On December 7, 2006, the European Commission adopted a revised Notice on Immunity from Fines and Reduction of Fines in Cartel Cases (the “Leniency Notice") which clarifies the information an applicant needs to provide to the Commission to benefit from immunity, and a reduction of fines. The Leniency Notice also introduces a marker system for immunity applicants, and a procedure to protect corporate statements made by companies from being made available to claimants in civil damage proceedings. The revisions take account of two public consultations, conducted in February, and October 2006. On announcing the new changes, the European Competition Commissioner, Ms. Neelie Kroes, stated,

Secret cartels undermine healthy economic activity. To root out cartels we need heavy sanctions to deter cartels and an efficient leniency policy providing incentives to report them. These changes will further strengthen the effectiveness of the Commission’s leniency program in the detection of cartels, and offer clearer guidance for business.

Leniency allows the European Commission to offer full immunity, or a reduction in the fines, that would otherwise have been imposed on a cartel member in exchange for disclosure of information on the cartel, and cooperation with the investigation. A number of improvements have been made in the revised Leniency Notice to provide more guidance to applicants, and to increase the transparency of the procedure. For example, the immunity thresholds have been clarified to:

- set out explicitly and clearly what type of information, and evidence, the applicants should submit to qualify for immunity;

- require that the information provided by the first applicant for full immunity must be sufficient to enable the Commission to conduct a "targeted investigation";

- confirm that applicants are not required to produce in their initial application for immunity information and evidence, the collection of which would jeopardize a Commission inspection, and which can be provided under the continuous cooperation obligation; and,

- state explicitly that the applicants need to disclose their participation in the cartel.

Concerning the threshold for reduction of fines, the Leniency Notice makes it clear that evidence that requires little or no corroboration will have greater value. Such evidence will also be rewarded outside the normal bands for reduction of fines, when it is used to establish any additional facts increasing the gravity or duration of the infringement.

The conditions for immunity and reduction of fines have also been made more explicit by:

- introducing flexibility as to the point in time when applicants should terminate their participation in the alleged cartel activities;

- clarifying that genuine cooperation requires, in particular, that the applicant provides accurate, and complete information that is not misleading;

- extending the obligation not to destroy, falsify or conceal information to cover also the period when the applicant was contemplating making an application;

- stating explicitly that the obligation on continuous cooperation concerns also applications for a reduction of fines.

Another innovation in the revised Leniency Notice is the introduction of a discretionary marker system. The Commission has stated that a leniency application will be accepted on the basis of only limited information, where justified, and the applicant will be granted time to perfect the information, and gather the necessary evidence to qualify for immunity.

Finally, the European Commission has developed a procedure to protect corporate statements given under the Leniency Notice from discovery in civil damage procedures in order to ensure that applicants that cooperate with the Commission's investigation are not impaired in their position in civil proceedings, as compared to companies who do not cooperate. The Commission considers such a step as "essential to maintain effectiveness of the Leniency Notice".

The revised Leniency Notice came into force on December 8, 2006, when it was published in the EU Official Journal.   It is currently applicable to companies who file for leniency in a cartel case, as long as no other company is already co-operating with the Commission under the Leniency Notice in the same cartel. The procedure to protect corporate statements is also in force with respect to all pending, and new applications for leniency.

Authored by:

Neil Ray

(415) 774-3269

nray@sheppardmullin.com

Reforms to Second Request Procedures Announced

• On December 15, the Antitrust Division released its amendments to its 2001 Merger Review initiative. The Division hopes that the changes will shorten the amount of time spent on merger reviews and reduce the amount of documents produced by focusing the Division on the most relevant issues and time periods. In addition, the Division also made changes to its model second request.

   

Under the new amendments, the Division will now allow parties to enter into a "Process & Timing Agreement," which will limit the Division's search to 30 employees and provide the parties and the divisions will clearer timelines for the completion of the review. To exceed 30 employees, the Division must obtain permission from the relevant section chief. In addition, the Division may add up to 5 employees to the list of each party as the investigation continues. This limitation, however, does not extend to subsequent or prior employees who encompassed the same position, the secretaries or administrative assistants of the employees, or the centralized databases. As consideration for the limitation on the number of employees whose files will be searched, the Division requires that the parties agree to allow the Division a sufficient amount of time to prepare its case if it opts to litigate the issue.

To be eligible for the Process and Timing option, the parties must have provided the Division with all of the information that the Division requested during the initial waiting period, and, after the issuance of the Second Request, provide the Division with 1) a current organization chart and personnel directory, 2) employees who understand the organization, 3) employees who know about the electronic data systems, and 4) employees knowledgeable about the data maintained by the company. The Division notes that it has observed that outside counsel generally do not have the information necessary to satisfy the needs of the Division with regards to organizational structure and information available. Five days after the parties has provided the Division with the information, the Division will give the parties the names of the employees whose files it will want searched.

The Division also made changes to the model Second Request. Some of the changes include decreasing the normal amount of time for which documents will have to be produced from 3 years to 2 years. Data that the company maintains will need to be produced for the previous 3 years. In addition, parties that comply with the second request within 90 days will not be required to conduct a second sweep, except for documents that relate to the transactions that were produced up to 30 days prior to the compliance with the Second Request. If, however, the parties take longer than 90 days to comply with the second request, they will need to conduct a second sweep for all responsive documents up to 30 calendar days prior to compliance with the Second Request.

Other changes to the model Second Request form include: companies may, with the permission of the Division, identify and preserve backup tapes of the companies past data for the duration of the Division's investigation, rather than searching all back tapes; companies need no longer produce electronic documents in hard copy and electronic form; and the privilege log may now omit documents that were sent only between the company and its counsel.

The changes to the Second Request procedures should produce some savings, although the Division had allowed parties in the past to negotiate limitations on the scope of a second request, an option that remains available. The Division noted that despite making revisions previously, the amount of documents produced continued to increase, due to the increasing volume of electronic documents and data that companies produce and preserve. Still the revisions should reduce the amount of time and effort needed to comply with a second request.

2006-Year End Review Unveiled

• On December 21, 2006, the Division released its statistics relating to the merger activity of fiscal year 2006. In 2006, the Division received 1,860 pre merger notification filings under the Hart Scott Rodino Act, an increase of 8.9% over 2005. Of these filings, only 1% received a second request, a decrease from 1.5% in 2005. The Division also highlighted the divestitures and performance remedies it had obtained in different mergers, including Mittal's acquisition of Arcelor, McClatchy's acquisition of Knigh Ridder, and DFA's acquisition of Southern Belle.

  In non-merger enforcement, the Division obtained criminal fines of $473,445,600 from various alleged cartel participants, representing an increase of 40% over the amount obtained in 2005. In addition, the Division highlighted its ongoing case against the National Association of Realtors, and the consent decree obtained against the American Bar Association, which required the ABA to pay $185,000 in fines for violating a 1996 consent decree baring the use of the accreditation process of law schools to limit competition.

Tunney Act Update

• In response to Gary Reback's attacks upon the Division's methods and evidence in the MCI/Verizon and AT&T/SBC investigation, the Division filed a reply. The Division stated that Mr. Reback had misrepresented the factual record, misstated the Division's position, and mischaracterized the applicable law. The Division reiterated its position that it had consistently found that the only competitive problem was with the 2-1 buildings where entry was unlikely, and that the scope had never varied. 

  In addition, the Division argued that Mr. Reback had mischaracterized the law, in that Mr. Reback had argued that the Court needed to find that entry would definitely occur in the 2-1 buildings where the Division had not required divestitures. The Division pointed out that the Merger Guidelines only require that entry is likely to occur. The Division also defended its decision not to challenge 3-2 or 4-3 buildings, as the merging parties were rarely the lowest cost providers to those buildings, meaning that lower-priced options would continue to exist.

  Finally, the Division defended the facts, noting first that its research had consistently shown that the applicable issue for entry was access to the building, not access to individual floors.  The Division also defended its interpretation of certain documents, although the details were redacted from the public record.

  Interestingly, two of the FCC Commissioners, Copps and Adelstein, in their comments regarding the recently approved AT&T/Bellsouth transaction mentioned the ongoing Tunney Act hearing, noting that the parties had agreed to come back to the FCC for further remedies if the result in the hearing changed the adequacy of any of the remedies. Commissioner Adelstein specifically noted that he had reservations about whether the Division's divestiture analysis adequately reflected the competitive harm.

Authored by:

Chris Bowen

(202) 772-5348

cabowen@sheppardmullin.com

Plaintiff Bearing Distributors, Inc. (BDI), a dealer, brought an action against Rockwell Automation, Inc. (Rockwell), and a competing dealer, Motion, alleging that Rockwell and Motion conspired to terminate it for refusing to abide by Rockwell's resale price maintenance (RPM) policy.  Rockwell contended that it terminated BDI, because it refused to impose a 25% minimum markup on BDI sales from "unauthorized" locations.  As the complaint failed to allege an RPM agreement between Rockwell and Motion, Motion moved to dismiss. It claimed that it was lawful for Rockwell to terminate a dealer, even at the suggestion of a competing dealer, where there was no agreement on price, or price levels.

The District Court denied the motion to dismiss.  It held that while the conduct alleged was not per se illegal, the complaint nevertheless stated a claim requiring rule of reason analysis.  The complaint alleged, in effect, that the tendered reason for the termination-sales from unauthorized locations- was pretextual.  It alleged that the real reason was BDI's refusal to adhere to a minimum RPM policy.  In addition, the complaint alleged that a conspiring dealer, Motion, had falsely informed BDI customers that it was substituting parts made in China, and representing that they were genuine Rockwell parts. The relevant product market was the sale of power transmission parts to the industrial maintenance, repair , and operation replacement and original equipment manufacturer market segments.  BDI was one of four large distributors, which also included Motion. With BDI's elimination, the remaining three dealers, it is alleged, possessed market power.

In denying the motion to dismiss, the court held that it would not apply the per se rule applicable to RPM, absent an allegation of a price fixing agreement between the manufacturer and a complaining dealer, citing Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717 (1988). It recognized, however, that the per se rule was merely an analytical tool that allows a court to find a Sherman Act violation, without performing an in depth analysis of the competitive effects in a properly defined market.

The court acknowledged that a claim is not stated if a manufacturer unilaterally terminates a dealer, even at the behest one dealer's complaints about the terminated dealer.  The court recognized that the complaint failed to allege a price fixing agreement between Motion, the complaining dealer, and Rockwell.  The complaint, however, sufficiently pleaded a group boycott to eliminate BDI as a competitor, and thus stated a claim upon which relief could be granted.

Of interest, are the allegations that Rockwell tolerated sales from unauthorized locations from competing dealers.  An inference may be present that the proffered reason for the termination was, thus, not the "real" reason, but a pretext.

The moral of the story is that failure to allege a per se unlawful RPM agreement is not necessarily fatal, where a complaint adequately pleads a concerted refusal to deal, and where the plaintiff adequately alleges sufficient concentration in the downstream market, and that the elimination of the plaintiff as a competitor will raise the specter of injury to the competition, because of the increased concentration in an already concentrated market.  Another moral is that counsel should be sensitive to maintaining an adequate record of unilateral action by the manufacturer, particularly where the action is taken after receiving complaints from competing dealers.  Counsel should also be careful to avoid the appearance on inconsistent enforcement of even benign vertical non-price restraints, such as termination for sales from unauthorized locations.

Authored by:

Don T. Hibner, Jr.

(213) 617-4115

dhibner@sheppardmullin.com