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- On November 28, the Antitrust Division with the FTC announced that they will hold a series of public hearings designed to examine the antitrust implications of single firm conduct under the antitrust laws. The primary goal of the hearings, which will begin in spring 2006, is to examine whether and when specific types of single-firm conduct are pro-competitive or benign, and when they may harm consumers. The hearings will examine and analyze a wide-range of legal and economic issues to help define the boundaries between single-firm conduct that is legal and conduct that is illegal under current antitrust laws.
- On November 23, the Antitrust Division issued a statement announcing the closing of its investigation of an alleged territorial allocation among Vermont's 12 Medicare-certified home health agencies. As a result of a new Vermont state law, the Home Health Services Act of 2005, the Division decided not to proceed with its investigation. While the Division's position remains that a state law cannot retroactively immunize illegal conduct, the Division decided not to pursue the case. Rather, the Division is urging Vermont's state officials to exercise close oversight under the new Act and to critically evaluate the Division's arguments for maintaining the status quo and keeping out competition.
- On November 16, the Antitrust Division closed its investigations of the proposed acquisition of Instinet Group Inc. ("Instinet") by The NASDAQ Stock Market Inc. ("Nasdaq") and the proposed merger of the New York Stock Exchange Inc. ("NYSE") and Archipelago Holdings Inc. ("Archipelago") (collectively, "the Exchange Mergers"). On April 20, 2005, the NYSE, one of the two leading equities markets in the country, announced plans to acquire Archipelago, which operates ArcaEx, one of the largest all-electronic stock markets in the world. Two days later, Nasdaq, the nation's other leading equities market, announced its intention to acquire Instinet Group Inc., the institutional brokerage and electronic trading network controlled by the Reuters Group. After the two transactions were announced, several separate enterprises, including regional exchanges such as the Boston Stock Exchange and the Philadelphia Stock Exchange, and others including BATS Trading Inc., announced their intent to enter and compete in the equity trading facilities services, listing services, and/or the market data service industries. Some of these ventures are backed by many of the nation's leading investment banks and securities firms, including Merrill Lynch, Citigroup, UBS, Credit Suisse First Boston, Morgan Stanley, Goldman Sachs, Lehman Brothers, Citadel, and Fidelity Investments. The Division thoroughly investigated the Exchange Mergers and determined that neither transaction is likely to reduce competition substantially. The critical and determinative issue regarding the deal was ease of entry. Specifically, the Department examined whether the planned and likely entry of several firms, including regional stock exchanges supported by investments from some of the nation's largest securities firms and investment banks, will be sufficient to resolve any competitive concerns raised by the transactions. The Division determined that the imminent entry of these enterprises should result in additional, viable alternatives to the two merged firms sufficient to ensure that the markets remain competitive.
- On November 2, the Antitrust Division sent a letter to the New Mexico Real Estate Commission advising it to reject proposed amendments to the New Mexico administrative code that would limit a consumer's freedom to choose which real estate services to buy and could cause New Mexico consumers to pay more for real estate brokerage services. Under current rules, New Mexico home sellers and buyers can choose between a full-service package of real estate brokerage services and a fee-for-service option that allows consumers to purchase their choice of services. While the rules currently require brokers to provide some negotiation and closing assistance to clients, home sellers may choose not to receive certain services through a written waiver. The proposed amendment would remove this waiver provision so that consumers would no longer have control over which services they receive and pay for. The letter also urged the commission not to define Virtual Office Websites ("VOWs") as advertising because it would stifle innovation and harm consumers. A state-imposed rule that defined VOWs as advertising could enable traditional brokers to block the customers of their VOW-operating competitors from using the competitor's website to review the same set of listings that traditional brokers deliver to their customers by other means. The Division has been sending consistent messages to the industry that consumer's must continue to have choices.
Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com
- On November 28, the Federal Trade Commission, together with the Antitrust Division of the U.S. Department of Justice ("DOJ"), announced that it will hold a series of public hearings designed to examine the antitrust implications of single-firm conduct under the antitrust laws. The primary goal of the hearings, which will begin in spring 2006, is to examine whether and when specific types of single-firm conduct are pro-competitive or benign, and when they may harm consumers. Participants will critically examine and discuss the standards used in recent cases, including DOJ's enforcement actions against Microsoft, American Airlines, and Dentsply, and FTC cases against Intel, Unocal, and Rambus. Private actions, such as Trinko and LePage's, also will be examined. Hearing participants also will examine what economic learning contributes to the analysis with respect to exclusionary or predatory conduct. In an upcoming Federal Register notice, the agencies will solicit public comment on the specific types of single-firm conduct that may raise antitrust concerns in a variety of regulated and unregulated industries. These comments will assist the agencies in developing the agenda and schedule for the hearings. The agencies anticipate participation from the business community, economists, lawyers, and other interested parties on this important topic.
- On November 22, the Commission authorized the staff to release publicly the FTC's Performance Report for Fiscal Year ("FY") 2005. As required by the Reports Consolidation Act of 2000, the Performance Report is included in the FTC's Performance and Accountability Report ("PAR") of Fiscal Year 2005. The FY 2005 PAR is the FTC's third consolidated report prepared pursuant to the requirements of the Accountability of Tax Dollars Act of FY 2002. The PAR is presented in three parts: Part I contains introductory and summary information about the FTC performance and financial activities; Part II is the Performance Report; and Part III contains the agency's financial statements and audit results. The FY 2005 independent financial audit resulted in the FTC's ninth consecutive unqualified opinion, the highest audit opinion available.
- On November 18, following a public comment period, the Commission approved the issuance of a final consent order in the matter concerning DaVita, Inc. and Gambro AB. On October 4, the Commission accepted for public comment an order resolving the competitive issues raised by DaVita's $3.1 billion purchase of rival outpatient dialysis clinic operator Gambro. DaVita will divest 69 dialysis clinics in 35 markets across the country. The Commission vote approving the final order was 4-0.
- On November 9, Federal Trade Commission Chairman Deborah Platt Majoras testified before a joint Senate hearing of the Committee on Commerce, Science and Transportation and the Committee on Energy and Natural Resources, detailing the FTC's extensive experience in enforcing the nation's antitrust laws regarding the petroleum industry and saying that federal price gouging legislation now being considered "would unnecessarily hurt consumers."
Regarding concerns about price gouging, Chairman Majoras said that, "In an economy in which producers are generally free to determine their own prices and buyers are free to reduce their purchases, it is unusual when many parties call for some sort of price caps on gasoline." The FTC "is keenly aware of the importance to American consumers of free and open markets," she said, "and intends faithfully to fulfill its obligation to search for and stop illegal conduct, which undermines the market's consumer benefits." She cautioned, however, "that a full understanding of pricing practices before and since Katrina may not lead to a conclusion that a federal prohibition on 'price gouging' is appropriate." Consumers understandably are upset when they face dramatic price increase within a short period of time, especially during a disaster, the Chairman said. "But price gouging laws that have the effect of controlling prices likely will do consumers more harm than good . . . While no consumers like price increases, in fact, price increases lower demand and help make the shortage shorter-lived than it otherwise would have been." The Chairman continued by saying that even if Congress were to outlaw gasoline price gouging, such laws would be difficult to enforce fairly, based on the difficulty of defining the term "price gouging" and determining when such laws should be put into effect. "For all of these reasons," the Chairman said, "the Commission remains persuaded that federal price gouging legislation would unnecessarily hurt consumers. Enforcement of the antitrust laws is the better way to protect consumers."
Chairman Majoras noted that at least 28 states currently have statutes that address short-term price spikes in the aftermath of a disaster and if Congress mandates anti-"gouging" enforcement - despite the associated enforcement problems - such enforcement should be left up to the states. The states are better situated to react to price gouging based on their proximity to retail outlets and their ability to react quickly to consumer complaints on the local level.
Chairman Majoras detailed the FTC's active role in merger enforcement related to the petroleum industry, presenting data showing that the Commission has brought more merger cases at lower concentration levels in this industry than in others. Further, unlike in other industries, the Commission obtained merger relief in moderately concentrated petroleum markets. The testimony continued by examining the Commission's recent nonmerger investigations into gasoline pricing, highlighted by the consent agreement reached with Unocal Corp., settling charges that the company deceived the California Air Resources Board ("CARB") in connection with regulatory proceedings to develop the reformulated gasoline standards that CARD adopted. Under the agreement, Unocal (and Chevron, which acquired it earlier this year) agreed to give up its claims to the relevant CARB gas patents, potentially saving California consumers more than $500 million in gasoline costs annually.
Finally, the Chairman presented the results of a Commission report on the factors influencing gasoline prices nationwide. According to the report, worldwide supply, demand, and competition for crude oil are the most important factors in the national average price of a gallon of gas in the United States. In addition, gasoline supply, demand, and competition produced relatively low and stable prices from 1984 to 2004, despite substantial increases in the United States' gasoline consumption. Other factors, as well, such as retail station density, new retail formats, and state and local regulations, can affect retail gasoline prices.
- On November 8, the Commission received a petition for proposed divestiture from The Procter & Gamble Company ("P&G") and The Gillette Company ("Gillette"). The Commission's consent order allowing P&G's acquisition of Gillette required the companies to divest certain assets after the transaction was consummated. In the petition, the companies requested FTC approval to sell Gillette's Rembrandt toothpaste and tooth whitening business to Johnson & Johnson. The FTC accepted public comments on the proposed divestiture until December 7, 2005, after which it will decide whether to approve it.
- On November 7, the Federal Trade Commission filed a complaint in the U.S. District Court for the District of Columbia under Section 13(b) of the FTC Act seeking to put an end to an agreement between drug manufacturers Galen Chemicals Ltd. (now known as Warner Chilcott) and Barr Laboratories ("Barr"). The agreement denies consumers the choice of a lower-priced generic version of Warner Chilcott's Ovcon oral contraceptive. According to the FTC's complaint, Barr planned to launch a generic version of Ovcon as soon it received regulatory approval from the Food and Drug Administration. Warner Chilcott expected to lose half its Ovcon sales within the first year if Ovcon faced competition from a generic equivalent. Faced with this prospect, instead of competing with Barr, Warner Chilcott entered into an agreement with Barr preventing entry of Barr's generic Ovcon into the United States for five years. In exchange for Barr's promise not to compete, Warner Chilcott paid Barr $20 million.
The complaint alleges that in September 2001, Barr filed an application with the FDA for approval to make and sell a generic version of Ovcon. Barr planned to sell generic Ovcon at a 30 percent discount to the branded product. In January 2003, Barr publicly announced its intention to market generic Ovcon by the end of that year. Generic Ovcon entry was understood by Warner Chilcott to be the "biggest risk to the company," the complaint alleges. Warner Chilcott expected that Barr's generic Ovcon would capture at least 50 percent of Ovcon's new prescriptions within the first year, thus causing a significant decline in Ovcon revenues. To protect these revenues from generic competition, Warner Chilcott intended to introduce a chewable form of the product ("Ovcon Chewable") before generic entry occurred. Warner Chilcott's strategy, the complaint states, was to convert its Ovcon customers to Ovcon Chewable and to stop selling Ovcon. Prescriptions for Ovcon Chewable could not be replaced at the pharmacy with generic Ovcon without express approval of the patient's physician.
According to the FTC, by mid-2003, Warner Chilcott's switch strategy to protect its Ovcon revenues - by converting customers to Ovcon Chewable before generic Ovcon entry - was in jeopardy. Barr's generic Ovcon entry appeared imminent, and Ovcon Chewable had not obtained FDA approval. Facing the imminent threat of generic Ovcon entry, the complaint alleges, Warner Chilcott, in September 2003, entered into an agreement in principle with Barr. Under this agreement, after Barr received final FDA approval for its generic Ovcon product, Warner Chilcott would have the option to pay Barr a total of $20 million. In return for this payment, the complaint alleges, Barr would not compete in the United States for five years with its generic Ovcon product. Instead of entering and competing, alleges the FTC, Barr would agree to be available as a second supplier of Ovcon to Warner Chilcott if Warner Chilcott so requested.
The complaint alleges that Warner Chilcott and Barr carried out their horizontal agreement not to compete. In April 2004, Barr received FDA approval to make and sell generic Ovcon. Several weeks later, Warner Chilcott paid Barr the money owed under the agreement. As a result, Barr is precluded from entering with its own generic Ovcon product until May 2009. The Commission's complaint charges that defendants' horizontal agreement not to compete, which prevents entry of Barr's generic version of Ovcon for five years, constitutes an unfair method of competition in violation of Section 5 of the FTC Act. According to the complaint, the agreement on its face eliminates competition, has no plausible justification, and thus is a naked restraint of trade.
- On November 2, the Federal Trade Commission announced a consent agreement that will protect competition and consumers in three significant medical device product markets affected by Johnson & Johnson's ("J&J") proposed $25.4 billion acquisition of Guidant Corporation ("Guidant"). The agreement will allow the transaction to proceed, provided the parties comply with its terms. Under the terms of the order conditionally approving the transaction, J&J is required to 1) grant to a third party a fully paid-up, non-exclusive, irrevocable license, enabling that third party to make and sell drug eluting stents ("DESs") with the Rapid Exchange ("RX") delivery system, 2) divest to a third party J&J's endoscopic vessel harvesting ("EVH") product line, and 3) end its agreement to distribute Novare Surgical System, Inc.'s ("Novare") proximal anastomotic assist device ("AAD").
According to the Commission's complaint, the transaction as originally proposed would violate the FTC Act and Section 7 of the Clayton Act, as amended, and would reduce competition in the three product markets identified. Each of these markets is highly concentrated and potential entry would not be timely, likely, or sufficient to offset the alleged anticompetitive impact of the acquisition. Specifically, as described in more detail in the Commission's analysis to aid public comment, J&J's acquisition of Guidant would remove Guidant as an imminent competitor from the U.S. market for DESs and be likely to lessen competition in the U.S. markets for EVH devices and proximal AADs.
The Commission's consent order is designed to remedy the alleged anticompetitive impact of J&J's acquisition of Guidant, not to improve pre-transaction competition in the relevant product markets. First, it requires J&J to license Guidant's intellectual property surrounding the RX delivery system at no minimum price to an up-front buyer with a DES program in development within 10 days of the acquisition's consummation. The parties proposed Abbott Laboratories ("Abbott"), one of the two companies best positioned to replicate the competition provided by Guidant in this market in the relevant time frame, as the up-front buyer of this divestiture package. The Commission believes Abbott's experience with both drugs and vascular stents will enable it to become a strong competitor in the DES market at its time of expected entry in late 2007, the same time Guidant would have entered with its DES on an RX delivery system. Still, the RX license defined in the agreement is transferable, so if Abbott's DES program is unsuccessful, Abbott will have the incentive and ability to transfer the license to another firm to ensure continued competition with J&J/Guidant.
Second, the order remedies the acquisition's potential anticompetitive effects in the market for EVH devices by requiring J&J to divest its EVH product line to a Commission-approved buyer within 15 days of its acquisition of Guidant. J&J has reached an agreement to sell these assets to Datascope, which currently has a line of products used in cardiac surgery, including products used in CABG procedures. The order allows Datascope to enter into a supply agreement with J&J for up to two years to ensure Datascope has time to receive required regulatory approvals and to begin manufacturing and/or packaging EVH device kits in its own facility.
Finally, the order will remedy the competitive concerns in the market for proximal AADs by requiring J&J to end its distribution agreement with Novare for Novare's proximal AAD, eNclose. The FTC expects Novare will be able to find a new eNclose distribution partner within the next couple of months.
The European Commission ("EC"), Canada's Competition Bureau, and other foreign competition authorities also reviewed this proposed merger. Throughout the course of their respective investigations, the FTC and the staffs of the EC's Competition Directorate, the Canadian Competition Bureau, and other interested competition authorities communicated and cooperated with each other under the terms of their respective cooperation agreements.
- On November 1, following a public comment period, the Commission approved the issuance of a final consent order in the matter concerning Penn National Gaming, Inc. and Argosy Gaming Company. The final order amended the proposed order accepted for public comment on July 26, 2005, to reflect changes in the timing of the acquisition and changes in the contracts divesting a casino in Baton Rouge, LA.
Authored by:
Robert W. Doyle, Jr.
202-218-0030
rdoyle@sheppardmullin.com
- Two Internet-based companies and their principals were permanently barred from misrepresenting any product or service on November 30, and will pay refunds to their consumer victims to settle Federal Trade Commission ("FTC") charges that their business practices violated federal laws. In a complaint filed in February 2005, the FTC alleged that, in the course of marketing and selling Internet-based business opportunities via direct mail and telemarketing, the defendants, Wealth Systems, Inc. ("Wealth Systems"), Ecommerce Network.com, LLC, and their principals, Martin Wilson and Shane Roach, enticed consumers to become what the defendants called "Web brokers." The FTC's complaint alleges that the defendants claimed that consumers could earn $20,000 to $50,000 by purchasing "Web broker packages" priced from about $300 to $1,400 or more. Consumers received a mailing with testimonials from "Web brokers," one of whom claimed to have made "over $300,000 in a little over a year." According to the FTC, the defendants offered advertising "coaches" and advertising packages costing "as low as two dollars" to help purchasers. Once consumers purchased a Web broker package, the advertising coaches allegedly used high-pressure sales tactics to persuade consumers to buy advertising services from them, stressing the need to spend as much money as possible on advertising in order to make a profit. Some of the advertising packages cost tens of thousands of dollars. The defendants allegedly claimed that one person had earned more than $12,000 in a month, and another person had invested only $300 and was receiving his first earnings check for $680. As alleged in the complaint, few, if any, consumers who purchased the defendants' business opportunity and/or advertising services made any money, and few consumers received refunds. According to the FTC, consumers were not given any pre-sale disclosure documents with information about Wealth Systems, such as names, addresses, and telephone numbers of Wealth Systems members and their earnings; or an earnings claim document stating a reasonable basis for defendants' earnings claims; or the number and percentage of prior purchasers who had achieved results as good as or better than the represented earnings.
- According to a study released on November 20 by the FTC, spammers continue to harvest email addresses from public areas of the Internet, but Internet Service Providers' anti-spam technologies can block the vast majority of spam sent to these email addresses. The FTC staff report also found that consumers who must post their e-mail addresses on the Internet can prevent them from being harvested by using a technique known as "masking." The agency studied three aspects of spam: e-mail address harvesting - the automated collection of e-mail addresses from public areas of the Internet; the effectiveness of spam filtering by ISPs; and the effectiveness of using "masked" e-mail addresses as a technique to prevent the harvesting of e-mail addresses. To conduct the study, FTC staff created 150 new undercover e-mail accounts - 50 at an ISP that uses no anti-spam filters and 50 each at two different ISPs that use spam filters. They then posted the e-mail addresses on 50 Internet sites, including message boards, blogs, chat rooms, and USENET groups where spammers might go to attempt to harvest the addresses. The study concluded that spammers continue to harvest e-mail addresses posted on Web sites, but addresses posted in chat rooms, message boards, USENET groups, and blogs were unlikely to be harvested. After a five week trial, e-mail addresses at the unfiltered ISP received a total of 8,885 spam messages. At the end of the same period, email addresses at one of the ISPs that uses filtering technologies received a total of 1,208 spam messages, and email addresses at the second ISP that uses filtering technologies received a total of 422 spam messages. The filter of the first ISP blocked 86.4 percent of the spam, and the filter of the second ISP blocked 95.2 percent of the spam. The study also tested whether using "masked" e-mail addresses prevents the harvesting of e-mail addresses and consequently reduces spam. "Masking" addresses involves altering an e-mail address to make it understandable to the recipient but confusing to automated harvesting software. For example, an e-mail address such as johndoe@ftc.gov could be altered to appear as john doe at FTC dot gov.
- The FTC announced on November 23 that it found a high level of compliance in East Texas with the FTC's Funeral Rule, which protects consumers from abusive practices in the funeral industry. In a recent sweep of funeral homes in the Tyler, Texas area, nine of the 10 funeral homes shopped were found to be in compliance with the rule. The FTC's Southwest Region office test-shopped the funeral homes as part of the FTC's ongoing nationwide law enforcement program. Under the program, FTC test shoppers visit funeral homes to see if they comply with key requirements of the law, such as providing consumers with an itemized general price list that contains mandatory disclosures and an itemized price list for caskets. The Funeral Rule is designed to ensure that consumers receive price lists and are told they can purchase only the goods and services they want or need for consumers. In January 1996, the FTC announced the Funeral Rule Offenders Program ("FROP"), a joint effort with the National Funeral Directors Association ("NFDA"), to boost compliance with the Funeral Rule. Under the FROP, funeral homes that do not give test shoppers itemized price lists in a prescribed time and manner may choose to enter the FROP program rather than face possible legal action, which could result in an injunction and civil penalties. If they choose FROP, they make a voluntary payment to the U.S. Treasury in lieu of civil penalties, and enroll in a program administered by the NFDA, which includes a review of price lists, compliance training, and follow-up testing and certification. Depending on the severity of the violation, funeral homes may be given the opportunity to resolve law violations through means other than through FROP or a formal law enforcement action, which could result in an injunction and civil penalties. Among those alternative means of resolving possible violations, a funeral home may receive a letter notifying the funeral home that it is not in compliance with the Rule and warning that future noncompliance could result in a monetary penalty.
- A Costa Rican operation that used Voice over Internet Protocol ("VoIP") services, shell corporations, aliases, and shills to con U.S. consumers into investing in a bogus business opportunity was halted by a U.S. District Court at the request of the FTC on November 16. The court issued a temporary restraining order barring the false claims, freezing the defendants' assets, and appointing a receiver, who shut down the toll-free and U.S. phone lines used to market the scheme. The defendants used classified ads and a Web site to advertise their coffee display rack franchises. They claimed that in exchange for payments from $18,000 to $85,000, they would provide customers with what they needed to operate a successful coffee display rack business, including assistance in finding profitable locations for the racks. According to the company's Web site, it was located in Las Cruces, New Mexico and had been in business since 1994. According to the FTC's complaint, the scam actually was based in Costa Rica, but the defendants used VoIP services to obscure the location of the business and make it appear that they were operating from New Mexico. The complaint also alleges the company has been operating for months, not years, as claimed on the Web site. The FTC's complaint alleged the defendants made false claims about earnings potentials, locations available for the display racks, and company-selected references. The complaint further alleged the defendants did not make certain disclosures required in the initial disclosure documents and in advertising that contained earnings claims. Representatives selling the franchises for the defendants claimed that consumers would make no less than $1,055.60 per week if they operated a 13-display rack venture.
- The FTC announced on November 14 it had received a final court order barring several Canadian-based telemarketers from misleading U.S. consumers about their ability - for a fee - to shield them from other unwanted telemarketing calls, as well as various types of fraud, including bank fraud and identity theft. The defendants often operated under the guise of the FTC, another government agency, or a bank to convince elderly consumers to provide them with their bank account information. They then used this information to steal hundreds of dollars from each victim, using either direct electronic debits or "demand drafts," which operate like a check but do not require the consumers' signature. In reality, the FTC alleged, the defendants provided nothing at all for their $399 up-front fee and had no way to sign consumers up for the National Do Not Call Registry as promised. In July 2004, the FTC charged the defendants with operating a deceptive "consumer protection service," engaging in telemarketing calls that targeted elderly consumers in the United States and promised to protect them from telemarketing and unauthorized banking. During the calls, the FTC alleged, the defendants often posed as government or bank officials in an attempt to trick consumers into disclosing their bank account numbers. They then used this information to debit money from the consumers' accounts. The FTC alleged that the defendants stole some victims' money even after the consumers specifically said they did not want the "services" offered. The FTC also charged the defendants with misrepresenting the cost of their products, sometimes telling consumers they were free, then automatically debiting $399 from their bank accounts. In other cases, they allegedly promised consumers a $500 credit to offset the $399 charge, or claimed they would deduct the $399 in small installments. In all cases, the defendants never received written permission to debit consumers' accounts.
- On November 10, the FTC staff sent warning letters to 34 Web site operators making claims that products advertised as natural alternatives to hormone replacement therapy would prevent or treat diseases, such as cancer, heart disease, or osteoporosis. The warning letters advised these sellers that their marketing claims may be illegal. The letters, sent to Web sites identified through an FTC Internet surf, warned that any health-related claims must be supported by competent and reliable scientific evidence. Another 16 sellers received letters from the U.S. Food and Drug Administration warning them that their business practices may violate FDA law. The Web sites were identified during a FTC Internet surf of sites making claims that their hormone replacement therapy alternative products - for example, progesterone creams, sprays or dietary supplements containing plant-based hormones - could cure diseases or prevent them. The letters noted that the FTC staff was not aware of any competent and reliable scientific evidence to support claims that the types of products advertised could prevent, treat, or cure cancer, heart disease, or other diseases, prevent osteoporosis, or increase bone density. They also emphasized that according to FTC case law, all health claims - including claims about the safety of natural hormones - must be supported by reliable scientific evidence. The letters offered guidance to the businesses, pointing them to the FTC publication Dietary Supplements: An Advertising Guide for Industry, on the FTC's Web site at http://www.ftc.gov/bcp/conline/pubs/buspubs/dietsupp.htm and Frequently Asked Advertising Questions: A Guide for Small Business, on the FTC's Web site at http://www.ftc.gov/bcp/conline/pubs/buspubs/ad-faqs.htm. FTC staff strongly advised the marketers to review their advertising and promotional materials, and to revise or delete any false, misleading, or unsubstantiated product claims.
- On November 9, Stewart Finance Company, seven related companies, and their principals agreed to settle FTC charges that the companies deceived consumers, many of them elderly, by, among other things, packing optional products such as accidental death and dismemberment insurance and membership in roadside assistance clubs onto small personal loans of $500 or less. The settlement requires the companies to shut down and to agree to the entry of a $10.5 million judgment in the FTC's case. The companies will liquidate their assets in federal bankruptcy court and through a federal district court receivership. Because the companies also owe amounts to other creditors, the FTC does not expect to collect the full amount of its judgment against the defendants. Monies the FTC receives through the bankruptcy and receivership will be combined with amounts due from certain individual defendants and directed to a consumer redress fund. In a complaint filed in September 2003, the Commission alleged that the defendants deceptively induced consumers to purchase expensive add-on products ancillary to the loan, to participate in a free "direct deposit" program that was not in fact free, and to incur additional costs and fees by repeatedly refinancing their loans. The complaint also alleged that the company failed to provide consumers who were denied loans with federally required "adverse action" notices, and took unlawful security interests in borrowers' household goods. According to the FTC, the Stewart companies violated the FTC Act, the Truth In Lending Act, its implementing regulation, Regulation Z, the Fair Credit Reporting Act, and the FTC's Credit Practices Rule. In addition to defendants Stewart Finance Company and the late John Ben Stewart Jr., the FTC's complaint named Stewart Finance Company Holdings, Inc.; Stewart National Finance Company, Inc.; D & E Acquisitions, Inc.; Preferred Choice Auto Club, Inc.; Stewart Insurance, Ltd.; and J & J Insurance, Ltd. The complaint also named Mr. Stewart's wife, Janice Stewart, and his two sons, William Joseph Stewart and John Benjamin Stewart III. The family members of John Ben Stewart Jr., the deceased company owner, were joined solely as relief defendants and were not charged with any wrongdoing. The stipulated final order permanently bars the Stewart companies and their principals from participating in any lending or direct deposit business.
Authored by:
Camelia Mazard
202-218-0028
cmazard@sheppardmullin.com
- On December 14, the European Union's Court of First Instance in Luxembourg is expected to rule on GE Electric's appeal over its bid for Honeywell International, which was blocked by the European Commission in 2001. The case triggered much trans-Atlantic tension as the first all-American deal blocked by European regulators after receiving clearance in the United States. The European Commission claimed that the combination would have enabled the merged entity to leverage the respective market power of the two companies into the products of one another. Although both companies appear to have no plans to resuscitate the deal, a successful appeal may provide critical guidance on how the European Commission should approach future prohibition decisions when reviewing merger cases.
- On November 28, the French Competition Council fined six of the most luxurious hotels in Paris for price-fixing. The Competition Council alleged that the Crillon, Bristol, Meurice, Piazza Athénée, Ritz and George V hotels operated a cartel in the super-luxury end of the Paris hotel market which constituted a market in itself. The hotels were alleged to have regularly exchanged confidential commercial information through meetings and messages, on a weekly and monthly basis. The hotels were fined between €55,000 and €248,000 each by the Competition Council.
- On November 28, it was reported that Madrid's Fifth Commercial Court ordered Spanish telecommunications company, Telefónica, to pay €670,000 in compensation to Conduit, an Ireland-based directory services group. The award stemmed from complaints made in 2003 to Spain's telecommunications regulator that the former state monopoly had provided "inaccurate and incomplete" subscriber information to Conduit, in breach of EU directives on market liberalization. The award may lead to increased litigation against Telefónica for preventing access to various telephone markets, and may also encourage law suits in the Spanish electricity industry, where there have been allegations of competitive abuse in the liberalized market.
- On November 23, following an agreement with the Attorney General of Canada, Labatt Brewing Company pleaded guilty to a charge of price maintenance on discount beer sold by nine independent convenience/grocery retailers in Sherbrooke and elsewhere in Québec, before the Court of Quebec. The Court fined Labatt $250,000 which was equal to the largest fine in a previous price maintenance case, and issued a prohibition order against the company. Under the prohibition order, Labatt will have to inform all of its Quebec independent convenience/grocery retailers in writing that under Canada's Competition Act, the company or its representatives cannot by agreement, threat, promise or similar means, attempt to influence upward, or discourage the reduction of the price of alcoholic beverages.
- On November 21, the UK's Competition Appeals Tribunal ("CAT") held that Sports World International could reclaim certain legal costs it had incurred while acting as a "whistle-blower" during a cartel investigation by the UK's antitrust regulator, the Office of Fair Trading ("OFT"). The CAT held that, "We bear in mind in particular, as general matters, the voluminous nature of the proceedings, that this was the first time a whistleblower had been called on by the OFT to assist it in such proceedings, and that on the face of the costs schedules the great majority of the work was done at associate rather than partner level." This precedent may lead to future cost applications against alleged cartel members by companies who benefit from the UK's new cartel amnesty program, and continue to cooperate with the OFT's cartel investigations.
- On November 21, Ms. Neelie Kroes, European Competition Commission, criticized the European professional services sector, and claimed that its was characterized by restrictive rules that were unnecessarily hindering competition. For example, she mentioned outdated price fixing regulation, bans on advertising, and severe restrictions on business structure and inter-professional co-operation as examples of highly restrictive rules which distort competition and "would be considered unacceptable in most spheres of economic activity." In particular, she criticized excessive obstacles or entry requirements to the legal profession in Europe, which "serve to limit supply and drive up prices, and which cannot be justified as being in the public interest."
- On November 17, the BBC reported that the Mexican antitrust authorities had imposed its highest fine ever on a Coca-Cola subsidiary and its distributors following a complaint by a shopkeeper, Ms. Chavez, that her distributors had ceased to deliver supplies when she refused distributor demands that she no longer sell rival Coke brands. Pepsi also later complained to Mexican authorities. According to the BBC, fines totaled $68 million, of which $13 million was the result of Ms. Chavez's complaint, and $53 million from Pepsi's complaint.
- On November 17, the European Commission confirmed that it had received improved commitments from the English Football Association Premier League ("FAPL") regarding the sale of the FAPL's media rights for the 2007 season onwards. The commitments follow an investigation by the Commission, into the sale by the FAPL of media rights to the Premier League competition on behalf of the individual clubs. Live TV rights will be sold in six balanced packages with no one bidder being allowed to buy all six packages. European Competition Commissioner, Neelie Kroes, said, "The commitments offered by the Premier League should ensure that the media rights are sold in a fair and transparent manner and give British football fans greater choice and better value."
- On November 16, the UK's Office of Fair Trading ("OFT") provisionally found that sunglasses brand, Oakley, and the UK department chain, House of Fraser, had entered into an agreement to fix the minimum prices of Oakley sunglasses in breach of the Chapter I prohibition of the UK's Competition Act 1998. The OFT has issued a statement of objections to the parties setting out its provisional findings that from November 5, 2001 to March 2004, Oakley supplied House of Fraser with its sunglasses on condition that House of Fraser agreed to sell them at prices no lower than the Oakley suggested selling price. The OFT has given the parties the opportunity to make written and oral representations on the statement of objections, which the OFT will take into account before making its final decision and as to the appropriate amount of any penalties.
- On November 16, Ms. Neelie Kroes, European Competition Commissioner, told her fellow European Commissioners that she wanted to increase her department's jurisdiction to review mergers by reviewing those deals that currently fall outside the EU Merger Regulation by virtue of the two-thirds rule. The two-thirds rule prevents the European Commission from scrutinizing deals where the merging companies earn two-thirds of their turnover in one and the same EU country. The rule is designed to ensure that the European Commission does not analyze transactions that are largely of interest to one EU country, and have little or no EU cross-border significance. The catalyst for Ms. Kroes' comments comes from the Commission's lack of jurisdiction over the proposed takeover of Spanish energy group Endesa by its rival Gas Natural. The €22.5bn ($26.3 billion) deal will create one of the biggest energy groups in a liberalized, pan-European market but evades Commission jurisdiction due to the two-thirds rule. The decision to clear or block the deal will rest with the Spanish antitrust authority.
- On November 14-18, the 5th UN Review Conference on Competition Policy took place in Antalya, Turkey. The conference reviewed the application and implementation of the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices, which is to date the only multilateral agreement on antitrust policy. It provides a set of equitable rules for the control of anti-competitive practices, recognizes the development dimension of antitrust law and policy, provides a framework for international cooperation and exchange of best practices in this area, including the provision of technical assistance and capacity building for interested member countries. The Conference reaffirmed the validity of the UN Set on Competition, and called upon all member States to make every effort to implement its provisions.
- On November 14, it was reported that Microsoft was seeking support from the Department of Justice and the White House in their attempts to annul a Decision adopted on June 1, 2005, by the European Commission which it believes will undermine its ability to protect valuable trade secrets. The Financial Times reported that Microsoft has also circulated a memorandum to several U.S. companies asking them to lobby the U.S. government in its support. Microsoft believes that the Decision which was issued in connection with the last year's landmark antitrust ruling against Microsoft "would allow licensees to distribute the source code of the software implementing confidential Microsoft technologies, with the result that the trade secrets embodied in such code would be readily available to the public." The memorandum suggests four talking points that should be raised including one which reads, "The European Commission's trade secrets decision will establish a precedent that could adversely impact the value of trade secrets which are substantial business assets for many U.S. companies, including mine."
- On November 8, the French Competition Council fined France Télécom €80 million for preventing its competitors from accessing the wholesale ADSL Internet market. The Council alleged that France Télécom prevented its competitors from making wholesale offers to Internet Service Providers that were competitive with those made by France Télécom and amounted to a refusal to access essential telecom infrastructure. The Council took the view that these practices were extremely serious, and had caused significant damage to the economy. It considered that France Télécom's anti-competitive practices effectively led to the closure of the market for broadband Internet ("ADSL"), thereby guaranteeing that France Télécom remained the sole ADSL wholesale supplier in the country.
Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com
Suppliers that attempt by agreement, threat, promise or like means, to influence upward or discourage the reduction of the price of products or services, are subject to criminal liability in Canada under Section 61(1)(a) of Canada's Competition Act (the "Act").1 Last week, Labatt Brewing Company faced such liability after an inquiry by the Canadian Competition Bureau (the "Bureau") into the Quebec beer industry resulted in allegations that between March 2004 and April 2005, Labatt engaged in price maintenance in violation of Section 61(1)(a) of the Act. Following an agreement with the Attorney General of Canada, Labatt pleaded guilty to one charge of the offense.
The Labatt Investigation and Conviction
A person who violates Section 61(1)(a) may be subject to imprisonment for a maximum of five years, a fine to be determined in the discretion of the court, or both.2
In Labatt's case, the volume of sales at issue represented only a small portion of Labatt's total sales of beer in Quebec. The Court of Quebec fined Labatt $250,000, which matches the highest amount previously imposed for a violation of Section 61(1)(a).3
According to an agreed statement of facts, Labatt influenced the price of discount beer sold by nine convenience store and grocery retailers by offering money and free cases of beer to store operators. In one case, Labatt offered a Sherbrooke, a Quebec retailer, $2,000 to raise the price of a competitor's products.4
The Bureau initiated its investigation of the industry after receiving a complaint in September 2004. In December 2004, after Labatt's Sherbrooke sales director had knowledge that the Bureau was launching an inquiry of the commercial practices of sales representatives in the region, Labatt allegedly continued to violate the Act's price maintenance prohibition. This continued even after the Bureau conducted in March 2005 an investigation and seized documents at Labatt's Sherbrooke offices. Once the company was issued a notice by the Bureau of its probable violation of the Act, it retained counsel to review its sales policy and took other measures to see that unlawful conduct did not occur. The Bureau represented to the court that it was satisfied that the unlawful conduct was isolated, as the conduct was limited to three sales representatives, and did not result from a general policy of price maintenance.
The court also issued a prohibition order against Labatt requiring it to inform all its Quebec independent convenience and independent grocery stores that it and its representatives cannot by agreement, threat, promise or like means, attempt to influence upwards or discourage the reduction of the price of alcoholic beverages.
Canada's Price Maintenance and Refusal to Deal Laws Impose Strict Standards on Suppliers
Section 61 of the Act has given rise to many criminal convictions and enforcement actions. Several class action suits for damages have also been launched in recent years.5 The Act has a broad application. There is no market power or dominant firm threshold or "safe harbor" from liability. Anyone who, by agreement, threat, promise or like means, attempts to influence prices upward or discourage their reduction, commits a criminal act, regardless of whether competition is harmed. Intellectual property agreements that include price terms may violate Section 61 too.
Violations of Section 61(1)(a) have been found even where something less than an express agreement, threat or promise was used to influence price upward or discourage its reduction. For example, a suggestion to increase prices made by a supplier to a retailer upon whom the retailer is dependent and who could be easily terminated, will violate the Act, even if the suggestion is not accompanied by any explicit threat.6 Likewise, a supplier who tells a dealer that it may cut off its supply if the dealer does not raise its prices would be attempting to influence price by way of a threat and contravene the statute. Duress, coercion, inducement or similar means used to influence price upward or discourage its reduction all constitute "like means" and will violate the Act.7
It is also a criminal act in Canada to refuse to deal with retailers because of the low prices they offer.8 Section 61(1)(b) provides that no person shall refuse to supply a product to or otherwise discriminate against any other person engaged in business in Canada because of the low pricing policy of that other person. Discrimination is interpreted to include many forms of distinctions in treatment; direct or circumstantial evidence of an intent to discriminate against a retailer because of its low pricing policy could result in a criminal conviction.
Section 61(1)(a), the price maintenance statute, was introduced in 1951 and reflects the idea that price maintenance lacks any redeeming social effect, so all price maintenance is considered illegal, without more. In this regard, it has the structure of a "per se" violation of U.S. antitrust law, although the conduct involved may be unilateral acts by a fringe firm, and even in the absence of anti-competitive effects. Section 61(1)(b), the criminal refusal to deal statute, by comparison, was softened beginning in 1976 such that a supplier may refuse to deal with a dealer where it believes, on reasonable grounds, that the dealer is using the supplier's products as "loss leaders";9 does not offer the level of service a purchaser would reasonably expect;10 or has a practice of engaging in misleading advertising in respect of the supplier's products.11 The case law varies in the definitions of "price" and "cost," and there is uncertainty as to when a product may be deemed a loss leader. This makes reliance on the loss leader defense riskier. None of these defenses, however, are available to threats to refuse to supply, only actual refusals may be covered by these defenses.
Further, by amendments made to the Act in 2003, private actions, including class actions, are available for actions based on claims of price maintenance or refusals to deal. Many of the civil cases filed so far have been brought by dealers suing suppliers after a refusal to continue to deal.12
While a proposal to decriminalize a number of the pricing provisions in the Competition Act are included in Bill-C-19, a package of proposed amendments to the Act being considered by Canada's Parliament this year, price maintenance and refusal to deal are not among them.13 These statutes are therefore likely to remain the law in Canada for the foreseeable future. Moreover, the Competition Bureau "will continue to fully enforce the price maintenance provision of the Competition Act."14
The strict standards for price maintenance and refusal to deal, and the willingness of Canadian regulators to enforce those laws, should cause companies whose products or services reach Canada to seek competent counsel to ensure sales and trading policies comply with all local rules.
Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com
- November 17, 2005, Republican FCC Commissioner Kathleen Abernathy announced that she was leaving the agency on December 9th. Her departure puts pressure on Senate Commerce Chairman Ted Stevens, R-Alaska, to speedily confirm Republican Deborah Tate, nominated by President Bush last week to fill an existing vacancy at the agency. The five-member FCC is currently split 2-to-2 among Republicans and Democrats, making it difficult for Chairman Kevin Martin to proceed with his deregulatory agenda. If Deborah Tate is not confirmed before Commissioner Abernathy leaves, Chairman Martin could be in the awkward position of being outnumbered by Democrats. Senator Stevens recently said the confirmation hearing would take place in December.
Authored by:
Gregg Mendenhall
202-218-0025
gmendenhall@sheppardmullin.com
The Second Circuit recently weighed in with its view of the legality of reverse payment settlements in Hatch Waxman patent litigation. In re Tamoxifen Citrate Antitrust Litigation, 2005 U.S. App. LEXIS 23653 (2d. Cir 2005). The Sixth Circuit previously found such payments to be per se illegal as analogous to market allocation agreements among competitors. In re Cardizem, 332 F.3d 896 (6th Cir. 2003). By contrast, the Eleventh Circuit rejected per se treatment if such settlements did not restrict competition beyond the exclusionary scope of the patent themselves. Valley Drug Co. et al. v. Geneva Pharmaceuticals, 344 F.3d. 1294 (2003). See also Schering Plough Corp. v. FTC, 402 F.3d. 1056 (11th Cir. 2005), cert. petition pending 2005 U.S. LEXIS 7855. In Tamoxifen, the Second Circuit largely aligned itself with the Eleventh Circuit and affirmed dismissal of the Complaint at the pleading stage for failure to state a claim for relief under Federal Rule 12(b). There was no discovery and no trial. The Court accepted the allegations of the Complaint as true and accurate but nonetheless found them insufficient. It affirmed a judgment dismissing the Complaint.
These reverse payment cases involve the intersection of patent and antitrust law with an overlay consisting of the Hatch Waxman Act. Both patent and antitrust law are designed to spur innovation. Patent law does so by rewarding the inventor with the right to exclude others, and hence a lawful monopoly, for 21 years. Antitrust law does so by outlawing conduct such as market allocation agreements among competitors. When a patent holder decides to maintain its monopoly by paying a potential generic infringer to stay out of a market, however, the two bodies of law collide. What appears to be a legitimate agreement by a patentee to maintain its lawful monopoly may in fact be a per se unlawful agreement not to compete among competitors. The FTC has launched many investigations and enforcement actions challenging the legality of reverse payment settlements under the antitrust laws.
Under Hatch Waxman, 21 U.S.C. § 355(j), the FDA approval process for a generic manufacturer of a patented drug is expedited by allowing it to file an Abbreviated New Drug Application ("ANDA"). Hatch Waxman also requires the patentee to submit patent information to be listed in the FDA Orange Book. The generic ANDA applicant must then "certify" to such patents prior to FDA approval. If the certification is under Paragraph IV - that the listed patent is either invalid or not infringed - the patentee has 45 days to file an infringement suit. If suit is filed, this delays FDA approval of the generic another 30 months, or until there is a court decision that the patent is either invalid or not infringed. Hatch Waxman thus authorizes infringement suits before the infringer has made any sales or the patentee has suffered any damages, but is threatened with the loss of its patent monopoly. This creates an incentive for the parties to settle a patent infringement suit by a payment from the plaintiff patentee to the defendant infringer to stay off the market until the patent expires. Hence the phrase "reverse payments." The final wrinkle in this unusual statutory scheme is that the first generic to file a Paragraph IV certification is given a 180 day exclusivity period running from the earlier of when it begins commercial marketing or a court decision declaring the patent invalid. This creates an additional incentive for the patentee and the first generic to "settle" their lawsuit through reverse payments, thereby creating a "bottleneck" which blocks entry by other generics.
The fact pattern of Tamoxifenis one familiar to those following Hatch-Waxman cases, albeit with a few unusual twists and turns. Zeneca, through a predecessor, obtained the patent on Tamoxifen in 1985 with an expiration date of 2002. Tamoxifen became a widely prescribed drug for the treatment of breast cancer. Barr filed an ANDA seeking FDA approval for its generic version with a Paragraph IV certification in September 1987. Within 45 days, Zeneca sued Barr for patent infringement. The trial court found Zeneca's patent invalid. While the appeal to the Federal Circuit was pending, however, Zeneca and Barr reached a settlement in 1993. Zeneca paid Barr a $21 million payment plus another $43 million to Barr's suppliers over a 10 year period. The parties also filed a joint motion to vacate the trial court judgment finding the patent invalid which was granted. Barr changed its Paragraph IV certification to a Paragraph III certification (which delays FDA approval of the generic until the patent expires) with the ability to reassert a Paragraph IV if the patent was invalidated in a later lawsuit. Zeneca also granted Barr a non-exclusive license to market Zeneca's branded version of Tamoxifen. In the 1993-2000 period, three other generic manufacturers filed ANDAs with Paragraph IV certifications. Zeneca filed infringement suits against each one. In each case, the court rejected the generic's attempt to rely on the vacated judgment and upheld the validity of Zeneca's Tamoxifen patent.
The plaintiffs, mainly consumers and third party payors, filed their lawsuits while the challenges to the patent by the other generics were pending. Plaintiffs alleged that the 1993 settlement agreement violated Sections 1 and 2 of the Sherman Act by, inter alia, eliminating generic competition and thereby maintaining an artificially high price for Tamoxifen. Plaintiffs asserted that, had the trial court's invalidity decision not been vacated and affirmed on appeal, then Barr and the other generics would have entered the market well before the 2002 expiration of the patent thereby lowering the price of Tamoxifen to consumers. They emphasized that the timing of the settlement -- after a court had found invalidity while appeal was pending -- plus the fact that the settlement amount exceeded the profits Barr could expect to earn had it prevailed on appeal and began selling its generic version demonstrated that the settlement was anticompetitive and not just to preserve a lawful patent monopoly.
The Second Circuit first noted that litigation settlements are favored by public policy, that settlements of a patent litigation alone do not violate the antitrust laws, and the validity of such settlements should not be based on a "guess" about whether the appellate court would have affirmed the invalidity ruling. 2005 U.S. App LEXIS 23653 at 21-23. It then rejected the notion that reverse payment settlements are per se unlawful, explaining that "the Hatch Waxman Act creates an environment that encourages them." Id. at 54. Hatch Waxman encourages the filing of Paragraph IV certifications by providing a profit incentive to companies that have not invested in the development of a drug, and the patent holder stands to gain little from winning infringement litigation other than the continued protection of its lawful monopoly. Thus, the Court saw no basis for categorically condemning reverse payments employed to lift the uncertainty surrounding the validity and scope of a patent. Id. at 24-26.
Perhaps the most noteworthy aspect of the Tamoxifen opinion, however, is its analysis of whether the reverse payments were excessive and thereby anticompetitive for that reason. Id. at 27-30. The court stated that the FTC and various commentators took the position that reverse payments to exit the market should be presumptively anticompetitive if they exceed the patentee's litigation costs, the generic's expected profits, the value of the patent, or some combination thereof. Here the payments exceeded the profits Barr could expect to make had it entered the market. Citing an FTC statement that "the total profits of the patent holder and the generic manufacturer . . . will be lower than the total profits of the patent holder alone under a patent-conferred monopoly," the Second Circuit stated it would thus make "economic sense" for a patent holder to pay some of that difference to the generic to keep the patent monopoly to itself. Since that amount exceeds what the generic sees as its likely profit should it prevail in the patent suit, it likewise makes "economic sense" for the generic to accept such payment. While the court conceded that a large payment may also be motivated by a weak patent, limiting the amount of such settlements to the generic's projected profits would not change the resulting level of competition or lower prices to consumers since the competitive effect of the settlement would be the same, i.e., there would still be no generics in the market. Thus, it would be "pointless," said the Court, to permit settlement, thereby protecting the patentee's monopoly over even a weak patent, but to limit the amount of the settlement to the generic's projected profits had it won the litigation. Id. at 30.
The Court expressed its agreement with the Eleventh Circuit that, so long as the exclusionary effects of the settlement do not exceed the scope of the patent itself, it is unlikely to violate the antitrust laws. Absent an extension of the monopoly beyond the patent's scope or fraud, the question is whether the lawsuit which gave rise to the settlement is objectively baseless under the Prof'l Real Estate Investors, Inc. v. Columbia Pictures, 508 U.S. 49 (1993) standard. That clearly was not the case here as given the later decisions upholding the validity of the patent. The Court went on to conclude that the 1993 settlement did not restrain the introduction or marketing of unrelated or non-infringing products emphasizing that Zeneca's patent is on a compound, and not just a formulation patent, that by its nature excludes all generic versions of the drug. The settlement also ended the litigation and did not entirely foreclose competition since Barr got a license to market Zeneca's version of Tamoxifen. Id. at 33-34.
One interesting sidebar in the case was Barr's FDA petition to reinstate its 180 day exclusivity as the first generic, when the "successful defense" requirement for 180 day exclusivity for the first generic was removed in 1998. The FDA granted Barr's petition, but a court later overturned the FDA decision by holding that the pre-1993 court decision finding invalidity, although vacated, was a sufficient court decision to trigger the exclusivity period, and thus it had long since expired. Although Barr's petition was not explicitly part of the 1993 settlement, plaintiffs nonetheless asserted it was part of the Section 1 conspiracy to delay generic entry. The lower court had found Noerr-Pennington immunity for Barr's petition, but the Second Circuit did not agree. Rather, it found that, since the settlement agreement itself was not an unlawful conspiracy, Barr's petition was not in furtherance of an unlawful conspiracy and thus not unlawful itself. Moreover, it further found that such a conspiracy would have been implausible in 1993 when a successful defense was a precondition to such exclusivity, as Barr had given this up by vacating the trial court invalidity judgment. It then concluded that plaintiffs could not show antitrust injury from Barr's petition since, by the time it was filed, other courts had already found the patent valid anyway. Id. at 35-36.
The last element of the 1993 settlement - the nonexclusive license to Barr for the patented version of Tamoxifen - was found by the Court to have increased competition by adding a competitor to the market, and reduced the value of the reverse payment by having money flow from Barr to Zeneca. While Barr's version sold at retail for just five percent less than Zeneca's and resulted in less price competition than if Barr had introduced its own generic version, this was "competition nonetheless." Id. at 34-35.
The dissent seized upon the summary nature of the dismissal and sharply criticized the majority's treatment of the excessive payment issue. Judge Pooler advocated a more subjective reasonableness inquiry as to the strength of the patent at the time of settlement and whether the amount of the reverse payment exceeded what the generic would have received had the appeal affirmed the invalidity ruling. As such, the dissent found the Complaint allegations sufficient to state a claim, and that a more complete factual record was necessary to evaluate the claim under the antitrust laws.
Tamoxifen signifies an emerging trend to analyze reverse payments in the context of whether the restrictions on competition exceed the scope of the patent monopoly, an issue the Supreme Court may choose to address should it grant certorari in Schering Plough. The discussion and analysis of the excessive payment issue is also quite instructive. The fact the Second Circuit affirmed dismissal at the pleading stage is quite significant, as in Valley Drug, the Eleventh Circuit remanded for further trial court proceedings. All this is not good news for the FTC enforcement actions in this area, as courts appear to be developing roadblocks to the Commission's liability theories in reverse payment cases.
Carlton A. Varner
213-617-4146
cvarner@sheppardmullin.com
After a number of losses by the federal government in cases seeking to enjoin hospital mergers, the Federal Trade Commission ("FTC") has won at least a preliminary victory in its challenge of a hospital merger that was consummated almost six years ago. The FTC successfully challenged Evanston Northwestern Healthcare Corporation's ("ENH") acquisition of Highland Park Hospital ("Highland Park") through an administrative trial. Although the FTC Administrative Law Judge ("ALJ") Stephen J. McGuire ruled in favor of the FTC, lengthy appeals are expected. The decision has been appealed to the full Commission and then if the Commission sides in favor of the FTC, that decision would likely be appealed to the Seventh Circuit. Given that the FTC has prevailed at least at this initial stage of the litigation process, the FTC staff's confidence in challenging hospital mergers may increase slightly.
Background
ENH acquired Highland Park in January 2000. As a result, ENH's Evanston and Glenbrook Hospitals, both located in Cook County, Illinois, were combined with Highland Park, which was the closest hospital to the north and located in Lake County. The FTC investigated alleged enormous price increases that followed the merger and then filed an administrative complaint challenging the merger in February of 2004. The FTC's Complaint alleged that following the merger, ENH was able to charge significantly higher prices to health insurers, thus leading to higher costs to the purchasers of health insurance and the consumers of hospital services.
Trial
Judge McGuire issued an initial decision that was made public on October 21, 2005. The trial lasted eight weeks. Unlike past hospital merger cases, Judge McGuire had the benefit of a mountain of actual data, evidence, and witness testimony from insurers indicating that prices increased significantly and, at least in the FTC's view, as a result of anticompetitive conduct. In the typical merger case, by contrast, the antitrust agencies do not have actual evidence of post-merger conduct, and the presentation of proof inevitably contains a substantial element of predictive judgments. Judge McGuire himself observed in his opinion that this trial presented a rare opportunity to examine the actual effect of concentration on price and he stressed that there was significant post-acquisition evidence to evaluate in assessing whether the probable effect of the merger substantially lessened competition.
Given this mountain of evidence, Judge McGuire concluded that ENH's acquisition resulted in "substantially lessened competition" and higher prices for general acute care inpatient services sold to managed care organizations in a relevant geographic market that included seven hospitals. Judge McGuire found the evidence of price increases that were imposed following the merger to be compelling. ENH did not dispute the price increases rather it contended that evidence of price increases standing alone is, as a matter of law, insufficient to demonstrate competitive harm, and that in any event those price increases were occasioned by forces other than an increase in market power caused by the merger, including among other things measurable improvements in quality of care. Judge McGuire rejected ENH's pro-competitive justifications for the price increases and found that the price increases were a direct consequence of the exercise of enhanced market power. He didn't provide much guidance with regards to ENH's claim that it had increased the quality of care through improvements and this might be an area where the Commission or the Seventh Circuit will have to provide more guidance. While it might be difficult to evaluate that substantial improvements to quality of care justify price increases, it seems clear that they should be evaluated.
While the ALJ ruled in favor of the FTC with regards to the hospital merger resulting in anticompetitive effects and that a divestiture was required, the ALJ did not entirely rule in the FTC's favor. The ALJ ruled in favor of the FTC under Count 1 of its Complaint that included alleged market definitions. The ALJ dismissed Count II of the FTC's Complaint, which was based solely on competitive effects, as moot. The FTC had contended that in this situation where the competitive effects were clear that it is not necessary to define markets. The ALJ disagreed and opined that had it been necessary to review Count II, he would have dismissed it because the FTC did not define the relevant markets.
The ALJ ruled in favor of the FTC that the hospital merger is anticompetitive and order EHN to divest a hospital within 180 days of the order. Both the FTC and EHN have appealed the decision to the full Commission. EHN is appealing the entire decision and the FTC is appealing the portion of the decision that applies to Count II. If the FTC wins at the Commission, EHN will more than likely appeal the decision to the Seventh Circuit for its review. This process would take about a year or so.
Practical Considerations
It is important to understand that this decision only provides the FTC with a temporary win. This decision will be reviewed by the full Commission and the Commission will provide more guidance on how to evaluate hospital mergers. In addition to the Commission's opinion, there is a strong chance that the Seventh Circuit will review this decision as well. More will be learned from these future decisions. That being said, the FTC can enjoy this initial victory.
Recently merged hospital systems and those that will merge in the future should keep the following practical considerations in mind. First, the FTC will continue to be very selective about which future hospital mergers or consummated mergers to challenge whether it eventually wins the Evanston case or not. Second, a merged hospital system cannot assume that the FTC will not investigate a consummated deal. Indeed, the FTC will conduct an analysis of hospital mergers after the fact to determine whether an investigation should be opened and whether a challenge is necessary. A challenge is more likely if there are two hospital systems or less in a specific geographic area. As in the ENH-Highland Park case, the relevant geographic and product markets will remain hot issues for dispute. Third, the FTC learns about problematic hospital mergers by monitoring local news articles and customer complaints. Therefore, post merger price increases to managed care organizations should not be substantially greater than those that have taken place historically. If merged hospitals abnormally increase prices to these payers, they will likely complain to the FTC, which could cause a lengthy and burdensome investigation and possibly a forced divestiture of a hospital. This means that health care providers should be less aggressive in seeking rate increases. To the extent price increases are necessary to pay for substantial improvements that lead to higher quality of care, the hospital systems should document this claim because the onus may be on the hospital systems to prove it. Fourth, merged hospital systems should integrate and realize bona fide and actual efficiencies as the FTC is less likely to break up hospital operations that are truly integrated and achieving real efficiencies.
Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com
Blackboard Inc. ("Blackboard"), a Washington-based developer of online learning resources and Web-based academic forums, announced Wednesday, October 12, it would acquire smaller rival WebCT Inc. ('WebCT") of Lynnfield, Massachusetts, for $180 million. The deal will bring the top two competitors in the online learning space together under one platform, with a total of 3,700 institutional users. The transaction has been approved by the companies' boards and the companies expect the deal to close later this year or in early 2006.
On November 23, Blackboard and WebCT each received a request for additional information from the Department of Justice ("DOJ") in connection with the entry into an Agreement and Plan of Merger by and among Blackboard, WebCT and College Acquisition Sub, Inc. The effect of the second request is to extend the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, until 30 days after the parties have substantially complied with the request, unless that period is terminated sooner by the DOJ.
Blackboard is the world's largest supplier of course management system ("CMS") software to educational institutions. Blackboard currently has 2,225 clients in 64 countries. In 2004, Blackboard had $3.7 million in net income on $111 million in revenue. Blackboard's products are divided into two separate categories: the Blackboard Academic Suite, which consists of software that facilitates long distance learning and the dissemination of classroom information; and, the Blackboard Commerce Suite, which allows universities to set up student debit accounts for use at both the institution and private businesses in the area. WebCT is the world's second largest supplier of CMS software. WebCT has 1,480 clients in 70 countries. Although WebCT does not offer commerce products for institutions, it does offer software, such as the WebCT Vista, which competes with the Blackboard Academic Suite by providing course preparation, distribution and viewing software.
This deal will need approval by the antitrust agencies in the United States. The DOJ will review this deal because of its past experience with the software industry. The parties will want the reviewing agency to use a broad product market definition, possibly encompassing all software applications made for academic institutions. Blackboard may argue the company competes in a broader software market against larger technology providers that make financial management, human resources and other products used by educators. This definition would allow Blackboard to place Oracle and SAP, two large software providers, in the market as well.
The DOJ could take a narrower view of the product market, defining it by the function of the application and the type of customer, as it has done in prior cases. When challenging Oracle's acquisition of PeopleSoft, the DOJ limited the product market definition to human resources and financial management software sold to the largest customers. In this case, if the DOJ were to use a similar product market definition, asserting that CMS software is only useful to academic institutions, it would likely define the market as CMS software.
Alternatively, Blackboard could argue that it competes against traditional methods of course management, as only 20% of the institutions of higher learning in the United States currently use Blackboard's software, while 59% do not use any form of CMS software. Accordingly, Blackboard may seek to define the market to include all software sold to colleges and universities, including student information and financial management products. The DOJ might define the relevant product market as CMS software because the Networks and Technology Enforcement Section has traditionally defined software markets narrowly. This product market definition may explain what caused the DOJ to issue a second request and may lead the DOJ to challenge the merger, arguing that the merger would create a monopoly in the CMS market.
The geographic scope of the relevant market is probably worldwide because technologies encompassed within the relevant product market are used on a worldwide basis. In addition, both Blackboard and WebCT sell substantial numbers of their software packages abroad, with international institutions accounting for 23% and 35% of the companies' revenues, respectively. Although Blackboard does not sell its commerce suite outside of North America, the product area where the two companies have overlaps, CMS software, is sold in every major region of the world. Furthermore, the market shares of the two companies internationally are approximately the same as they are nationally.
In Oracle/PeopleSoft, the DOJ found that both Oracle and PeopleSoft sold their software throughout the United States and the world. Hence, it found the United States to be a relevant geographic market in Oracle/PeopleSoft. Accordingly, the geographic scope in this case might appropriately be defined as either worldwide or national.
If the DOJ defines the market as CMS software, it could express serious reservations about the merger and try to block it. Blackboard currently has a 54% share of the CMS market, while WebCT has a 27% share. Other market share reports state that Blackboard controls roughly 45% to 50% of the U.S. market for software used to conduct college and other school classes, among other functions, over the Internet, while WebCT holds about 35% to 40%. These figures indicate that the combined company would have at least 80% of the CMS market.
Furthermore, the current competitors in the CMS market do not currently challenge either WebCT or Blackboard. Competitors such as Desire2learn, Jenzabar, Angel Learning, and ConcordUSA tend to focus on smaller educational institutions, and thus may not have resources to devote to research and development that Blackboard does. In addition, none of the companies offer the full array of CMS software offered by Blackboard, but rather only focus upon niches. Thus, colleges and universities may find it cheaper to go with a suite of software if they need more than one product, which may leave the other competitors with a small market for which to compete. Another competitor, eCollege.com, focuses on adult learning and incorporates a "pay-as-you-go" model that avoids direct competition with Blackboard, which sells to the universities directly. Finally, an open source project, known as Sakai and started by a consortium of universities, also competes with Blackboard, but analysts have doubts as to its ability to keep up with Blackboard in terms of product development, support, and quality.
Hence, DOJ may assert that no other current competitors pose a credible threat to Blackboard despite Blackboard's assertion that this acquisition is needed to help it remain competitive against the new market entrants and open-source initiatives that are out there. WebCT has been the most serious competitive threat to Blackboard. Although Blackboard indicated that it worries about either SAP or Oracle entering the CMS market, the DOJ might contend that the most likely way that either of these companies would enter the market would be through the acquisition of an existing CMS provider, and that Blackboard's acquisition removes the threat of better-capitalized players entering the market using WebCT as a platform.
There is a possibility, however, that entry by either Oracle or SAP would pose a significant problem for Blackboard, due to the financial resources of these companies and their ability to bundle CMS software with other software that universities must buy anyway, such as human resources and financial services suites. Oracle and SAP's failure to enter the market may indicate that neither may be interested in it, decreasing the weight of potential entrants as a barrier to market power abuse.
Authored by:
Camelia Mazard
202-218-0028
cmazard@sheppardmullin.com
On November 9, 2005, the UK's antitrust regulator, the Office of Fair Trading ("OFT") announced that it had issued a statement of objections to 50 of the UK's leading private schools which set out the OFT's provisional findings that the schools had infringed the Chapter I prohibition of the Competition Act 1998 (which is the UK's equivalent of Section 1 of the Sherman Act in the US) by entering into an agreement to exchange detailed information about their academic fees.
The OFT believes that the schools concerned exchanged information relating to their intended fee increases and fee levels for boarding and day pupils in relation to the academic years 2001/2002, 2002/2003, and 2003/2004. The information was allegedly exchanged through a survey, known as the "Sevenoaks Survey." Between February and June of each year, the schools gave details of their intended fee increases and fee levels for the academic year beginning in September. Sevenoaks School then collated that information and circulated it, in the form of tables, to the other schools. The information in the tables was allegedly updated and circulated between four and six times each year as schools developed their fee increase proposals in the course of their annual budgetary processes.
The OFT has provisionally concluded that this regular and systematic exchange of confidential information as to intended fee increases was anticompetitive, and resulted in parents being charged higher fees than would otherwise have been the case.
The OFT has given the schools several months to make written and oral representations on the statement of objections, which the OFT will take into account before making its final decision as to whether the Chapter I prohibition has been infringed, and as to the appropriate amount of any penalties the OFT may decide to impose on each of the schools concerned. The amount of any such penalties will reflect the particular circumstances of this case but at this stage the OFT does not anticipate that any penalty imposed will likely to be at the top end of the range available under the Competition Act (10% of worldwide turnover in the last business year).
The Times newspaper reported that one e-mail containing details of fee increases at 20 other schools was sent to Sir Andrew Large, who is Deputy Governor of the Bank of England and Warden of Winchester College. Sent by Bill Organ, Winchester College's then bursar, it carried the message: "Confidential please, so we aren't accused of being a cartel." The Times also disclosed that Eton and Winchester had sought a "plea bargain" with the OFT to obtain immunity from fines in return for turning "supergrass."
The Independent Schools Council, which represents all the schools concerned, admitted that they had exchanged information but said the investigation was a "scandalous waste of public money."
"Exchange of information is commonplace among charities," the council said. "Until March 2000, schools were specifically exempted from competition law and were freely able to exchange information without restriction. This exemption was silently removed - without debate (or even any mention) in Parliament - and without any consultation with schools or their representatives. Schools continued to exchange information in ignorance that the law had changed." Jonathan Shephard, the General Secretary of the Council, said schools stopped the practice as soon as they realized it was illegal. That was in May 2003, before the OFT launched its investigation.
In terms of the number of parties involved, this is one of the largest investigations carried out by the OFT to date. In June 2004, in response to a number of questions posed by UK private schools about the application of the Competition Act (apparently following the commencement of the OFT's investigation), the OFT published guidance on the extent to which independent schools can lawfully exchange information. The provisional findings of the OFT comes as the UK private school sector is under pressure to attract new pupils as the number of pupils attending fell for the first time in a decade this year in the face of rising fees.
Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com
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