In In re Terazosin Hydrochloride Antitrust Litig., 2005 U.S. Dist. LEXIS 108 (S.D. Fla. January 5, 2005), the Southern District of Florida held, on remand from the Eleventh Circuit, that "reverse" payments to settle patent infringement litigation under Hatch-Waxman were per se illegal.

Under the Hatch-Waxman Act, the FDA lists all approved new drugs in a publication called the "Orange Book." The listing for each new drug includes any patents claiming the new drug owned by the new drug manufacturer. Hatch-Waxman further provides that after the FDA has approved a new drug, a generic drug company may seek approval to sell a generic version of the drug by filing and receiving approval of an Abbreviated New Drug Application ("ANDA"). In filing this application, the FDA requires that the generic manufacturer make one of four certifications. For purposes of this case, it is the Paragraph IV Certification that is relevant: the generic manufacturer certifies that the patents listed claiming the drug it seeks to manufacture are invalid or not infringed by the proposed generic drug. If the new drug manufacturer files a patent infringement suit against the generic producer within forty-five days of the generic producer's Paragraph IV Certification, the FDA will automatically impose a stay on final FDA approval of the generic drug for thirty months or until there is a court decision on the validity of the patent, whichever is earlier.

In 1996, Abbott Laboratories ("Abbott") listed the drug terazosin hydrochloride in the Orange Book as well as a patent that claimed it (the '207 patent). Geneva, a generic drug manufacturer, filed an ANDA seeking to market a generic version of this drug and made a Paragraph IV Certification with respect to the '207 patent. Abbott brought a patent infringement suit within forty-five days. While this suit was pending, Abbott and Geneva entered into an agreement in which Abbott agreed to pay Geneva a monthly fee if it would refrain from marketing generic terazosin hydrochloride until an appellate judgment on the validity of the '207 patent. On September 1, 1998, the district court ruled that the '207 patent was invalid because what it claimed was sold in the United States more than one year prior to the filing date of the patent application (the "on-sale bar" doctrine). Abbott appealed this holding to the Federal Circuit, which ultimately affirmed the district court's invalidation of the '207 patent based on the "on-sale bar" doctrine. Antitrust plaintiffs challenged the agreement between Abbott and Geneva for Geneva not to market generic terazosin hydrochloride until after the Federal Court ruled on the patent as a violation of Section One of the Sherman Act.

The Southern District of Florida originally characterized the challenged agreement as a market allocation agreement between competitors that allocated the entire market to Abbott, who then shared its monopoly profits with Geneva and, as such, per se illegal. In re Terazosin Hydrochloride Antitrust Litig., 164 F.Supp.2d 1340 (S.D. Fla. 2000). Reviewing this holding on appeal, the Eleventh Circuit found that this characterization of the agreement was "premature." Valley Drug Co. v. Geneva Pharms. Inc., 344 F.3d 1294 (11th Cir. 2003) The Eleventh Circuit noted that Abbott was in possession of a patent that lawfully permitted it to exclude others and that it was possible that the exclusionary effect of the Abbott-Geneva agreement "may have been no broader than the potential exclusionary effect of the '207 patent." Id. The Eleventh Circuit instructed that the district court should, on remand, find whether the Abbott-Geneva agreement had exclusionary effects beyond those of the '207 patent before subjecting the agreement to traditional antitrust analysis.

In In re Terazosin Hydrochloride Antitrust Litig., the Southern District of Florida held, on remand from the Eleventh Circuit, that the exclusionary effects of the Abbott-Geneva agreement did indeed exceed the exclusionary potential of the '207 patent and that the agreement was illegal per se under Section One. The court adopted a three-part test to assess whether the exclusionary effect of the agreement exceeded the exclusionary effect of the relevant patent: (1) the court would first determine the extent of the protections afforded to Abbott by its patent and the relevant law; (2) the court would then evaluate the likely outcomes of the '207 patent litigation, specifically the likelihood of Abbott obtaining injunctive relief to keep Geneva off the market while Abbott appealed the district court's finding of invalidity, judged as of the time the Abbott-Geneva agreement was made; and (3) the court would determine whether the agreement represented a reasonable implementation of the protections to which Abbott was entitled by holding the '207 patent, in light of the applicable law, the pending litigation, and the general policy justifications supporting settlements of intellectual property disputes.

With respect to the scope of the protections of the patent, the defendants argued that the '207 patent did not expire until 2014 and that the proper characterization of the extent of the protections afforded to Abbott, in light of the presumption of validity accorded to patents, was that Abbott could totally exclude generic competition until 2014. However, remarking that Geneva presented a substantial challenge to the validity of the '207 patent based on solid Federal Circuit precedent, the court found that the chance that the '207 patent would be held invalid was high at the time the challenged agreement was made and that this probability must be taken into account in assessing the protections of the patent. The court thus held that the expiration date of the patent was inconclusive as to the scope of the protections of the patent.

The court then considered the likely outcome of the '207 patent litigation. The defendants argued that Abbott could have obtained a preliminary injunction to keep Geneva's product off the market until after the Federal Circuit issued a final ruling on the '207 patent's validity. The proper determination to be made here, according to the court, was whether it was "more probable than not" that Abbott would be entitled to a preliminary injunction. The court noted that a party must demonstrate a likelihood of success on the merits in order to obtain a preliminary injunction. As such, the court proceeded to assess the likelihood of Abbott prevailing in its patent infringement suit against Geneva as of the time of the agreement, which was made two years into the patent infringement litigation and approximately five months before the district court held the '207 patent invalid. At this point in time, Geneva's motion for summary judgment had been fully briefed for almost one year. In that motion, Geneva asserted that what was claimed by the '207 patent had been sold more than one year before the filing of the '207 patent and that the '207 patent was therefore invalid under the "on-sale bar" doctrine. The court found that Geneva effectively demonstrated that there were at least three sales of the anhydrous terazosin hydrochloride claimed by the '207 patent more than a year before the filing of the patent and that Abbott's arguments in defense were unconvincing and unlikely to succeed. Noting that an inability to demonstrate a likelihood of success on the merits is fatal to a request for a preliminary injunction, the court held that Abbott would likely not have obtained one. The court also observed that its conclusion that Abbott would not be able to demonstrate a likelihood of success on the merits for purposes of a preliminary injunction necessarily meant that the likely ultimate outcome of the patent litigation would be that the '207 patent would be found invalid.

The court then considered whether the agreement was a reasonable implementation of the patent's protections and found that it was not. The court noted that the settlement did not actually settle any litigation at all; rather, by keeping Geneva off the market until a final appellate decision on the patent, the agreement merely resolved a hypothetical preliminary injunction motion that Abbott never actually filed and actually prolonged the patent dispute to Abbott's advantage by delaying generic entry. The court was also unconvinced by defendant's argument that the agreement was reasonable in light of the fact that the Federal Circuit had a high reversal rate in patent cases. The court emphasized that it found that the facts of this case indicated that there was a high likelihood that the '207 patent would be ruled invalid and the reversal rate for district court patent decisions generally was therefore irrelevant.

Thus, because the '207 patent was of doubtful validity, Abbott would likely not have been able to obtain a preliminary injunction against Geneva preventing it from marketing its product, and the Abbott-Geneva agreement was not a reasonable implementation of the protections of the likely invalid patent, the court concluded that the challenged agreement exceeded the exclusionary scope of the '207 patent. Proceeding in accordance with the Eleventh Circuit's instructions, the court then subjected the agreement to traditional antitrust analysis.

Noting that Geneva and Abbott were actual or potential competitors and that the agreement essentially provided that Abbott would pay Geneva to refrain from competing with Abbott until the Federal Circuit's decision on the '207 patent, the court reaffirmed its prior characterization of the agreement as a horizontal agreement between competitors to eliminate competition. Since such horizontal restraints are per se illegal, the court held, the Abbott-Geneva agreement must be considered per se illegal.

To avoid per se treatment, the defendants argued that the challenged provision was reasonably ancillary to the following pro-competitive qualities of the agreement: (1) the agreement permitted Abbott to continue to exploit their patent and minimize the uncertainty regarding the outcome of the patent litigation until the Federal Circuit made a final ruling; (2) the agreement allowed Geneva to enter the market long before the expiration of the '207 patent in 2014; (3) the agreement preserved Geneva's opportunity to eliminate the '207 patent altogether; and (4) the agreement was consistent with the policies underlying the Hatch-Waxman regulatory regime. Observing that once a naked restraint of trade is found, pro-competitive justifications should not be considered, the court nevertheless addressed these points in summary fashion as "part of the threshold inquiry of whether the Agreement constitutes a naked restraint of trade."

The court disposed of the first proffered pro-competitive quality of the agreement by noting that the agreement permitted Abbott to exploit the '207 patent regardless of its validity or Abbott's likelihood of succeeding on the merits. This feature of the agreement was thus clearly not pro-competitive. The court was unconvinced by the second proffered justification because, due to the high chance that the patent would be ruled invalid, Abbott's right to enforce the patent until 2014 was dubious as of the time the agreement was made. The court rejected the third proffered justification because the defendants did not show why the agreement was necessary to preserve Geneva's preexisting right to challenge Abbott's patent. Finally, the court rejected the fourth proffered justification by observing that the Hatch-Waxman Act does not evince any intent to delay generic entry beyond thirty months after the Paragraph IV certification; indeed, Hatch-Waxman provides for a stay of FDA approval until the earlier of thirty months after the certification and a court decision on the patent at issue. Thus, the Southern District of Florida remained firmly committed to its conclusion that the "reverse" payments from patentee Abbott to generic manufacturer Geneva to stay off the market until a Federal Circuit ruling on the patent infringement litigation between them was per se illegal.

Authored by:
Carlton A. Varner
213-617-4146
CVarner@sheppardmullin.com

and

Anik Banerjee
213-617-4124
ABanerjee@sheppardmullin.com

On November 2, 2004, California voters approved Proposition 64 which significantly limits lawsuits brought under California's Business and Professions Code § 17200, known as the Unfair Competition Law (the "UCL") and for false advertising under Business and Professions Code § 17500 ("False Advertising Law").

Under California's Constitution, Proposition 64 became effective on November 3, 2004. Since that time, there has been a substantial amount of litigation to determine whether or not the limits imposed by Proposition 64 apply to pending cases or whether those limits apply only to lawsuits filed after the election. So far, most trial courts have found that Proposition 64 applies to pending cases, though a minority of courts have found that it does not. The California Supreme Court has yet to rule on this issue.

This article will discuss (1) the limits imposed by Proposition 64, (2) the current debate over whether Proposition 64 applies to pending cases, and (3) the status of existing challenges in the appellate courts.

What Does Proposition 64 Do?

Prior to Proposition 64, any private person could file a lawsuit alleging unlawful, unfair or fraudulent business practices or false or misleading advertising under the UCL. Under California's UCL and the False Advertising Law, lawsuits could be filed by "any board, officer, person, corporation or association or by any person acting for the interests of itself, its members or the general public."

Under these statutory schemes, some private plaintiffs were allowed to seek injunctive and monetary relief on behalf of the "general public" without satisfying class action requirements and without having suffered any injury as a result of the challenged conduct. These plaintiffs were allowed to sue to obtain relief on behalf of others even if they never dealt with the defendant. These plaintiffs were not Good Samaritans. Rather, they were motivated by the possibility of recovering substantial attorney's fees under California's "private attorney general" statute (CCP Section 1021.5).

Furthermore, some plaintiffs were allowed to allege false advertising even if no consumer was deceived and even if they never relied upon the challenged advertising to buy any products. Some lawsuits were brought over mere typographical errors that did not cause any consumer harm. In these cases, the plaintiffs argued they only had to show that the advertising was "likely to deceive" the public.

All of this changed with Proposition 64. Proposition 64 provides that only those who have suffered "injury in fact" and lost "money or property" as a result of the challenged conduct will be allowed to sue. Plaintiffs attorneys will not be allowed to sue in the name of friends, secretaries and spouses or others who suffered no injury and did not deal with the defendant.

Further, the requirement of showing "injury in fact" and loss of "money or property" will limit questionable false advertising claims brought by private parties. After Proposition 64, private plaintiffs will have to show more than that the challenged advertising was "likely to deceive." Private plaintiffs now will have to show that they suffered "injury in fact" and "lost money or property" as a result of the false advertising.

Proposition 64 also clearly eliminates representative actions on behalf of the "general public." Under Proposition 64, the plaintiffs will need to satisfy existing class action requirements in order to obtain any relief on behalf of any other person.

Proposition 64 does not affect lawsuits brought by public prosecutors such as the California Attorney General or District Attorneys. In fact, Proposition 64 could enhance the ability of public prosecutors to bring actions for unfair competition and false advertising because it provides that all civil penalties collected by public prosecutors can only be used to enforce consumer protection laws.

The Current Debate

Proposition 64 was passed to end the prosecution of lawsuits under the UCL and False Advertising Law on behalf of the "general public" and without any showing of injury or lost money or property. Defense lawyers immediately recognized that the rationale and wording of Proposition 64 applied to pending cases as well as future lawsuits. After all, why would the voters have chosen to end lawsuits characterized as frivolous by Proposition 64, but allow pending cases to continue unabated?

The first challenges to pending lawsuits were asserted the day after the election and the approval of Proposition 64. Defense lawyers argued that, because Proposition 64 repealed a statute, that statutory repeal applied to pending cases. Defense lawyers also argued that Proposition 64 should apply retroactively because it made a "procedural change" to existing law. Either argument would apply Proposition 64 to pending cases and would require dismissal of all cases that did not meet the new standing requirements.

The statutory repeal argument is well-settled in California. Although statutes normally operate prospectively, "when a pending action rests solely on a statutory basis, and when no rights have vested under the statute, 'a repeal of such a statute without a saving clause will terminate all pending actions based thereon.'" (Governing Bd. v. Mann (1977) 18 Cal.3d 819, 829. Where a statutory claim or remedy is withdrawn by an "amendment or repeal" that contains no saving clause, "the new statutory scheme" is properly "applied to pending actions without triggering retrospectivity concerns." (Brenton v. Metabolife Int'l, Inc. (2004) 116 Cal.App.4th 679, citation omitted; accord, Physicians Com. for Responsible Medicine v. Tyson Foods, Inc. (2004) 119 Cal.App.4th 120, 125 ["repeal" of statutory remedy or claim "presents entirely distinct issues from that of the prospective or retroactive application of a statute"]; Younger v. Superior Court (1978) 21 Cal.3d 102, 109-110 [the repeal of a purely statutory claim or remedy must be applied to all pending cases, unless the repealing or amending statute contains a "saving clause".) Proposition 64 did not have a savings clause.

Defendants also argued that, even if the Statutory Repeal arguments did not prevail, Proposition 64 should be applied to pending cases under the retroactivity analysis. Where application of a new provision is "procedural in nature," the "rule [that] a statute should be construed as not operating retroactively absent a clear legislative direction does not apply." (Kuykendall v. State Bd. of Equalization (1994) 22 Cal.App.4th 1194, 1211 fn. 20.)

The plaintiffs have tried to frame the issue as whether Proposition 64 should be retroactive. According to the plaintiffs, the ordinary rule is that statutory amendments are not retroactive and are presumed to operate prospectively unless there is an express declaration of retroactivity or a clear indication of that retroactivity was intended. The plaintiffs rely principally on Tapia v. Superior Court (1991) 53 Cal.3d 282, 287 and Evangelatos v. Superior Court (1988) 44 Cal.3d 1188.

In addition to dealing with whether Proposition 64 applies to pending cases, the trial courts and the courts of appeal have grappled with whether to allow plaintiff's attorneys leave to amend to add an injured plaintiff or to add class allegations. In most cases, leave to amend should be denied because adding a new plaintiff would be like starting a case over again from the most part. In most cases, there would be more prejudice to keeping the existing case open, and there should be no prejudice to filing a new case. Nevertheless, it is likely that whether leave to amend is appropriate will depend on the facts and circumstances of each case.

The Current Status

Several trial courts have ruled on whether Proposition 64 applies to pending cases. At least 13 cases have determined that Proposition 64 applies to pending cases. These decisions were rendered by Superior Courts in Los Angeles, San Francisco, San Mateo, San Bernardino, San Diego, and Orange Counties. Only 6 trial courts are known to have ruled that Proposition 64 does not apply to pending cases. The rulings refusing to apply Proposition 64 to pending cases were issued by Superior Courts in Sacramento, Stanislaus, San Bernardino, San Francisco and Orange Counties. A sampling of the reasoning of a few of these cases follows:

In the Bloussant Cases (San Bernardino Case No. JCCP No. 4336), the trial court applied Proposition 64's new standing requirements to a pending case and granted the defendant's motion for judgment on the pleadings. The court based its ruling on the Statutory Repeal argument discussed above and found no reason to discuss retroactivity or legislative intent.

By contrast, in California Law Institute v. Visa USA, Inc., (San Francisco Case No. CGC-03-421180), the trial court denied the defendant's motion for judgment on the pleadings. The court reasoned that "a new ballot proposition is presumed to operate prospectively unless there is either an express declaration of retroactivity or a clear indication that the electorate intended otherwise." The court relied heavily on a quote from Brenton and Tapia which stated that it is "the effect of the law, not its form or label, that is important for the purposes of this analysis." After acknowledging that that Proposition 64's standing limits may be procedural and that the Mann case supported the defendant's position, the trial court nevertheless ruled that Proposition 64 would not be applied because doing so would have the "effect" of dismissing the action. The court found nothing in the language of the initiative to support retroactive application.

In Spielholz v. Los Angeles Cellular Telephone Co. (Los Angeles Case No. BC186787), Judge McCoy granted the defendant's motion for judgment on the pleadings and ruled that Proposition 64 applies to pending cases. The court based its ruling on the Statutory Repeal line of cases represented by Younger and Mann.

As can be seen, the California Courts of Appeal and Supreme Court likely will have to resolve this issue. There are at least two cases pending in the Supreme Court which may address whether Proposition 64 applies to pending cases. In one of those cases, review was granted and briefing was submitted on the Proposition 64 issue. The petition for review is pending in the other case.

There are at least 9 cases pending in the Courts of Appeal which have received briefing on the Proposition 64 issue. Eight of those cases are pending in the Fourth Appellate District. One other case is pending in the Third Appellate District. At least two of the cases pending in the Fourth Appellate District have been briefed, argued and submitted and are awaiting a ruling. Two cases in the Courts of Appeal, one in the Second District and the other in the Fourth District, have expressly refused to rule on whether Proposition 64 applies to pending cases even though those issues were fully briefed.

The first appellate decisions have come down and, like the trial courts, are split on whether Proposition 64 should apply to pending cases. In Californians for Disability Rights v. Mervyn's LLC, Case No. A106199 (February 1, 2005), the First Appellate District held that Proposition 64 did not apply to pending cases. The Mervyn's case involved a plaintiff that would have lacked standing under Proposition 64. The Court held that a statute is presumed to operate prospectively absent a clear indication by the voters to the contrary. Relying principally on Tapia and Evangelatos, the Court held that there was no indication that Proposition 64 was intended to be retroactive. The Court did not fully discuss the statutory repeal argument except to note that the statutory repeal doctrine conflicted with its analysis. The result in Mervyn's may be explained by the procedural posture of that case on appeal. In Mervyn's, the plaintiff obtained a judgment in its favor after a trial prior to the effective date of Proposition 64. The Mervyn's court seemed to place significance on this fact, believing that applying Proposition 64 to that case would be a retroactive application of the law. The Court ignored that in both Younger and Mann, the Supreme Court had no difficulty applying the Statutory Repeal doctrine in the same procedural posture.

On February 9, 2005, the Second Appellate District answered Mervyn's in Branick v. Downey Savings & Loan Association, Case No. B172981 (February 9, 2005). The Second Appellate District applied the Statutory Repeal doctrine to hold that Proposition 64 does apply to pending cases. The Court relied on Brenton and Mann and also cited Government Code § 9606 which states that "[p]ersons acting under any statute act in contemplation of [the] power of repeal." The Court noted that it disagreed with the reasoning in Mervyn's. The procedural posture in Branick also may have helped the outcome. In Branick, the trial court entered judgment in favor of defendants based on a motion for judgment on the pleadings.

In Benson v. Kwikset (Case No. G030056) (February 10, 2005), the Fourth Appellate District, like the Second Appellate District, held that Proposition 64 applies to pending cases. Like Branick, the Benson case relied on Younger and Mann for its holding. The significance of the Benson decision is that, like Mervyn's, it involved an appeal from a trial court's judgment in favor of the plaintiff. Unlike Mervyn's, the Fourth Appellate District did not let the procedural posture affect the outcome. The Court reversed the trial court's judgment even though it had previously upheld it on appeal in 2004. The Benson case properly notes that the Mervyn's decision misunderstood and failed to properly apply the Statutory Repeal Doctrine.

Like the trial courts, the Courts of Appeal have issued conflicting rulings on whether Proposition 64 applies to pending cases. The Supreme Court will need to resolve the conflict presented by Mervyn's, Branick and Benson.

Authored by:
James M. Burgess
310-228-3722
JBurgess@sheppardmullin.com

and

Robert S. Beall, II
714-424-2844
RBeall@sheppardmullin.com

On January 6, the Commission ruled that Chicago Bridge & Iron Company ("CB&I") illegally acquired Pitt-Des Moines, Inc.'s ("PDM") Engineered Construction and Water Divisions. The FTC did not initially investigate the deal when the parties filed their Hart Scott Rodino notification forms. Eight months after the HSR waiting period expired, the FTC challenged the merger administratively before an FTC Administrative Law Judge ("ALJ"). The CB&I case serves as a powerful reminder that the expiration of the HSR waiting period does not mean that the transaction has been approved by the FTC or cleared from a potential challenge.

According to Commissioner Swindle's thorough and well-reasoned ruling, on behalf of a unanimous Commission, the acquisition provided CB&I with a monopoly or near-monopoly position in each of four relevant markets and violated Section 7 of the Clayton Act and Section 5 of the FTC Act. To restore competition as it existed prior to the merger, the Commission ordered CB&I to create two separate, stand-alone divisions capable of competing in the relevant markets and to divest one of those divisions within six months. The Commission's goal is to restore competition as it existed prior to the merger.

Background

CB&I completed the acquisition of PDM assets on February 7, 2001. On October 25, 2001, the Commission filed a complaint challenging the acquisition. The complaint alleged, among other things, that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States: liquefied natural gas storage tanks; liquefied petroleum gas storage tanks; liquid atmospheric gas storage tanks; and thermal vacuum chambers. On June 12, 2003, the initial decision by the ALJ held that the deal was anticompetitive and ordered CB&I to divest all assets obtained in the acquisition. Both CB&I and counsel supporting the complaint appealed the initial decision, and the case was reviewed by the full Commission. The Commission upheld the initial decision's finding that the acquisition was illegal, but differed with that decision's analysis and with the decision's final relief.

At the time and prior to the 2001 transaction, CB&I and PDM competed against each other as the two leading U.S. producers of large, field-erected industrial and water storage tanks and other specialized steel-plate structures. According to the Commission's opinion, the acquisition substantially lessened competition in four relevant product markets in the United States. The Commission held that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States: liquefied natural gas storage tanks; liquefied petroleum gas storage tanks; liquid atmospheric gas storage tanks; and thermal vacuum chambers.

Opinion

According to the unanimous opinion of the Commission, this case involves the acquisition of a company by its closest competitor in four relevant markets in the United States. CB&I and PDM were the dominant suppliers in each of the four relevant markets prior to the acquisition. The Commission stated that the acquisition provided CB&I with a monopoly or near-monopoly position in each of the markets. It also ruled that entry into each of the relevant markets is not only difficult, but is also unlikely to happen within a timely manner to restore the competition lost from the acquisition. The Commission stated that the size of the commerce affected by an acquisition is not a factor in determining the legality of a merger. Moreover, the FTC found that the customer testimony demonstrated that customers could not constrain a price increase despite the parties' claims that the customers were sophisticated and powerful enough to constrain prices.

As did the ALJ's initial decision, the Commission's order requires a divestiture to restore competition as it existed prior to the merger. The order differs from the relief proposed in the ALJ's initial decision because the Commission believed that the relief sought in the initial decision was unlikely to restore a viable competitor to the market. Specifically, the Commission ordered CB&I to reorganize its business unit related to the relevant products into two separate, stand-alone subsidiaries, and to divest one of those subsidiaries within six months. Rather than giving the responsibility to a third party trustee, who would have to learn the business, the Commission explains that CB&I is in the best position to know how to create two viable entities from its current business.

The order also requires CB&I to divide its current customer contracts between the two newly-created subsidiaries, and to facilitate the transfer of employees so that each subsidiary has the technical expertise to complete the customer contracts assigned to it and to bid on and complete new customer contracts. In particular, CB&I must provide incentives for employees to accept offers of employment from the acquirer and remove contractual impediments that would prohibit employees from accepting such offers. The Commission appointed a monitor trustee to oversee the divestiture and, among other things, to assess the need for CB&I to provide technical assistance and administrative services to the acquirer. The Commission also reserved the right to appoint a divestiture trustee in the event that CB&I does not accomplish the divestiture in six months.

Conclusion

The decision is noteworthy for several reasons. First, it demonstrates that the expiration of the HSR waiting period should not be interpreted to mean that the Commission has approved the deal. Second, the Commission can and will challenge a consummated deal if it determines that the deal is anticompetitive. Third, the FTC has a particular interest in post-acquisition competitive effects of consummated mergers. Fourth, the FTC will seek a complete divestiture to remedy an anticompetitive merger, whether it is integrated or not. Therefore, parties to a consummated deal, particularly transactions that avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and monitor closely post-acquisition conduct.

Authored by:
Andre Barlow
202-218-0026
ABarlow@sheppardmullin.com

An interesting development has occurred internationally regarding the issue of retail shelf space control and management. On January 5, Israeli Antitrust Authority ("IAA") General Director Dror Strum announced the finalization of rules that prohibit, among other things, slotting allowances and category captaincy arrangements between large retailers and suppliers. Mr. Strum originally announced these rules in May 2003, but had provided time for industry to appeal.

Mr. Strum's original report laid out major requirements for change in Israel's highly concentrated food manufacture and retail industries. His report issued from the perspective that all monopoly should be prevented - not just monopoly used to unreasonably restrain competition. He also noted that large grocery retail chains' profit margins were shooting up far in excess of the CPI and that the supplier end was characterized by dominance by one or two suppliers in several staple food categories. Moreover, an investigation conducted by the IAA found serious breaches of Israel's competition law being enforced by formal and informal agreements among suppliers and retailers. Several specific instances cited included:

• Retailers agreeing not to introduce private label brands at the behest of competing dominant suppliers;
• Agreements between retailers and dominant suppliers that the supplier's product would occupy more than half of the shelf space devoted to that category of product;
• Retailers agreeing not to permit competing brands to hold sales at the same time as a dominant supplier's sale, and the supplier's reciprocal agreement not to lower prices at other retailers; and
• Vertical minimum resale price maintenance and chargebacks by retailers for local price competition.

These and other anticompetitive practices, Strum concluded, required sweeping reform to prevent further concentration and increases in barriers to entry. The report's specific guidelines are as follows:

1. Retailers are to determine independently the quantity and identity of suppliers whose products they will display and sell. Retailers may not accept one supplier's payments or discounts for the retailer's agreement to limit access by competing suppliers.
2. Retailers are to determine independently whether to sell private label products.
3. Retailers may not agree to allocate to one supplier more than half the display area designated for a particular product category in which the supplier is dominant. Moreover, retailers may not grant exclusive access to off-shelf displays to one supplier for more than a brief period.
4. Citing Conwood and Israel's unusually concentrated food markets, the report forbids category captaincy - i.e., category management by a supplier. Only retailers may perform category management. Only retailers or consultants employed by retailers (and not connected to suppliers) may prepare retail displays.
5. Discounts for meeting sales goals are strictly limited, and suppliers cannot price discounted units below cost.
6. Retailers and suppliers may not enter into contracts setting the supplier's (or its competitor's) market share at the retailer.
7. Retailers and suppliers cannot agree to limit competing suppliers' or retailers' responses to sales held by the contracting retailer or supplier.
8. The report bans resale price maintenance, with an exception allowing suppliers to set maximum retail prices that are lower than the price previously afforded for the same product. Moreover, suppliers may use MSRP's for newly launched products.
9. Retailers may no longer demand that suppliers intervene with competing retailers regarding the competitors' prices. Moreover, retailers may no longer charge "chargebacks for local price competition," i.e., demand payments from suppliers to make up for the retailer lowering its price to meet local competition.
10. Retailers may no longer provide to suppliers information on other suppliers' wholesale prices, sales terms, or other similar information; and suppliers may no longer provide to retailers information about competing retailers' purchase quantities, etc.

Note that the IAA's guidelines generally apply to large retail chains and dominant suppliers only. The report defines "large retail chain" as any of four specific Israeli retail chains, and "dominant supplier" as any supplier that is a monopolist or that has supplied more than half of the general products of that type to a large retailer in the previous calendar year. Retailers and suppliers affected by the guidelines may approach the IAA for approval of individual agreements if they can show a pro-competitive effect.

A recent report from "Globes" newspaper states that Strum and the heads of Israel's food companies have further agreed on a 45-day suspension of the ruling for additional negotiation. If the negotiations do not bear fruit, retailers and suppliers will have a six-month grace period during which to prepare for enforcement.

Authored by:
Jane Langdell Robinson
213-617-4261
JRobinson@sheppardmullin.com

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") requires all drug companies, including brand-name companies and generic makers, to file certain agreements with the FTC and DOJ. Under the Act, whose filing requirements began on January 7, 2004, drug companies must file all brand-generic settlement agreements with the antitrust regulators within 10 days of their execution. Typically, these settlement agreements involve resolutions of patent disputes between brand-name companies and their generic competitors, and, in some instances, disputes between two generic competitors over issues that typically relate to exclusivity for first-to-file generic products.

On January 7, 2005, the Commission released a summary of the settlement agreements filed during fiscal year 2004 (ending September 30, 2004). It is the first report publicly issued by the Commission since the law became effective. The summary identifies 22 agreements filed by generic and branded drug manufacturers. The summary provides information about the settlements using criteria similar to those employed by the Commission in its earlier Generic Drug Study, including whether the agreements:

• were between brand-generic or generic-generic manufacturers;
• resolved patent litigation;
• restricted generic entry;
• involved any payments between the parties; and
• involved first-to-file or subsequent generic file issues.

According to the FTC summary, 19 of the 22 agreements filed in fiscal year 2004 involved agreements between brand and generic manufacturers, with the remaining three occurring between two generic manufacturers. The summary data show that 14 of those 19 agreements resolved patent infringement litigation between brand and generic manufacturers. No settlement included a payment from the brand to the generic manufacturer in exchange for the generic's agreement not to market its product.

In particular, the summary noted, among other things, that 9 of the 14 settlements "did not restrict generic entry either because (a) the generic was already on the market and the settlements did not require the generic to withdraw its product (three agreements), (b) the agreements allowed the generic to market its product upon receiving FDA approval (five agreements), or (c) the brand agreed to supply the generic with product within three months of the agreement (one agreement)." Moreover, of these 9 agreements, three had no payments between the parties, two required a royalty from the generic to the brand, and four had payments from the brand to the generic.

The Medicare Prescription Drug filing program appears to be successful in its first year of operation. It provides the FTC/DOJ with an effective mechanism for early review and detection of potentially anticompetitive agreements between brand and/or generic manufacturers, an area that has been of great interest to the FTC for a long time.

Authored by:
Robert W. Doyle, Jr.
202-218-0030
RDoyle@sheppardmullin.com

On January 14, 2005, the Eastern District of Pennsylvania enjoined the Antitrust Division from indicting and prosecuting Stolt-Nielsen S.A., Stolt-Nielsen Transportation Group, Ltd and Richard Wingfield. The decision is noteworthy because the Antitrust Division had taken the unusual step of attempting to indict and prosecute two corporations and an individual who participated in the Antitrust Division's corporate amnesty program. This was reportedly the first time that the DOJ had tried to revoke an immunity agreement. The district court basically held that the DOJ got what it bargained for when it gave the company and its employees immunity from prosecution for potential antitrust violations in exchange for information that led to convictions of other firms involved in a cartel.

The Amnesty Program is designed to encourage companies involved in cartels to come forward with information about the illegal activity. The first company to come forward with details regarding the anticompetitive scheme gains full immunity from criminal prosecution. The district court found that the two corporations and the individual fulfilled their obligations under an amnesty agreement that produced successful prosecutions and uncovered an illegal cartel in the ocean parcel tanker business.

After counsel for Stolt-Nielsen discovered that the company was possibly engaged in a customer allocation scheme, the decision was made to seek amnesty and to determine whether Stolt-Nielsen would receive leniency under the Amnesty Program. In this situation, counsel for Stolt-Nielsen contacted the DOJ on November 24, 2002 to inquire whether the DOJ had opened an investigation into the parcel tanker industry and whether the DOJ had given a marker. A marker is provided to the first company to come forward to hold its place in line until the company completes its internal investigation into the potential anticompetitive activity.

On December 17, 2002, the DOJ provided the company with a marker indicating that it was first in line for the Amnesty Program. The company and the DOJ executed a letter agreement formalizing the company's and all of its employees and executives immunity from prosecution on January 15, 2003. After obtaining convictions and fines, the DOJ attempted to revoke the agreement, contending that Stolt-Nielsen misrepresented when it had ceased its illegal activities. According to the DOJ, the company said it stopped violating the law in March 2002, but the company and its employees continued the illegal activity after that date. The only date, however, that was referenced in the letter agreement was January 15, 2003, the date it was signed. In that agreement, the DOJ agreed not to prosecute the company as well as its employees or executives for criminal activity, which may have occurred before the date of the letter. Nowhere in the agreement is there a reference to March 2002.

Stolt-Nielsen, its parent company, and Mr. Wingfield filed a civil suit in the U.S. District Court for the Eastern District of Pennsylvania seeking an injunction against the indictment and prosecution. The Eastern District of Pennsylvania ordered the Antitrust Division to honor what was memorialized in its written agreement regardless of whether any oral or any other tacit understanding of what the Division contends was meant during negotiations. Therefore, the district court ordered that the Antitrust Division was enjoined from indicting or prosecuting the two companies and Mr. Wingfield for any violation of the Sherman Act up to and including January 15, 2003, in the parcel tanker industry involving transportation to and from the United States.

Authored by:
Andre Barlow
202-218-0026
ABarlow@sheppardmullin.com

• On February 2, Scott D. Hammond was appointed to serve as the Deputy Assistant Attorney General for Criminal Enforcement for the Antitrust Division. Mr. Hammond replaces James M. Griffin, who retired from the DOJ in December 2004. Mr. Hammond will have supervisory authority over the Antitrust Division's domestic and international criminal antitrust investigations and prosecutions. As Deputy Assistant Attorney General for Criminal Enforcement, he will be responsible for reviewing all recommendations to open criminal investigations or bring criminal charges. He will also be responsible for reviewing all requests for amnesty under the Antitrust Division's Corporate and Individual Leniency Program. Mr. Hammond has served as the Director of Criminal Enforcement for the Division since 2000.

• On January 31, SBC Communications Inc. ("SBC"), the second-largest regional phone company in the nation, said it would buy AT&T Corp. ("AT&T"), the biggest U.S. long-distance carrier, for about $16 billion, making SBC the largest U.S. telecommunications company and ending AT&T's independence after suffering a two-decade decline after losing its U.S. monopoly. The Antitrust Division is expected to review the deal.

• On January 21, it was reported that Sprint Corporation and Nextel Communications filed documents with the Department of Justice and the Federal Trade Commission that would initiate the DOJ's review of the deal. The filings are required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

• On January 21, Ionics, Incorporated ("Ionics") announced that the 30-day waiting period under the HSR Act relating to Ionics' proposed acquisition by General Electric Company expired.

• On January 18, the Antitrust Division of the U.S. Department of Justice issued a request for additional information and documentary material (often referred to as a "Second Request") to Toppan and DuPont Photomasks regarding the proposed transaction. The information request was issued under notification requirements of the HSR Act. They reported that they intend to cooperate fully with the Department of Justice and respond promptly to the Second Request.

• On January 12, Zeon Chemicals L.P., a Kentucky based, wholly owned subsidiary of Zeon Corporation of Tokyo, agreed to plead guilty and to pay a $10.5 million criminal fine for participating in a conspiracy to fix prices of synthetic rubber used to manufacture a variety of products including automotive parts. The charge is part of an ongoing investigation by the Antitrust Division's Sand Francisco Field Office and the FBI.

• On January 10, Scott Hammond, Deputy Assistant Attorney General for Criminal Enforcement in the DOJ's Antitrust Division, gave a speech at the ABA's Mid-Winter Meeting, focusing on recent developments in the antitrust division's criminal enforcement program. He opened by stating "The detection, prosecution, and deterrence of cartel offenses is the highest priority of the Antitrust Division. The Division places a particular emphasis on combating international cartels that target U.S. markets because of the breadth and magnitude of the harm that they inflict on American businesses and consumers. This enforcement strategy has succeeded in cracking dozens of international cartels, securing convictions and jail sentences against culpable executives, and obtaining record-breaking corporate fines."

Authored by:
Andre Barlow
202-218-0026
abarlow@sheppardmullin.com

• On January 25th, the Commission, by a vote of 5-0, authorized publication of a Federal Register notice announcing the revised thresholds for the Hart-Scott-Rodino ("HSR") Antitrust Improvements Act of 1976 required by the 2000 amendments to Section 7A of the Clayton Act. Section 7A(a)(2) requires the FTC to revise the jurisdictional thresholds annually, based on the change in gross national product, in accordance with Section 8(a)(5). Certain related thresholds and limitations in the HSR rules also were adjusted by the notice. The notice will be published in the Federal Register shortly and become effective 30 days after publication. The revised thresholds will apply to all transactions that close on or after the effective date of this notice. The new "size of transaction" and "size of person" thresholds are as follows:

Subsection Of 7a	Original Threshold	Adjusted Threshold
7A(a)(2)(A)	$200 million	$212.3 million
7A(a)(2)(B)(i)	$50 million	$53.1 million
7A(a)(2)(B)(i)	$200 million	$212.3 million
7A(a)(2)(B)(ii)(I)	$10 million	$10.7 million
7A(a)(2)(B)(ii)(I)	$100 million	$106.2 million

Subsection Of 7a	Original Threshold	Adjusted Threshold
7A(a)(2)(B(ii)(II)	$10 million	$10.7 million
7A(a)(2)(B)(ii)(II)	$100 million	$106.2 million
7A(a)(2)(B)(ii)(III)	$100 million	$106.2 million
7A(a)(2)(B)(ii)(III)	$10 million	$10.7 million

• On January 21, the Commission approved the publication of a Federal Register notice announcing changes in the two threshold figures that define when it is unlawful for an individual to serve as an officer or director of two or more competing corporations. Under the new interlocking directorate thresholds, effective immediately, Section 8 of the Clayton Act is applicable to such arrangements (with certain exceptions) if each of two companies has capital, surplus, and undivided profits in excess of $21,327,000, and the competitive sales of each corporation exceed $2,132,700. Section 8 of the Clayton Act charges the FTC with preventing and eliminating unlawful interlocking directorates. A 1990 amendment to Section 8 requires the FTC to adjust the thresholds that trigger the prohibition - originally set at $10 million and $1 million, respectively - each year, based on the change in the Gross National Product. The Commission vote to adjust the threshold levels was 5-0.

• On January 21, Magellan Midstream Partners, L.P. ("Magellan") filed a petition requesting the Commission's approval of the proposed divestiture of certain assets recently acquired from Shell Oil Company ("Shell"). Under the terms of the FTC's consent order concerning Magellan's acquisition of certain pipeline and terminal assets from Shell, Magellan is required to divest a gasoline terminal located in Oklahoma City, Oklahoma. Through this application, Magellan is requesting Commission approval to divest the former Shell Oklahoma City Terminal, as that asset is defined in the order, to SemFuel, L.P. The FTC will accept public comments on the proposed divestiture for 30 days, until February 19, 2005, and thereafter will decide whether to approve it.

• On January 14, the Commission approved a petition for proposed divestiture received from General Electric Company ("GE") and related to the FTC decision and order regarding GE's acquisition of InVision Technologies ("InVision"). Under the terms of the order, GE must divest its "X-Ray Nondestructive Technology ("NDT") Business," as that term is defined in the order, to a Commission-approved buyer. In its petition, GE requested approval to divest the X-ray NDT Business to Andlinger & Company, Inc. ("Andlinger"). By a vote of 3-0-2, with Commissioner Pamela Jones Harbour recused and Commissioner Jon Leibowitz not participating, the Commission approved the proposed divestiture to Andlinger.

• On January 11, the Commission approved the appointment of Quantic Regulatory Services, LLC ("Quantic") as interim monitor in the matter concerning Cephalon, Inc.'s ("Cephalon") acquisition of Cima Labs, Inc., and has approved an interim monitor agreement between Cephalon and Quantic. Under the consent order allowing this transaction, the companies are required to license and deliver to Barr Laboratories, Inc. ("Barr") certain intellectual property and business information and know-how related to the drug Actiq (oral optoid fentanyl). Due to the complexity of successfully transferring these assets to Barr and the need to ensure this transfer is completed in a timely manner, Cephalon has agreed to the appointment of the interim monitor and the monitor agreement. The Commission vote appointing the interim monitor and approving the interim monitor agreement was 4-0-1, with Commissioner Pamela Jones Harbour recused.

• On January 4, the FTC granted approval for Enterprise Products Partners L.P. ("Enterprise") and Dan L. Duncan to divest the Enterprise Propane Storage Interest in Hattiesburg, Mississippi, to Enbridge Midcoast Energy, L.P., a wholly owned subsidiary of Enbridge Energy Partners, L.P. ("Enbridge"). Pursuant to a September 2004 Commission consent order with Enterprise and Dan L. Duncan, arising out of Enterprise's $13 billion merger with GulfTerra Energy Partners ("GulfTerra"), Enterprise and Duncan are required to divest these assets, subject to the FTC's approval, by December 31, 2004. The order also requires Enterprise and Duncan to divest either Enterprise's 51 percent interest in the Starfish Pipeline Company, LLC, or its 100 percent-owned natural gas pipeline in the Gulf of Mexico by March 31, 2005. The Commission vote approving the divestiture of the Enterprise Propane Storage Interest to Enbridge was 5-0.

Authored by:
Robert W. Doyle, Jr.
202-218-0030
rdoyle@sheppardmullin.com

• The Federal Trade Commission issued its seventh quarterly announcement summarizing the agency's continued enforcement against telemarketing fraud and abuse on January 28. The quarterly enforcement update lists significant case developments in 22 federal court cases between November 2004 and January 2005. A Web page containing the "Quarterly Update for January 2005" also contains a list of enforcement actions involving telemarketing that have seen developments since October 1, 2002, with links to press releases related to each of these actions. The Web page now contains information about 147 actions involving the use of the telephone to market goods or services. This information covers cold-call outbound telemarketing, as well as inbound calls generated from advertisements or other solicitations to purchase products or services. The quarterly enforcement update issued last month can be found on the FTC's Web site by clicking here.

• Mexico's consumer protection agency, the Procuraduría Federal del Consumidor, and the Federal Trade Commission signed a bilateral Memorandum of Understanding ("MOU") on January 27 to promote enhanced cooperation in the fight against cross-border fraud. This memorandum marks the first time the FTC has signed a consumer protection MOU with a non-English-speaking nation. The signing took place in Washington, DC. The MOU strengthens the close relationship between the United States and Mexico and will facilitate greater law enforcement coordination in consumer protection matters affecting both nations. This memorandum is a "best efforts" agreement - it is not legally binding and does not alter either country's existing consumer protection laws.

• On January 24, the FTC announced settlements with three individuals responsible for a scheme that directed an international telemarketing network to defraud hundreds of thousands of consumers through the deceptive telemarketing of bogus advance-fee credit cards. These individuals are banned from telemarketing for life as part of federal court orders settling Federal Trade Commission charges. Another alleged leader of this massive scam, who has a prior history involving telemarketing fraud, also agreed to a lifetime telemarketing ban. The Assail Telemarketing Network engaged in more than $100 million in deceptive telemarketing sales, including the sale of hundreds of thousands of fraudulent advance-fee credit card packages using names such as Advantage Capital, Capital First, and Premier One. The FTC alleged in its complaint that the defendants operated the advance-fee credit card scam through a network of telemarketing boiler rooms, Canadian front men, and outsourced fulfillment and customer service centers. The FTC also alleged that the defendants' telemarketers contacted consumers with poor credit records and told them that they were guaranteed to receive a MasterCard for an advance fee. Consumers, however, did not receive a MasterCard or any other legitimate payment device. The FTC's complaint alleged that the defendants maintained their own telemarketing boiler rooms and also kept contract boiler rooms in the United States, Canada, India, and the Caribbean. Three of the settlements were with officers of Assail, Inc.: Joel Best, Vice President; Michael Henriksen, Chief Financial Officer; and Clifford Dunn, General Manager. The fourth settlement was with Lawrence Silverman, who the FTC alleged played a critical role creating the deceptive corporate structure of the scheme, and his company, defendant Lamar Holdings, Inc. ("Lamar"). The FTC alleged that each of these defendants played important roles in planning and implementing the scam.

• The Federal Trade Commission, the Orange County (California) District Attorney, and the California State Attorney General announced on January 18 that they had reached settlements with Body Wise International, Inc. ("Body Wise"), an Orange County business, resolving allegations that Body Wise deceptively advertised the "AG-Immune" dietary supplement. The FTC alleged that Body Wise made unsubstantiated claims that AG-Immune prevents, treats, or cures numerous diseases, including cancer, HIV/AIDS and asthma, in violation of a 1995 FTC order. The FTC's proposed settlement with Body Wise, if approved by the court, requires Body Wise to pay a $2 million civil penalty to the FTC. California's proposed settlement would require Body Wise to pay the State of California an additional $1.58 million in penalties and costs for allegedly violating the State's Business and Professions and Health and Safety Codes. The FTC also reached a settlement with Jesse A. Stoff, M.D., an expert endorser of AG-Immune, to resolve allegations that he made deceptive claims for the product. The FTC complaint names Body Wise International, located in Tustin, California, and Jesse A. Stoff, M.D., a resident of Tucson, Arizona. According to the complaint, in April 2000, Body Wise began marketing AG-Immune, a dietary supplement containing "antigen infused dialyzable bovine colostrum/whey extract" or "AI/E-10." Body Wise marketed this and other AI/E-10 products directly to consumers and through a network of "consultants" who marketed and sold Body Wise products to consumers. Body Wise sold AG-Immune for approximately $50 for a one-month supply, and had over $14 million in sales.

Authored by:
Camelia Mazard
202-218-0028
CMazard@sheppardmullin.com

• On January 26, the UK's Competition Commission concluded that the acquisition by Emap plc ("Emap") of ABU Building Data Limited ("ABU") will result in a substantial lessening of competition with the merged entity controlling approximately 70% of the supply of construction project information and contract data. As a result, Emap will be required to sell the ABU business. This is the third merger that has been prohibited under the UK's Enterprise Act 2002. In the other two cases, the mergers had not been completed. This is, therefore, the first time that the Competition Commission has sought to impose a divestment undertaking.

• On January 26, Ms. Neelie Kroes, the European Competition Commissioner, outlined her intention to reform the EU's state aid rules. She criticized the bail-out of large, failing national companies despite the possibility that a failure of government-injected funds in such cases may lead to large scale job losses. "State aid that is given to a lame duck [company] without initiative, without innovation, is only relief for the moment. But it is not a positive instrument for what we really want." She wants Member States to spread such aid as widely as possible and ensure that risk capital, research and development subsidies are available to a wide range of companies. In particular, she is keen for governments to invest in smaller companies which demonstrate greater growth potential. She also wants to curb richer Member States from providing subsidies to their poorer regions. Her proposals will likely lead to conflict with the larger EU countries who have previously battled with the Commission to ensure the funding of nationally-valued companies, for example, France's Alstom, UK's British Energy, or Germany's Landesbanken (state-owned banks). A formal paper outlining state aid reform is expected by the middle of the year.

• On January 25, Philip Lowe, the Director General of the European Commission's Competition Directorate, stated that the European Commission "may have a say" on any takeover of the London Stock Exchange ("LSE"). He announced that the Commission was in contact with the UK's Office of Fair Trading and the German Bundeskartellamt, about the possibility of a takeover of the LSE. He said that there were issues to examine in the clearing and settlement area, and efficiencies in the trading area. There is concern that the Deutsche Böurse bid centers on its ownership in Frankfurt of clearing and settlement as well as equities trading, a vertically integrated structure that is unpopular with the LSE.

• On January 24, the Italian Government was criticized for making two politicized appointments to oversee the country's antitrust authority. The antitrust authority, set up in 1990 to protect Italy's free market economy against anticompetitive practices, is generally regarded as one of the best and least politicized regulatory agencies in a country where politics, business and state administration often blend together. High profile critics of the recent appointments include former European Competition Commissioner, Mario Monti, and Giuliano Amato, a two-time prime minister. Mr. Monti stated that neither of the two appointees, Mr. Guazzaloca and Mr. Pilati, would help further the evolution of the authority into a promoter of strong competition, an area where Italy is still thought to trail the rest of Europe.

• On January 24, the European Commission cleared WPP's $1.5 billion purchase of Grey Global. WPP is the world's second largest advertising company and together with Grey Global provides marketing communications and media buying services. The Commission examined the deal closely in a number of geographic markets, but concluded that the deal would not significantly impede effective competition since there were enough rivals to ensure a competitive market, and media owners held countervailing power. The acquisition narrows the gap between WPP, a London-based firm, and Omnicom Group Inc., the world's largest advertising company by sales.

• On January 24, the Dutch competition authority, the Nederlandse Mededingingsautoriteit ("NMa") imposed fines totaling €135 million on 344 Dutch construction companies for their roles in cartel forming and colluding to overbid on public contracts for roads and waterways. The fines are the result of the second part of an investigation into the country's construction industry. The NMa said that the individual fines ranged from "several hundred thousand euros to many millions" depending on the size of the companies involved. The fine follows an earlier decision to fine 22 builders €100 million in December 2003.

• On January 24, Microsoft stated that it would not appeal a ruling by the President of the European Court of First Instance ordering the company to immediately implement antitrust sanctions imposed by the European Commission last year. Microsoft had sought to suspend the sanctions until its main appeal against the European Commission decision had been heard. The company must now offer a version of Windows without Microsoft's Media Player software, and to disclose software protocols that will allow rivals to design server software that functions smoothly with Windows-driven PCs. However, Microsoft will continue to pursue its main appeal against the merits of the Commission's antitrust decision. A decision from the European Court of First Instance is not expected for two to three years.

• On January 24, it was reported that Belgium's Economic Minster, Mr. Marc Verwilghen, asked the country's antitrust authority to investigate the pricing policies of TUI AG and Thomas Cook, Europe's top tour operators, for evidence of price fixing. The request followed a report that noted that there had been an almost simultaneous price increase from fuel surcharges during May 2004.

• On January 23, the Brazilian antitrust authority, the Conselho Administrativo de Desa Econômica ("CADE") announced a new set of criteria for the investigation of merger cases. Under the new procedures, CADE will only investigate those mergers between companies with an annual joint turnover higher than $400 million in the national market, and whose joint market share exceeds 20%. Previously, CADE investigated merger case involving companies with annual joint turnover higher than $400 million, though not necessarily limited to the national market. The changes are aimed at simplifying procedures of CADE.

• On January 21, the Spanish Government published guidelines for the reform of the Spanish competition law system. The guidelines cover the introduction of new policies such as leniency programs and the formation of a new regulator, the Comisión Nacional de Defensa Competencia, which will be given a higher degree of independence than existing regulators, and have a greater range of responsibilities, including the taking-over of merger decisions. However, the Spanish Government proposes to maintain a veto over decisions affecting certain key areas. The consultative process on the guidelines closes at the end of March.

• On January 19, Japan and Canada reached an agreement on a draft cooperation arrangement over anticompetitive activities. The agreement covers notification, cooperation, coordination, requests for enforcement activities, and consideration of important requests. When finally concluded, the agreement is expected to strengthen the enforcement of both countries' antitrust laws for international anticompetitive activities, develop cooperation between the authorities in each country, and prevent conflict regarding extraterritorial execution of jurisdiction of both parties' competition laws.

• On January 19, Czech press reported that the Czech Anti-Monopoly Office ("UOHS") imposed fines totaling the equivalent of $65 million, which included a large fine ($19 million) on six Czech financial companies. The UOHS has investigated both domestic and international companies and targeted large strategic sectors, including telecoms, financial services, heating, steelworks and cable television.

• On January 19, the European Commission fined Akzo Nobel, Atofina (now known as Arkema) and Hoechst a total of € 216.91 million for operating a cartel in the market for Monochloroacetic Acid ("MCAA") which is a chemical intermediate used in the manufacture of detergents, adhesives textile auxiliaries, and thickeners used in foods, pharmaceuticals and cosmetics. From at least 1984 to 1999, the producers of MCAA allocated volume quotas and customers, agreed to price increases, exchanged information on sales volumes and prices to monitor the cartel, and agreed on a compensation mechanism to ensure implementation of the cartel arrangements. The participants met regularly and engaged in other contracts to agree and implement the activities of the cartel. The Commission considered the infringement to be very serious due to its nature. In fixing the amount of the fine, the Commission took account of the value of the European market for the product, the duration of the infringement, the individual weight of the companies in the infringement, their overall size, and the fact that Atofina and Hoechst had previously been sanctioned for similar infringements. The Commission also had regard to the cooperation given under the Commission's Leniency Notice by some of the companies involved. Clariant received full immunity for being the first to provide evidence of the existence of the cartel to the Commission. Atofina and Akzo were granted reductions of 40% and 25% respectively for the information they provided.

• On January 15, the Financial Times reported that Ian Norris, the former chief executive of British Engineering Company, Morgan Crucible, had been arrested by London police to face extradition to the U.S. to face various charges of price-fixing. Morgan Crucible, a U.K. maker of carbon and ceramic components, and its North Carolina-based subsidiary, Morganite Inc., agreed in 2002 to pay $11 million to settle charges by the U.S. Department of Justice of conspiring to fix the price of carbon products between January 1990 and May 2000. However, a federal grand jury in Philadelphia indicted Mr. Norris, who resigned from Morgan Crucible in October 2002, and three other executives last year with obstructing the price-fixing investigation. The Financial Times said that the case indicated the DOJ's willingness to use new treaty arrangements between the U.K. and U.S. to secure the extradition of suspects.

Authored by:
Neil Ray
415-774-3269
NRay@sheppardmullin.com

• On January 31, SBC Communications Inc. ("SBC"), the second-largest regional phone company in the nation, said it would buy AT&T Corp. ("AT&T"), the biggest U.S. long-distance carrier, for about $16 billion. The combination will make SBC the largest U.S. telecommunications company and end AT&T's independence after suffering a two-decade decline after losing its U.S. monopoly. The deal marks the final chapter in the 120-year history of AT&T, the first technological giant of the modern age and the original model for telecommunications companies worldwide. It is a reunion of sorts, putting back together some of the largest pieces of the Ma Bell telephone monopoly, which was broken up in 1984. This transaction will be reviewed by both the FCC and the DOJ. In 1997, Reed Hundt, FCC chief at the time, deemed such a reunion "unthinkable." But many analysts feel the deal will probably clear that agency as well as Justice Department antitrust enforcers because the industry has changed so dramatically.

• The DOJ will not ask the U.S. Supreme Court to review a decision that struck down FCC rules that relaxed restrictions on the ownership of TV stations, radio stations and newspapers in the same market, an FCC spokeswoman said on January 27. Media interests that supported the FCC's rules nevertheless intend to file an appeal with the high court, but the absence of Bush administration support will make it harder to get the case heard. The FCC sparked a controversy in June 2003 when it adopted rules that allowed one company to own three TV stations, eight radio stations, the dominant local newspaper and cable systems in the country's largest markets. In addition, the agency permitted greater media concentration in mid-sized and small markets. Last June, a panel of the U.S. Court of Appeals for the Third Circuit in Philadelphia rejected the bulk of these FCC policies. The rules never took effect because the Third Circuit imposed a judicial stay in September 2003.

• On January 25, the FCC opened an inquiry to examine the competitive impact of rules that prevent cable systems from importing network stations from neighboring markets. Small cable operators are concerned that the inability to provide out-of-market network stations gives the in-market network stations excessive market power in negotiating carriage agreements. Last December, Congress passed a law that ordered the Commission to study the impact of four rules and to file a report with the House Energy and Commerce Committee and the Senate Commerce Committee by September 8. Congress was particularly concerned about whether the rules were harming the ability of rural cable to obtain access to digital-broadcast signals and to compete with direct-broadcast satellite carriers. In its public notice, the FCC requested to receive comments no later than March 1 and reply comments no later than March 16. The FCC study will review retransmission consent, which allows TV stations to demand payment and other forms of compensation for cable carriage. The agency will also look at the network-nonduplication rule, which allows a network station to bar a cable system from carrying network programming provided by another network affiliate. Additionally, the Commission asked for comment on the syndicated-exclusivity and sports-blackout rules. Small cable operators are focused on retransmission-consent and network-nonduplication rules. By importing out-of-market network stations, small operators believe that in-market network affiliates of ABC, NBC, CBS and Fox would have less leverage in carriage negotiations.

• On January 24, Kenneth Ferree, chief of the FCC's Media Bureau, informed his staff in an e-mail that he plans to depart March 4, about the same time as FCC chairman Michael Powell (see below). Ferree was Powell's point man on a number of key issues. He helped craft controversial broadcast-ownership rules that were ultimately blocked from taking effect. Last year, Ferree and his staff created a plan to end TV broadcasting's transition of digital-only transmission by December 31, 2008 - a proposal the National Association of Broadcasters ("NAB") is trying to defeat as too friendly to the cable industry and too hostile to consumers who have not purchased digital receivers. In June 2003, Powell and Ferree tried to relax broadcast-ownership rules in a plan that would have allowed one company to own more TV stations, radio stations, newspapers and cable systems in the same market. These media rules sparked a large controversy, with consumer and public-interest groups complaining that the FCC was catering to the wishes of industry and exaggerating the impact of the Internet on competition and diversity. But TV broadcasters were divided over the plan. In particular, NAB members affiliated but not owned by the four major TV networks bitterly opposed the FCC's decision to move the national audience-reach cap to 45%. Congress rolled back the 45% cap to 39%, and a Federal Appeals Court rejected nearly all of the rest of the plan.

• On January 21, FCC chairman Michael Powell announced his resignation after four years as chairman. In a prepared statement, Powell said he planned to leave "sometime in March" and take some time off "before taking up my next challenge." Powell, 41, joined the FCC in 1997, a Republican nominee of President Clinton who previously appointed him chief of staff of the DOJ's Antitrust Division. President Bush elevated Powell to FCC chairman a few days after his 2001 inauguration. Later, Powell was confirmed for a five-year term ending June 30, 2007. Powell said it was time to leave the FCC "having completed a bold and aggressive agenda" designed "to get the law right in order to stimulate innovative technology that puts more power in the hands of the American people."

Authored by:
Olev Jaakson
213-617-5528
OJaakson@sheppardmullin.com