On November 29, 2007 a federal court in Philadelphia issued a decision granting the motion of Stolt-Nielsen (Stolt), a Luxembourg tanker shipping company, to dismiss a grand jury indictment against it for violations of Section 1 of the Sherman Act alleging it conspired with its competitors to allocate customers among them. Stolt had self reported the customer allocation scheme to the Department of Justice in 2002, and thereafter entered into a leniency agreement with the DOJ whereby it was immunized from prosecution based on representations that it had ceased the unlawful conduct and would cooperate in the investigation. The DOJ later notified Stolt that it had obtained evidence that Stolt did not terminate its participation in the conspiracy as represented, and thus the leniency conditions were not met. The indictment followed. In this decision, Judge Kaufman reviews the evidence and concludes that Stolt did take action to terminate its participation in the conspiracy as represented, and otherwise fulfilled its obligations under the leniency agreement. Our January blog will contain a complete review and analysis of this important decision.
Authored by:
Carlton A. Varner
(213) 617-4146
cvarner@sheppardmullin.com
A price squeeze occurs when a vertically integrated company with a monopoly in the upstream market sets its wholesale prices to its customers so high that they cannot compete effectively with it at the downstream level. In some circumstances, price squeezes may constitute exclusionary conduct under Section 2 of the Sherman Act. For example, in City of Mishikawa v. American Electric Power, 616 F. 2d 976 (7th Cir. 1980) the defendant utility company sold power both at wholesale and directly to consumers. By setting its wholesale price higher than its retail price, it effectively prevented its wholesale customers from competing with it at the consumer level. Other courts, however, have criticized price squeeze claims pointing out that they can be pro-consumer when the upstream monopolist can carry out the downstream activities more efficiently than its independent competitors, and such claims also impose administrative burdens on the courts with respect to price setting for which they are ill-suited. Town of Concord v. Boston Edison Co., 915 F. 2d 17 (1st Cir. 1990).
In Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004), the Supreme Court held that the refusal of a monopolist to deal with a competitor usually does not constitute exclusionary conduct sufficient to violate Section 2 of the Sherman Act. In Trinko, the defendant had a lawful monopoly over the lines necessary for delivery of telephone and internet communications. The 1996 Telecommunications Act required it to give competitors access to these lines on fair and nondiscriminatory terms. Defendant allegedly failed to do so, and engaged in other obstructionist conduct vis-à-vis its competitors. This conduct gave rise to the Section 2 claim. In reaching its holding, the Supreme Court emphasized that unilateral refusals to deal seldom violate the antitrust laws, particularly where such conduct is subject to regulation by another set of laws and agencies.
Since Trinko was decided, one issue that has split the courts is whether it also bars price squeeze claims, i.e., where the monopolist is willing to supply its competitors, but only on terms regarded as unfair or unduly burdensome by the competitor. Compare Covad Communications Co. v. Bellsouth Corp., 374 F. 3d 1044, 1050 (11th Cir. 2004) (holding that price squeeze claims survive Trinko) with Covad Communication Co. v. Bell Atlantic, 398 F. 3d 666, 673 (D.C. Cir. 2005) (holding they do not). Logic suggests that since under Trinko the integrated monopolist is free to refuse to deal entirely, it should be free to set the terms – including a price squeeze – on which it will deal with rivals.
In Linkline Communications v. Pacific Bell, 2007 U.S. App. LEXIS 21719, the Ninth Circuit dealt with a price squeeze claim in the telecommunications industry. Plaintiffs were Internet Service Providers ("ISPs") who sell digital subscriber lines ("DSL") on the internet to retail customers. They leased those facilities from defendants, which had regional monopolies over the telephone lines used for DSL access. In addition to providing access to those lines at wholesale to ISPs, defendants themselves provided DSL access at retail to individual consumers. Plaintiffs alleged, inter alia, that defendants engaged in a price squeeze by charging ISPs a high wholesale price in relation to the price at which defendants provided retail service. The District Court denied the motion to dismiss the price squeeze claim but certified its order for interlocutory appeal. Defendant's main argument on appeal was that such price squeeze claims in the telecommunications industry were barred by the Supreme Court's Trinko decision.
In a 2-1 decision, however, the Ninth Circuit rejected this argument. It stated that, in City of Anaheim v. Southern California Edison Co., 955 F. 2d 1373 (1992) it had joined its sister circuits in holding that claims of price squeezing under Section 2 are viable against monopolists in regulated industries. By contrast, in Trinko, the Supreme Court held that Verizon's insufficient assistance in the provision of service to rivals is not a recognized claim under the Court's refusal to deal precedents. While the Trinko court did recognize that the regulatory structure governing telecommunications was an important factor in concluding that it was not justified in extending antitrust liability to include Trinko's case, it was only one factor and not a per se bar to judicial enforcement of the antitrust laws.
Thus, according to the Ninth Circuit, the issue was whether Anaheim remains viable after Trinko. It found that the reasoning and theory of Anaheim is not "clearly irreconcilable" with that of Trinko. Trinko did not involve a price squeeze theory and the Trinko court took "great care" to say that "claims that satisfy established antitrust standards" are preserved. Moreover, Anaheim did not embrace an unlimited view of Section 2 price squeeze claims in regulated industries, but cautioned that courts should tread carefully in regulated industries and require a showing of specific intent by the monopolist to serve its monopolistic purposes at the expense of retail competitors. Since Trinko stated that the existence of a regulatory structure was only one factor to consider, and Anaheim rejected the wholesale importation of antitrust theory into regulated industries, the Ninth Circuit found that the two decisions are consistent. The court concluded its decision by noting that, unlike both Anaheim and Trinko, the industry here was only partially regulated, and that regulation is limited to the wholesale level and there is no regulation at the retail level. Since much of the conduct at issue relates to the unregulated retail prices, this provides a further basis for concluding that Trinko should not bar the claim.
Judge Gould dissented from the majority decision and opinion. In his view, Trinko takes the issue of wholesale pricing out of the case since "it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal. Covad Communications v. Bell Atl. Corp., 398 F. 3d. 666, 673 (D.C. Cir. 2005) (quoting 3A Areeda & Hovenkamp, Antitrust Law, 129-30 (2d. Ed. 2002). Once the wholesale pricing issue is removed, then plaintiff does not have an antitrust claim unless it can show that the retail prices are predatory within the meaning of Brooke Group v. Brown & Williamson Corp., 509 U.S. 209 (1993). Since plaintiffs did not allege that defendant had market power in the retail DSL market, that its retail prices were below cost, or that defendant could recoup its losses after a period of predation, it could not satisfy the Brooke Group standards and the Complaint should be dismissed.
The defendants did file a petition for certorari with the Supreme Court on October 17, 2007. Shortly thereafter, a star studded group of economists (William Baumol, Kenneth Elzinga, Franklin Fisher and Thomas Jorde among others), represented by Robert Bork and J. Gregory Sidak, filed an amicus brief in support of the petition. The amicus brief argues, inter alia, that the Ninth Circuit opinion is "incompatible" with the reasoning of the Trinko court, specifically noting that Trinko recognized that, in regulated industries, "[e]nforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing – a role for which they are ill-suited." Trinko, 504 U.S. at 408. Thus, the last chapter has not been written and, given the split in the circuits as well as the amicus brief submitted by numerous influential economists, the Supreme Court may choose to take up this issue itself.
Authored by:
Carlton A. Varner
(213) 617-4146
cvarner@sheppardmullin.com
In October, the Department of Justice obtained a half a million dollar penalty against Iconix Brand Group for omitting "4(c)" documents in its Hart-Scott-Rodino Act premerger notification. For lawyers and companies involved in mergers, acquisitions and joint ventures, the DOJ's actions make clear that HSR filings, including their more technical aspects, are no minor matter and call for diligence.
The HSR Act imposes premerger notification and waiting period obligations on transactions over a certain size, where the parties are over a certain size, before those transactions may be completed. Each "person" who is a party to an HSR-reportable deal must file an HSR notification with the DOJ and the Federal Trade Commission.
Under Section (d)(1) of the HSR Act, the FTC, with the DOJ's concurrence, is authorized to require that the HSR notification be in the form and contain the documentary material and information that is necessary to determine whether the acquisition, if completed, may violate the antitrust laws. Accordingly, Item 4(c) of the HSR notification form requires the parties to submit with their HSR filings "[a]ll studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s)…for the purposes of evaluating or analyzing the acquisition."
Iconix owns a portfolio of fashion brands. On March 6, 2007 it and Rocawear Licensing LLC signed an asset purchase agreement whereby Iconix would acquire Rocawear's names, brands and other assets. Each filed an HSR notification on March 14, 2007. Neither of them submitted a single Item 4(c) document with the filing. As all HSR filings require, Iconix and Rocawear included a sworn statement that the information submitted in the filing was to the best of their knowledge, "true, correct and complete." The next week the FTC telephoned Iconix to verify that an appropriate search had been conducted for 4(c) documents. Iconix's counsel told the FTC that the company had duly searched for 4(c) documents and no such documents existed. The FTC and DOJ cleared the acquisition, finding it did not raise competitive issues.
Soon after however, the DOJ opened an investigation to determine whether Iconix "in fact had undertaken an acquisition requiring more than $200 million in financing without its officers or directors having prepared or reviewed documents that evaluated or analyzed the proposed acquisition with regard to competitive factors that would be responsive to Item 4(c)."The investigation uncovered three documents responsive to Item 4(c). One document was an email addressed "To the Iconix directors", sent also to several Iconix officers, describing Rocawear as a "leader in the urban lifestyle category" and the acquisition as "a great opportunity to expand into this market segment [and] in new categories [including] international tie-ins." Another document was a presentation sent to Iconix's Executive Vice President describing "Rocawear's presence in the urban lifestyle market," with charts showing Rocawear's and its competitors market shares. The third document included materials prepared for an Iconix Board of Directors meeting, sent to all members of the Board, including the same market share data that Iconix's Vice President received.
In some instances, it might not be clear whether a document is a 4(c) document. This case does not appear to be one of them. All of the above documents were prepared by or for Iconix's officers or directors and evaluated and analyzed the proposed acquisition with respect to market shares, competition, competitors, markets, and potential for sales growth or expansion into product or geographic markets. The DOJ thus filed a complaint in United States District Court for the District of Columbia, alleging that Iconix's failure to submit documents it knew or should have known were responsive to Item 4(c) violated the HSR Act's reporting and waiting requirements. The maximum amount of civil penalty for each day that a person violates the HSR Act is $11,000 per day. Iconix was thus exposed to liability for nearly $1 million, as it was allegedly in violation of the Act for 85 days. The company ultimately paid $550,000 as it agreed to the DOJ's settlement offer. The DOJ's investigation teaches that the government treats the HSR Act's filing requirements seriously, even when a proposed transaction does not raise substantive, competitive issues.
