British Airways PLC and Korean Air Lines Co, Ltd. will each pay $300 million fines and plead guilty to charges that they participated in conspiracies to fix prices of passenger and cargo flights, according to the U.S. Department of Justice Antitrust Division.  United States v. British Airways PLC, 07-183-JDB (D.D.C. filed Aug. 1, 2007); United States v. Korean Air Lines Co., Ltd., 07-184-JDB (D.D.C. filed Aug. 1, 2007).

The two companies -- both among the top ten largest international cargo carriers with combined U.S.-related cargo revenues reportedly topping $1 billion – will plead guilty to violations of Sherman Act Section One and have agreed to cooperate with the department's ongoing criminal investigation, the DOJ said.

"The Department of Justice is committed to vigorous antitrust enforcement and will continue to bring to justice those who fix prices and thereby deprive the American public of the benefits afforded by a truly competitive market," Attorney General Alberto R. Gonzales said in a written statement.

Each company is accused of participating in two conspiracies: one to fix prices for international air transportation services for cargo ("air cargo services") and the other to fix prices charged for international air transportation services for passengers ("passenger services").  In both cases, both companies are accused of meeting with co-conspirators to discuss prices, ultimately agreeing on prices, and working with co-conspirators to monitor and enforce the agreed-upon rates.

Two other airlines, Virgin Atlantic and Lufthansa AG, have been conditionally accepted into the Antitrust Division's Corporate Leniency Program and also have agreed to cooperate in the investigation.  The leniency program allows a qualifying company that is the first to disclose participation in an antitrust crime and which fully cooperates in the investigation to avoid criminal liability.  Virgin Atlantic entered the program after reporting its participation with British Airways in the passenger services conspiracy, and Lufthansa entered the program after reporting its role in the air cargo conspiracy, DOJ said.

"Virgin Atlantic and Lufthansa are obligated to pay restitution to the U.S. victims of their conspiracies," according to the DOJ press release.

The airline conspiracy investigation demonstrates the value of the leniency program, said Scott D. Hammond, the DOJ's deputy assistant attorney general for criminal enforcement.  Hammond credited the amnesty program with breaking up dozens of cartels and helping to obtain more than $2 billion in fines.

British Airways allegedly conspired to fix prices charged for air cargo services from March 2002 to February 2006.  The company allegedly conspired to fix prices for passenger services from August 2004 to February 2006.

DOJ claims that British Airways conspired with competitors to fix the fuel surcharge for passengers on long-haul international flights, including flights between the United States and the United Kingdom.  During the time period of the alleged conspiracy, the fuel surcharge for round-trip passenger tickets rose from $10 to nearly $110, according to the DOJ.  The air passenger conspiracy raised the price of "virtually every ticket" purchased between 2004 and 2006 for the conspirators' long-haul international flights, according to the DOJ.

Britain's Office of Fair Trading also fined British Airways $246 million for its participation in the alleged conspiracies.  OFT Chairman Philip Collins said that the investigation demonstrates the benefits of international cooperation between competition authorities.

"Such close co-operation is intended to deal with companies that operate globally and who do not respect competition laws," Collins said in a written statement.

British Airways Chief Executive Willie Walsh said that passengers had not been overcharged, and that "a limited number of individuals" in the company broke competition laws, according to a report from the Associated Press.

Korean Air allegedly conspired to fix fares charged to passengers and travel agents for flights from the United States to Korea from January 2000 to July 2006.  DOJ claims the company agreed with competitors regarding base ticket rates or fuel surcharges for passenger services, or both.  The company is also charged with conspiring to fix rates charged to customers in the United States and elsewhere for cargo services from January 2000 to February 2006.

Korean Air is represented by Morgan, Lewis & Brockius; British Airways is represented by Sullivan & Cromwell.

Authored by:

Tyler M. Cunningham

(415) 774-3208

tcunningham@sheppardmullin.com

On February 21, 2007, Whole Foods and Wild Oats and entered into an agreement under which Whole Foods would acquire Wild Oats for a price of approximately $670 million.  On June 6, 2007, the FTC filed a Complaint in the United States District Court for the District of Columbia seeking to block this transaction.  According to the FTC, the proposed Whole Foods/Wild Oats transaction would constitute an anticompetitive merger of the top two competitors in the highly concentrated market for "premium natural and organic supermarkets."

n its Complaint, the FTC contends that several characteristics distinguish premium natural and organic supermarkets from conventional supermarkets.  Premium natural and organic supermarkets focus on high-quality perishable products such as high quality fresh fruits and vegetables and target a specific sub-segment of supermarket consumers – namely, affluent, well educated, health conscious and environmentally concerned people.  These supermarkets also offer more amenities, higher levels of service and more knowledgeable personnel than conventional supermarkets, promote healthy lifestyles, emphasize the natural and organic nature of their food, expend substantial resources on brand identity and charge premium prices.  Finally, apart from the products they sell, these stores seek to provide a dynamic shopping experience where customers come not only to shop but also to "gather, interact, and learn."  Because of these distinguishing and unique characteristics, shoppers with preferences for premium natural and organic supermarkets are not likely to switch to other retailers in response to price increases.  As such, according the FTC, premium natural and organic supermarkets' primary competitors are other premium natural and organic supermarkets, not conventional supermarkets, and comprise their own distinct market.  The FTC Complaint concludes that the Whole Foods/Wild Oats merger would reduce the number of premium natural and organic supermarkets from three to two or two to one in many geographic markets and thus raise prices and reduce service and choice for consumers in these already highly concentrated markets.

n support of its theory that this merger is anticompetitive, the FTC makes extensive use of statements by Whole Foods CEO John Mackey that, from an antitrust perspective, are problematic.  The most problematic among these is Mr. Mackey' statement to his Board of Directors that

By buying [Wild Oats] we will…avoid nasty price wars in Portland (both Oregon and Maine), Boulder, Nashville, and several other cities which will harm [Whole Foods'] gross margins and profitability.  By buying [Wild Oats]…we eliminate forever the possibility of Kroger, Super Value, or Safeway using their brand equity to launch a competing natural organic food chain to rival us…[Wild Oats] may not be able to defeat us but they can still hurt us….[Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space.  Eliminating them means eliminating this threat forever, or almost forever.

he FTC prominently featured this statement in its Complaint to bolster its contentions that the premium natural and organic food market is a separate market, that one purpose and effect of this merger would be to thwart entry into the premium natural and organic food market, and that Whole Foods intended to and would unilaterally raise prices after the merger.

his merger challenge is analogous to the FTC's 2003 challenge to the merger between Nestle Holdings, Inc. and Dreyer's Grand Ice Cream, Inc.  In that action, the FTC alleged that the parties were among the few participants in the market for "super premium" ice cream apart from premium and economy ice cream. The FTC's alleged market ultimately did not prevail.

he FTC's efforts to block this merger has stirred passions.  On the Whole Foods website, Mr. Mackey opined, "It is Whole Foods' opinion that the FTC had already decided to try to prevent this merger before they even began their investigation!" and attacked the FTC for "consistently behav[ing] in a biased, adversarial, and arrogant manner, while engaging in bullying tactics again and again and again."  Holman Jenkins of the Wall Street Journal contends, "The FTC's Complaint was shoddy and sophomoric."  To complicate matters, Mr. Mackey has recently admitted to posting statements to internet stock forums deprecating Wild Oats and saying its stock was overpriced under an anonymous psuedonym.  For example, Mr. Mackey posted  the statement, quot;The writing is on the wall. The end game is now underway for (Wild Oats) .... Whole Foods is systematically destroying their viability as a business -- market by market, city by city."  The FTC is also making use of these anonymous postings by Mr. Mackey in its case against the merger.  Despite the rancor surrounding this merger, the key issue in this merger remains unresolved at this point:  whether premium natural and organic supermarkets constitute a separate market in which conventional supermarkets do not compete.

Authored by:

Anik Banerjee

(213) 617-4124

abanerjee@sheppardmullin.com

On July 27, the European Commission (EC) confirmed that it sent a Statement of Objections (SO) to Intel alleging that Intel infringed European competition rules on the abuse of a dominant position (Article 82) with the aim of excluding its main rival, AMD, from the x86 Computer Processing Units (CPU) market.  In the SO, the EC alleges that Intel engaged in three types of abuse of a dominant market position.  First, Intel allegedly provided substantial rebates to various Original Equipment Manufacturers (OEMs) conditional on them obtaining all or the great majority of their CPU requirements from Intel.  Secondly, Intel allegedly made payments in order to induce an OEM to either delay or cancel the launch of a product line incorporating an AMD-based CPU.  Third, in the context of bids against AMD-based products for strategic customers in the server segment of the market, Intel allegedly offered CPUs on average below cost.  The EC alleges that these three types of conduct were aimed at excluding AMD, Intel's main rival, from the market, and each exclusionary practice  reinforced the other as part of a single, overall anti-competitive strategy.  Intel has 10 weeks to reply to the SO, and will then have the right to be heard in an Oral Hearing.

On August 6, 2007, the European Commission (EC) decided to lodge an appeal before the European Court of Justice (ECJ) against the Court of First Instance's (CFI) judgment that the EC must partially compensate Schneider for certain losses that it incurred as a result of the Commission's illegal prohibition of its acquisition of Legrand.  Having examined the CFI's ruling in depth, the EC considers that the judgment contains a number of errors.  In particular, the EC does not agree that the breach of rights of Schneider's rights of defense constitutes a sufficiently serious breach of European Community law to give a right to damages under Article 288.  Further, the EC considers that the principal damage identified by the CFI, that is, the reduced sale price that Schneider had to agree with Wendel/KKR in order to defer the sale while Schneider was waiting for the outcome of appeal and the resumed merger control procedure, is not directly imputable to any unlawful conduct by the EC.  Indeed, the EC argues that Schneider, itself, imposed a deadline for its own re-examination of its acquisition of Legrand, selling Legrand to Wendel/KKR before the EC had reached its conclusion on the acquisition's compatibility with the EC's Merger Regulation.  The EC, therefore, claims that the CFI erred in considering that the reduction in price was directly imputable to the EC's illegality, and so could be recovered.

On August 2, EC announced that it sent a Statement of Objections to a number of companies alleging their participation in an illegal cartel in the sodium chlorate sector, in violation of Article 81 of the European Community Treaty and Article 53 of the EEA Agreement (MEMO//07/319).  Sodium chlorate is mainly used as a bleaching agent in the pulp and paper industry. T he companies will now have an opportunity to respond to the allegations, and evidence set out in the Statement of Objections. They will have access to the EC's file, and may request an oral hearing.

On August 2, the Australian Competition and Consumer Commission (ACCC) instituted legal proceedings against Netti Atom Pty Ltd alleging the company engaged in resale price maintenance in relation to the range of Scott branded bicycles which Netti Atom imports, and distributes to retailers throughout Australia.  The ACCC alleges that Netti Atom contravened section 48 of the Trade Practices Act 1974 by attempting to induce retailers to whom it supplies Scott bikes not to advertise the bikes on their websites below the recommended retail price specified by Netti Atom.  The ACCC also instituted proceedings against Mr. Paul Feltis, Netti Atom's national sales and purchasing manager and part-owner. The ACCC alleges that Mr. Feltis was knowingly concerned in the alleged contraventions by Netti Atom.  This is the first matter instituted by the ACCC in the Federal Court's new "Fast Track List" which aims to streamline court procedures, thereby reducing the time and cost of litigation.

On July 30, the EC initiated formal anti-trust proceedings against the German energy company, E.ON, and the French gas company, Gaz de France, for an alleged breach of the European Community Treaty's rules on restrictive business practices (Article 81).  The case arises out of the inspection carried out in 2006 on E.ON and Gaz de France premises in Germany, and France. The EC proceedings are focusing on an alleged agreement or concerted practice between E.ON and Gaz de France to keep out of each other's home market, even after the liberalization of the European gas markets.

On July 27, 2007, the EC announced that it sent a statement of objections to a number of companies, including importers, alleging their participation in an illegal cartel for the sale of bananas, in violation of Article 81 of the European Community Treaty, and Article 53 of the EEA Agreement .  The companies will now have an opportunity to respond to the allegations, and evidence set out in the statement of objections. They will have access to the Commission's file, and may request an oral hearing.

On July 31, New Zealand's Commerce Commission signed a cooperation agreement with the Australian Competition and Consumer Commission that will make it easier for the two commissions to coordinate activities.  Both commissions are responsible for enforcing competition and consumer law, and for market regulation.  The new Cooperation Agreement between the ACCC, and the Commerce Commission, was signed by Commerce Commission Chair, Ms Paula Rebstock, and ACCC Chairman, Mr. Graeme Samuel, at the Commerce Commission's Wellington office.  The new agreement replaces a 1994 Memorandum of Understanding between the Commerce Commission and the ACCC's predecessor, the Trade Practices Commission.   Ms Rebstock said the agreement is a major advance in the already strong relationship enjoyed by the two Commissions: "This agreement reflects the closer relationship that has developed between the two Commissions over the years and will provide a sound basis for working closely together in the future.  Given the emergence of global cartels and global mergers, trans-Tasman cooperation is becoming increasingly important."  In 2006, the two Commissions signed up to a trans-Tasman merger protocol to facilitate decisions on mergers and acquisitions.

On July 19, 2007, the Court of First announced that judgment is due to be handed down in the Microsoft appeal (Case T-201/04) on September 17.  Microsoft is seeking the annulment of the EC's March 2004 decision, which found that Microsoft had infringed Article 82 by abusing its dominant position in the market for PC operating systems by refusing to supply certain "interoperability information" to its competitors in the work group server operating systems market, and by bundling Windows Media Player with the Windows operating system.  In the alternative, Microsoft is seeking a substantial reduction in the €497 million fine imposed by the EC, although the penalty payments imposed by the EC for non-compliance with the "interoperability remedy" are the subject of a separate appeal.

On July 26, the ACCC imposed penalties of more than AUS$9.1 million on 11 companies and 18 individuals for a series of alleged bid-rigging, and price fixing cartels in commercial air conditioning after Federal Court action.  In particular, the ACCC alleged that the companies tendering for commercial air conditioning and mechanical services projects in Western Australia agreed on which company would submit the lowest price for particular jobs, and therefore be likely to win the tender.  ACCC Chairman, Mr. Graeme Samuel, said, "The court's decision marks its strong disapproval of such widespread and long running collusive practices within the mechanical services industry in Western Australia.  It is a clear message that anyone involved in a cartel will be liable for a substantial pecuniary penalty".

On July 26, the French antitrust agency fined five suppliers of high-tension approximately $27 million for allegedly bid-rigging conduct with respect to two tenders held by Electricité de France for underground electricity networks.  The French authorities stated that they was particularly concerned by alleged information exchanges, and related anticompetitive conduct prior to an tender held by electronic auction.  The companies concerned received a 10% reduction in their fines because they did not contest the findings, represented that they would not appeal the ruling, and agreed to ensure that their staff received antitrust training.

On July 11, in the first case involving an award of damages from the European Commission (the “Commission”) to a party to merger proceedings, the European Court of First Instance (the “CFI”) ordered the Commission to pay damages to Schneider Electric SA (“Schneider”) for violating its rights of defense, in basing its decision to block Schneider’s acquisition of Legrand SA (“Legrand”) on an objection that was not contained in its statement of objections, and appeared for the first time in its prohibition decision.  Schneider made a formal notification to the Commission of its proposed acquisition of Legrand on February 16, 2001.  Following completion of Schneider’s acquisition of Legrand in August 2001, the Commission published its decision prohibiting the merger on October 10, 2001, and then issued a second decision on ordering Schneider to divest itself of Legrand.  Schneider brought an action for annulment of each of these two decisions but prepared for the likelihood of having to divest Legrand by entering into a contract for the sale of Legrand to the consortium Wendel/KKR. The CFI annulled both Commission decisions in October 2002.  The CFI held that by advancing an objection to the merger for the first time in the decision itself rather than in its statement of objections, the Commission had failed to have regard to Schneider’s rights of defense and had therefore acted illegally.  Following the annulment of its decisions, the Commission reopened its investigation into the merger.  However, due to the Commission’s persistent doubts as to whether Schneider’s proposed undertakings would be adequate to protect against a substantial lessening of competition, Schneider decided to abandon the merger and execute the contract with Wendel/KKR Schneider, and then brought an action for damages against the Commission before the CFI, in relation to loss suffered as a result of the Commission’s decision to block the merger, which had been found to be illegal by the CFI.

The CFI held that there must have been unlawful conduct on the part of the European Community institutions for the EC to incur non-contractual liability, and that the criterion was whether the institution had grave and manifest disregard for the limits of their powers of assessment. The CFI held that it is in the public’s interest that the EC institutions’ latitude and discretion (both in its policy decisions and in its interpretation and application of Community law) be protected, while ensuring that the cost of the consequences of flagrant and inexcusable failings does not fall on third parties.  While the CFI agreed with the Commission’s conclusion as to dominance and elimination of competition in France, the CFI found that the Commission had rejected the parties’ proposed remedies in relation to the French market on the basis of an objection that was not contained in its statement of objections, and had therefore violated Schneider’s right of defense, and that there was no justification or explanation for denying Schneider its right to be heard in this regard.

The CFI concluded that the Commission had an obligation to compensate Schneider for the harmful consequences of denying them their right of defense.  The CFI held that the Commission was liable to compensate Schneider for: (i) the expense incurred by Schneider in participating in the Commission’s investigation following the annulment of the Commission’s decision by the CFI on 22 October 2002; and (ii) the reduction in the divesture price that Schneider had to concede to Wendel/KKR in order to obtain a postponement of the divesture.  However, only two thirds of the latter is payable since the CFI held that Schneider had itself contributed to its own loss in part by assuming the real risk that the merger would subsequently be declared incompatible and that the divestment of Legrand would be inevitable.  Damages were not awarded for loss of profit.

On June 21, it was reported that the European Union's 50 year-old commitment to undistorted competition as one of the bloc's objectives had been removed from the new draft of the EU treaty.  Where the original EU Treaty refers to an "an internal market where competition is free and undistorted, the new draft Treaty now refers to just "an internal market".  The removal of the reference to "free and undistorted" competition followed pressure from the French Government.  Although competition will now be mentioned in a protocol attached to the Treaty, it will no longer be held up as a specific objective or principle in the bloc’s basic legal text.  Some legal experts argue the new wording will weaken the European Commission's ability to crack down on antitrust abuses and fight protectionism.  But European Competition Commissioner, Neelie Kroes, insisted the change would make no difference, saying the protocol in fact reaffirmed the Commission’s duties and rights as an antitrust watchdog.  She stated that, “The Commission will continue to enforce Europe’s competition rules firmly and fairly".

On July 4, the European Commission announced that its officials, accompanied by their counterparts from the relevant national competition authorities, conducted unannounced inspections at the premises of a number of manufacturers of hardware for windows and doors in a number of EU member states in order to investigate potential breaches of Article 81 of the EC Treaty.  Hardware for windows and doors is the metal equipment used for the fastening, handling and locking of windows and doors, including bolts, handles, locks and hinges.  The EC is investigating allegations that the companies may have infringed Article 81 of the EC Treaty. The EC has power to conduct unannounced investigations (otherwise known as "dawn raids") in relation to a suspected infringements of Articles 81 and/or 82 of the EC Treaty.  It also has the power to examine books and other business records, take copies of, or extracts from, books and business records, ask for oral explanations on-the-spot and to enter any premises, land and means of transport of undertakings, including homes of directors, managers and other members of staff. Dawn raids are a first step in an EC investigation into suspected cartel activity.

On July 4, the EC fined the Spanish incumbent telecoms operator, Telefónica €151.9 million (US$207m)  for "a very serious abuse of its dominant position" in the Spanish broadband market.  The EC alleged that Telefónica imposed unfair prices in the form of a margin squeeze between the wholesale prices it charged to competitors and the retail prices it charged to its own customers. In so doing, the EC alleged that Telefónica had weakened its competitors, making their continued presence and growth difficult. With high wholesale costs and weakened retail competition on the broadband market, the EC calculated that Spanish consumers paid 20% more than the EU-15 average for broadband access.  EC Competition Commissioner, Neelie Kroes, commented: “Spanish consumers are paying far more than the average for high-speed Internet access and many have chosen not to pay that price. The margin squeeze that Telefónica imposed on its competitors not only raised their costs, but also harmed customers significantly. When consumers and businesses are harmed in such a major market, the entire economy suffers. I will not allow dominant companies to set prices that undermine telecoms liberalization".

On July 5, the new Spanish Competition Act was approved, and published in the Official Journal of the Government of Spain.  The new framework will become effective in September, and will replace the Competition Act of 1989.   The main legal changes include the emerging of the two administrative authorities, the Servicio and Tribunal de Defensa de la Competencia, into one authority called the Comisión de la Competencia.  Other changes include: giving the commercial civil courts the power to directly decide about antitrust damages, the replacement of the current authorization system for vertical restraints with self evaluation by businesses, and a lenieincy program for cartel cases.

On June 29, the Australian Competition and Consumer Commission announced that it had instituted legal proceedings in the Federal Court, Melbourne, against TEAC Australia Pty Ltd, alleging the company engaged in resale price maintenance in relation to a range of TEAC branded electronic goods including televisions, digital set-top boxes and portable music devices. The ACCC is alleging that TEAC contravened section 48 of the Trade Practices Act 1974 by attempting to induce and inducing a certain retailer not to advertise certain TEAC products below the 'go price' specified by TEAC.  The ACCC has also instituted proceedings against the an employee who was the National Sales Manager of TEAC.  The ACCC alleges that the employee was knowingly concerned in the alleged contraventions by TEAC.  The ACCC is seeking, inter alia, for declarations that TEAC contravened section 48 of the Act, injunctions restraining TEAC and the sales manager from engaging in similar conduct in the future, and also demanding pecuniary penalties against TEAC.

On June 27, the EC prohibited, on the basis of the EU Merger Regulation, the proposed takeover by Ryanair of Aer Lingus. The acquisition would have combined the two leading airlines operating from Ireland which "currently compete vigorously against each other".  The Commission held that the merger would have harmed consumers by removing this competition and creating a monopoly or a dominant position on 35 routes operated by both parties.  The EC alleges that this would have reduced choice and, most likely, led to higher prices for more than 14 million EU passengers using these routes to and from Ireland each year.  The EC stated that its investigation and market test of remedies offered by Ryanair demonstrated that the remedies were inadequate to remove the competition concerns.  In particular, the EC held that the limited number of airport "slots" offered was not likely to lead to competition sufficient to replace the competitive pressure currently exercised by each airline on the other.  EC Competition Commissioner, Ms Neelie Kroes, said “Our decision to prohibit this merger was essential to safeguard Irish consumers, who depend heavily on air transport, and other EU consumers. Monopolies are bad for consumers because they reduce choice, lower quality and give rise to higher prices. Low-cost carriers like Ryanair are no exception to this rule. Unfortunately, the remedies proposed by Ryanair were not sufficient to remove the competition concerns."

On June 26, the French antitrust agency, the Conseil de la Concurrence, announced that it was fining the two largest French companies in the corporate clothing rental and laundry services sector, Elis and Initial BTB, for alleged price-fixing behavior, and implementing a system of customer sharing.  The Conseil de la Concurrence alleged that the two companies, "implemented a non-aggression pact for exclusive customers (exchange of information prior to call for tenders and setting-up of cover offers so as to limit the risk of supplier switches) and a price coordination pact for 'shared customers'".   However, the companies received significant reductions in fines for their cooperation in the investigation, and for implementing an innovative "whistle blowing" system within the industry in order to prevent future infringements.

On June 22, the UK's Department of Health and Goldshield Group Plc, Goldshield Pharmaceuticals Ltd and Forley Generics Limited ("Goldshield") jointly announced settlement of the claims brought against Goldshield for an alleged anti-competitive cartel conduct in connection with the supply to the National Health Service ("NHS") of generic drugs.  Under the terms of the settlement, Goldshield have agreed, on a full and final basis and without admission of liability, to pay the NHS the sum of £4 million (US$8 million), and to provide co-operation in connection with the continuing civil claims regarding the alleged price-fixing arrangements.

Authored by:

Neil Ray

(415) 774-3269

nray@sheppardmullin.com

A class action antitrust Complaint passed the new, stricter "plausibility" pleading standard the Supreme Court established earlier this summer in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955; (No. 05-1126) 2007 U.S. LEXIS 5901 (2007).  In re Hypodermic Products Antitrust Litigation, No. 05-CV-1602 (JLL/CCC) (D. N.J. June 29, 2007).  In three separate, unpublished opinions, a New Jersey district court overruled defendant medical device manufacturer Becton Dickinson & Company (Becton)'s motion to dismiss Section 1, Sherman Act and Section 3, Clayton Act claims because the three Complaints provided plausible grounds to infer that Becton and group purchasing organizations (GPOs) entered into unreasonably anticompetitive agreements.

The Complaint

Healthcare organizations, pharmacies and wholesalers sued Becton separately.  This piece focuses on the court's decision rejecting Becton's motion to dismiss plaintiff healthcare organization, Medstar Health Inc. and its subsidiaries' class action amended Complaint.  Plaintiffs' Complaint states causes of action for exclusive dealing and exclusionary practices in violation of Section 1 of the Sherman Act and Section 3 of the Clayton Act; unlawful maintenance of monopoly power and attempted monopolization in violation of Section 2 of the Sherman Act; state antitrust law violations; and unjust enrichment.  The Complaint alleges that that Becton has been a leading U.S. hypodermic syringe manufacturer since the 1950's and that Becton has a dominant share in four relevant product markets collectively called the disposable hypodermic product market.  The Complaint contends that Becton entered into anticompetitive arrangements with GPOs, which serve as negotiating agents for hospitals, where Becton would pay a GPO million dollar cash payments and offer "equity positions" with the expectation that the GPO "would favor Becton's products, regardless of price, over those of Becton's competitors".  Kickbacks like these were illegal until 1986, when Congress amended the Social Security Act's "anti-kickback" provisions to create exceptions for vendors' payments to GPOs.  For example, in 1999, the Complaint alleges, Becton awarded one GPO, Novation, with a $1 million payment and high administration fees for a four year "sole-source" contract, whereby Becton would be the only vendor approved by Novation to sell disposable hypodermic products to Novation members.  In 1998, the Complaint also alleges, Becton and another GPO, Premier, entered into a 7.5 year sole-source contract.  Further, the Complaint alleges that when Becton faced competition in the 1970's from Terumo, a Japanese corporation, Becton engaged in a program called "Block Terumo".  The program entailed "the use of an aggressive strategy" including "bundled pricing and contracting strategies and other similar exclusionary and predatory tactics".  Becton allegedly used similar strategies to limit competition from another competitor, Retractable Technologies, in the late 1990s.  The Complaint alleges that Becton's agreements and practices foreclosed competition and thus caused purchasers of Becton's disposable hypodermic products to pay higher prices.

Standard for Review

Becton's motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure contended the Complaint is deficient in alleging unlawful exclusionary conduct, anticompetitive effects, the relevant markets, antitrust injury, and standing.  The Court addressed the standing issue in a separate opinion.  Before considering each ground for dismissal, the court set out the applicable standard of review.  The court first observed that in the Third Circuit, antitrust Complaints should be liberally construed, citing Commonwealth of Pa. ex rel. Zimmerman v. PepsiCo, Inc., 836 F.2d 173, 179 (3d Cir. 1988).  The court then referred to Twombly, where the Supreme Court held that to avoid dismissal, an antitrust Complaint need not provide detailed factual allegations but must plead "enough facts to state a claim to relief that is plausible on its face."  127 S. Ct. at 1964, 1974.  The court followed Twombly and found that the Complaint's Section 1 and Section 3 causes of action alleged facts that provided plausible grounds to infer that Becton and certain GPOs and manufacturers had entered into anticompetitive, illegal agreements.

Unlawful Exclusionary Conduct

The court set out the elements to the Complaint's' first count against Becton, unlawful exclusive dealing in violation of Section 1 of the Sherman Act and Section 3 of the Clayton Act.  Section 1 requires: (1) concerted action by defendants; (2) that produced anti-competitive effects with the relevant market; (3) that the concerted action was illegal; and (4) that the plaintiff was inured as a proximate result of the concerted action.  The crucial question, the court noted, is whether the challenged anticompetitive conduct arises from independent decision or from an agreement, tacit or express.  Twombly, 127 S.Ct at 1964.  Recovery under Section 3 of the Clayton Act generally requires, the court said, (1) an exclusive dealing arrangement; and (2) the probable effect of exclusion must be to substantially lessen competition in the market".  Citing Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961).  In analyzing the sufficiency of these claims, the court applied Twombly which requires that a Complaint allege "enough facts to state a claim to relief that is plausible on its face."  The court held the Complaint satisfied this standard.

The court first pointed out the Complaint's allegations about Becton's kickbacks to Premier and Novation and Becton's four and 7.5 year exclusive dealing contracts with these GPOs.  The Complaint also cites a February 1997 article that reports that as a result of a deal between Becton and Premier, Premier would receive warrants for Becton stock, so that the more Premier purchased from Becton, the more Premier's warrants would be worth.  The Complaint additionally alleges that Becton entered into agreements with GPOs, certain hospitals and other customers which included exclusivity clauses and bundled financial incentives.  If a member desired to purchase disposable hypodermic products from another manufacturer, the Complaint alleges, the class member risked losing numerous financial incentives.  These agreements foreclosed competition in a substantial portion of the market, the Complaint alleges.  Finally, the Complaint alleges antitrust injury in contending that plaintiffs were injured by Becton's exclusive arrangements to the extent they were forced to pay higher prices for disposable hypodermic products than they would have paid in the absence of the agreements.  The court thus concluded that the Complaint satisfied Twombly because it alleged  enough facts to raise a reasonable expectation that discovery will lead to evidence of illegal agreement.

Anticompetitive Effects

Becton also argued, unsuccessfully, that plaintiffs' action should be dismissed because the Complaint contains no particularized allegations about competition in any specific market.  Becton cited no legal authority, the court pointed out, that indicated that such particularized allegations are a pleading requirement.  To the contrary, the court said, "Federal Rule of Procedure 8(a)(2) requires only a short and plaint statement of the claim showing that the pleader is entitled to relief in order to give the defendant fair notice of what the … claim is and the grounds upon which it rests", quoting Twombly, 127 S.Ct. at 1964 (citations omitted).  In any event, the court continued, the Complaint provides examples of the types of exclusionary practices Becton utilized.  Unlike in Twombly, where the Complaint sought to demonstrate anticompetitive agreements based on parallel conduct through inference, the Complaint in this instance alleges specific anticompetitive agreements between Becton and certain manufacturers (and GPOs).  This gives Becton, the court found, sufficient notice of the particular grounds of plaintiffs' claims, particularly given the fact that plaintiffs have not yet had the benefit of discovery.  For additional support, the court quoted Hosp. Bldg. Co. v. Trs. of Rex Hosp., 425 U.S. 738, 745-57 (1976), where the Supreme Court said that "dismissals prior to giving the plaintiff ample opportunity for discovery should be granted very sparingly."

Relevant Market

Becton also argued for dismissal on the basis that plaintiffs improperly defined the relevant market.  The court rejected this argument too, finding that the determination of a relevant product market is a highly factual one best allocated to the trier of fact.

Conclusion

Twombly's plausibility standard for pleading Section 1 and Section 3 violations will be satisfied when a Complaint alleges anticompetitive agreements with enough specificity to give the defendant adequate notice of the basis of plaintiff's claims.  Here, this was achieved with allegations that identified with particularity the parties, duration, specific contents, and the effects of alleged anticompetitive agreements.  Quoting Twombly, the court added that a Complaint must allege enough facts to create a reasonable expectation that discovery will reveal evidence of illegal agreement.  The Complaint's allegations satisfied the Twombly plausibility standard since they raised a reasonable expectation that discovery will reveal evidence of an illegal agreement.

Authored By:

Heather M. Cooper

(213) 617-5457

hcooper@sheppardmullin.com