospitals. The court dismissed this argument by invoking the principle of interpretation that the specific trumps the general. Although Tennessee may well prefer competition as a general matter, as does the federal government, both state and federal governments regularly create exceptions to this general policy of competition. In the present case, the court continued, "the language of the statute clearly indicates the desire to create an exception to the antitrust laws, and the general preference for competition is therefore superseded."

Finally, the plaintiff argued that the phrase "regardless of competitive consequences" was simply a recognition by the legislature that empowering the hospital districts to enter into contracts and exercise other powers that enabled them to better compete with private hospitals may disadvantage or harm individual competing hospitals, not authorization by the state to harm the competitive process itself. The Court was unconvinced by this reading of the phrase. Given that it is obvious that any government entity's actions will affect, sometimes negatively, private actors, the plaintiff's reading of the phrase would render it superfluous. Moreover, the phrase "competitive consequences" is commonly used in the context of antitrust and competition law; it is not commonly found in any other context. Hence, in the words of the court, "permission to act 'regardless of competitive consequences' is most sensibly read as an authorization to act without regard for the antitrust laws."

The Sixth Circuit adheres to an expansive conception of the scope of state action immunity. As the opinion in Jackson, Tennessee Hospital noted, the Sixth Circuit, in Michigan Paytel Joint Venture v. City of Detroit, 287 F.3d 527 (6th Cir. 2002), had recently applied the foreseeable result standard in holding that Michigan law implicitly authorized anticompetitive conduct when it empowered prisons to grant public contracts for the provision of telephone services. In light of this broad conception of state action immunity, the Tennessee legislature's statutory statement that hospital districts were to exercise their broad powers without regard to competitive consequences made the Jackson, Tennessee Hospital case an easy one for the Sixth Circuit.

Authored by:
Anik Banerjee
213-617-4124
abanerjee@sheppardmullin.com

In a number of recent speeches, Ms. Neelie Kroes, the European Competition Commissioner, has highlighted the European Commission's ("Commission") intention to undertake a comprehensive review of the European Community's ("EC") state aid policy to stimulate European economic growth and increase European competitiveness on the global market.

Since the signing of the Treaty of Rome in 1957, state aid policy has been an integral part of the EC's competition policy. Article 87 of the EC Treaty prohibits any aid granted by a Member State which distorts or threatens to distort competition by favoring certain firms or the production of certain goods in so far as it affects trade between Member States. The Commission is responsible for monitoring proposed and existing state aid measures by Member States to ensure that they do not distort intra-community competition and trade to an extent contrary to the common interest, and applying the Treaty's exceptions to the ban on state aid.

However, the Commission has recognized that state aid control has evolved over the years into an unnecessarily complicated set of rules, exemptions, and guidelines. The procedures have grown lengthy and cumbersome. The Commission has had to intervene in rather insignificant cases, and Commission approval of state aids is often seen as just one additional bureaucratic formality to be jumped at the end, once the decision to grant aid has already been taken. The EC's enlargement in 2004 underlined the need for an adaptation of state aid policy.

The Commission proposes to redesign the future state aid regime around two twin principles: efficiency and equity. According to Ms. Kroes, efficiency will promote overall economic growth by targeting the gaps that the markets alone cannot fill. State aid rules should help Member States obtain the best value for money for their taxpayers, and ensure that scarce national resources are used where they can have the most impact. Equity means more than ensuring that European companies compete as equals on the basis of merit within Europe's Single Market. It also means delivering on a wide range of primarily non-economic issues which are of fundamental importance to Europe's social model, including social and regional cohesion, cultural diversity, and environmental protection.

The Commission has, therefore, issued a State Aid Action Plan, setting out the philosophy, principles and key proposals which will guide its action over the next five years. The State Aid Action Plan contains four key features:

• A general philosophy of less and better state aid. The State Aid Action Plan puts forward general criteria to assess the validity of an aid measure. It argues that state aid should only be used: when it is an appropriate instrument for meeting a well defined objective of common interest (like cohesion, public services, economic growth, or employment); when it creates the right incentives and is proportionate to the problem; and, when it distorts competition to the least possible extent so that on balance it can be authorized by the Commission.

• Refined economic analysis. An economics-based approach will focus aid on market failures in areas that make a difference for the overall competitiveness of Europe. By market failures, the Commission means situations where the market by itself does not deliver an efficient outcome, and gives an example in the field of risk capital, where normal market conditions typically mean that small, innovative and thus risky businesses face tremendous problems in getting funding. In these circumstances, the State is sometimes the only economic actor able to change the incentives for investors, to make them consider innovative ventures worth a try. Commissioner Kroes has also recognized the importance of facilitating the pursuit of wider state aid objectives such as environmental protection, research and development support, and the promotion of regional cohesion.

• Efficient procedures. The Action Plan will also aim to improve the efficiency and transparency of state aid procedures, and speed up decision-making. The Commission will consolidate and extend as much as possible the use of block exemptions, which authorize the granting of aid without it being notified to the Commission. This will allow the Commission to concentrate its resources on cases that significantly distort competition and trade. Fewer aid measures should need to be notified, which means less bureaucratic burden on companies and authorities. The Commission also intends to simplify and consolidate the many existing regulations, so that the overall architecture of state aid policy is easier to grasp. Best practice guidelines will help make the framework as user-friendly as possible.

• Partnership with Member States. The Commission recognizes that the success of these reforms depends on the willingness of Member States to work in partnership. Member States can cooperate by providing complete notifications, or timely and accurate replies to the Commission's questions. In terms of policy goals, Member States are responsible for setting their own spending priorities and designing schemes that generate growth and sustainable jobs. Finally, if state aid is condemned as illegal and incompatible, Member States have a duty to recover the illegal subsidies, and to put the money to other uses in the interests of their tax-payers.

The Commission's State Aid Action Plan provides a roadmap of the reforms which the Commission intends to deliver over the coming years. It aims to meet the two basic objectives of state aid policy - efficiency, and equity - and put Europe firmly back on the path to sustainable growth and jobs. Before finalizing its regulatory proposals, the Commission's Action Plan is subject to public consultation, and comments must be received by September 15, 2005.

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

Competition Bureau Announces Withdrawal of Regulated Conduct Defence Bulletin and Forthcoming Issuance of New Bulletin

On June 20, 2005, Canada's Competition Bureau changed directions and announced that it would immediately withdraw its Information Bulletin on the Regulated Conduct Defence released in December 2002 (the "Bulletin") and release a new Bulletin on the Regulated Conduct Defence ("RCD") in Fall 2005.¹ The announcement came after the Bureau reviewed submissions received in response to its invitation for public comment on the Bulletin. The stated purpose of the Bulletin is to "outline and clarify the Bureau's position with regard to the jurisprudence on [the] regulated conduct defence." Since its release, however, the Bulletin has been sharply criticized for "ignoring the very jurisprudence which forms the RCD and reflecting a view that is at odds with that jurisprudence."² This is troubling and creates uncertainty in the law since the Bureau's administrative guidance, whether characterized as "guidelines" or an "information bulletin", often serves in practice as a statement of law. ³

The RCD Permits A Party Acting Pursuant to or At Least Under the Authority of Other Regulation to Escape Liability under the Competition Act

The Regulated Conduct Defence is a principle established in the case law of the predecessor to the Act, the Combines Investigation Act. The RCD constituted a defense to liability for the many criminal offences under this former competition legislation. The RCD provides a means of resolving liability under the Act where the Act overlaps or is in conflict with other valid regulatory legislation. It thus is important to energy, broadcasting, environmental, agriculture and other industries subject to regulatory schemes. Canadian courts have primarily applied the RCD in cases where conduct mandated or authorized by valid provincial regulatory legislation is at the same time inconsistent with the Act. It has, however, also been applied in the federal regulatory context.

Under the RCD, an activity will be excluded from liability under the Act provided the other legislation under which one has acted and raises in its defense is (1) validly enacted; (2) the activity or conduct falls within the scope of the legislation and is at least authorized under that legislation; (3) the regulator exercises its authority (passive acquiescence or tacit approval is not enough); and (4) the conduct does not frustrate the public body from carrying out its responsibilities.

The new Act decriminalized many of the offenses under the former competition legislation and some commentators and the Bureau have questioned whether the RCD is available as a defense to the civil provisions of the Act. In the Bulletin, the Bureau accepted that the RCD could apply to the civil provisions of the Act. Nevertheless, the Bureau adopted a more narrow view of the RCD, stating that the conduct in question must have been mandated or required by the regulator, not just authorized by it. Likewise, conduct that is voluntary and which merely receives regulatory approval would no longer benefit from the RCD. Thus, where there is a conflict between the Act and another statute, the Bulletin prioritizes the Act over such other legislation.

In addition, the Bulletin supplemented the four factor test for the RCD, outlined above, by requiring that there be a "clear operational conflict." Commentators criticize this narrowing of the principle and point out that the clear operational conflict requirement has no support in the jurisprudence that forms the basis for the RCD. Rather, the requirement is derived from a Supreme Court decision addressing a conflict between decisions of two federal administrative tribunals.⁴ In that instance, the Court held that such problems should be resolved by a "pragmatic and functional" approach according to which one decision should take precedence over the other only when the conflict is real and not merely apparent.

Stakeholder Submissions

The Bureau received submissions from stakeholders including media industry participants, the Canadian Bar Association and public interest advocacy groups. Many of those providing submissions to the Bureau admonished it for not consulting with stakeholders, as the Bureau has done in other areas, prior to releasing the Bulletin.⁵ While one submission adopted the unlikely position that the Act should simply not apply to business transactions in the broadcasting industry, the others implored the Bureau to improve and clarify the Bulletin by specifying the jurisprudence underpinning the propositions in the Bulletin and to update the Bulletin by applying relevant cases decided after the Bulletin was issued in 2002.

How Garland Could Affect Use of the RCD in Competition Cases

One such case is Garland v. Consumers' Gas Company, decided by the Supreme Court of Canada in 2004.⁶ Although not a competition case, the Court's statements in Garland regarding the inapplicability of the RCD to that case could support an argument that the RCD does not apply to per se criminal offences under the Act. In Garland, the respondent utility company attempted to avail of the RCD to escape liability for the plaintiff class action's unjust enrichment claim that the late payment penalties levied by the respondent exceeded the interest limit prescribed by Section 347 of Canada's Criminal Code. The Court held that for the RCD to be available, "Parliament needed to have indicated, either expressly or by necessary implication, that Section 347 of the Criminal Code granted leeway to those acting pursuant to a valid provincial regulatory scheme."⁷ A valid a provincial regulatory scheme therefore will not displace the application of the Criminal Code unless Parliament indicates, either expressly or by necessary implication, that the relevant section of the Criminal Code grants leeway to those acting pursuant to such a scheme. Garland will likely thus have an impact on parties subject to provincial regulatory schemes where such schemes potentially conflict with the Criminal Code.

With regard to competition cases, Garland could be interpreted to mean that the RCD does not apply to criminal offenses under the Act. The CBA's National Competition Law Section, for one, believes that the RCD continues to apply to per se criminal offenses under the Act on the basis that those adhering to or exercising powers under a provincial regulatory scheme would not act with criminal intent.⁸ If the Act is amended to create a per se offense for hard core cartels, this issue will become significant, particularly for the many provincial marketing boards utilized in Canada.

Invoking the RCD in the Merger Context

Another issue the 2002 Bulletin raised is the circumstances in which parties to a merger could invoke the RCD. The Bulletin took the position that the RCD is applicable in the context of civil reviewable practices, including mergers, regulated by the Act. However, the Bulletin suggested that for the RCD to apply, a "clear operational conflict" between regulatory legislation and the Act must be found. As noted by the CBA National Competition Law Section, conceiving of a merger case with "clear operational conflict" between regulatory legislation and the Act is difficult. In the merger context, the parties undertake a merger based on their own private, voluntary decision and not pursuant to any regulatory or legislative mandate. Submissions on the RCD recommended that the Bulletin acknowledge the case law where other regulation has provided an effective defense in the merger context and explain how the Bureau will analyze the relevance of other regulation in similar cases.

Conclusion

Like the filed rate doctrine and the principle of state action immunity in U.S. antitrust law, the RCD, for participants in regulated sectors of the Canadian economy in particular, is a valuable defense to liability for anticompetitive conduct. Whether the recent Garland decision will be applied to a competition case and whether it has any relevance in circumstances where there is potential conflict between two or more federal statutes remains to be seen. Moreover, how the Bureau chooses to reformulate its position on the RCD more generally in issuing its forthcoming bulletin will shed light on the scope and availability of the RCD in Canadian competition law.

1. Press Release, Canadian Competition Bureau, Competition Bureau to Draft New Bulletin on the Regulated Conduct Defence (June 20, 2005), online: Competition Bureau Homepage: http://www.competition bureau.gc.ca (last accessed July 29, 2005).


2. Submission of the Canadian Bar Association National Competition Law Section, January 6, 2005, available online: Competition Bureau Homepage: http://www.competition bureau.gc.ca (last accessed July 29, 2005).


3. Submission of the Canadian Bar Association National Competition Law Section, October 2003, resubmitted January 6, 2005, available online: Competition Bureau Homepage: http://www.competition bureau.gc.ca (last accessed July 29, 2005).


4. Shaw Cable Systems (B.C.) Ltd. et al. v. British Columbia Telephone Co. et al (1995), 125 D.L.R. (4th 443 (S.C.C.).
   
5. See the CBA's October 2003 submission, supra note 3 at 3. Other commentators on the Bulletin express the same view. See D. Jeffrey Brown, "The Competition Bureau's Information Bulletin on the Regulated Conduct Defence: Observations from the Astral/Telemedia Case," Canadian Competition Record (2003).


6. [2002] 1 S.C.R. 629 [hereinafter Garland].


7. Id. at para. 77.


8. January 6, 2005 submission of the CBA National Competition Law Section, supra note 2 at 2.


Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com

• On July 21, the American Medical Association asked the DOJ's Antitrust Division to thoroughly investigate the proposed acquisition of PacifiCare Health Systems by UnitedHealth Group through a letter sent to Attorney General Alberto R. Gonzales.

• On July 18, the Financial Times reported that DOJ's Antitrust Division is closely evaluating antitrust implications of mergers proposed by both the New York Stock Exchange and Nasdaq. The Nasdaq has proposed buying Instinet's electronic trading network, and the NYSE proposes merging with electronic rival Archipelago.

• On July 14, KLA-Tencor announced that the Antitrust Division notified it that the DOJ has closed its investigation of KLA's offer to acquire August Technology Corp. As a result of the closed investigation, KLA-Tencor anticipates that, in the event that it is able to reach an agreement to acquire August, the DOJ would not issue a "second request" for additional information pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, but would instead permit the transaction to proceed.

• On July 13, the DOJ announced that it reached a settlement with the Kentucky Real Estate Commission under which real estate brokers in Kentucky will be able to offer rebates and inducements to consumers. The proposed settlement would resolve the DOJ's competitive concerns and lawsuit against the Commission. On March 31, 2005, the DOJ filed a civil antitrust lawsuit challenging the Commission's regulations that prohibited Kentucky real estate brokers from offering rebates and other inducements to attract customers. The complaint alleges that the Commission's regulations restricted competition and caused consumers to pay higher prices for real estate services. Under the proposed settlement agreement, the Commission agreed to cease enforcement of its regulations prohibiting rebates or other inducements. The proposed final judgment also states that any disciplinary action initiated by the Commission against any broker for offering a rebate, discount, or other inducement is null and void, and the Commission must note that in its records.

• On July 12, Rudolph Technologies, Inc. announced that it has been advised by the DOJ's Antitrust Division, that the DOJ has closed its investigation into the competitive effects of the proposed merger of Rudolph and August Technology Corporation.

• On July 11, Adobe Systems announced that they have received a second request for additional information and documentary materials from the DOJ in connection with Adobe's pending acquisition of Macromedia. The second request is limited to information about the companies' products in the areas of web authoring/design and vector graphics illustration.

• On July 6, Alltel Corp. agreed to divest assets in rural areas of Arkansas, Kansas, and Nebraska to proceed with its $6 billion acquisition of Western Wireless. DOJ's Antitrust Division contended that the deal, as originally proposed, would have resulted in higher prices, lower quality, and diminished investment in network improvements for consumers of mobile wireless services in those affected areas. The complaint alleged that the proposed deal would result in substantially reduced competition for mobile wireless telecommunications services in 16 areas where both Alltel and Western Wireless operate. In these areas, DOJ asserted, Alltel and Western Wireless are each other's most significant competitors. To resolve these concerns, the proposed consent decree would require the merged firm to divest Western Wireless' mobile wireless services business--including spectrum and customers--in nine Nebraska markets, six Kansas markets, and one Arkansas market.

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

• On July 28, the FTC voted to authorize the staff to seek a temporary restraining order and preliminary injunction to block Aloha Petroleum LTD's ("Aloha") proposed $18 million acquisition of the half interest in an import-capable terminal and retail gasoline assets of Trustreet Properties, Inc. ("Trustreet") on the island of Oahu, Hawaii. According to the Commission's complaint, the transaction, which was not reportable under the Hart-Scott-Rodino (HSR) premerger filing guidelines, would reduce the number of gasoline marketers and could lead to higher gasoline prices for Hawaii consumers. Aloha seeks to acquire from Trustreet a 50 percent interest in the Barbers Point petroleum importing terminal on Oahu. Aloha already owns the other half. Aloha also would acquire, through long-term leases, 18 retail stations that Trustreet now operates under the "Mahalo" brand name.

  Built in the 1990s, the Barbers Point terminal is the newest on the island. It can take full cargoes of gasoline, which is the most economical way to bring in low-cost bulk supply. The complaint alleges that the ability to import cargoes of gasoline is necessary to obtain a competitive bulk supply price from one of the two refiners on Oahu. These refineries are owned by Chevron Corporation ("Chevron") and Tesoro Corporation ("Tesoro"). Both Aloha and Trustreet have the right and ability to use the Barbers Point terminal to import cargoes of gasoline or to store gasoline obtained from the refiners on Oahu. The only other terminal that will be available for gasoline imports is the Shell terminal. Consequently, the complaint alleges, this acquisition, if allowed to proceed, would reduce the number of gasoline marketers with ownership of, or guaranteed access to, a refinery or an import-capable terminal from five to four, and would reduce from three to two the number of bulk suppliers who have been willing to sell to unintegrated retailers, thereby leading to higher prices for bulk supply of gasoline.

  All refined petroleum products supplied to Hawaii's outer islands come from Oahu, which is the only island with refineries and with terminals large enough to supply the rest of the State. Accordingly, any combination of bulk suppliers on Oahu is likely to impact the other Hawaiian islands as well.

  Regarding the retail market, there are seven major gasoline retailers on Oahu: Chevron, Tesoro, Shell, Aloha, Mid Pac, Costco, and Trustreet. The complaint alleges that the Mahalo and Aloha stations are each other's closest competitors as low-priced retailers of gasoline on Oahu. This acquisition will end that competition and give Aloha the ability to raise prices. Accordingly, the complaint alleges, this proposed acquisition likely will lead to higher gasoline prices for consumers on Oahu.

  According to the Commission's complaint, the transaction as proposed would be anticompetitive and in violation of Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended. The FTC vote to challenge the proposed acquisition was 2-1-1, with Commissioners Pamela Jones Harbour and Jonathan D. Leibowitz voting yes, Thomas B. Leary voting no and Chairman Deborah Platt Majoras recused. The motion was filed on July 27, 2005 in the U.S. District Court for the District of Hawaii.

• On July 28, the White House transmitted to the Senate the nomination of William E. Kovacic to succees Orson Swindle as the Federal Trade Commissioner. President Bush nominated Kovacic for a term to exprire on September 25, 2011. Kovacic currently is the E.K. Gubin Professor of Government at the George Washington University Law School. From June 2001 to December 2004, Kovacic served as General Counsel of the FTC. On his watch, the commission prevailed in over 20 appellate matters--including the validity of the Do-Not-Call Registry. Before joining the faculty of the George Washington University Law School, he served as the George Mason University Foundation Professor at the Goerge Mason University School of Law.

• In order to ensure continued competition in the market for casino services in Baton Rouge, Louisiana, on July 27, the FTC announced a consent order that will permit Penn National Gaming, Inc.'s ("PNG") $2.2 billion acquisition of Argosy Gaming Company ("Argosy"), provided PNG sells Argosy's Baton Rouge casino to Columbia Sussex Corporation within four months of the order's becoming final. Because PNG and Argosy now operate the only two casinos in Baton Rouge, the divestiture is necessary to preserve a competitive alternative.

• On July 26, following a public comment period, the Commission approved the issuance of a final consent order in the matter concerning Valero L.P.'s recent acquisition of Kaneb Services and Pipe Line Partners. The Commission vote approving the final consent order was 3-0-1, with Chairman Deborah Platt Majoras recused.

• In an effort to preserve competition in U.S. markets for three generic pharmaceuticals, on July 19, the FTC approved Novartis AG's ("Novartis") $1.72 billion acquisition of Eon Labs, Inc. ("Eon"), provided Novartis divests three overlapping drugs to Amide Pharmaceutical, Inc. ("Amide").

  Under the terms of a proposed consent order with the Commission, Novartis is required to divest all the assets necessary to manufacture and market generic desipramine hydrochloride tablets, orphenadrine citrate extended release ("ER") tablets, and rifampin oral capsules in the United States to Amide within 10 days of Novartis's acquisition of Eon. Further, Novartis, through its Sandoz generic pharmaceuticals division, will supply Amide with orphenadrine citrate ER and desipramide hydrochloride tablets until Amide obtains Food and Drug Administration ("FDA") approval to manufacture the products itself, and will assist Amide in obtaining all necessary FDA approvals.

  Desipramine hydrochloride is a tricyclic antidepressant, with annual U.S. generic sales of approximately $6 million. Orphenadrine citrate ER, a muscle relaxant, has annual U.S. generic sales of approximately $10 million, while rifampin, a drug used in the treatment of tuberculosis, has annual U.S. generic sales of approximately $14 million. The average price of each of these three branded drugs is more than twice the average price of their generic equivalents.

  Thus, it is competition among producers of each of the generics that has a direct and substantial effect on the pricing of that generic. As a result, the Commission concluded that the generic forms of these drugs constitute appropriate antitrust markets in which to analyze the effects of the transaction.

  The transaction threatened competition in each of the three generic markets. In all three markets, Novartis and Eon are significant competitors. Further, in all of the markets of concern there is only one other competitor. In the generic desipramine hydrochloride market, the only other competitor is Watson Pharmaceuticals, which manufactures only three of the six strengths of the drug, and accounts for a minuscule share of the market. Likewise, in the orphenadrine citrate ER and rifampin markets, Impax Laboratories and VersaPharm, respectively, are the only other generic competitors, and in both markets, the combined Novartis/Eon would account for about 70 percent of generic sales. The Commission therefore has concluded that, unremedied, the Novartis-Eon deal would be likely to result in higher prices and other anticompetitive effects in each of these generic markets.

• Following a public comment period on July 19, the Commission approved the issuance of a final consent order in the matter concerning Occidental Petroleum Corporation's recent acquisition of three chemical plants and related assets from Vulcan Chloralkali, LLC and Vulcan Materials Company. The Commission vote approving the final consent order was 4-0.

• On July 15, The Commission has received a petition seeking the approval of three proposed divestitures required under the FTC's order regarding Valero L.P.'s ("Valero") recent acquisition of Kaneb Services LLC ("Kaneb"). Under the terms of the consent order, Valero and Kaneb are required to divest: 1) the West Pipeline System; 2) the Philadelphia Area Terminals; and 3) the San Francisco Bay Terminals, as those terms are defined in the order, to Commission-approved purchasers. Through this petition, Valero and Kaneb have requested FTC approval to divest all three assets to Pacific Energy Group LLC, or one of its wholly owned subsidiaries, per a July 1, 2005, purchase agreement between the relevant companies.

• On July 15, The Commission approved a petition to reopen and modify the final decision and order in the 2003 matter concerning Nestlé Holdings Inc., Docket No. C-4082, which arose from Nestlé's acquisition of Dreyer's Grand Ice Cream Holdings, Inc. The respondents petitioned the FTC on behalf of CoolBrands International, Inc., and its subsidiary Integrated Brands, Inc., the Commission-approved divestiture buyer in this proceeding, to extend portions of the Transitions Services Agreement between respondents and CoolBrands for an additional 12 months. The Commission has approved the petition by a vote of 4-0. The companies also requested expedited consideration of the petition and a waiver of the public comment period. The FTC denied that request.

• Following a public comment period on July 8, the Commission has approved a petition by Entergy-Koch, LLC ("EKLP") to reopen and set aside an existing order in Docket No. C-3998. The order, dated January 31, 2001, establishes procedures for Entergy and EKLP to follow regarding 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.

  In its petition, EKLP stated that Paragraph II of the Commission order was intended "to create a competitive, transparent process to make it easier for regulators to detect whether Entergy purchased gas supplies . . . at inflated prices or a level of service that is above what necessary for effective operation, in the wake of the joint venture that gave Entergy a 50 percent interest in Gulf South," a major natural gas transportation supplier in Louisiana and Mississippi. The respondents accordingly petitioned the FTC to reopen and modify the order because: 1) Entergy and EKLP have fully complied with its terms; 2) EKLP sold Gulf South to TGT Pipeline, LLC on December 29, 2004, eliminating Entergy's indirect 50 percent ownership in Gulf South; and 3) Entergy no longer has any ownership interest in or control over Gulf South, so it no longer has any arguable incentive to pay inflated natural gas transportation prices to Gulf South. Moreover, with the sale of Gulf South, EKLP no longer can ensure that Gulf South posts on its Electronic Bulletin Board, as required by Paragraphs II.C.1.d and II.C.2.d. Consequently, it stated that there is no longer a basis for the remedy contained in the order. Through the action announced today, the Commission has approved the petition.

• On July 5, the FTC issued a report entitled "Gasoline Price Changes: The Dynamic of Supply, Demand, and Competition." The Report analyzes the many factors that influence fluctuations in the prices that U.S. consumers pay for gasoline at their local gas station. It examines a wide range of gasoline price factors - including the cost of crude oil, increasing national and international demand, and federal, state, and local regulations - all of which influence the prices consumers pay at the pump. One of the Report's conclusions is that over the past 20 years, changes in the price of crude oil have led to 85 percent of the changes in the retail price of gasoline in the U.S., while other important factors have included increasing demand, supply restrictions, and federal, state, and local regulations such as "clean fuel" requirements and taxes.

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

• On July 29, the Federal Trade Commission ("FTC") issued its ninth quarterly announcement summarizing the agency's enforcement efforts against telemarketing fraud and abuse. The quarterly enforcement update lists significant case developments in 22 federal district court cases occurring between May and July 2005. A Web page containing the "Quarterly Update for July 2005" also contains a list of enforcement actions involving telemarketing that have seen developments since October 1, 2002, with links to press releases related to each of these actions. The Web page also contains information about 165 actions involving the use of the telephone to market goods or services. This information covers cold-call outbound telemarketing, as well as inbound calls generated from advertisements or other solicitations to purchase products or services. The quarterly enforcement update can be found on the FTC's Web site at: www.ftc.gov/bcp/conline/edcams/telemarkfraudenforcement/update05jul.htm. The telemarketing fraud and abuse enforcement Web page can be found at: www.ftc.gov/bcp/conline/edcams/telemarkfraudenforcement/index.html. In addition to helping consumers learn about the Commission's enforcement actions, the Web page and the quarterly enforcement update provide consumers with easy access to information about the specific frauds and abuses perpetrated using telephone calls and the types of matters prosecuted by the Commission, including matters brought under the Telemarketing Sales Rule and its National Do Not Call Registry. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them.

• The FTC won a $10.2 million judgment against a debt- collection operation, National Check Control, and its principals on July 28. The amount represents the largest judgment in FTC history for violations of the Fair Debt Collection Practices Act ("FDCPA"). In addition, a federal district court judge permanently banned the defendants from engaging in debt collection in the future. In a complaint filed in May 2003, the FTC alleged that the defendants violated the FDCPA by harassing and threatening consumers with claims that they owed money for checks returned for insufficient funds. The defendants made repeated phone calls, sent threatening letters, and falsely threatened that consumers could face civil or criminal charges if they did not pay the debts. The FTC alleged that, in many cases, the consumers did not owe the money, or owed far less than the defendants claimed. At that time, the court entered a temporary restraining order freezing the defendants' assets. In addition to the ban on debt-collection activities and the $10,204,445 judgment, the court banned the defendants from violating the FDCPA in the future, including harassing consumers with repeated phone calls, obscene language, or threats of legal action; misrepresenting the amount a consumer owes; failing to notify consumers of their right to dispute the debt; and misrepresenting that the person contacting the consumer is a lawyer. The defendants are further barred from selling or transferring any consumer accounts. In order to satisfy the monetary judgment, the court ordered the defendants to turn over all of their assets. It is not yet clear how much money actually will be available for redress.

• On July 27, the FTC provided the Senate Special Committee on Aging with a report detailing patterns of complaints regarding fraud and identity theft from consumers age 50 and older. Testifying for the FTC, Lois Greisman, Associate Director of the Division of Planning and Information in the FTC's Bureau of Consumer Protection, said that in 2004, consumers age 50 and over reported $152,000,000 in fraud losses to the agency. After identity theft, Internet auction fraud is the top category of fraud complaints for consumers both over and under 50 years. Greisman said, however, that FTC data showed that older consumers more frequently fall victim to some types of fraud. According to the testimony, the FTC received 650,000 fraud and identity theft complaints in 2004 - 85 percent provided the consumer's age and approximately a quarter of those complaints - 145,895 - were from consumers age 50 and over.

• The FTC, advancing its fight against scams targeting the Hispanic community, announced six law enforcement actions during the Hispanic Law Enforcement and Outreach Forum in Phoenix, Arizona on July 26. The cases target deceptive marketing for a range of products and services, including work-at-home business opportunities, disease cures, and weight-loss supplements. The Hispanic Law Enforcement and Outreach Forum was hosted by the FTC, the U.S. Postal Inspection Service, and the U.S. Attorney's Office in Phoenix as part of the FTC's ongoing effort to expand outreach into the Hispanic community and bring local law enforcement and Hispanic community leaders together in the fight against fraud. It is the latest in a series of workshops that aim to identify local problems and discuss ways to address them; facilitate open dialogue with local government, consumer groups, and members of the Hispanic community on issues affecting Hispanic consumers; and share consumer education resources to help local communities conduct outreach about fraud and how to report it. Previous workshops were held in Chicago, Dallas, and Miami, with another event planned in Los Angeles for later this year. At the workshop, the FTC also announced a new educational outreach partnership with Arizona State University-West Campus, where the workshop was held.

• On July 25, the Federal District Court in Newark, New Jersey, entered a final default judgment against NorVergence, Inc., that immediately resulted in the cancellation of 1,600 contracts with the company valued at more than $47 million. The judgment is the result of a November 2004 FTC complaint charging NorVergence with defrauding consumers through misleading claims that it would provide them with dramatic savings on their monthly telephone, cellular, and Internet bills. The court found that consumers signed a set of applications and agreements with a total price equal to the promised monthly payments over five years. Most of the total payments were allocated to rental agreements for a "Matrix" or "Matrix Soho" device that supposedly would provide the promised costs savings. In reality, the Matrix was just a standard integrated access device, commonly used to connect telephone equipment to a long-distance provider's lines. The Matrix Soho was essentially a firewall. The Matrix boxes cost between $200 and $1,550. The total cost to the consumer was $7,000 to $340,000, with an average cost of $29,291. The price of the rental agreement had nothing to do with the cost of the Matrix, which itself was an incidental part of the promised services. NorVergence had an estimated 9,400 Matrix rental agreements totaling over $275 million. Other than the 1,600 contracts cancelled by this judgment, NorVergence sold its rental agreements shortly after they were signed to over 40 finance companies for cash. These sold contracts were not immediately affected by the default judgment. An unknown minority of these contracts were sold to finance companies for only a part of their typical five-year term.

• In a crackdown on operations that illegally expose unwitting consumers to graphic sexual content, the FTC charged seven companies with violating federal laws requiring warning labels on e-mail that contains sexually-explicit content on July 20. U.S. District Court suits filed against three operations seek civil penalties and a permanent bar on the illegal marketing. Settlements with four other operations imposed $1.159 million in civil penalties. The settlements bar the illegal marketing practices in the future and require that the defendants monitor their affiliates to ensure they are not violating the law. The FTC's Adult Labeling Rule and the CAN-SPAM Act require commercial e-mailers of sexually-explicit material to use the phrase "SEXUALLY EXPLICIT:" in the subject line of the e-mail message and to ensure that the initially viewable area of the message does not contain graphic sexual images. The Rule and the Act also require that unsolicited commercial e-mail contain an opportunity for consumers to opt out of receiving future e-mail and provide a postal address, among other things.

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

• On July 29, the UK's Competition Commission ("CC") provisionally concluded that the proposed acquisition of London Stock Exchange plc ("LSE") by Deutsche Börse AG or Euronext NV would substantially lessen competition. The CC found that either merger would make it more difficult for other exchanges to compete with LSE in trading UK equities because of both bidders' ownership or control over the future provision of clearing services to LSE. Any exchange attempting to compete with LSE and win the business of trading firms on the LSE would require access to LSE's clearing services provider. The CC will now start discussions with interested parties concerning actions that could be taken to remove the anti-competitive effects of the proposed mergers.

• On July 28, it was reported that Cemex Germany, which is part of Cemex SA De CV, Lafarge SA and Dyckerhoff AG, will be named as defendants in a €140 million damages claim being brought by twenty-weight corporate customers. The claim, for alleged price-fixing, is due to be filed with a German state court in Duesseldorf, according to a German press sources. These customer actions follow-on from fines totaling approximately €660 million imposed in April 2003 by the German Cartel Office, the Bundeskartellamt on the six largest German manufacturers: Alsen AG, Dyckerhoff AG, HeidelbergCement AG, Lafarge Zement GmbH, Readymix AG, and Schwenk Zement KG. The companies allegedly operated anticompetitive market allocation and quota agreements from the 1970s until 2002. The geographic markets affected were the four regional cement markets eastern Germany, Westphalia, northern Germany and southern Germany.

• On July 27, it was reported that the Greek Competition Commission had imposed fines on importers and representatives of Hyundai and KIA cars on the Greek market. The Commission held that the dealers in the two representatives networks had allegedly set minimum sales quantities and car parts and services prices contrary to Article 81 of the EC Treaty and Greek competition law. The Commission held that these requirements limited the independence of authorized car dealers, and inhibited competition in the domestic car market.

• On July 27, the Australian Competition and Consumer Commission issued a draft decision proposing to deny an immunity request for authorization made by the Royal Australian Institute of Architects for a range of arrangements and activities, including a code of professional conduct and fee guides. The ACCC was concerned that certain aspects of the arrangements were likely to be highly anticompetitive, including a number of provisions in the Institute's proposed code of conduct and fee guidance material. However, in the event that these concerns are addressed, the ACCC may grant authorization to the Institute.

• On July 26, Argentina's Economy Minister Roberto Lavagna said the country's competition bureau would fine all of the country's cement producers for colluding on prices and dividing the country's market between 1981 and 1999. The fine is the largest ever imposed by the country's antitrust agency. The Economy Ministry said that the fines are on conduct by all cement companies in the country, and ''[t]he behavior of companies has hurt consumers of cement, who would have otherwise faced lower prices". Loma Negra SA, owned by Construcoes e Comercio Camargo Correa SA, the country's biggest cement producer with 48.35 percent of the market in 1999, was fined 138.7 million pesos ($48.5 million); Juan Minetti SA, controlled by Holcim Ltd, the second largest, was fined 100 million pesos.

• On July 26, the UK's OFT confirmed that it had written to eight major credit card companies to consult on its provisional conclusion that the levels of default charges they impose (e.g. for late payments) are excessive. A charge currently of around £20 to £25 is payable if a cardholder fails to pay his credit card bill on the due date, exceeds his credit limit, or pays on time but by a direct debit or check that is not honored. The OFT has rejected the credit card companies arguments that their default charge provisions are fair, and given them three months in which to provide suitable undertakings or otherwise to address the concerns it has raised.

• On July 24, the Polish Consumer and Competition Protection Office launched an anti-monopoly proceeding to investigate the conditions of the tender organized by the Polish Football Association for football match television rights. It is alleged that France's Canal+ was treated more favorably than other bidders by guaranteeing that Canal+ would automatically win the tender only if its offer, which could be presented within 10 days of the last bid, was as good as the best offer. If the companies are found guilty, they may face fines of up to 10 percent of their revenue.

• On July 22, the UK's Office of Fair Trading ("OFT") confirmed that it had recently searched the premises of twenty-two companies in Nottinghamshire, Leicestershire, Derbyshire and South Yorkshire under warrant as part of an investigation into allegations of collusive tendering for public and private contracts in the construction industry between 2000 and 2005. The investigation is currently being conducted under the OFT's civil powers under the Competition Act 1998. However, the OFT has not ruled out the possibility that the investigation may uncover some behaviors in breach of the criminal cartel offence under section 188 of the UK's Enterprise Act 2002.

• On July 21, the UK's Office of Fair Trading ("OFT") released research revealing that nearly a quarter of small and medium sized enterprises (SMEs) across Britain believe they are harmed by unfair practices such as cartel price fixing, and collusion to set tender prices. The research found that one in three SMEs say they are aware of anti-competitive activities in their industries, and one in five (22 per cent) feel they have been a victim of anti-competitive behavior. The OFT is now calling on SMEs to recognize anti-competitive practices in their markets, and work with the OFT to take action against companies who break competition law.

• On July 21, the Slovak Antitrust Office ("PMU") reduced its original fine of SKK 2.1 million on a group of pig breeders for violating the competition protection law to SKK 1.69 million, after hearing arguments that several farmers had not participated in a final vote in support of an allegedly cartel agreement. In January, the PMU held that the group had allegedly participated in a horizontal cartel, and agreed to fix prices. "The agreement should have prevented market competition. By this action it limited consumers' opportunities to benefit from sharp competition," commented Mr. Jurkovic, a spokesman for the PMU. This was the first case uncovered by the Slovak Antitrust Office following the country's recent revision to its competition protection laws.

• On July 20, following an investigation launched after complaints filed by private TV broadcasters Antena 3 and Telecinco, Spain's antitrust agency, Sercicio de Defensa de Competencia ("SDC") held that the Afyve and Agedi, both music producers' rights management associations, had abused their dominant positions by discriminating in favor of Televisión Española, the state-owned television broadcaster. In particular, the SDC uncovered evidence that the fees charged to Antena 3 and Telecinco were considered excessively high since they were based on Antena 3's and Telecinco's respective annual turnovers, whilst the fees paid by TVE for 18 years of use of Agedi's rights are some ten times lower. The SDC report has been submitted to the Spanish Competition Court, Tribunal de Defensa de Competencia, which will issue a final decision within a year.

• On July 12, European Commission official conduced 'dawn raids' at Intel's offices in the UK, Germany, Spain and Italy, and also searched the offices of computer retailers and manufactures, including Dell. The raids come two weeks after AMD, a rival computer chip manufacturer, filed antitrust complaints against Intel in the US and Japan, accusing the company of abusive monopolistic behavior on a global scale. Intel denies any wrongdoing, and says that it is fully cooperating with the investigators.

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

• On August 3, 2005, Federal regulators approved the pending $35 billion merger between Sprint Corp. and Nextel Communications Inc., potentially clearing the way for the companies to close the giant deal within weeks. The Federal Communications Commission approved the deal in a unanimous 4-0 vote, and the Justice Department also gave the merger its blessing. The merger will create a nationwide company with about 45 million customers and give Sprint, which will be the surviving company, Nextel's loyal and lucrative base with business customers. Sprint will remain the nation's third-largest wireless carrier after Cingular Wireless and Verizon Wireless. The acquisition "will ensure that consumers continue to receive the benefits of wireless competition, such as reduced prices and increased coverage," FCC chairman Kevin Martin said in a statement. As a condition to its approval to the merger, the FCC is requiring that Sprint Nextel fulfill its voluntary commitment to meet certain milestones for offering service in 2.5 GHz band, unless circumstances beyond its control prevent the merged entity from reaching those milestones. The Justice Department said: "The evidence gathered in the Division's investigation indicates that the merger will not harm customers."

• President Bush is expected as early as Friday, August 5, 2005, to fill two vacancies at the Federal Communications Commission, according to an informed source. Expected to be nominated are Richard M. Russell, the White House's associate director in the Office of Science and Technology Policy, and Deborah Taylor Tate, director of the Tennessee Regulatory Authority. Both are Republicans. The five-member FCC has been short one seat since the March resignation of FCC chairman Michael Powell. Bush is expected to make a second nomination because current FCC member Kathleen Abernathy has said she intends to leave the agency once her seat has been filled.

• On August 1, 2005, CompTel, a leading U.S. industry association representing competitive communications providers, submitted comments on the impact of the SBC/AT&T and Verizon/MCI mergers to the Office of Fair Trading ("OFT"), an independent professional organization that promotes consumers interests in the United Kingdom. CompTel urged the OFT to refer the mergers to the Competition Commission for further investigation. "The competition authorities in Europe should not assume that in the United States the FCC or the Department of Justice will block the mergers or impose effective conditions or other remedies," writes CompTel President and CEO Earl Comstock in the filing. "These mergers will have detrimental effects on the Internet backbone market, peering, and Global Telecommunications market, and will have a negative impact on E.U. (including U.K.) customers." In its comments, CompTel offered evidence that the SBC/AT&T and Verizon/MCI mergers will harm competition. "These mergers deserve a very thorough competition review and investigation in the U.K. with a wide consultation of all interested third parties," writes Comstock. "Therefore in the U.K., it is important that the OFT refer these mergers to the Competition Commission."

• On July 28, 2005, FCC Chairman Kevin Martin said he has circulated a proposal that would treat the service, known as digital subscriber line ("DSL") broadband, as an information service. If approved, that would exempt it from most traditional telephone rules, such as requirements to lease network access to competitors. The FCC in 2002 decided that broadband Internet service offered by cable companies was an information service and the Supreme Court last month upheld that decision. That has cleared the road for the FCC to act on DSL service. A 2002 regulatory proceeding governing DSL modems was put on hold pending the cable-modem court case. With the high court's refusal to consider the FCC's media ownership rules, the agency will revisit rules barring newspapers from owning broadcast stations. Telephone companies have complained that applying legacy telephone rules to new broadband services put them at a competitive disadvantage against other companies, such as cable operators, that do not have to adhere to such regulations. While DSL is usually cheaper, cable Internet service typically offers faster speeds.

• On July 26, 2005, telecommunications industry officials reacted favorably to reports about a tentative reorganization of the FCC contemplated by agency Chairman Kevin Martin. Martin is contemplating abolishing the Wireless Telecommunications Bureau and splitting its functions into the existing Wireline Competition Bureau and a new spectrum bureau or office, according to sources in the industry and within the FCC, as well as officials who have recently departed the agency. Most sources see a spectrum bureau absorbing the functions of the Office of Engineering and Technology, which offers technological advice to the chairman, particularly on radio-frequency issues. Martin also is contemplating the creation of a homeland security division or bureau that would centralize the functions pertaining to emergency responders, whether through wireless or wire-based communications, sources said.

• On July 24, 2005, Commissioner Adelstein call for an investigation of payola practices uncovered by New York Attorney General Eliot Spitzer, based on the announcement of a settlement with Sony BMG Music Entertainment. Commissioner Adelstein said, "It's a real tribute to Attorney General Eliot Spitzer that he has blown the lid off a potentially far-reaching payola scandal. I've been expressing concern about this for some time in terms of enforcing our federal rules, but it took someone with Spitzer's tenacity and subpoena power to bring forward solid evidence." Commissioner Adelstein has challenged the entertainment industry to reform its practices, and he openly called for the American public to help the FCC in monitoring and enforcing the rules against airing undisclosed promotions, including VNRs and product placements. At the urging of Commissioner Adelstein, the Commission issued a unanimous Public Notice on Video News Releases and a fact sheet on payola. In the Notice, the FCC said the payola rules "are grounded in the principle that listeners and viewers are entitled to know who seeks to persuade them with the programming."

• On July 21, 2005, public-interest groups and competing satellite programmers sought to impose additional conditions on the acquisition of Adelphia Communications by Comcast and Time Warner. Comcast and Time Warner intend to purchase bankrupt Adelphia and divide the spoils -- a $17.6 billion transaction that also includes key system swaps design to bolster regional clusters. Among the critics of the merger are DirecTV, EchoStar Communications Corp., International Brotherhood of Electrical Workers, Communications Workers of America, the Center for Digital Democracy, Media Alliance, the National Hispanic Media Coalition and the U.S. Public Interest Research Group. Because "the unmistakable purpose of this transaction is to create or maximize regional monopolies ... the commission must refuse permission for this transaction," the groups said. DirecTV and EchoStar want guaranteed access to regional sports networks before the federal government approves the takeover of Adelphia. Few experts think the deal will be blocked, although some are pushing for rules requiring that cable programmers not discriminate in the price they charge operators for spots or other programs. FCC regulations that prevented a single cable operator from serving more than 30 percent of the nation's television households have been overturned, and neither Comcast nor Time Warner would exceed the limits as a result of the Adelphia acquisition.

• On July 14, 2005, the FCC delayed the start of its effort to rewrite rules on media consolidation. The FCC pulled the issue from its agenda at the last minute, with FCC Chairman Kevin Martin citing disagreements among commissioners about the kind of public input that would be sought in crafting new rules.

• On July 7, 2005, the Justice Department tentatively approved Alltel's $4.4 billion purchase of Western Wireless, a merger that would make Alltel the fifth-largest wireless carrier in the United States, the Seattle Post-Intelligencer reports. On July 11, 2004 the Federal Communications Commission consented to the applications filed in connection with the proposed merger of Alltel and Western Wireless subject to certain conditions. The transactions would transfer the control of licenses held by Western Wireless and its subsidiaries to Widgeon Acquisition, a wholly-owned subsidiary of Alltel. The Commission conditioned its consent on the companies divesting Western Wireless business units - customers, infrastructure, and cellular spectrum - in 16 CMAs. The Commission stated that this condition would ensure that there will be a sufficient number of competitors with the presence and capacity to compete effectively against the merged entity in these markets. The Commission denied all of the petitions filed in opposition to the merger, finding that the merger as conditioned would serve the public interest. Western Wireless shareholders are set to vote on the proposed deal July 29th.

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