The Roberts Supreme Court appears to be well on its way to reining in the outer reaches of private antitrust enforcement. In the term just concluded, all three antitrust cases heard by the Court resulted in reversals or vacating of judgments in favor of private plaintiffs in actions involving the Robinson Patman Act, joint ventures, and tying.¹ Two of these decisions – the Dagher joint venture case and the Independent Ink tying case – were 8-0 (Alito did not participate) decisions, while the Volvo price discrimination opinion commanded the votes of seven justices. Near the end of its term, the Court also granted certorari on two decisions – one by the Ninth Circuit and the other by the Second Circuit – which likewise stretched private enforcement beyond its usual boundaries.

The Ninth Circuit decision is Ross-Simmons Hardwood Lumber Co, Inc. v. Weyerhaeuser Co., 411 F. 3d 1030 (9^th Cir. 2005), cert. granted 2006 U.S. LEXIS 4908. This is a monopolization case by a competitor under Section 2 of the Sherman Act. Monopolization requires exclusionary conduct as well as monopoly power. Exclusionary conduct is, and always has been, an elusive concept since conduct which injures competitors often benefits consumers. Predatory pricing is an example of such conduct. Accordingly, the Supreme Court has held that such pricing is unlawful only where it is below some measure of cost,² coupled with the ability to recoup the losses from the predation period after the monopolist has eliminated its rivals from the market. Brooke Group v. Brown & Williamson Tobacco Corp., 113 S. Ct. 2578 (1993). Not surprisingly, successful predatory pricing cases have been few and far between since Brooke Group.

Weyerhauser involves a rare species of exclusionary conduct – predatory buying. This occurs when the alleged monopolist pays an excessively high price for an input for the purpose of depriving its competitors of a source of supply or raising their costs. In Weyerhauser that input was sawlogs purchased by sawmills from timberland owners. The sawmills process the logs into finished lumber and sell such lumber. Plaintiff and defendant are competing sawmills. Plaintiff alleged that defendant Weyerhauser paid higher prices than necessary for the sawlogs, and this was an anticompetitive act.

The jury found in favor of plaintiff even though Weyerhauser was not operating at a loss in its sales of finished lumber. Both the District Court and the Ninth Circuit rejected Weyerhauser's argument that the Brooke Group criteria should be applied to a predatory buying claim. Unlike Brooke Group predatory selling, said the Ninth Circuit, predatory buying does not involve low prices to consumers, the concern that formed the basis of Brooke Group's restrictive two-part rule. Thus, the Ninth Circuit approved jury instructions which permitted a liability finding if plaintiff proved Weyerhauser "purchased more logs than it needed or paid a higher price for logs than necessary, in order to prevent the plaintiffs from obtaining the logs they need at a fair price." 411 F.3d at 1036 n. 8. There apparently was also evidence showing that Weyerhauser had a substantial (roughly 65%) share of the input market, that entry barriers were high and the supply of sawlogs inelastic.³

At a minimum, we should expect the Court to clarify the standard for predatory buying beyond the nebulous standard adopted by the Ninth Circuit. Basing liability on vague terms such as "higher than necessary" or "more than needed" provides little or no guidance for businesses or practitioners. It could also discourage price competition at the input level, which likewise is a concern of the antitrust laws. Indeed, the Department of Justice submitted an amicus curiae brief in support of the cert petition criticizing the Ninth Circuit's "subjective and standardless test" and asserting that it will chill pro-competitive conduct. Whether the Supreme Court will go all the way with Weyerhauser and apply the Brooke Group criteria to predatory buying is an open question. There is scant authority on predatory buying, and the analytical model for predatory pricing does not translate well to the buy side since it may not involve liability for giving consumers low prices. Logic would suggest, however, that the standard adopted should be one which at least requires a showing of monopoly power on the sell side and perhaps that the high input prices caused defendant to sustain some loss on the selling side. Otherwise liability could attach to conduct that is economically rational and pro-competitive in the input market.

The Second Circuit decision which will be reviewed by the Supreme Court is Twombly v. Bell Atlantic Corp., et al., 425 F. 3d 99 (2d Cir. 2005). The issue in Twombly is the legal sufficiency of Section 1 conspiracy allegations in a Complaint. It has long been the law that conscious parallelism alone among competitors is not sufficient to meet the Section 1 conspiracy requirement. Theatre Enterprises, Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 541 (1954). This is because competitors with similar information and economic interests will often make the same decisions, and that should not be sufficient for a Section 1 conspiracy. Rather, there must be additional "plus" factors such as evidence that the parallel behavior is against the individual defendants' economic interests absent an agreement (e.g., raising prices at time of oversupply), or direct communications among the competitors at which they discussed prices or the restraint at issue. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986); Apex Oil Co. v. DiMauro, 822 F.2d 246, 253-54 (2^nd Cir. 1987).

The Complaint in Twombly alleged that the incumbent local exchange carriers ("ILECs") – the four "Baby Bells" – conspired not to compete with each other in their respective geographic markets and to prevent competing local exchange carriers ("CLECs") from entering those markets. Plaintiff alleged that such conduct would be "anomalous" in the absence of an agreement, that defendants had the ability and incentive to conspire, and thus there was a conspiracy in violation of Section 1. While the Complaint did not allege any direct evidence of an agreement not to compete or exclude new entrants, it did allege that the ILECs had opportunities for direct communications in industry meetings, and had negotiated similar unfair agreements with the CLECs and provided poor quality connections to those networks Twombly, 425 F.3d at 103-4. 

The backdrop for this alleged conspiracy is the 1996 Telecommunications Act which was designed to open both the local and long distance markets to competition. It mandated that the ILECs provide access to their telecommunications infrastructure to the CLECs on reasonable and nondiscriminatory terms. Prior to that time, the 1982 settlement of the AT&T case gave them monopoly power over local telephone services in their respective markets. The Supreme Court earlier dealt with this statutory framework in Verizon v. Trinko decision, 540 U.S. 398 (2004). Trinko concluded that an ILEC's refusal to give access to CLECs did not give rise to a Section 2 claim. While the issue in Twombly is much different, this regulatory background may play a significant role in the Supreme Court's decision.

The regulatory background did play an important role in the District Court opinion which granted defendant's motion to dismiss for failure to state a claim. Twombly v. Bell Atlantic Corp., 313 F. Supp. 2d 174, 182-187 (S.D.N.Y. 2003). Based in large part on the regulatory history and background of the telecommunications market, the District Court concluded that parallel decisions by defendants to impede competition from the CLECs and not to enter each other's territory was consistent with their individual economic interests. It noted that, while the "overly neat" allocations of territories may raise an inference of conspiracy in most markets, such an inference was not justified here given the history of regulatory monopoly in the industry.  A conspiracy inference was also undermined by the fact that if an ILEC became a CLEC in another ILEC's market, it would be entering an "entirely different business" in which it would be reliant on their competitor's infrastructure.

The Second Circuit reversed. It emphasized that the Federal Rules permit notice pleading, that claims should not be dismissed at the pleading stage unless it appears beyond doubt that plaintiff can prove no set of facts to support his claim, and at the pleading stage all inferences must be drawn in plaintiffs' favor. It viewed the District Court's detailed analysis at the pleading stage as inconsistent with these principles. The Complaint was sufficient despite the absence of plus factors⁴ since it sets forth the temporal and geographic parameters of the alleged illegal activity and the identity of the key participants. Since a court could not conclude that there is "no set of facts" that would permit plaintiff to prove that the particular parallelism was the product of collusion rather than coincidence, the allegations were sufficient to state a conspiracy claim. The Second Circuit stated that, had this been a summary judgment motion, the plaintiff would need to show the existence of plus factors. Twombly, 425 F.3d at 114. At the pleading stage, however, the Second Circuit concluded that a balance should be struck in favor of permitting such claims to proceed in light of the Congressional policy of vigorous enforcement of the antitrust laws despite the burden on the courts and the colossal expense for defendants of litigating potentially merit less claims. If that balance is to be recalibrated, said the Second Circuit, it is for Congress or the Supreme Court to do so.

It appears likely that the Supreme Court may do some "recalibration" here. The stark contrast between the District Court and the Second Circuit in their application of the same pleading standards focuses the pleading issue well. It is doubtful that the Court will modify the rule that conscious parallelism is not sufficient to state a conspiracy claim, and will require the specific pleading of some "plus" factors for a plaintiff to survive a motion to dismiss in a conspiracy claim. At the same time, however, it may conclude that the District Court went too far in drawing inferences adverse to plaintiff from the regulatory background, or possibly the inferences it did draw were not justified in the current environment. The interplay between pleading rules and conspiracy standards, coupled with the impact of the regulatory framework, make Twombly potentially a landmark decision.

United States District Judge Emmett Sullivan, sitting in Washington, D.C., has thrown the already-consummated of AT&T/SBC and Verizon/MCI mergers into a state of confusion. Judge Sullivan is requiring the parties and the Antitrust Division of the Department of Justice ("DOJ") to produce evidence to support the alleged public interest purposes served by the consent decrees filed by the DOJ in 2005, to settle its allegations that the acquisitions were anti-competitive and violated Section 7 of the Clayton Act. In the past, federal courts have approved such negotiated consent decrees with little or no comment, attaching extreme deference to the consent decrees and signing them as a matter of course. Judge Sullivan has now stated, however, that the 2004 amendments to the Tunney Act (15 U.S.C.A. § 16 (2006)), passed in response to District of Columbia Circuit's highly deferential review and approval of the consent decree in United States v. Microsoft, require that he give both mergers -- which have already closed -- a more in-depth review. The 2004 Amendments to the Tunney Act directed that "before entering any consent judgment proposed by the United States under this section, the court shall determine that the entry of such judgment is in the public interest," and then instructed the court to consider the impact of the entry of judgment "upon competition and upon the public generally." 15 U.S.C.A. 16(e). Judge Sullivan apparently has interpreted this provision as requiring him to review evidence himself, rather than relying upon the administrative agencies' review of the evidence.

In October 2005, the Department of Justice announced that it had reached an agreement with MCI in its purchase of Verizon and with SBC in its purchase of AT&T. In its complaints and the Competitive Impact Statements filed simultaneously as required by the Tunney Act, the Department of Justice indicated that the only competitive problems with the acquisitions concerned individual buildings in certain cities where the only landline services were provided by the merging parties and there was little possibility of a rival company entering the particular building because of the difficulty of entry and the small number of potential customers. The DOJ found around 700 total buildings to have a problem, and required the acquiring party to divest the lesser of half of the unused bundles of fiber optic cable or eight unused bundles of fiber optic cable for each building. To complete the divestiture, the acquiring parties signed contracts with competing providers, with the contracts expiring on July 31, 2006.

As with prior mergers, the Department of Justice submitted its Competitive Impact Statement, its charging complaint, and the proposed final judgment to the District Court, and posted them on its website, inviting public comment. Two associations of competing small telephone companies, ACTel and COMPTEL, responded to the filings and argued that the DOJ should have also challenged buildings in which the merger would leave the building with only 2 or 3 providers, rather than only focusing on buildings in which the merger would leave only 1 provider. The merging parties and the government responded by arguing that the District Court's inquiry was limited to the buildings at issue in the DOJ's Complaint, which reflected the Department's determination about the extent of anticompetitive impact which would result from each merger. Arguments about the DOJ's supposed failure to challenge other buildings, or provide solutions to other perceived anticompetitive impacts from the mergers were, therefore, irrelevant to the Tunney Act analysis according to the DOJ and the merging telephone companies.

After extensive briefing, on July 12, 2006, Judge Sullivan held an unprecedented hearing to determine whether 1) the Court could fulfill its statutory duties under the amended Tunney Act by relying on the government’s examination of the evidence, or if the Court needed to have sufficient evidence itself to satisfy the requirements, 2) whether the government had produced enough evidence to satisfy the Court through its current filings, and 3) what the scope of the Court's review should be. Judge Sullivan began by noting that the government had produced no affidavits, declarations, or expert reports in support of its request to have the final judgment approved, while ACTel had presented the report of an expert economist, which had laid out competitive problems with the merger.

The government and the parties presented a number of pieces of evidence at the hearing, including maps showing the fiber optic cables of competing parties, and charts showing the number of competitors to certain buildings, in an attempt to convince Judge Sullivan that the Court had sufficient evidence to make its public interest determination. In addition, the government and the merging parties argued strenuously that Judge Sullivan was limited to reviewing the effectiveness of the remedy as to the 700-odd buildings in which the complaint alleged a violation. To expand the scope of the review, the government argued, would impose upon its prosecutorial discretion and pose a constitutional separation of powers issue. Finally, the government noted that both the Department of Justice and the Federal Communications Commission had found serious flaws with the economist's report relied on by ACTel, and had refused to seriously consider it.

ACTel and COMPTEL argued the proposed final judgment was too narrow to satisfy the “public interest” standard Judge Sullivan must now apply. They argued that the complaint was actually quite broad, as it did contain statements about the overall market power of the combined firms in much larger markets, not just the individual buildings for which divestiture had been ordered. In addition, ACTel argued that political pressure had forced the Department of Justice to approve the acquisitions as the price of obtaining confirmation of a new head for the Antitrust Division. Finally, the small telephone companies argued that the Court should require some sort of an evidentiary hearing to allow the parties to present evidence and expert testimony about the anticompetitive effects of the merger.

On July 25, 2006, Judge Sullivan held a status hearing, at which he indicated that he would require the government to submit “any material necessary for the Court to satisfy its judicial and statutory function” by August 7, 2006, with ACTel and COMPTEL having until August 17, 2006, to respond, and replies due by August 28, 2006. Judge Sullivan also indicated that it was premature to order an evidentiary hearing, but refused to rule out the possibility of such a hearing in the future.

The potential implications of Judge Sullivan’s actions to date are enormous. If consent decrees are subject to this level of delay, and retrospective examination in the future, then merging parties may be less inclined to close a merger until the Tunney Act process is over – significantly increasing delay and risk of not getting the deal done, while being more inclined to abandon a merger if a consent decree is required as a condition of approval, or correspondingly more inclined to fight the matter in court. It is also possible that future complaints accompanying consent decrees will be more tightly drafted to prevent objecting parties from arguing that the alleged violations extend beyond the proposed remedy. And exposing materials and deliberations in the DOJ merger review process in open court -- which until now have been entirely closed to public view -- could impact the merger review process in fundamental ways not yet apparent. Finally, depending upon what Judge Sullivan ultimately does, a direct constitutional clash between Congress, the executive and the courts under the separation of powers doctrine could be in the offing. We will report further developments as they occur.

Authored by:

David R. Garcia
310-228-3747
 

Plaintiff, a real estate agent representing buyers, brought an action under Section 1 of the Sherman Act for illegal tying, Reifert v. South Central Wisconsin MLS Corp., 7^th cir., No. 05-3601, 6/12/06. Plaintiff claimed that defendant Realtors' Association violated Section 1 by requiring an agent subscribing to a multiple listing service ("MLS") to also pay dues to an affiliated national association, the National Association of Realtors ("NAR").

Plaintiff also alleged an unlawful group boycott pursuant to Section 1, and finally, that a provision of the NAR Code of Ethics violated Section 1 as an unreasonable restraint of trade, as it prohibited members of NAR from "interfering" with exclusivity agreements entered into by other members with their respective clients.

The district court granted summary judgment on the tying claim, finding that the plaintiff had failed to present any evidence of competition in the market for the tied product. The district court granted summary judgment on the group boycott claim based upon the same factors which mitigated against the finding of an unlawful tying arrangement. As to the Code of Ethics claim, the court entertained a rule of reason analysis and found that the "balance between pro and anti-competitive effects weighs heavily in favor of Article 16." This was on the principle ground that the non-interference policy promoted information transparency, and thus would have been output expansive in the relevant market.

The Court of Appeals for the 7^th Circuit affirmed. Relying on its decision in CarlSandburgVillage Condo Association No. 1 v. First Condo Development Co.¹, the court held that plaintiffs had failed to produce any "economic evidence" of foreclosure to a substantial volume of interstate commerce in the market for the tied product, namely membership in NAR. The alleged tying product market was access to the defendants MLS. Relying on Carl Sandburg, the court held that it is incumbent upon the plaintiff to present "economic evidence" that there is at least one additional competitor in the market for the tied product. The court held that by simply forcing a purchaser to purchase an unwanted tied product, conditioned upon access to the tying product, a defendant does not violate the antirust laws, absent substantial foreclosure in the tied product market.² The court stated,

"Despite Reifert's desire to avoid purchasing a Realtor's Association membership, without evidence of competitors in the market for services offered by the Realtor's Association, there can be no foreclosure of competition."³

While plaintiff produced a lengthy list of associations, arguably in competition for realty services, the court determined that none were in the same market, because their services were not sufficiently good substitutes to raise a genuine issue that there was meaningful cross-elasticity with NAR.

The court also noted that in the 7^th Circuit, it was insufficient for a plaintiff to simply offer a listing of "practical indicia" factors as referenced in Brown Shoe.⁴ The court noted that

"While the "practical indicia" named in Brown Shoe … are important considerations in defining a market, they were never intended to exclude economic analysis altogether."⁵

Thus, while the Court of Appeals affirmed the district court's grant of summary judgment on the ground that there was no evidentiary showing of a "non-insubstantial amount of interstate commerce" being affected, it inferred that there was no foreclosure based upon the amount of commerce involved.⁶ 

In concurring in the judgment, Circuit Judge Diane Wood would have found that the plaintiff failed to provide evidence of a per se violation, as

"It is the fact that Reifert offered no evidence to show that there was any foreclosure in the tied product market. As far as we can tell from this record, no one refrained from joining any other organization because of the cost of membership in the realtor associations … before us."⁷

Judge Wood held that this is what distinguished the instant case from Thompson Metro Multi-List, Inc., 934 F.2d 1566 (11^th Cir. 1991), cert. denied, 506 U.S. 903 (1992).In Thompson, a substantial effect on interstate commerce was shown where the competitor offering similar services lost 400 members because of a tie between an association of real estate agents and an MLS Service. Judge Wood, however, would avoid a seeming rule of reason analysis, and rely on the majority opinion in Jefferson Parish,⁸ and not on the concurring opinion of Justice O'Connor, that tying arrangements should be evaluated under the standards applied in Fortner II, and not under the per se rule applied in Morton Salt⁹ and Loew's¹⁰.

Citing the 7^th Circuit opinion in Kahn v. State Oil Co¹¹., she would limit the court to pointing out the problems with per se analysis in the area of tying arrangements,¹² but nevertheless adhere to the Supreme Court's articulation of a per se rule in tying cases.¹³

Authored by:

Don T. Hibner, Jr.
213-617-4115

The California Supreme Court finally decided whether Proposition 64 ("Prop. 64") applies to actions pending at the time it was passed in November, 2004. Prop. 64 limited private actions under the Unfair Competition Law ("UCL"), Bus. & Prof. Code § 17200, et seq. to those who have "suffered injury in fact and lost money or property as a result of" unfair competition or false advertising. Since the plaintiffs in many UCL actions pending at the time of its passage did not meet this requirement, this raised the issue of whether Prop. 64 applies to such pending actions. The California lower courts had split on the issue, although a majority had concluded that Prop. 64 did apply to pending actions.

In California for Disability Rights v. Mervyn's LLC, Case No. S131798 (July 24, 2006), the California Supreme Court held that Prop. 64 did apply to pending actions. The Court, however, rejected defendant's argument that the language of Prop. 64 itself compelled this result. It held that Prop. 64 did not impose new or different liabilities based on past conduct, but only prevented uninjured persons from suing for restitution on behalf of others. Thus, Prop. 64 was a change in the standing rules only which, under its prior precedents, should apply to pending cases. In a companion decision, the Court also held that plaintiffs in such pending actions may be permitted to amend their Complaints to substitute a competent Prop. 64 plaintiff who had suffered injury. Branick v. Downey Sav. & Loan, Case No. S132433 (July 24, 2006).  Branick further holds, however, that the decision to permit such amendment rests with the trial court in its discretion and the new plaintiff is not permitted to "state facts which give rise to a wholly distinct and different legal obligation against the defendant."

In another significant development, a California Court of Appeal held that the injury in fact requirement also applies to purported class members and that plaintiffs bringing false advertising claims under the UCL must show they actually relied on the false or misleading representation in entering into the transaction at issue. Pfizer, Inc. v. Superior Court, Case No. B188106, Second Appellate District (July 11, 2006). These issues arose in the context of a class action filed after the passage of Prop. 64 on behalf of consumers alleging misrepresentations in the advertising and sale of Listerine mouthwash. Prior to Prop. 64, plaintiffs did not need to show reliance in such cases but only a likelihood that members of the public would be deceived. Although Prop. 64 clearly requires the plaintiff in a representative action to show injury-in-fact, two open issues were whether the injury requirement also applied to class members and whether the injury requirement meant that reliance would now be required in false advertising cases. This Court of Appeal answered both questions affirmatively.

The Court of Appeal reasoned that since post Prop. 64 representative actions must meet class action requirements, and one of those is that plaintiff must have claims "typical" of the class, the class members must also have suffered injury in fact. The Court of Appeal further held that the "likely to deceive" standard could not be reconciled with Prop. 64's new standing and causation requirements. Focusing on the Prop. 64 language that plaintiffs must show injury in fact … as a result of the fraudulent practice, the Court of Appeal held that such plaintiffs "or others" must show they purchased Listerine in reliance on the false advertising and as a result suffered injury. The Court of Appeal thus held the trial court must vacate its order granting class certification and enter a new order denying the motion.

The overall impact of Pfizer is to make it virtually impossible for a court to certify class actions for false advertising or other fraudulent conduct under Section 17200 et seq. California class action law, like federal law, requires that common questions of fact and law predominate over individual questions and that plaintiff's claim be typical of the class members before a class can be certified. Given the need of each class member to show individual injury and reliance, the predominance and typicality requirements are unlikely to be satisfied in such class actions.

Authored by:
Carlton A. Varner
213-617-4146

• On July 12, the European Commission imposed a penalty payment of €280.5 million on Microsoft for its continued non-compliance with some of its obligations under the Commission’s March 2004 Decision. That Decision found that Microsoft had abused its dominant position under Article 82 EC, and required Microsoft to disclose complete and accurate interface documentation which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers.  Should Microsoft continue to fail to comply, the Decision also increases the amount of the daily penalty payment to which Microsoft could be subject to €3 million per day.  European Competition Commissioner, Neelie Kroes, stated:
  " Microsoft has still not put an end to its illegal conduct.  I have no alternative but to levy penalty payments for this continued non-compliance.  No company is above the law.  Any businesses operating in the EU must obey EU law". In a press release, Microsoft's General Counsel, Brad Smith, responded: "The fine announced today is larger than the fines the Commission has imposed for even the most severe competition law infringements, such as price-fixing cartels. When you consider Microsoft’s massive efforts to comply with this ruling, and the fact that more than a dozen companies are already using similar documentation provided in the U.S. to ship actual products, we do not believe this fine is justified."
• On July 13, the European Court of First Instance (CFI) annulled the decision of the European Commission which approved the creation of a joint venture between Sony and Bertelsmann Music Group (BMG) under Article 8(2) of the old EC Merger Regulation (Regulation 4064/89). The CFI has found that the two main reasons why the Commission concluded that there was not a collective dominant position on the markets for recorded music (the lack of transparency and absence of retaliatory measures) were not adequately supported by the Commission's reasoning or examination.  The Commission's decision was, therefore, annulled due to the Commission's manifest error of assessment.
• On July 24, the European Commission cleared the proposed merger between the French company, Alcatel, and the US firm, Lucent Technologies, under the EU Merger Regulation.  The Commission concluded that the transaction would not significantly impede effective competition in the European Economic Area (EEA) or any substantial part of it. The Commission held that the main competitive impact of the proposed transaction would be on the supply of optical networking equipment (in particular, on optical core switches - OCS), and broadband access solutions (in particular, Digital Subscriber Line Access Multiplexers - DSLAM).  However, the Commission’s investigation revealed that, despite the considerable market shares the merged entity would have in these product areas, the market structure would remain competitive even after the proposed transaction.  In particular, a number of effective competitors would remain in the market and customers (mostly network operators) would be able to sufficiently constrain the merged entity through their countervailing power in bidding procedures that are a characteristic of the industry.
• On July 17, Portugal's antitrust agency, the AdC, fined four salt-producing companies  €910,000 for alleged cartel activity. The AdC alleged that Vatel, Salexpor, Salmex and Vitasal, who between them represent between 75% and 90% of salt sales in Portugal, colluded for 8 years by fixing prices, and dividing up sales territories.  The cartel allegedly ran from 1997 until March 2005 when the AdC launched its investigation following a complaint.  The cartel allegedly affected salt sales for the food sector as well as for the industrial sector, and its negative impact on customers was estimated at  €5.6 million. The four companies received different fines based on the collaboration of each with the AdC's investigation.
• On July 12, the Dutch antitrust agency, the NMa, fined 12 manufacturers of prefab concrete products for alleged cartel offences. The NMa imposed fines amounting to a total of more than  €3 million on nine manufacturers of prefab concrete piles, and fines of well over €2 million on three manufacturers of concrete floor elements.  The highest individual fine amounted to more than €1 million. The NMa alleged that the nine companies producing concrete piles held periodical meetings between 1 January, 1998, and December 31, 2001, to coordinate their individual production and sales volumes. The NMa alleged that the three  manufacturers of concrete floor elements held periodical meetings between 1 January, 1998, and March 2003, to coordinate their individual sales volumes. The NMa has warned that it will continue to monitor the construction sector for any further potential cartel activity.
• On July 20, the Korean Fair Trade Commission (KFTC) imposed fines of  US$2.83 million on four chicken processors for alleged price-fixing practices. The KFTC alleged that the four companies colluded to fix prices for processed chickens. Halim, the country's leading chicken processor, was fined 1.24 billion won (approx. $1.3 m), and Maniker Co., the No. 2 company, 557 million won (approx. $0.6 million).
• On July 13, the French Conseil de la Concurrence accepted undertakings offered by France Telecom and Pages Jaune (Yellow Pages) Group after an investigation into allegations that France Telecom had engaged in discriminatory practices by selling subscriber lists that were less complete than those for its internal use, thereby inhibiting new entrants from competing, and Pages Jaune had prevented new entrants from accessing its database. France Telecom has offered to increase the amount of data provided to new entrants, and Pages Jaune has agreed to allow new entrants to access its databases until the end of July 2006, and share its commercial names database until the end of March 2007.  
• On July 17, it was reported that an Australian class action lawsuit brought against three international vitamin suppliers for alleged price fixing had settled for $30.5 million AUD ($23 million USD).  Roche Holding AG, BASF AG and Sanofi-Aventis SA were accused of fixing prices for a range of vitamin products used for animal nutrition or health over 10 years in the 1990s.  The plaintiffs alleged that Australian farmers and businesses lost market share or paid inflated prices, and filed the country's first ever cartel class action suit. If the Federal Court approves the proposed settlement, it will be the first successfully concluded cartel class action in Australia.
• On July 19, the European Commission announced that it had appointed Ms Nadia Calvino as Deputy Director-General for Competition, in charge of mergers.  Ms Calvino has held a number of posts in the competition defense service of the Spanish Ministry of Economy and Finance, and, most recently, was Director General of Competition.  She will take up her post within DG Competition in the coming weeks, and will be responsible for developing and formulating EU/Commission policies in the mergers field.  Prior to this appointment, Philip Lowe, the Director General for Competition, had been covering the mergers position.

Authored by:

Neil Ray
(415) 774 3269

 

McClatchy's Acquisition of Knight Ridder Approved

• Under a consent decree filed by the Antitrust Division of the Department of Justice on June 27, 2006, McClatchy will have to divest the St. Paul Pioneer Press as a condition of its merger with Knight Ridder. The sale does not come as a surprise, as McClatchy had announced in March that the St. Paul Pioneer Press would be one of the newspapers sold, noting that it would not fit the strategic direction of the company, as Knight Ridder already had a newspaper in that market, the Star Tribune. The consent decree is important, however, as it highlights the Division's continued view of media product and geographic markets.

  As in prior mergers, the Division separated the product market for daily newspapers from the product market for other sources of information. When looking at the market for readers, the Division noted that daily newspapers provided longer stories, classified advertisements, calendars of local events, and daily TV listings, while other sources of news, such as radio, television, and weekly newspapers, either did not provide any of these items or provided them on a reduced or less timely basis. 

  The Division also limited the product market because of the market for advertising. Advertisers who use daily papers would not consider using the internet, radio, television, or weekly newspapers, because none of those options would permit them to convey detailed information to their target audience in a timely fashion. Although the internet, radio, and television would permit the transmittal of timely information, and weekly newspapers would permit the transmittal of detailed information, only a daily paper could combine both required characteristics.

  Finally, the decision followed earlier precedent by defining the geographic market as the Minneapolis/St. Paul market, based on the level of interest in the local stories. Readers were unlikely to purchase an out-of-town newspaper in response to an increase in prices, because only a local paper would have the stories of interest to the readers.

  The decision is worth noting, however, because the Antitrust Division went through the trouble of filing a complaint and consent decree, despite the buyer having already announced that the newspaper would be sold off. Knight Ridder's failure to find an up-front buyer for the paper may have prolonged the investigation, by forcing the Department to investigate the overlap. Although Knight Ridder probably has a buyer lined up, as indicated by the consent decree only giving Knight Ridder 60 days to sell the paper, if Knight Ridder had found an upfront purchaser, the investigation might have closed earlier. 

FTC Commissioner Leibowitz Attacks Recent Court Decisions

• On July 27, FTC Commissioner Jon Leibowitz testified before Congress about the effect of patent settlements on generic drug competition. He used his testimony as an opportunity to attack the decision by the Eleventh Circuit Court of Appeals in Schering-Plough Corp. v. F.T.C., 403 F.3d 1056 (11th Cir. 2005) and by the Second Circuit in In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370 (2d Cir. 2005). He also called for the committee to pass legislation to overturn the courts' decisions.

  In 1984, Congress had passed the Hatch-Waxman Act, which permitted generic drug makers to apply for approval for a new drug using the test results from the studies used by the branded drug. Not having to perform the three stages of testing dramatically lowers the cost of entry for generic drugs. The intent of the legislation was to decrease the price of prescription drugs by allowing the quick introduction of generic drugs once the patents had expired. Although the branded manufacturers may challenge the generics on the basis of patent infringement, the generic drug manufacturers have successfully defended themselves 75% of the time. 

  In response to the threat posed by generic drug manufacturers, numerous branded drug manufacturers had started settling patent claims against them through contracts that included provisions, some of which had the effect of eliminating the generic drug from the market. Under the 2003 Amendments to the Hatch-Waxman Act, the branded and generic drug makers must submit these settlements to the Federal Trade Commission and the Department of Justice. The Federal Trade Commission had begun challenging these settlements under the Sherman and Clayton Acts, arguing that they were inherently anticompetitive

  In Schering-Plough Corp. v. F.T.C., 403 F.3d 1056 (11th Cir. 2005), the Eleventh Circuit refused to analyze the transaction under either the per se or rule of reason analysis. Rather the Court said that, for the transaction to receive scrutiny, the patent must either be proved invalid or it must be proved that the product did not infringe upon the patent. Only if the branded drug did not have a valid patent claim could the FTC maintain that the settlement was actually a "sham" and thus subject to the antitrust laws. The Second Circuit followed the Eleventh Circuit in In re Tamoxifen Citrate Antitrust Litigation., 429 F.3d 370 (2d Cir. 2005).

  According to Commissioner Liebowitz, the fact that 75% of generic drugs withstand the patent challenges under the Hatch-Waxman Act shows that, most of the time, entry is likely and will decrease prices. The court's decisions, therefore, will encourage settlements between branded and generic drug manufacturers, as the companies will split the monopoly profits rather than compete with each other. "[B]rand-name and generic company are both better off avoiding the possibility of competition and sharing the resulting profits, there can be little doubt that, should those rulings become the controlling law, we will see more of these settlements and less generic competition."

  Although Congress may not act on Commissioner Liebowitz's recommendations for the passage of a statute overturning the decisions, the testimony is significant as it indicates that the FTC feels that it may not be able to win this battle in the courts. As Commissioner Liebowitz noted, "litigating another case to conclusion will take years," meaning that the Commission sees little chance of obtaining a favorable judgment in another circuit that could cause the Supreme Court to take note. Although the FTC is currently suing Warner Chilcott, this case involved a non-competition clause that was more "naked" than the one at issue in Schering. Thus, unless Congress does pass a law, these settlements will probably remain legal for the foreseeable future, as, even in the event of an adverse decision in Warner Chilcott, lawyers will be able to draft agreements like those in Schering.

Authored by:

Christopher Bowen
(202) 772 5348