On October 27, 2006, the Second Circuit issued its opinion in Paycom Billing Services, Inc. v. MasterCard Int'l, Inc., 2006-2 Trade Cas. (CCH) ¶ 75,470, 2006 U.S. App. LEXIS 26820 (2d Cir. October 27, 2006), affirming the dismissal of Paycom's complaint against MasterCard by Judge Trager in the Eastern District of New York. See 2005-1 Trade Cas. (CCH) ¶ 74,751, 2005 U.S. Dist. LEXIS 4920 (E.D.N.Y. 2005). Paycom, a processing service for primarily adult internet credit card services, had purported to allege violations of Sections 1 and 2 of the Sherman Act with respect to MasterCard's (1) chargeback system; (2) former Competitive Programs Policy ("CPP"); and (3) Cross-Border Acquiring Rules ("CBA Rules"). Paycom abandoned its Section 2 claims on appeal.

MasterCard is one of four major payment-card-network-service providers in the United States, operating a global card-payment-network that provides the infrastructure and network services for the authorization, clearance, and settlement of transactions effected with MasterCard-branded payment-cards. 2006 U.S. App. LEXIS 26820, at *3. As set forth in the Second Circuit's opinion, MasterCard is a "consortium of competitors owned and effectively operated by some 20,000 banks, which compete with one another in the issuance of payment cards and the acquiring of merchants' transactions." Id., at *4 (internal citation and quotations omitted).  These members agree to abide by certain regulations and bylaws promulgated by the association. Id.

Paycom is a merchant that sells access to password-protected websites owned by independent entities that do not charge their consumers directly.  A consumer wanting to purchase the services offered by such a website -- in Paycom's case, largely, but not exclusively, sexual or adult content -- is redirected to Paycom's website, where he or she purchases the desired services from Paycom.  Paycom accepts MasterCard-, Visa-, and Discover-branded payment cards, as well as automated clearing house transactions. Id., at *8.

Paycom's Chargeback System Challenge

Paycom's challenge to MasterCard's chargeback system was rooted in its exclusive processing of "card-not-present" ("CNP") transactions, as opposed to "card present" ("CP") -- i.e., face-to-face transactions. As described in the Second Circuit's opinion, when a cardholder disputes a transaction, the process is reversed by means of a "chargeback," whereby the issuing bank requires the acquiring bank to return the funds, and the acquiring bank then usually deducts these funds from the merchant's account. See id., at *6. However, if the merchant proves the validity of the transaction by producing a signed sales receipt, the funds are generally restored to the merchant's account. As set forth in the opinion, in this respect, MasterCard essentially "guarantees payment to CP merchants that retain signed sales receipts reflecting the physical use of the card." Id. According to Paycom, this forces CNP merchants like Paycom to assume the risk of fraud because CNP merchants are not afforded the same payment guarantee as CP merchants that can produce signed sales receipts. Id., at *10.

Paycom alleged that MasterCard's chargeback system violated the Sherman Act in two respects.  First, it claimed that the refusal to grant CNP merchants an alleged payment guarantee similar to that accorded CP merchants was the result of an unlawful conspiracy not to compete with respect to the costs or risks of CNP fraud and chargebacks.  Second, it alleged that the systematic imposition of "chargeback fines and penalties" was the result of an agreement among MasterCard members to fix the price that merchants like Paycom pay for this fraud. See id., at *20-21.

The Second Circuit affirmed the District's Court's dismissal of these claims for lack of antitrust standing. See id., at *20-22. The Court noted that chargebacks, as well as the alleged "fines and penalties" for excessive chargeback activity, are assessed against acquiring banks, not merchants, and it is the acquiring bank's decision whether or not to pass along such charges. Id., at *20-21. The Court analogized Paycom's position to that of the indirect purchaser plaintiffs in Illinois Brick Co. v. Illinois, 431 U.S. 720, 742-47 (1977), who were found not to have antitrust standing. Thus, the Court concluded, "even if one hundred percent of the chargebacks, fines, and penalties were passed-on, Paycom, as an indirect payor of the chargebacks and chargeback fines and penalties, would still lack antitrust standing." Id., at *21-22.

The Court also concluded that even if Paycom's claims were construed as focusing on the conduct of the acquiring banks as horizontal competitors, such claims still would fail for lack of an allegation of concerted action. See id., at *22-24. While noting that "an agreement among [acquiring] banks to pass all costs of fraud back to CNP merchants would be a per se violation of Section 1," the Court held that the facts alleged in Paycom's complaint showed "only largely parallel behavior in response to the relatively higher costs of CNP transactions." Id., at *23-24. The Court held that there was no allegation that acquiring banks had jointly agreed to pass along the costs of fraud to CNP merchants. Lastly, the Court found that "[n]othing in Paycom's complaint sufficiently allege[d] that MasterCard rules or an agreement among acquiring banks have prevented Paycom from negotiating with acquiring banks to create an individualized solution to Paycom's costs of fraud." Id., at *24-25.

The Competitive Programs Policy Claim

The Second Circuit also affirmed dismissal of Paycom's challenge to MasterCard's former Competitive Programs Policy, which was previously held to violate Section 1 of the Sherman Act under a rule of reason analysis. See United States v. Visa U.S.A., Inc., 344 F.3d 229, 234 (2d Cir. 2003). Paycom claimed that, absent the CPP, American Express and Discover would have had access to MasterCard banks and thereby would have expanded the scope of their network services by increasing transaction/issuance volume. According to Paycom, this increased competition from Discover and American Express in turn would have caused MasterCard to adopt policies more favorable to Paycom. 2006 U.S. App. LEXIS 26820, at *25-26.

Although the Second Circuit found that Paycom was a consumer of payment card network services, it nonetheless held that Paycom was not an "efficient enforcer" of federal antitrust law, and thus lacked standing to seek damages allegedly resulting from the former CPP. Id., at *26. The Court found that Paycom failed to satisfy any of the "efficient enforcer" factors set forth in Volvo N. Am. Corp. v. Men's Int'l Prof'l Tennis Council, 857 F.2d 55, 66 (2d Cir. 1988).

First, the Second Circuit found Paycom's alleged injuries were indirect and derivative of the direct harms allegedly suffered by competing payment-card network service providers, like Discover and American Express. 2006 U.S. App. LEXIS 26820, at *26-27. Second, the Court determined that the extent of Paycom's losses caused by the CPP were "highly speculative." Id., at *27-28. Third, the Court held that Paycom was "not an entity whose self-interest would most motivate it to vindicate the public interest in antitrust enforcement." Id., at *28 (internal citation and quotation omitted). Finally, the Court held that "[i]t would be virtually impossible" to apportion damages between those allegedly directly injured (Discover and American Express), and the millions of merchants that conducted MasterCard transactions during the operation of the CPP and that might have been indirectly injured; "the probability of duplicative recoveries would be very large." Id., at *29.

Paycom's Challenge to MasterCard's Cross-Border Acquiring Rules

Finally, the Second Circuit affirmed the dismissal of Paycom's challenge to MasterCard's CBA Rules. Paycom contended that under the CBA Rules, non-U.S. banks are prohibited from acting as acquiring banks for internet merchants' MasterCard transactions, thereby limiting the number of acquiring banks with which Paycom could contract for the provision of MasterCard network services.  Paycom alleged that the CBA Rules constituted an unlawful market allocation scheme insulating domestic banks from competition against foreign banks that might otherwise provide services to internet merchants. Id., at *13.

The Second Circuit found it unnecessary to decide whether Paycom's claims against the CBA Rules should be analyzed under a rule of reason or per se analysis, finding instead that Paycom had failed to state antitrust injury or demonstrate antitrust standing with respect to such claims. The Court found that "none of the facts alleged even suggest that the CBA Rules have any anticompetitive effect on Paycom."  Id., at *30. The Court noted that Paycom conceded that the market for banks offering acquiring services is very large and competitive and that, in the Eastern District of New York alone, "[h]undreds of banks issue and/or acquire MasterCard credit and debit cards." Id. The Court concluded that, with so many options available, the CBA Rules "cannot impact competition in the market for acquiring services," and therefore, "there can be no antitrust injury and, consequently, no antitrust standing." Id., at *30-31.

Moreover, the Court added that Paycom had not alleged that "absent the CBA Rules, foreign banks would actually enter the market for acquiring MasterCard transactions, or even that it has attempted to contract with a foreign bank." Id., at *31.  Noting that nothing prevents a foreign bank from establishing a domestic presence, the Court found that Paycom had failed to provide any reason to believe that foreign bank acquirers would behave any differently from domestic acquiring banks.  Thus, the Court concluded that Paycom could not claim any "injury" causally connected to the CBA Rules. Id.

Authored By:

Michael W. Scarborough

(415) 774-2963

mscarborough@sheppardmullin.com

An October 30, 2006 Business Review letter ("BRL") from the Antitrust Division of the Department of Justice (the "Department") is a potentially important step forward in providing guidance to Standard Development Organizations (SDO's) and their lawyers about the form of acceptable SDO patent disclosure requirements. The BRL was in response to a request by VITA, an international trade association, and its standards development subcommittee, VSO. VITA is an SDO that is accredited by the American National Standards Institute, and includes developers, vendors and users of real-time modular imbedded computing systems originally based on the VMEbus Computer Architecture. VITA sought guidance on the propriety of its proposed new rules for requiring disclosure of relevant patents and pending patent applications as a precondition to participating in standard setting activity.

The issue of disclosing pending patent applications or relevant patents held by companies involved in SDO's has become a very hot topic since the Federal Trade Commission's recent decision in In The Matter of Rambus, Inc., Docket No. 0302, July 31, 2006 ("Rambus"). In Rambus, the FTC held that the failure by Rambus to disclose patents it held, and others that it was applying for, which related to technology being considered for standardization by an SDO which Rambus was part of constituted an unfair trade practice, and violated Section 5 of the Federal Trade Commission Act. Counseling SDO's on appropriate mechanisms for controlling the possibility that a standard might unwittingly require the use of patented technology owned by one or more participants in the standard setting process has been difficult in the absence of clear guidelines by the enforcement agencies on what kinds of SDO rules on patent disclosure are acceptable. While the Rambus decision itself provides some guidance, there were heated factual disputes about the extent to which the SDO involved there actually required disclosure of patents and patent applications, and the extent to which Rambus failed to adhere to those requirements. Beyond the clear prohibition on so-called "patent ambush" activities, lawyers counseling SDO's about what is permissible in requiring patent disclosure have had no general guidance from either of the antitrust enforcement agencies about specific disclosure mechanisms which will be deemed acceptable. The VITA BRL changes that landscape.

The Antitrust Division began by noting that standard setting can have powerful pro-competitive impacts. Standards developed by VITA could actually enable broader competition in the VME industry, and spur the creation of new products by entities able to engineer to an open standard. For example, since VITA standards are backward compatible, systems utilizing VME connections can be upgraded with newer technology. VITA systems developers are given the ability to integrate a variety of components into a single system. Open standards ultimately enable competitors, downstream purchases and upstream suppliers all to benefit from a wider variety of products, rather than being confined to any proprietary technology.

The Antitrust Division then described VITA's new proposed policy: (1) Each member of a VITA standard setting working group must promptly identify all patents or patent applications that may become essential to the implementation of the future standard; (2) Working group members must declare the maximum royalty rates and most restrictive non-royalty terms that the member company will request when licensing such patents; (3) Patent holders may subsequently submit declarations with less restrictive licensing terms, but the original declaration of licensing terms cannot be made more onerous; (4) If a working group member specifies a maximum royalty but does not include other licensing terms, members agree they must accept specific limits on grant backs, reciprocal licenses, non-asserts, covenants not to sue or defense of suspension provisions; (5) A working group member who fails to disclose a known essential patent or fails to declare associated most restrictive licensing terms on a prompt basis as defined in the rules commits to license the essential claims of the undisclosed patent on a royalty free basis; and (6) All members agreed to binding arbitration in front of a panel to be drawn from the VITA Board of Directors to resolve any disputes over applications of the disclosure rules. The proposed policy would continue the existing VITA prohibition on any negotiations or discussions at all working group meetings of specific licensing terms among working group members or with third parties.

The Department began its substantive analysis by noting that the Supreme Court had condemned activities where SDO members conspired with one another, or manipulated standard setting processes, to injure a horizontal competitor. The Department went on to note that these cases resulted in many SDO's implementing rules strictly forbidding all activities that could potentially result in antitrust liability, including restrictions on any discussions about the terms and conditions of licenses to patents that could be essential to a standard. The Department noted that VITA's proposed policy would relax such restrictions somewhat by requiring patent holders to make the unilateral declarations described above, while maintaining a prohibition on joint negotiation and discussion of patent licensing terms.

Having defined the question, the Department's analysis was surprisingly short. The Department began by noting that standard setting processes could not be used to cloak naked price fixing or bid rigging, and that since such activities did not seem to be reasonably implied from the proposed VITA rule changes, the Department would proceed to analyze the proposed VITA rule changes under the rule of reason. Then, in what will likely become the most often cited portion of the BRL, the Department acknowledged the powerful pro-competitive rationales for requiring standard setting participants to disclosure patents. Essentially, such disclosure would allow each member of the VITA standard setting working group to compare the most restrictive licensing terms associated with each alternative technology, including freely available public domain technologies, when deciding which technology to support for inclusion in the draft standard. This created the possibility that a standard setting organization like the VITA might decide that a cheaper, less technologically elegant solution would be best given the potential cost of a technologically better proprietary solution. Participants in a standard setting organization with rules like the ones proposed by the VITA should be encouraged to compete by submitting declarations that would increase the chances that its patented technology would be selected. As the Rambus litigation worked its way through the Federal Trade Commission, a spirited debate emerged among economists and lawyers advising SDO's about whether stringent patent disclosure rules would ultimately wind up impeding standard setting activity. While certainly not explicitly taking sides in that debate, the VITA business review letter can be seen as a ringing endorsement of stringent patent disclosure rules if particular SDO's chose to deploy them.

Finally, the Department took considerable comfort in VITA's continued prohibition of discussions about patent licensing terms. It noted that working group members would not set actual licensing terms, which still have to be negotiated separately outside the organization, subject only to restrictions imposed by the patent holder's unilateral declaration of its most restrictive terms pursuant to VITA rules. The Department closed with an admonition that it would not hesitate to condemn any use of the declaration process as a cover to fix downstream prices of VME products or of efforts by patent owners to rig declarations of licensing terms.

Authored By:

David Garcia

(310) 228-3747

dgarcia@sheppardmullin.com

One of the most significant developments in U.S. antitrust law in years has come upon the horizon: the much criticized, nearly 100 year old rule holding that  minimum resale price maintenance ("RPM") is per se illegal is in jeopardy. This per se rule was  adopted in Dr. Miles Med. Co., Inc. v. John D. Park & Sons.¹ and could be overturned by the Supreme Court which on December 7, 2006, granted a petition for writ of certiorari. The Court has also granted leave to manufacturers associations and economists to file amicus curiae briefs.

In PSKS, Inc. v. Leegin Creative Leather Products, Inc., ² the Fifth Circuit upheld a judgment for plaintiff on the basis that stare decisis required application of the per se rule against RPM. The lower court ordered defendant Leegin, a manufacturer of women's accessories sold under the brand name Brighton, to pay $3.6 million in trebled damages to plaintiff PSKS, Inc., a women's clothing and accessories store doing business as Kay's Kloset in the Lewisville, Texas area.  Leegin was also ordered to pay another $375,000 for attorneys' fees and costs. On appeal, Leegin did not challenge the jury's finding that it entered into price-fixing agreements with retailers. Instead, it challenged the application of the per se rule and argued that RPM agreements should be evaluated under the more relaxed rule of reason.

After the Fifth Circuit issued a writ of mandate sending the case back to the lower court, Leegin submitted an application to recall and stay the mandate pending the filing and disposition of a petition for a writ of certiorari. The court granted the Application on August 28, 2006. On October 4, 2006, Leegin filed the petition.³ The petition urges the Court overrule the per se rule, or in the alternative, to limit the per se rule to apply only where there is a clear likelihood of anticompetitive effects. By granting Leegin's petition for a writ of certiorari, the Court has sent a strong signal that it will reconsider the application of the per se rule to RPM. Groups such as the National Association of Manufacturers have also been granted leave to file amicus briefs supporting the petition.

Leading up to this case, the Supreme Court has suggested that it would one day overturn the rule in Dr. Miles. Eight years after Dr. Miles was decided, the Court held in United States v. Colgate that only if there is agreement on resale price, as opposed to a unilateral policy, is RPM per se illegal.⁴ In 1967, in Schwinn, ⁵ the Court expanded the per se rule to nonprice vertical restrictions, but overturned this decision some years later in Continental T.V.⁶ Almost a decade after Continental T.V., the Court held in Business Electronics that the per se rule should only apply to vertical restrictions where there is an agreement on price or price levels.⁷ Nearly another decade later, the Court, in State Oil v. Khan,⁸ overturned yet another vertical restraint case, Albrecht,⁹ thereby rejecting the application of the per se rule to maximum resale price maintenance agreements.  Thus, by increasingly limiting the application of the per se rule to vertical restrictions over the years, the Court has sent signals that it would one day limit the rule with respect to minimum resale price maintenance.

Leegin's petition to the Supreme Court presents more developed arguments for abrogating the per se illegal rule for RPM agreements. The rule adopted in Dr. Miles, Leegin emphasizes, was not grounded in economic theory or justified by empirical evidence. Instead, without considering the competitive effects of an agreement between a manufacturer and its distributors establishing minimum resale prices for the manufacturer's goods, the Supreme Court relied in Dr. Miles on the "antiquated" common law rule against restraints on alienation to hold that such an agreement is a per se violation of the Sherman Act.¹⁰ Since then, the courts' have "blindly" applied Dr. Miles under the doctrine of stare decisis. Leegin criticizes the courts' lack of regard for whether an RPM agreement has a real anticompetitive effect on the market, whether the defendant had market power or whether the defendant had a legitimate procompetitive purpose for its practice. Recalling the Court's decision in Khan, where the Court overturned past precedent,¹¹ and held that the per se rule was inappropriate for maximum resale price agreements,¹²  Leegin analogizes that, like in Khan, Dr. Miles should be expunged because stare decisis in not an inexorable command and there is a competing interest to recognize and adapt to changed circumstances and the lessons of accumulated experience. 

Furthermore, Leegin argues, the Court should overturn the per se rule against RPM because the common law and the Sherman Act were meant to be adapted to modern conditions. Neither should inaction by Congress prevent the Court from overturning the rule. Congress has never outlawed RPM, Leegin argues, so its failure to legislatively overrule the rule in Dr. Miles and its other acts short of repealing the rule is no reason “to freeze in place the per se rules that existed in 1911. Note, however, that in 1983 Congress did prohibit the DOJ from using any funds to support efforts to overturn the RPM per se rule.¹³

At the crux of Leegin's arguments for why a per se rule against RPM is wrong is that the premise in Dr. Miles is inconsistent with the Supreme Court's modern antitrust analyses.¹⁴  The law on RPM should, Leegin argues, be made consistent with the legal standards applied to all other vertical restraints. According to other, later decisions of the Supreme Court, antitrust per se rules are appropriate, Leegin submits, only for conduct that always or almost always tends to restrict competition. According to "modern" economic analysis RPM does not meet this condition because the practice often has substantial competition-enhancing effects.¹⁵

More particularly, Leegin observes that per se treatment has been rejected for vertical nonprice¹⁶ and vertical maximum price¹⁷ restraints for insufficient economic justification. Leegin argues that so too should per se treatment be rejected for RPM because economists and legal scholars have reached "an unusually strong consensus" that RPM has a number of procompetitive uses and effects that, if permitted by the antitrust laws, could enhance consumer welfare.¹⁸  Thus, the courts, Leegin continues, should no longer assume that RPM limits intrabrand price competition, raises retailers' margins, raises retailers' prices, and are therefore harmful to consumers. Quoting from the Court's decision in Continental T.V., Leegin asserts that economists have identified a number of ways in which manufacturers can use such restrictions to compete more effectively against other manufacturers, and that manufacturers entering new markets can use RPM agreements to induce competent and aggressive retailers to make the kind of investment in capital and labor that is often required in the distribution of products unknown to the consumer. Quoting also from Robert Bork, Leegin further contends that RPM will not enable retailers to enjoy fat retail margins because “[n]o manufacturer or supplier will ever use resale price maintenance or reseller market division for the purpose of giving the resellers a greater-than-competitive return ... The manufacturer shares with the consumer the desire to have distribution done at the lowest possible cost consistent with effectiveness."¹⁹

In addition, Leegin directly addresses the distinction that has been made in the treatment of price and nonprice restraints under the Sherman Act and criticizes this distinction as largely illusory. Leegin contends, referencing another Supreme Court decision, that the economic effect of price and nonprice restrictions is in many cases similar or identical.²⁰ Interestingly, Leegin acknowledges in a footnote that RPM may lead to higher retail prices. It claims, however, that according to empirical analysis, RPM can in some circumstances result in lower prices. For example, if RPM enables a manufacturer to compete more effectively and thereby expand its sales and output, it may achieve efficiencies in manufacturing or distribution that could allow it to lower its unit costs and prices.²¹

Offering additional reasons why RPM agreements should not be considered per se unlawful, Leegin asserts that if manufacturers were permitted by the antitrust laws to use RPM, they would do so for procompetitive purposes, such as providing incentives to stock and promote the manufacturer's products. Price restrictions would help manufacturers compete on product quality by giving retailers an incentive to compete on service. RPM could help new entrants break into the marketplace, encourage retailers to purchase more of its products or introduce new or more innovative products, enhancing interbrand competition and benefiting consumers. Leegin does concede that manufacturers have other tools to achieve their desired mix of price and service promotion, such as through unilateral “Colgate” policies²² and through contracting for exclusive territories or for particular distribution services. It criticizes these tools as not cost-free and contends that "a legal regime that forces businesses to select second-best tools to achieve their competitive ends is inherently insufficient.”²³ Colgate policies are no cure, Leegin asserts, because firms  can cross a line between enforcing a unilateral policy and a per se illegal contract, as Leegin did in this case. 

Many antitrust commentators agree that there is a good chance that after nearly 100 years, Dr. Miles will be overturned or at least, RPM agreements will be subjected to a "quick-look" analysis and scrutinized more carefully only when the manufacturer has market power or there is a clear likelihood of anticompetitive effects. This could lead to the enactment of state statutes prohibiting RPM as per se illegal, or to some Congressional action, but this would not be the first time this has happened. All the same, it may indeed be time the sun set on Dr. Miles.

Authored by:

Heather Cooper

(213) 617 - 5457

hcooper@sheppardmullin.com

On November 30, Judge Sullivan held yet another hearing in his review of the mergers between SBC and AT&T and Verizon and MCI. The purpose of the hearing was to determine if the Court should hold an evidentiary hearing to examine the government’s witnesses or, if not, what the court’s next steps should. Although the first exchanges between the government’s lawyer, Mr. Claude Scott, and the court were fairly cordial and professional, Judge Sullivan took umbrage at Verizon’s suggestion that there was nothing the court could do to undo the completed parts of the merger, and Mr. Reback, representing ACTel, accused the government’s lawyers and economists of misrepresentation.

In the Government’s presentation, Mr. Claude Scott said that the Division had produced the most helpful evidence to the Court and reiterated the government’s position that the Court did not have the authority to look beyond the 700 buildings listed in the complaint as competitive problems. Although acknowledging that the 2004 amendments to the Tunney Act had changed what had been a discretionary review into a mandatory review, Mr. Scott noted that the amendments had not changed the fact that the Tunney Act focused upon the adequacy of the remedy to problem in the complaint, rather than the adequacy of the remedy to the overall effects of the merger. At times, the Court seemed in agreement with this limitation, as the Court noted that, just as a prosecutor may choose to charge an individual with none, some or all of the possible charges, so too the government may have chosen not to bring this case in the first place, and thus have totally avoided the review.

Although Ms. Lewis from AT&T emphasized the same points as the Government, Mr. Thorne from Verizon surprised the gallery when he emphasized to the judge that the merger was, in fact, closed as of January 2006. The judge then pointedly asked why we were here, if it was all a fait accompli. Mr. Thorne responded that they had gathered to discuss the validity of the remedy for the problems proposed in the complaint. Judge Sullivan responded by stating, “I will do the review and we’ll see if the merger ‘closes.’” Judge Sullivan also pondered aloud whether Congress should amend the Tunney Act to prevent parties from closing the transaction prior to the approval of the Judge.

The merger’s opponents used their time to attack the merits of the remedy and the integrity of the Antitrust Division. Although Mr. John Heinz from the Antitrust Bureau of the New York Attorney General’s office only stated that the Division had been led astray, Mr. Reback, from ACTel indicated that the government’s arguments were “beyond fraudulent” as the government had lied about “the facts, the law, and the economics.” On the facts, Mr. Reback argued that evidence the government had provided to the Court showed that CLECs were not a viable competitive option for most buildings, even when they had already wired certain floors of a building. On the law, Mr. Reback argued that the government had misdirected the Court’s focus to the restoring of the number of competitors within a building, rather than on whether the merger would affect prices. Finally, on the economics, Mr. Reback argued that the Government’s use of Bertrand competition was faulty, because Bertrand models were not as effective or plausible as others.

Finally, Mr. Christopher Wright, representing Sprint and former General Counsel of the FCC, argued that the Court should simply issue an opinion denying the remedy. Although Mr. Wright acknowledged that the government could respond by simply refusing to challenge any portion of the merger, Mr. Wright stated that the Antitrust Division’s lawyers would face heated questioning from Congressional committees if they attempted that. Mr. Wright dodged questions from the Court about whether he agreed with Mr. Reback’s arguments that the Antitrust Division’s lawyers and economists had been dishonest, and instead simply asked the Court just to do what Congress wanted.

Mr. Claude Scott, in his rebuttal for the government, vigorously defended the Division’s work and integrity, and noted that Mr. Reback had quoted passages of the evidence out of context and with numerous textual omissions in order to construct his points. Judge Sullivan agreed that Mr. Reback’s accusations were “startling” and that he would permit the Division, if it wished, to make a written reply to the accusations. Mr. Scott pointed out that Mr. Reback’s groups, far from being public interest organizations, were in fact primarily made up of competitors of the merging parties and that the vitality of the assets could be seen by the fact that the Division had 6 potential buyers lined up to purchase the assets. In addition, Mr. Scott pointed to specific evidence that the Division had explained its rationale in excruciating detail to John Heinz, who had claimed the that Division had never provided any rationale. Judge Sullivan concluded the hearing by stating that he was taking the issues under advisement.

The harsh tenor of Mr. Reback's accusations may reflect a consensus that Judge Sullivan probably will issue a final order in the case, rather than order another hearing in which Mr. Reback could further complain. In fact, all of the parties and amici at least somewhat agreed that an evidentiary hearing would not add to the Court's understanding, although Judge Sullivan mused that a hearing may give him the opportunity to judge the demeanor of the witnesses. Although Judge Sullivan at points seemed to be favoring a dismissal of the case, his ire at the closure of the merger prior to his approval may persuade him to force some other concessions from the government. Still, as one spectator in the gallery remarked upon leaving, “this is never going to end for them,” indicating that there may be future hearings. 

In the long run, the New York Attorney General's joining of Mr. Reback in attacking the Division's integrity and wisdom could hinder cooperation between the Antitrust Division and the Antitrust Bureau in the future, although Mr. Heinz did state that he felt only that the Division had been led astray. Finally, the strident tone of Mr. Reback's attacks on the integrity of the process surprised many, including Judge Sullivan, and could indicate that Mr. Reback plans to appeal from a decision approving the consent decree.

Authored by:

Christopher Bowen

(202) 772-5348

cabowen@sheppardmullin.com

• On November 29, the European Commission fined five groups of companies a total of €519m for allegedly participating in a cartel to fix prices and share customers for certain types of synthetic rubber in violation of the EC Treaty’s ban on restrictive business practices (Article 81).  The overall fine is the second highest imposed by the Commission in a cartel case, and brings the total amount of cartel fines imposed this year to €1.843 billion - a new annual record for the Commission. The Commission stated that its Decision was based on numerous documents, corporate statements, and witness interviews provided by the Leniency applicants, together with meetings notes discovered by the Commission during an on-site inspection. The Commission alleged that the cartel agreements were made before, or after, the official meetings of the European Synthetic Rubber Association which took place in various European cities.  During these meetings, the Commission alleged that the participants agreed prices, exchanged information on key customers, and the amounts of synthetic rubber supplied to them. Competition Commissioner, Neelie Kroes, stated, “Cartels strike at the heart of healthy economic activity.  They undermine competition, raise prices for consumers and reduce the diversity, quality and innovation of European companies. The Commission has imposed high fines in this case, but if companies continue to indulge in cartel activities, then they can expect their fines to be even higher in the future”.

• On November 8, the European Commission re-adopted a decision on a cartel in the steel beams sector, and fined Arcelor Luxembourg SA (formerly Arbed SA), Arcelor International SA (formerly TradeArbed SA), and Arcelor Profil Luxembourg SA (formerly ProfilArbed SA) a total of €10 million for allegedly participating in a cartel in steel beams, in violation of Article 65 of the European Coal and Steel Community (ECSC) Treaty, and Article 81 of the EC Treaty.  The Commission alleged that the companies fixed prices, allocated quotas, and exchanged confidential information in the steel beams industry covering the whole of the European Single Market between 1988 and 1991.  The re-adoption follows a judgment of October 2, 2003, by the European Court of Justice, where the Court annulled the European Court of First Instance’s judgment and, on procedural grounds, the Commission decision, insofar as it concerned Arbed SA. In fixing the fine, the Commission took into account the size of the EC market for the product in 1990, the last complete year of the infringement, the duration of the cartel, and the size of the firms involved.  Under normal circumstances, the fine would have been at least €20 million, plus an increase for the duration.  However, the Commission considered that it had already taken a position on the amount of the fine for Arbed SA in its 1994 decision, which the Court of First Instance reduced to €10 million in its March 11,1999, ruling.

   

• On November 16, the European Court of First Instance (CFI) dismissed an appeal by Peróxidos Orgánicos (PO) against a fining decision of the European Commission for its alleged participation in an illegal cartel in the organic peroxides sector.  The CFI dismissed the appellant's claims that the Commission was time barred from imposing a penalty, and had been treated unequally by the Commission.  In December 2003, the Commission imposed fines totaling €70 million on a number of companies for their alleged participation in a price-fixing, and market-sharing cartel in the European market for organic peroxides. PO was fined €0.5 million for its alleged role in a sub-arrangement by which the cartel was implemented in Spain.  The Commission began its investigations in April 2000, following a leniency application by one of the cartel participants, and sent formal requests for information to the main cartel participants (not PO) early in 2002.  Formal proceedings were launched, and a statement of objections was served on PO on 17 June 2003.  PO lodged an action with the CFI claiming that the proceedings against it were time barred as its participation in the cartel had ended more than five years before the first actions were taken by the Commission. The CFI held that there was no evidence from the other alleged cartel participants that PO had ceased its involvement at the beginning of 1997, or had stated its intention to cease involvement.  On the contrary, the CFI held that the Commission's evidence showed that the PO continued to participate after January 1997. In addition, PO neither told its corporate shareholders nor the other participants of its alleged intention to distance itself from the alleged cartel.  The CFI held that PO's arguments that the other participants knew of its withdrawal and continued without it were mere assertions, which were not backed by the evidence of the other parties.  Similarly, the CFI dismissed explanations provided by PO as to how the cartel continued to have information relating to its sales data, and market share despite its alleged withdrawal.  Currently, the EC limitation periods for the imposition of fines and periodic penalties are set out in Regulation 1/2003. Under Article 25 of Regulation 1/2003, the limitation periods for fines, and periodic penalties, are 3 years for infringements relating to the provision of information or the conduct of investigations, and 5 years for all other infringements.

   

• On November 23, the UK's Office of Fair Trading ("OFT") held that an agreement between 50 of the UK's fee-paying independent schools to exchange detailed fee information was in breach of competition law. The OFT alleged that the schools concerned exchanged confidential information relating to their intended fee levels for boarding and day pupils through a survey known as the 'Sevenoaks Surveys' compiled for the academic years 2001-02 to 2003-04. The OFT's decision follows the announcement in May that the schools concerned had admitted exchanging information regarding their intended fee levels in breach of competition law.  The admission was made as part of an agreed resolution of an OFT investigation between the OFT and the schools.  The schools did not, however, make any admission that the agreement had any effect upon fees, and the OFT's decision did not make any such finding. With one exception, each school must pay a penalty of £10,000, reduced in the case of six of the schools by up to 50 per cent for leniency. The relatively low fine for each school reflects the exceptional circumstances of the case, including the fact that all the schools will make payments totaling £3 million into an educational charitable trust designed to benefit the pupils who attended the schools during the relevant academic years, and the schools' charitable status.  It is the first time the OFT has imposed penalties on charities, and sends out a message that competition law applies to all businesses enjoying charitable status, who should not assume the OFT will in future accept the payment of a relatively low penalty as appropriate.  John Fingleton, OFT Chief Executive, said: "The penalties imposed on the schools and the contributions that they will make to the charitable trust, represent a fair and proportionate outcome to this case, given the parties' charitable status and their acceptance that there has been a competition law infringement.  This is the first case where the OFT has imposed penalties as part of an agreed resolution, and demonstrates our willingness to consider innovative solutions in appropriate cases".

   

• On November 20, it was reported that the Korean Fair Trade Commission ("KFTC") fined 10 petrochemical companies KRW200bn, its largest-ever fine, for allegedly colluding to set the price of plastic products over a 20 year period. The KFTC alleged that the cartel participants had manipulated prices, and production quantities of polyethylene, and hard polyethylene since the late 1970s. The KFTC also alleged that the cartel participants drove up prices of their products when oil prices increases, but failed to lower them when oil prices decreased.

   

• On November 23, the European Commission confirmed that Microsoft had submitted a revised version of the Technical Documentation with a view to meeting the requirements of the Commission’s March 2004 Decision.  That Decision ordered Microsoft, among other things, to disclose, and license complete and accurate interface documentation which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers.  The Decision required Microsoft to supply the relevant complete and accurate interface documentation within four months (i.e. July 2004).  In December 2004, the European Court of First Instance rejected a request from Microsoft to suspend the application of the March 2004 Decision. Microsoft subsequently committed to, and missed a number of deadlines for delivering complete and accurate specifications. The Commission decided on July 12, 2006, that should Microsoft continue to fail to comply with its obligations to (i) provide complete and accurate Technical Documentation of the interface information, and (ii) make that information available to licensees at a reasonable and non-discriminatory price, the amount of the daily penalty payment to which Microsoft could be subject would be increased from up to €2 million to up to €3 million per day with effect from July 31, 2006.

   

• On November 22, the European Commission confirmed sending a Statement of Objections to E.ON Energie AG alleging that the company had, intentionally or at least negligently, broken an official seal fixed by Commission officials on an office door to secure documents found in the course of an unannounced inspection carried out in May 2006.  The purpose of the inspection was to investigate suspected restrictions of competition and/or abusive behavior on the German electricity market.  The Statement of Objection is only a preliminary statement of the Commission’s position, and does not prejudge the final outcome of the investigation. Under Regulation (EC) 1/2003, the Commission has the power to seal any business premises, books or records for the period, and to the extent necessary for the inspection.  Where a seal is broken intentionally or negligently, the Commission may impose on the company responsible a fine of up to 1% of the total turnover in the preceding business year.

   

• On November 15, the Australian Competition and Consumer Commission ("ACCC") issued for public comment a draft guide to the formal merger clearance process (including the process for reviewing ACCC's clearance determinations), and the new merger authorization process.  Under the new merger clearance process, parties can apply to the ACCC for clearance in respect of proposed acquisitions of shares or assets.  If a clearance is granted by the ACCC, then Section 50 of the Trade Practices Act 1974, which prohibits anti-competitive acquisitions of shares or assets, does not prevent the acquisition in accordance with the clearance.  ACCC determinations in relation to merger clearance applications can be reviewed by the Australian Competition Tribunal.  Under the new merger authorization process, parties seeking authorization of proposed acquisitions that might be anti-competitive but which can be conferred protection from application of Section 50 on public benefit grounds, must now make such applications directly to the Tribunal. The ACCC has stated that the guidelines are designed to provide guidance to the business community, their advisers, and the public generally.  It outlines the approach that the ACCC proposes to take in assessing applications for formal clearance, and the requirements on applicants for merger clearances.  It also outlines the legislative requirements on parties wishing to apply to the Tribunal for authorization of proposed mergers, and acquisitions.

   

• On November 28, the Australian Competition and Consumer Commission revoked an authorization granted to the South Australian Mixed Business Association in 1979 which enabled it to publish, and circulate a price guide suggesting retail prices for grocery items to members.

   

• SAMBA has since changed its name to the State Retailers Association of South Australia which has continued to publish the price guide. ACCC Chairman, Mr. Graeme Samuel said, "While some members were likely to value the guide, and the assistance it provided in setting retail prices, it did not result in a public benefit that would outweigh the anti-competitive detriments from a reduction in price competition.  Price guidance by trade associations is less likely to raise competition concerns where they involve a 'bottom up' approach and identify various operating costs but which allow members to individually determine margins and set prices". The ACCC stated that this was not the case with the SRA's price guide.

Authored By:

Neil Ray

(415) 774-3269

nray@sheppardmullin.com

Court Refuses to Dismiss Division’s Suit against National Association of Realtors

• In United States v. National Association of Realtors, No. 05 C 5140 (N.D. Ill. Nov. 27, 2006) (available at http://www.usdoj.gov/atr)., Judge Filip rejected the National Association of Realtors' ("NAR") arguments that the Court lacked subject matter jurisdiction or that the Division had failed to state a claim. Importantly, Judge Filip held that just because NAR had changed its policies in response to the threatened filing of a complaint did not mean that there was no case or controversy about the initial filing.

In response to traditional broker's complaints that the increasing use of Virtual Office Websites ("VOWs"), in which clients of a broker could view all of the information about listings without going to the broker's office, NAR passed a mandatory policy that would have permitted brokers to refuse to have certain properties shown on competing brokers' VOWs. After the Division notified the NAR that it would probably initiate a suit to enjoin the enforcement of the new policy, NAR rescinded the prior policy and issued a new one, in which brokers could only refuse to let competing brokers show their listings on their VOWs if the broker also agreed not to show any of the competing brokers' listings on his or her VOW.

The Court held that it still had subject matter jurisdiction over the initial policy because the effects of the policy may be continuing and that there is a possibility that NAR may reinstitute the policy. On the continuing effects, the court distinguished Stevens v. Northwest Indiana Dist. Council, Int'l B 'hood of Carpenters, 20 F.3d 720 (7th Cir. 1994), as the same organization that had adopted the initial policy, NAR, had adopted the latter policy. In addition, the court noted the Government's complaint alleged that several brokers had exercised the opt out clause while it had been in effect, and at least one discount broker had been forced to close because of the policies. Because the initial policy was " fairly traceable" to NAR and the policy had enduring effects, the Court determined that there was a case or controversy.

Alternatively, the Court held that it had subject matter jurisdiction because there was a reasonable chance of NAR resuming the conduct. The Court distinguished United States v. Oregon Stale Med'l Society, 343 U.S. 326 (1952), because NAR's initial policy had been rescinded only shortly before the institution of litigation. "'It is the duty of the courts to beware of efforts to defeat injunctive relief by protestations of repentance and reform, especially when abandonment seems timed to anticipate suit, and there is probability of resumption.'" (quoting Oregon Stale Medical Society). 

The ruling is noteworthy because it highlights that the antitrust enforcement agencies may still pursue an association for anticompetitive policies that have been rescinded. Thus, associations and their members must craft such policies carefully in the first instance, as adopting a later policy will not necessarily preclude the Division from suing to enjoin the operation of the first policy. This is important, as the Division may now seek discovery of all of the materials related to the first policy as well as the second policy. 

FTC Defines Narrow Markets in Funeral Home Consent Decree

• On November 22, 2006, the FTC announced that it had reached an agreement with SCI, the nation's largest funeral home services company with 10% of the market by revenue, and Alderwoods, which represents 5% of the market by revenue. Under the terms of the consent decree, the merging parties will divest funeral home services in 29 markets, and cemetery services in 12 markets. In addition, in 6 markets, SCI may either divest the Alderwoods property or end its affiliate program with independent funeral homes.

  The decision emphasized that the FTC will define certain markets by consumer. Noting that certain consumers of funeral home services were "customs-conscious," the FTC required divestiture in cities where the parties would not have otherwise had concerning market shares, if they would have a higher percentage of either the "customs-conscious" funeral homes or the non-"customs-conscious" funeral homes. For example, in Alhambra, California, the FTC forced a divestiture because the combined company would include 100% of the funeral homes that provide funeral home services to Chinese-American customs-conscious consumers. The complaint also differentiated between traditional funeral home services and "no frills" funeral homes, and concluded that entry by a "no frills" competitor would be unlikely to deter price increases, as it would not be a sufficiently close substitute. In other geographic markets, however, the product market was simply all funeral home services.

  The FTC chose the market definition, because customs-conscious consumers will not switch to another funeral home provider even when faced with a price increase. Thus, when reviewing mergers for antitrust issues, the FTC will at different markets, even when the products appear substantially similar.

Updated on Linde – BOC

• Linde and BOC have requested FTC approval of Airgas, another leading industrial gas company, as a purchaser of their atmospheric gases plants. Linde and BOC, two of the largest industrial gas producers in the United States, announced their merger in March. After an investigation and second request, the FTC in July announced that it would require the divestiture of certain Helium assets to Taiyo Nippon, and the divestiture of regional nitrogen and oxygen facilities in Northeast, Southeast, Ohio, and the Milwaukee-Chicago Region to another buyer.

  The public will have until January 7 to make public comments before the FTC votes on whether to approve Airgas as a buyer.

Authored by:

Christopher Bowen

(202) 772 - 5348

cabowen@sheppardmullin.com